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　　We visited Fuyao Glass and spoke with management.
　　Comments
　　Overseas work resumption gradually advancing; worst headwindsto end. We estimate the strongest headwinds from overseasCOVID-19 will be reflected in 2Q20. Overseas revenue accounted for49.1% of Fuyao’s 2019 total revenue. Based on this revenue structureand assuming flat YoY domestic revenue in 2Q20, we estimateFuyao’s overall revenue would drop 4.9%, 9.8%, or 14.7% in 2Q20 ifits overseas revenue declines 10%, 20%, or 30%. However, weestimate net profit may see sharper declines than revenue, as fallingcapacity utilization and rising sales of float glass to third parties mayweigh on gross margin.
　　Consolidation in aluminum part sector to release market room. TheWall Street Journal reported1 Dura (a global leader in aluminumparts) completed its bankruptcy deal in May, which we think mayreshape the aluminum trim market. During 1Q20 results briefings,management said upgrades of its subsidiary FYSAM’s two productionlines have been largely completed. Per-vehicle value of aluminumpart supply is about three times that of glass, and theoretical profitmargin is higher than automotive glass. We think FYSAM will boostprofit growth in the medium-to-long term.
　　Expanding presence on smart glass; per-vehicle supply value toimprove in the medium-to-long term. On June 1, the firm signed anagreement with BOE Technology to cooperate in smart switchableglass and window displays. We expect the firm’s per-vehicle supplyvalue to improve in the medium-to-long term, as glass becomesmarter and more integrated, and panoramic sunroof increasesper-vehicle glass uses. This should enhance ASP and gross margin, inour view.
　　Valuation and recommendation
　　We raise our 2021 earnings forecast 10% to Rmb3.5bn, given thepossible boost from integration of FYSAM in 2021, and our upbeatview on the recovery of domestic and overseas businesses. FuyaoA-share is trading at 20.8x and 15.4x 2020e and 2021e P/E, andH-share at 15.6x and 11.6x P/E. Maintain OUTPERFORM on A-shareand H-share. We raise A-share TP 10% to Rmb25.20 (18x 2021e P/Ewith 17% upside) given the earnings forecast revisions, and maintainH-share TP at HK$23.00 (14.2x 2021e P/E with 22% upside). Risks:Stronger-than-expected headwinds from overseas COVID-19;disappointing integration of FYSAM.