In 4Q23, Fuyao’s total revenue jumped 21.9% YoY while net profit surged 75.9% YoY to RMB1.5bn, beating our expectation on better- than-expected gross margin and FX gains. Auto glass ASP grew 5.9% YoY in 2023, below original guidance of 10%, mainly due to the unfavourable sales mix either by product or by region, as well as extra OEM rebates. Gross margin showed diverging trend at home versus abroad as gross margin of domestic business dropped 2.7ppts in 2023, whereas that of overseas business substantially expanded by 5.8ppts, benefiting from declining freight costs for exports and improving profitability in US base despite heavier drag from loss-widening SAM. We see high visibility of Fuyao’s earnings this year and its sustainable growth over the mid-run on the back of capacity expansion. Maintain BUY with TP of HK$51.00 based on unchanged 20x 2024E P/E.

Key Factors for Rating

4Q23 revenue in line with both domestic and overseas growth accelerated. In 4Q23, total revenue rose by 21.9% YoY to RMB9.3bn, in line with our prior forecast. Separately for auto glass business which contributed over 90% of total revenue, overseas revenue surged c.25% YoY thanks to the recovering growth of ARG market and steady growth of OEM markets, while domestic revenue grew c.19% YoY, consistent with overall PV output growth.

ASP growth lower than original guidance for several reasons. In 2023, the company’s total auto glass revenue elevated 16.8% YoY, propelled by shipment growth of 10.2% and ASP growth of 5.9%, below initial guidance of 10%, which we attribute to several factors: (i) lower proportions of overseas sales which enjoy ASP 30-40% higher than domestic sales; (ii) unfavourable product mix with stronger ICE demand last year that led to slower adoption of high-value-added products (i.e. panoramic skylight glass); (iii) extra OEM rebates that negated ASP growth by 0.8ppt. Even so, we expect overall ASP to sustain an annual growth rate of above 5% over the coming years.

4Q23 gross margin slightly beat on improving utilisation rate and lower additional rebates. In 4Q23, gross margin further extended QoQ at 36.5%, in spite of a rebound in heavy sodium carbonate price. In 2023, gross margin added 1.4ppts to 35.4%, mainly thanks to improving operating leverage and the decrease of freights by c.RMB250m from prior year. By region, we see divergent trend of margin at home versus abroad as gross margin of domestic business dropped 2.7ppts to 36.9% last year dented by greater OEM rebates and softer cost advantages, whereas that of overseas business substantially expanded by 5.8ppts to record high of 32.1%, benefiting from declining freight costs for exports and improving profitability in US base, in spite of heavier drag from loss-widening SAM.

Better-than-expected profitability at US bases, whereas SAM continued to miss expectations with impairment loss. In 4Q23, the revenue in US base surged 34.6% YoY to US$216m, while the operating profit reached US$28m with operating margin jumping to a new high of 13%, supported by elevating utilisation rate and improving operational leverage. For SAM, the 4Q23 revenue rallied 53.8% QoQ to EUR44.8m, rebounding to the normalised level in 1H23. However, the operating loss sharply widened from EUR13.4m in 3Q23 to EUR33.3m, primarily owing to the year-end recognition of impairment losses by EUR19.2m. But even if excluding the above-mentioned impairment loss, operating losses widened from 3Q23, lagging behind the scheduled loss-reduction progress and our prior estimates. Although SAM continued to miss expectations on loss-reduction progress, the mgmt. believes in two approaches to improve SAM’s financials in 2024, including stricter in- house KPI requirements, and potential claims of customer recoveries from OEM customers that continuously fail to meet the contractual procurement volume.

CAPEX to elevate substantially in 2024 for capacity expansion. For 2024, the company’s planned CAPEX surged to RMB8.1bn, from RMB4.5bn in 2023. In addition to the postponed expenditure for new capacity building in Fuqing and the US, the surge in CAPEX reflects the company has entered into a new round of expansion since 2H22, in our view. Following the announcements of new capacity in 2H22, the company announced another two projects in Fuqing and Hefei recently, with total investment amount up to RMB9bn .

Earnings Forecast and Valuation

We largely leave our net profit forecasts for 2024-25E intact at RMB6.1bn and RMB6.9bn, respectively. Currently, its H-shares are trading at c.16x 2024E P/E, still below the historical average level albeit much higher than most HK-listed components.

We reckon its valuation premium over the counterparts is justified by its absolute dominance in global auto glass market with stabilised competitive landscape and solid record on results for years. Moreover, in spite of headwinds in either stiffening competition domestically or global geopolitical issues, we see high visibility of Fuyao’s earnings this year and its sustainable growth over the mid-run on the back of capacity expansion to ride on the prevailing adoption of smart EVs in the global automotive industry. Maintain BUY with TP of HK$51.00, based on unchanged 20x 2024E P/E.