Fuyao’s 2Q25 revenue advanced 21.4% YoY to c.RMB11.5bn, beating our anticipation on stronger overseas auto glass sales that elevated 25.4% YoY. Supported by wider-than-expected gross margin expansion, the attributable net income surged 31.5% YoY to RMB2.8bn, well above our estimate. In addition, the company unexpectedly announced an interim cash dividend of RMB0.9 per share, significantly sparking investors’ enthusiasm. To reflect higher-than-expected overseas revenue and margin, we raise our net profit forecasts for 2025-26 by 7- 9% to RMB9.3bn and RMB10bn, respectively. We remain optimistic about the company’s ability to sustain strong profitable growth, driven by sequential market share gains in overseas markets and product portfolio enhancements. In particular, the fast-tracked retreat of direct competitors would provide wider addressable market share for Fuyao and accordingly bolster its global market dominance. Maintain BUY.

Key Factors for Rating

2Q25 revenue beat on stronger overseas demand for both US manufacturing base and auto glass exports. Fuyao’s 2Q25 total revenue rose by 21.4% YoY to RMB11.537bn, beating our prior forecast on stronger demand for overseas business. By region, overseas automotive glass revenue surged 25.4% YoY to c.RMB5.0bn in 2Q25, propelled by compelling revenue growth in both FGA base (+28.3% YoY) and exports, both beyond our anticipation. Domestic automotive glass revenue maintained steady growth, increasing 16.6% YoY to c.RMB5.5bn in 2Q25, also above PV auto production growth of 11.7% YoY, mainly driven by ASP growth

Impressive gross margin uplift in 2Q25 outstrips anticipation, with positive outlook for gross margin in 2H25. 2Q25 GPM added 0.8/3.1ppts YoY/QoQ to 38.5%, surpassing our projections and market consensus, thanks to improved product mix with higher proportion of high-value-added products, increased share of export revenue, enhanced profitability at overseas manufacturing facilities for both FGA and SAM, and declines in raw material costs (mainly natural gas and sodium carbonate). These factors more than offset the adverse impact of the continuing OEM rebates in domestic market in 2Q, as we learnt that the OEM rebates in sales proportion was intact at 1.3%-1.4% in 2Q25 vs. 1.3% in prior quarter, and higher than last period’s below 1%. Going forward, the new capacity in Anhui and Fuqing sites scheduled for November launch was ahead of original timetable. Early start-up costs for the new capacity rollouts may weigh on gross margin temporarily, but we deem the upward margin trajectory holds firm, supported by solid order backlogs, efficient lean management practice (well proved during FGA phase-two capacity launch), and potential freight cost deflationary savings.

Surprisingly strong US base profitability, SAM loss reduction on track towards breakeven. US base: The US base reported a 28.3% YoY revenue increase to US$291m in 2Q25, driven by the continued ramp-up of phase-two production. Operating profit elevated 34.5% YoY to US$51m, with the OPM advancing 3/5ppts YoY/QoQ to 17.6%, far above our prior projections and the company’s full-year OPM guidance. Key contributors might include margin- preserving price hike to manage potential US tariff pressures, increasing utilisation rate towards optimal production output, and improved economies of scale. Against this backdrop, we believe US operations are poised to deliver buoyant full-year profitability above estimates. SAM: SAM’s 2Q revenue showed modest QoQ improvement to EUR29.5m, and YoY declines narrowed to 3.8%, against 17.1% in 1Q25. Operating losses continued to shrink QoQ to EUR0.5m. During the earnings call, the company reiterated its full-year guidance of reducing SAM’s net loss to below EUR10m, which we view a bit conservative. Instead, the improved operational efficiency positions SAM for a potential breakeven in 2H25, though a full-year loss is still likely.

Unscheduled interim dividend proclamation sparks investor enthusiasm. The company announced an interim cash dividend of RMB0.9 per share, totaling RMB2.349bn and equivalent to a payout ratio of close to 50%. This marks the first interim dividend declaration in past seven years, underscoring management’s confidence in sustained growth and commitment to enhancing shareholder returns.

Valuation

To reflect higher-than-expected overseas revenue and robust outlook for overseas profitability improvement, we raised our net profit forecasts for 2025- 26 by 7-9% to RMB9.3bn and RMB 10bn, respectively.

Over the mid-to-long run, we remain optimistic about the company’s ability to sustain strong profitable growth, driven by continued market share gains in overseas markets and product portfolio enhancements spurred by domestic intelligent transformation. In overseas markets, we anticipate the fast-tracked retreat of Fuyao’s direct competitors to provide wider addressable market share for Fuyao and accordingly bolster its global market dominance.

Yesterday, Fuyao’s stock price surged by 15%, significantly outperforming the broader auto sector, mainly fueled by street enthusiasm over the unexpected dividend payout along with results beat. But we see its share performance YTD still underperformed other HK-listed auto parts under our coverage, while its H- shares after yesterday’s upsurge are trading at 17.4x 2025E P/E and 16.2x 2026E P/E, which is undemanding. Maintain BUY with higher TP of HK$83.00, based on 20x 2026E P/E.