In 1Q26, Fuyao’s revenue grew 5.1% to RMB10.4bn, broadly in line. Domestic revenue beat driven by impressive ASP surge of 11% YoY and market share gains post-4Q capacity release, whereas overseas revenue continued to slow. 1Q26 gross margin of 37.4% beat expectations, delivering a counter-trend expansion. If stripping out RMB439m in FX losses and non-recurring items, core profit jumped 18.9% YoY to RMB 2.08bn, slightly topping our projections of RMB1.9- 2.0bn. As market focus within the auto parts sector shifts toward earnings visibility and margin stability, we expect Fuyao to stand out, underpinned by its dominant market position and visible ASP expansion that stands in stark contrast to the deflationary pressures seen in tech-heavy components like LiDAR. Thus, even in face of raw material price volatility and pricing pressure from OEMs, we believe Fuyao’s profit resilience remains superior across the sector. Maintain BUY with TP of HK$83, based on 20x 2026E P/E.

Key Factors for Rating

1Q26 revenue broadly aligns expectation though regionally mixed. The company logged 1Q26 revenue of RMB10.4bn, up 5.1% YoY, in line with our forecasts, yet regional performance varied. Domestically, automotive glass revenue climbed 3.2% YoY to RMB5.0bn, significantly outpacing the 9.3% YoY decline in domestic passenger vehicle production, exceeding our expectations, fueled by an impressive 11% YoY ASP surge (vs. a 2025 full-year jump of 8.1% and 4Q25’s 10.5% YoY rise) and steady market share gains post-4Q capacity additions. We reckon the rapid ramp-up of smart dimmable glass has become a key driver behind Fuyao's better-than-expected ASP uptrend. On the flip side, overseas automotive glass revenue growth slowed to 11.2% YoY, which marks the second consecutive quarter of growth slowdown, underscoring weakening momentum amid the global automotive market softness.

Gross margin beat with counter-trend improvement with manageable cost headwinds in sight. The company reported a 1Q26 gross margin of 37.4%, up 2ppts/0.4ppt YoY/QoQ, reflecting a notable counter-trend uptick that exceeded our projections. The improvement was primarily fueled by an improved product structure with stronger ASP, strong order pipeline sustaining elevated domestic capacity utilisation, a QoQ profitability boost in overseas units (primarily FGA), and favourable raw material costs dynamics. While market concerns linger over rising natural gas prices and shipping cost volatility potentially disrupting future margin trajectories, we expect the adverse impact to remain modest aided by the company’s rigorous cost oversight and positive product upgrade dynamics.

Core earnings slightly exceeded anticipation while FX losses weigh on reported figures. 1Q26 OPEX ratio rose by 1.5ppts/0.7ppt YoY/QoQ to 15.7%. Burdened by FX losses of RMB439m from USD/EUR depreciations against RMB, 1Q26 net profit slumped 15.7% YoY to RMB 1.71bn. If excluding currency effects and one-off items, core profit soared 18.9% YoY to RMB2.08bn, slightly ahead of market estimates of RMB1.9-2.0bn, highlighting the company’s robust operational resilience against automotive demand softness and FX headwinds.

Overseas operations reflect divergent trends. Fuyao America (FGA): 1Q26 revenue rose 11.2% YoY to US$273m, while operating margin recovered by 3.6ppts QoQ to 12.4%, supported by consistent order flow and enhanced operational efficiency. German SAM: In line with its ongoing strategic downsizing, German SAM's 1Q26 revenue plummeted by over 30% YoY to EUR19m. While the top line held steady on a QoQ basis, the sharp YoY decline reflects a deliberate move to scale back operations in Germany and simultaneously expand domestic capacity to foster better synergies and optimise overall operational efficiency of aluminum trim segment. On a brighter note, operating loss shrank notably QoQ to EUR1.1m, on track toward the fullyear breakeven target in 2026.

Valuation

We maintain our 2026E net profit forecast largely unchanged at RMB9.53bn. This projection already factors in the potential foreign exchange losses stemming from the observable depreciation of the USD and EUR against the RMB this year.

YTD, the company’s share price performance shows a decent standing relative to the auto parts industry, although it still lagged the broader market and underperformed the overall automotive & parts sector. Now its share prices trade at 15x 2026E P/E, which is undemanding in our view.

For the rest of the year, we believe the market attention on the auto parts sector is shifting toward earnings visibility and margin stability amid the evolving competitive dynamics. Against this backdrop, Fuyao indeed offers a unique counter-trend play. While components like LiDAR counters ASP deflationary trends in tech iterations, Fuyao’s ability to grow unit prices, especially fueled by a surprising rapid scale-up in high-value dimmable glass volume, represents a key structural upside. Thus, even in face of raw material price volatility and OEM cost pass-through demands, Fuyao’s profit durability should stand out among auto parts. Maintain BUY with TP of HK$83, based on 20x 2026E P/E.