Aluminium Trim Business Adds To Earnings Momentum
FYG’s businesses are growing on all fronts. CRU of its auto glass plant recovered from 75% in 1Q23 to 80% in 2Q23, with inventory drawn down. For 2023, FYG guides for mid single-digit growth in auto glass sales volume. For its aluminium trim business, FYG targets to quintuple revenue from Rmb1.18b in 2022 to Rmb6.00b in the next few years. Based on that, we raise 2023-25 EPS by 6%/9%/11% to Rmb1.92/Rmb2.28/Rmb2.80 respectively. Maintain BUY. Raise target price to HK$42.00.
WHAT’S NEW
• CUR rebounded to over 80% in 2Q23 with inventories depleted. Fuyao Glass Industry Group (FYG) saw a rebound in capacity utilisation rate (CUR) of its auto glass plant from 75% in 1Q23 to 80% in 2Q23, Meanwhile, inventory days have been drawn down from 74 days as of 31 Mar 23 to a normal level of 67-68 days, implying faster growth in sales volume compared to production volume. Going forward, CRU will probably rise further to over 80% in 2H23, implying an average CRU of over 80% for full-year 2023.
• Sales volume expected to grow at mid-single digits in 2023. FYG guides for mid-single digit growth in auto glass sales volume for 2023. Domestic sales volume is expected to grow 3-4% to 21m sets in 2023, in tandem with the overall industry. Exports to Europe and other countries excluding the US should grow by double digits to c. 4m sets and 1.5m-2.0m sets respectively in 2023, driven by growing orders for new auto glass from European carmakers. With the Ukraine-Russia war causing gas shortage in Europe, many European carmakers have been shifting orders of auto glass from Europe to FYG. Export of aftermarket replacement glass (ARG) to the US will probably remain steady at 2m sets in 2023. The US plant will likely grow sales volume by 16% to 4.3m sets in 2023, based on the growing orders from American carmakers. All in all, FYG’s auto glass sales volume will probably grow by mid-single digits to c. 33m sets, roughly in line with our estimate.
• Revenue of aluminium trim business targeted to quintuple from Rmb1.18b in 2022 to Rmb6.00b in the next few years. In 2022, FYG registered Rmb1.18b in revenue from the aluminium trim business, which includes Rmb900m from its Germany subsidiary FYSAM and Rmb280m from FYG’s China plants. FYG targets to grow the business’ revenue to Rmb1.5b in 2023 and Rmb6.0b in the next few years. Aluminium trims are installed around the glass of the rear side window. FYG combines aluminium trims and auto glass to provide an entire module of rear side window for carmakers, making it easier to penetrate the supply chain of European carmakers.
• The prospective quintupling of the aluminium trim business’ revenue will be driven by strong order flows from carmakers in China and overseas and capacity expansion. After capacity expansion at end-22, FYSAM could generate a maximum revenue of Rmb2b at full CRU. FYSAM’s CRU will probably rise from 45% in 2022 to over 50% in 2023, implying a 20% growth in revenue to Rmb1.1b. FYSAM registered a net loss of €59.69m, including Rmb45m in net loss from operations and €15m in provisions. For 2023, FYSAM targets to narrow net loss to €20m. We expect FYSAM to turn around by 2H24 with an estimated CUR of 70%.
• For the aluminium trim business in China, FYG has three production lines ? one in Fuqing and two new ones in Changchun just completed in early-23. Each production line is designed to generate maximum Rmb600m-700m in revenue. FYG plans to add one production line in Fuqing plant in 2023 and another two production lines in Suzhou in 2024. As such, FYG will have six production lines for aluminium trims in China by the end of 2024, which will be able to generate over Rmb4b in revenue. Given Rmb300m in investment and estimated revenue of Rmb600m-700m for every production line and net margin of 13-15%, the ROIC would be 26-35%, higher than about 20% for FYG’s auto glass business.
• Gross margin to be underpinned by high CRU and peaking of soda ash prices and natural gas prices. FYG expects the average soda ash price in China to drop 17% from Rmb3,000/tonne in 2022 to not more than Rmb2,500/tonne. In 1H23, soda ash price dropped to Rmb2,800-2,900. Natural gas prices have also stabilised ytd. At these levels of raw material prices and fuel prices, gross margin could improve on top of 2022’s 34%.
STOCK IMPACT
• Maintain 2023-25 sales estimates at 32.3m sets/33.5m sets/34.9m sets respectively, implying 4% CAGR, based on 3% CAGR in global automobile sales volume.
• Keep 2023-25 assumptions on ASP hike at 12% p.a., implying 2023-25 ASP of Rmb924/set, Rmb1,35/set and Rmb1,159/set respectively, vs management’s guidance of >Rmb1,500/set for 2025. Our projections are based on a 5-6ppt p.a. increase in high value-added products in revenue mix in 2023-25 from 45% in 2022. We do not expect the pricing pressure on automakers to feed through to lower prices of auto glass, as all large automobile glass manufacturers (with the exception of FYG) are either barely making profit or making losses, implying no room for additional price cuts.
• We factor in Rmb1.5b/Rmb2.4b/Rmb3.3b in revenue from the aluminium trim business for 2023/24/25 respectively, compared to the company’s long-term target of Rmb6.0b. • We maintain 2023-25 gross margin assumptions at 34-35%, on a par with those of 2022, based on the stabilising soda ash prices and natural gas prices.
EARNINGS REVISION/RISK
• We raise our 2023-25 earnings estimates by 6%/9%/11%. We raise our forecasts on 2023-24 net profit and EPS to Rmb5,016m/Rmb5,938m/Rmb7,299m and Rmb1.92/Rmb2.28/Rmb2.80 respectively, as we factor in the contribution from the aluminium trim business.
• We estimate 2Q23 net profit at Rmb1.05b (+30% yoy/+6% qoq), based on Rmb7.5b in revenue (+18% yoy/+7% qoq) and 14% net margin.
• Risks to our earnings estimates may come from the fluctuations in raw material prices and natural gas prices.
VALUATION/RECOMMENDATION
• Maintain BUY and raise target price from HK$40.00 to HK$42.00, based on higher 2023F EPS and the unchanged 19x target 2023F PE, on par with historical mean one-year forward PE.