In 1Q24, Fuyao’s total revenue soared 25.3% YoY, while net profit surged 51.8% YoY to RMB1.4bn; if excluding non-recurring items and FX loss, core earnings jumped over 60% YoY to quarterly record high of RMB1.6bn, well above expectations. In 1Q24, overseas operations performed better than expected as operating profit of US bases more than doubled YoY with margin improving to all-time high of 14.6%. Overall speaking, we see greater visibility of Fuyao’s earnings outlook this year with the tailwinds from higher utilisation rate and favourable cost environment. For the mid-to-long horizon, we anticipate increasing auto glass usage per vehicle and ASP expansion amid the smart electric migration will lead Fuyao’s content value per vehicle to a sustainable uptrend. Meanwhile, its overseas (US) operational capabilities for years have given it a competitive edge over peers amid current geopolitical threats. Reiterate BUY with higher TP of HK$53.00, based on 20x 2024E P/E.

Key Factors for Rating

1Q24 revenue growth accelerated thanks to wider-than-expected market share gains both domestically and abroad, plus quickening ASP expansion. By region, the domestic auto glass revenue extended robust growth of 27.3% in 1Q24, significantly outpacing the domestic PV output growth of 6.6%, while overseas revenue accelerated growth of 31.1% YoY with constant market share expansion and restoring AGR revenue growth on lower comparative basis. By OEM customer, we learnt that Fuyao’s market share in own-brand OEM (especially NEV start-ups) as a whole is higher than JV OEM and global OEM. In addition, the ASP for auto glass business restored growth with 7.5% YoY expansion, against the softer ASP improvement of 5.9% YoY for entire 2023.

Gross margin nicely beat on lofty utilisation rate alongside moderate cost tailwinds. In 1Q24, the gross margin continued to improve for five consecutive quarters and stayed lofty at c.37%, nicely beating our prior anticipation and street consensus. This could essentially attribute to (i) higher utilisation rate as we estimate the domestic utilisation rate could be held steady at above 80% in 1Q24 regardless QoQ shipment pullback while overseas operation saw improving utilisation rate bolstered by swift production ramp-up in US base, and (ii) softer drags from SAM as it continued to narrow losses. In addition, we see moderate tailwinds from raw material costs side, with the cost- savings from sodium carbonate price reduction largely offsetting the upsurge of freight costs amid Red Sea tensions.

Surging profit from US operations while SAM narrowed losses from 2H23. In 1Q24, the revenue in US base surged 30.8% YoY to US$225m, while the operating profit more than doubled YoY to US$32.8m with operating margin jumping to all-time high of 14.6%, driven by the swelling usage rate on the back of mounting order intakes and tight capacity supply. For SAM, 1Q24 revenue dropped over 20% YoY to EUR33.5m due to the unfavourable demand environment. However, the operating loss largely narrowed to EUR10m in 1Q24, against EUR13m/33m in 2H23 by virtue of stricter OPEX outlay and cost savings from workforce cuts. For 2024, the mgmt. expect SAM could continue to narrow losses with the rebound in order intakes and scrutinised operational activities.

Valuation

We nudge up revenue by 1-2%, and raise our gross margin assumption to reflect higher utilisation rate and lucrative US operations. Accordingly, we lift our net profit forecasts for 2024-25 by 4%-9% to RMB6.37bn/7.18bn.

For this year, we see greater visibility on earnings prospects with the tailwinds from improving utilisation rate and favourable cost environment. Since last year, the company has entered into a new round of capacity building stage. Before the expected massive release of new capacity from 2H25 onwards, the decent auto glass demand in both domestic and overseas markets against tight capacity will lead Fuyao’s utilisation rate to an uptrend. On the other hand, we anticipate the secular decline of heavy sodium carbonate prices and natural gas prices may help reduce COGS cost, thus boding well for margin recovery. Although the Red Sea crisis unexpectedly fueled shipping costs in certain routes at the start of the year, we anticipate the freight cost pressure would be manageable given the demand slowdown in the global economy.

For the mid-to-long horizon, we believe the company would be the primary beneficiary to garner global smart EV demand in spite of recent backslide on gasoline cars. Firstly, its well-prepared value-added auto glass products (incl. AR-HUD, panoramic sunroof glass and double window glass) are precisely what functionalities smart EV makers would like to offer in the future. This could lead to persistent improvement in content value per vehicle and ASP uptrend. Secondly, the absolute leadership position in global auto glass market gives it stronger bargaining power to tackle possible pricing pressure from OEM clients compared with most other local components suppliers. Thirdly, over the past decades, Fuyao has accumulated abundant globalisation experiences and has proved its overseas operational capabilities, which gave it a competitive edge over peers amid current increasing geopolitical threats.

Now its H shares are trading at 16x 2024E P/E, at a wider premium over other HK-listed suppliers. Yet we deem its valuation premium well supported by the high visibility of its earnings outlook this year and mid-to-long-term sustainable growth logic mentioned above. Reiterate BUY with higher TP of HK$53.00/RMB56.00 based on 20x/23X 2024E P/E.