Research Report

Author

章晶小姐 (Zhang Jing)
高級分析師

本科畢業於同濟大學工科,碩士畢業於華東師範大學金融貿系。現為輝立証券持牌高級分析師,主要負責汽車及航空板塊的研究,曾獲得《華爾街日報》亞洲區2012年度汽車及零部件最佳分析師第二名,擅長將行業前景與上市公司結合分析。

Bachelor Degree in Tongji University of Engineering; Master Degree in East China Normal University of finance. Currently cover automobile and air sectors. Having worked in research for years and is good at combining analysis for the companies with industry prospects.


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Fuyao Glass (3606.HK) - Overseas segment Partly Makes up for the Negative Impact of Domestic Downturn

Tuesday, June 18, 2019 Views691
Fuyao Glass(3606)
Recommendation on  18 June 2019
Recommendation Buy
Price on Recommendation Date $21.630
Target Price $27.300

Investment Summary

The Company Has High Growth + High Dividend in 2018 and Steady Growth in the First Quarter of 2019

Fuyao Glass recorded a revenue of RMB20.23 billion in 2018, increasing by 8.1% yoy. The net profit attributable to the parent company was RMB41.2 billion, up by 30.9% yoy, with net profit attributable excluding non-recurring items reached RMB3.47 billion, a year-on-year increase of 14.4%. The EPS was RMB1.64. The dividend per share was RMB0.75. Plus the medium-term dividend of RMB0.4, the dividend payout ratio was 70%.

In the first quarter 2019 results report, the revenue of Fuyao Glass reached RMB4.93 billion in 19Q1, a slight increase of 3.9% yoy, and the net profit attributable to the parent company was RMB610 million, up by 7.7% yoy. The net profit attributable to the parent company excluding non-recurring items was RMB520 million, down by 13.2% yoy.

Fuyao Glass's brilliant profit performance in 2018 is mainly due to the boost from exchange gains and one-time gains from asset disposal. Benefiting from the devaluation of the RMB, the Company recorded exchange gains of RMB260 million in the whole year, compared with exchange losses of RMB390 million in the same period last year. The company sold 75% of Beijing Futong's equity, and recorded an investment income of RMB664 million. If such impact is excluded, the company's revenue was barely equal, outperforming the clearly declining industry average.

Q1 of 2019 saw an exchange loss of RMB130 million due to the appreciation of Renminbi, which was RMB90 million less than the same period of last year. We expected that with the depreciation of Renminbi, exchange loss would be significantly narrowed or even converted into exchange gain.

Overseas segment Partly Makes up for the Negative Impact of Domestic Downturn

After years of cultivation, the overseas business started to develop. The Company recorded a domestic business revenue of RMB11.57 billion in 2018, basically unchanged yoy, which was mainly affected by the slowdown of the domestic automobile market in Q4. Overseas revenue reached RMB8,312 million, a significant increase of 28% yoy, which was mainly due to the climbing capacity of US factories. In Q1 of 2019, the overseas revenue continued to grow rapidly and recorded a growth rate of 17% yoy, while the domestic business revenue fell by 10% yoy due to the continuous deterioration of the automobile market.

Gross Margin Is Under Pressure, Expense Ratio Remains Stable, and ASP Sees Steady Enhancement

In 2018, the gross margin of Fuyao Glass was basically unchanged, down 0.14 ppts yoy to 41.5%, among which the gross margin of domestic business increased by 1.07 ppts and that of overseas business decreased by 1.5 ppts, which was mainly due to the sales structure. In 2019, the Company's gross margin decreased by 3.4 ppts yoy to 39.1%, which was mainly due to 1) accelerated deterioration of the domestic automobile market, 2) the gross margin of North American business is still in the climbing period and its expanding proportion brought down the overall gross margin level, and 3) the impact of asset consolidation of the German company SAM.

The Company's expense ratio remained stable, dropping by 1.6 ppts during 2018 and by 1.2 ppts in Q1 of 2019. Owing to the expanding proportion of high value-added products, ASP was steadily enhanced, with an increase of 3.7% in 2018 and 4% in Q1 of 2019.

With Acquisition of the German Company SAM, Deepening of Overseas Business Expansion Continues

Fuyao Glass announced on January 15 to acquire the German Company SAM for EUR58.85 million. The Company started to set about consolidation from March 1 and set foot in the automotive aluminum trim strip industry. After the integration, it is expected to achieve integrated supply of aluminum trim strips and automotive glass, improve the added value of products and expand the customer base. Looking ahead, as the North American business steps on the right track, the Russian business has bottomed out and recovered, and the domestic market share continues to increase, we are optimistic that the Company's overall performance will maintain a stable growth in the future.

Investment Thesis

Overall, considering the steady leading position, continuous optimization of the product structure and a high dividend rate provide a greater margin of safety for the Company. We maintain the "Buy" rating,with target price to be HK$ 27.3, equivalent to 15.1/14.3x P/E for 2019/2020E. (Closing price as at 13 June 2019)

Risks

Demand for automobiles keeps sluggish; cost of raw materials increases; RMB appreciates

Catalyst

Success market development of overseas automobile market; rebound of domestic demand for automobile; depreciation of RMB

Financials

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