2019 earnings preannounced to fall 29.7% YoY, lower than expected
Fuyao Glass preannounced that its operating revenue rose 4.3% YoYin 2019 to Rmb21.1bn and attributable net profit fell 29.7% YoY toRmb2.9bn. The results missed the market’s and our expectations dueto US$39.29mn (Rmb270mn) for compensation and arbitration fees.
Trends to watch
4Q19 gross margin improved but earnings fell due to arbitrationfees. In 4Q19, revenue rose 7.2% YoY to Rmb5.47bn, gross marginreached 37.5% vs. 37.2% in 3Q19, and operating profit dropped 35%YoY to Rmb660mn. Fuyao Illinois paid US$39.29mn (Rmb270mn) incompensation and arbitration fees in 4Q19, weighing on earnings.
Profitability of auto glass remained stable; 2019 earnings declinedon several factors. Specially, SAM was consolidated March 19, and itmade an Rmb300mn loss. Fuyao Illinois paid Rmb270mn incompensation and arbitration fees. Exchange gains in 2019 were onlyRmb140mn (vs. Rmb260mn in 2018). Fuyao confirmed Rmb660mn ofinvestment income in 2018 by selling its stake in Beijing Futong. In2019, Fuyao paid export duties of Rmb76.35mn. Excluding the abovefactors, 2019 total profit fell only 7.5% YoY, essentially the same asthe decline in domestic auto output, implying stable profitability forauto glass sector.
COVID-19 to weigh on 2020 earnings. In 1Q20, Fuyao’s domesticcapacity utilization rate has remained low and consequently weighingon 1Q20 earnings. In addition, European and American OEMssuspended production from mid-March amid overseas COVID-19outbreak. We expect Fuyao’s earnings from US business to be underpressure in 2Q20 and the turnaround of at SAM to be delayed.
Valuation and recommendation
We cut our 2019, 2020, and 2021 net profit forecasts 6%, 25%, and12% to Rmb2.90bn, Rmb2.81bn and Rmb3.55bn. Fuyao-A/H istrading at 17.5x/13.1x 2020e P/E and 13.8x/10.4x 2021e P/E. Wemaintain OUTPERFORM for Fuyao-A/H but cut our TP for Fuyao-A7% to Rmb25 (22.3x 2020e and 17.7x2021e P/E) offering 28% upsideand cut our TP 10% for Fuyao-H to HK$27 (21.5x 2020e and 17x2021e P/E), offering 58% upside.
Risks
COVID-19 escalation results in losses in overseas business.