2Q20 results in line with our forecast
　　Fuyao announced 1H20 results: Revenue and attributable net profitfell 21.1% and 36% YoY to Rmb8.12bn and Rmb964mn. In 2Q20,revenue dropped 26.2% YoY and 5.3% QoQ to Rmb3.95bn, andattributable net profit decreased 44% YoY but rose 9.6% QoQ toRmb504mn, largely in line with our expectations.
　　Trends to watch
　　Overseas business loss-making but market share rising. The USfactory turned to a loss in 2Q20 compared with 1Q20 with net loss atabout Rmb110mn, and we think it may report a loss for 2 months asUS automakers halted production. The loss at FYSAM in 2Q20 totaledEUR13.95mn with monthly loss at about EUR4.65mn. Excludingimpact from COVID-19, we think Fuyao’s consolidation of productionlines and personnel at FYSAM has paid off and FYSAM’s earnings havegradually recovered.
　　Earnings under pressure due to fixed expenses; fine-tuning of staffpositions to increase per capita income. In 2Q20, Fuyao’s grossmargin and net profit margin expanded by 2.65ppt and 1.73ppt QoQto 37.1% and 12.8%. Gross margin improved thanks to a higherdomestic capacity utilization rate, but we see further room forimprovement given falling revenue and a rising portion ofdepreciation and amortization. We expect per capita income toimprove with the revenue recovery and a decline in employee coststo bring continuous marginal improvement.
　　Overseas business improves; upgrades in glass products continue.
　　We expect Fuyao’s overseas and export business to continue torecover amid work resumptions at overseas automakers. Fuyao’sdomestic production saw better recovery than overseas production,which we think bodes well for its export supply; we thus believe itcan increase its market share. We expect a rising penetration rate ofHUD, canopy, and switchable glass to boost per-vehicle sales value.
　　Financials and valuation
　　We maintain our 2020 and 2021 earnings forecasts. H-share trades at21.5x 2020 and 16.0x 2021 P/E. A-share trades at 27.4x 2020 and20.4x 2021 P/E. For H-share we maintain OUTPERFORM and our TP ofHK$32.00 (27.4x 2020 P/E and 20.4x 2021 P/E), offering 27.5%upside. For A-share we maintain OUTPERFORM and our TP ofRmb35.00 (33.7x 2020 P/E and 25.1x 2021 P/E), offering 23.1%upside. Risks: Disappointing recovery in overseas business and/ordomestic auto market.