FUYAO GLASS(600660)：UPBEAT PROFIT OUTLOOK REWARDED BY STRONGER MARGIN EXPANSION-格隆汇

机构：中银国际
研究员：LOU Jia/Olivia NIU/Catherine SUN

　　We expect Fuyao’s total revenue to sustain QoQ growth to above RMB10bn in 3Q24, driven by seasonal demand recovery in domestic market as well as robust overseas contribution. Despite a mixed picture on FX factors, we expect core net profit (excluding FX) to pick up QoQ to RMB2.1bn as a fresh new high in 3Q24 fueled by gross margin expansion. In spite of sticky freight costs pressures, we expect gross margin to extend QoQ expansion to 38%+ in 3Q24, helped by cost deflation of sodium carbonate, improving product structure, plus higher utilisation rate. For overseas plants, we expect US bases to continue profit improvement while SAM may see reduction in losses helped by on-going cost optimisation efforts. We raise our net profit forecasts for 2024-25 by 4%-6% to RMB7.3bn/8.0bn to reflect our higher gross margin assumptions. Reiterate BUY and lift our TP to HK$68.00, based on 20x 2025E P/E.
　　Key Factors for Rating
　　3Q24 revenue likely to set another new high. Despite YoY growth slowdown in China’s 3Q24 PV sales due to the relatively higher comparative basis last year, we expect Fuyao’s total revenue to maintain QoQ growth driven by seasonal demand recovery in domestic market as well as robust overseas demand with both higher shipments and product ASP. Overall, we anticipate 3Q24 revenue to exceed RMB10bn as another quarter high.
　　Upbeat GPM outlook leans on the lag between cost deflation movements and prior mark-up for new orders amid inflation woes. Despite rising freight cost pressures, we expect 3Q24 gross margin to extend sequential QoQ expansion to 38%+ driven by the constant cost deflation of sodium carbonate, improving product structure with larger high value-added product sales proportion thanks to escalated NEV penetration across the industry, as well as improving utilisation rate. In 1H24, the freight cost headwinds adversely impacted overall GPM by 0.5ppt, the bulk of which was indeed recognised in 2Q24. Although the freight costs continued to rise in Jul/Aug, we expect the upsurge may come to an end given the recent downtrend in shipping costs from Sep. This may lead to a controllable increase in average shipping costs in 3Q24. Besides, we noticed that the company continuously delivers a consensus-beating gross margin expansion trajectory this year, primarily benefiting from the lag between the raw material cost deflation movements and prior mark-up for new orders amid high inflation woes in 2021-22, which differs from most auto parts suppliers that directly pass through the cost pressures with instant price hikes.
　　US plant to continue profit improvement while SAM sees HoH reduction in loss helped by better operational efficiency. For US base, the net profit more than doubled YoY to RMB387m (c.US$55m) in 1H24, significantly outstripping the revenue growth during the same period. Before the massive new capacity release starting from 2025, we see continuous margin improvement headroom for US phase-one facility, fueled by higher utilisation rate and greater sales mix of high value-added products. Regarding the US phase-two plant, it is scheduled to start production in 2025 and set to add 1m sets of tempered laminate side window and 500k sets of coated automotive glass per year. During our prior post-results NDR meeting, the mgmt. guided mild profit for phase-two plant next year given the underutilisation during the early ramp-up period. Even so, we expect the profitability at US phase-one plant to improve next year and management target the net margin to reach 15% next year, against 12.1% in 1H24. For SAM, we expect to see a sequential reduction in recurring losses in 2H24, helped by improving operational efficiency and on-going cost optimisation efforts. Besides, we see potential claims of recoveries from OEM customers in 2H24 to improve the bottom line.
　　3Q24 core earnings to stay steady at above RMB2bn. For 3Q24, we see mixed picture on FX financial impacts, with the FX losses from weaker US dollar against RMB being partly offset by FX gains from stronger Euro against RMB. If excluding FX factors, we expect 3Q24 core earnings to extend QoQ improvement to RMB2.1bn, against RMB2bn in 2Q24.
Valuation
　　We leave our revenue forecasts for 2024-25 intact at RMB39.8bn/46.0bn, respectively. Reflecting our higher gross margin assumption, we raise our net profit forecasts for 2024-25 by 4%-6% to RMB7.3bn/8.0bn.
　　At present, its H-shares are trading at 15.9x 2024E P/E and 14.4x 2025E P/E, which seems undemanding. We favour Fuyao for its long-term growth story driven by continuous product upgrades as well as enhanced leadership in global auto glass marketplace. Reiterate BUY and raise our TP to HK$68.00 as we roll over our valuation multiples to 20x 2025E P/E (vs. 20x 2024E P/E previously).