3Q21: Earnings Up 8.9% yoy And Down 9.6% qoq, Missing Estimates

FYG’s 3Q21 net profit came in below estimate at Rmb827m (+8.9% yoy/-9.6% qoq). The 3Q21 earnings miss was due to in the bigger-than-expected impact of chip shortage on revenue and margins. Looking ahead, we expect revenue to recover starting from 4Q21 in tandem with the easing chip shortage for the automobile industry. We trim 2021-23 EPS by 8-11% to factor in a higher raw material cost and energy cost. Maintain BUY. Cut target price from HK$57.00 to HK$52.00.

RESULTS

• Fuyao Glass (FYG) registered Rmb827m in net profit in 3Q21, up 8.9% yoy and down 9.6% qoq, vs our and consensus estimates of around Rmb1.1b. This brings 9M21 net profit to Rmb2,596m, up 50.7% yoy, vs our net profit forecast of Rmb4,294m and consensus estimate of Rmb3,849m for full-year 2021. The 3Q21 earnings miss came from the 0.8% yoy/3.9% qoq revenue drop due to more severe-than-expected impact of the chip shortage. Gross margin dropped 1ppt yoy and 0.2ppt qoq to 40.4% in 3Q21, due to operating deleveraging and cost hikes. However net margin hiked 1.3ppt yoy and dipped 0.9ppt qoq to 14.7%, due to the drop in administrative expenses and finance cost.

STOCK IMPACTs

We keep sales volume estimates for 2021-23 unchanged at 28.3m sets/31m sets/32.9m sets respectively, based on: a) the global chip shortage that will start easing from 4Q21, b) the full recovery of global chip supplies starting from 2H22, and c) FYG’s increasing market share of the global automobile glass market.

We trim 2021-23 assumptions on gross margin from 42% to 40% based on the lower gross margin in 3Q21 and higher raw material and energy prices. Our previous long-term gross margin assumption was too high, as it was based on the extraordinarily high gross margin in 4Q20; we now assume a normalised gross margin of 40%. Management guided for a steady gross margin, underpinned by the rising share of high value-added products (eg sunroof, top-up display glass, electrochromic glass, etc.).

EARNINGS REVISION/RISK

We trim our 2021-23 net profit forecasts by 11%/9%/8% to Rmb3,827m/Rmb4,699m/ Rmb5,417m respectively on lower margins. Our 2021-23 earnings estimates are roughly in line with consensus estimates.

VALUATION/RECOMMENDATION

Maintain BUY and trim target price from HK$57.00 to HK$52.00, based on an unchanged 24x 2022F PE (2SD above historical mean 1-year forward PE and roughly on a par with domestic peers) and lower 2022F EPS.