3Q19 results in line with our estimates
Fuyao Glass announced that revenue rose 6.1% YoY to Rmb5.35bn in3Q19, but net profit attributable to shareholders dropped 40% YoY toRmb841mn, due to a high base caused by the recognition of anRmb476mn one-off investment income in 3Q18.
Trends to watch
3Q19 gross margin （GM） increased QoQ; EBIT rose YoY. In 3Q19, thefirm’s revenue grew 6.1% YoY to Rmb5.35bn, with GM edging up1.1ppt QoQ to 37.2%. Its EBIT fell 20% YoY to Rmb853mn. SAMcontinued to make a loss in 3Q19. Excluding SAM, we estimate thefirm’s EBIT dropped roughly 13% YoY, vs. down 20% YoY in 2Q19.
Domestic business operations recovered; US profits dipped QoQ. In3Q19, China’s automobile output dropped 6% YoY, vs. a 17.6% YoYdecline in 2Q19. As a result, the utilization ratio of Fuyao’s domesticproduction facilities increased in 3Q19, with the GM improving QoQ.
We expect earnings to increase on potential recovery of theautomobile market in 2020; aluminum component business tosupport growth. Looking ahead to 2020, we believe the firm willregain a high utilization ratio and end the oversupply of float glass, ifthe automobile market recovers. Coupled with possible decreasedlosses at SAM, we are upbeat on Fuyao’s earnings in 2020.
Financials and valuation
We keep our 2019 and 2020 net profit forecasts at Rmb3,085mn andRmb3,729mn. The H-shares are trading at 16x 2019 and 13x 2020P/E. The A-shares are trading at 18x 2019 and 15x 2020 P/E. ForH-shares we maintain OUTPERFORM and our TP of HK$30.00 （22x2019 P/E and 18x 2020 P/E）， offering 35% upside. For A-shares wemaintain OUTPERFORM and our TP of Rmb27.00 （22x 2019 P/E and18x 2020 P/E）， offering 25% upside.
Risks
Slower-than-expected recovery of the automobile market.