Fuyao Glass (3606 HK, HK$62.05, HK$162bn) Resilience Through the Cycle

Resilient Topline Despite Softer Demand: Fuyao reported 1Q26 revenue of RMB10.4bn (+5% YoY / -14% QoQ). While growth moderated amid a softer auto cycle, with China’s auto production and sales both falling around 6% YoY, the quarter still showed resilience. This was mainly supported by continuous sales mix upgrade, as high-value-added products such as panoramic roof glass, HUD windshield glass and lidar-related automotive glass kept gaining share. According to its FY25 results, their revenue contribution rose 5.44ppt YoY to 54.2%, supporting both ASP uplift and a richer margin mix. Meanwhile, COGS increased by only about 2% YoY, well below revenue growth. As a result, gross profit reached RMB3.9bn and GPM improved from 35% to 37%.

Core Strength Intact, FX Weighed on Earnings: Core operating profit rose 7% YoY to RMB2.3bn, with core OPM improving by 1ppt to 22%, as gross margin expansion offset broadly stable operating expenses, with OPEX ratio stable at 16%. Net profit fell 16% YoY to RMB1.7bn, with NPM declining to 16%. This was driven by RMB appreciation against the USD, EUR, RUB and JPY, resulting in a RMB438.7mn FX loss, compared with a RMB235.9mn FX gain in the same period last year.

Cash Flow Weakened on Working Capital: Operating cash flow stood at RMB360mn in 1Q26, down 82% YoY, mainly dragged by increase in working capital. A greater share of customer settlement shifted to bills, driving notable increases in notes receivable and receivables financing and slowing cash collection. At the same time, declines in notes payable and accounts payable reduced supplier financing and accelerated cash outflows. Meanwhile, inventory stayed broadly stable, indicating no obvious inventory build-up. Against weaker operating cash flow and ongoing capex, the company increased financing during the quarter. Short-term borrowings rose from RMB7.61bn to RMB9.01bn, while long-term borrowings increased from RMB3.67bn to RMB7.29bn, lifting the debt-to-asset ratio to 47%. Meanwhile, cash and cash equivalents increased from RMB19.3bn to RMB20.7bn, further strengthening liquidity.

Our views: Despite a high base, Fuyao remained resilient in 1Q26. Near-term support is expected to come from product mix upgrades, as a higher contribution from value-added products drove both ASP uplift and margin improvement.

Fuyao has also strengthened its cost advantage through vertical integration, with silica sand and float glass self-sufficiency reaching 95% and 90%, respectively. As float glass is the key upstream input, this helped lift its GPM from around 30% five years ago to nearly 40% today. Combined with the heavy-asset nature and high certification barriers of the industry, this has supported deeper ties with leading global OEMs and expanded global market share to around 32%, while continuing to gain share from markets exited by Saint-Gobain. Its global manufacturing footprint also helps address transportation constraints, given the bulky and fragile nature of automotive glass.

Meanwhile, investing cash outflow increased by 91% YoY to RMB-2.3bn in 1Q26, mainly due to continued investment in Phase II of the US plant, European capacity expansion, and domestic plant upgrades and smart manufacturing. We believe Fuyao’s competitive position remains strong. Short-term volatility does not alter its long-term earnings visibility, and the company remains a high-quality auto parts leader with both resilience and growth. The counter is trading at 14x FY26E P/E and 10x FY26E EV/EBITDA, with a 4.5% dividend yield. (Research Department)