Action
　　We are upbeat on the growth potential of the automotive glassindustry given the use of head-up displays (HUD) and panoramicsunroofs. We expect earnings at Fuyao Glass to turn around afterCOVID-19 outbreaks overseas are brought under control. In addition,we are optimistic about Fuyao’s earnings in the longer term andexpect the firm to gain market share worldwide given its investmentsin the aluminum trim and smart glass businesses.
　　Reasoning
　　Volume and price of automotive glass to rise. We are upbeat onChina’s automotive glass industry given the healthy competitivelandscape, high barriers to entry, and glass exports. We think thehigher volume and price of automotive glass used in vehicles will addto the growth potential of the automotive glass industry.
　　Earnings to turn around as impacts of overseas outbreaks ease;FYSAM to turn a profit. In 1H20, Fuyao faced headwinds fromCOVID-19 outbreaks in China and abroad. We expect its earnings toimprove as impacts of overseas outbreaks ease. We think its Germansubsidiary FYSAM will generate profits monthly in the short term.
　　We expect Fuyao to gain market share worldwide given its highR&D input and broad product portfolio. Fuyao has recorded a higherR&D expense ratio and provided a broader product portfolio thanmany leading glass manufacturers. It has cooperated with BOE andBICV in switchable glass, antenna glass, and other smart glass. Wethink Fuyao’s high R&D input and focus on the auto glass businesswill help it rapidly respond to changing market demand duringproduct upgrades. Given its business scale and R&D strength, wethink Fuyao will continue to gain market share worldwide.
　　Earnings forecast and valuation
　　We maintain our earnings forecasts. Fuyao-A is trading at 27.8x2020e and 20.6x 2021e P/E. Fuyao-H is trading at 21.2x 2020e and15.7x 2021e P/E. We are upbeat on the sector valuation given theincreased volume and price of automotive glass, and expect thefirm’s valuation to increase as its earnings recover and FYSAM turns aprofit. We maintain our OUTPERFORM ratings for Fuyao-A/H, andraise our TP for Fuyao-A by 39% to Rmb35 (25x 2021e P/E, 21.4%upside) and lift our TP for Fuyao-H by 39% to HK$32 (20x 2021e P/E,29.3% upside).
　　Risks
　　Recurrence of COVID-19 outbreaks in the US; weakening of USdollars.