2Q26 revenue is expected to be soft, but gross margin should remain resilient

Overview

This report is Morgan Stanley's preview of Fuyao Glass Industry Group's 2Q26 results. The core view is that revenue is under pressure while margins should remain relatively stable: weak auto production weighs on volumes, product-mix upgrades support ASP growth, gross margin is expected to remain resilient, and the Ohio plant fire and foreign-exchange losses create short-term profit pressure.

Core views

The report believes 2Q26 core operating profit from automotive glass should be broadly stable. Negative factors include automotive-glass volumes being pressured by weak auto production and the impact of the Ohio plant fire on US operating profit. Positive factors include continued automotive-glass ASP growth and resilient gross margins. The overall view is neutral, with an Equal-weight rating and an In-Line industry view.

Analysis framework

The report uses an earnings-preview framework to assess 2Q26 profitability across revenue growth, volumes, ASPs, gross margin, foreign-exchange gains and losses, and disruption at the US plant. It derives an A-share target price using DCF valuation and then converts it into an H-share target price.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  The A-share target price is based on DCF valuation, with key assumptions including a 13% WACC, 15.3% cost of equity, 6.3% cost of debt, an 8% medium-term growth rate, and a 3% perpetual growth rate. The H-share target price uses an HK$1.12/RMB exchange rate and incorporates a 15% five-year average valuation discount.

• Research frameworkMorgan Stanley ModelWare

  Morgan Stanley internal modeling framework

  The report notes that, unless otherwise stated, all metrics are based on the Morgan Stanley ModelWare framework.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Fuyao Glass Industry Group (03606.HK)

  Research subject

  Strengths

  Continued automotive-glass ASP growth, gross-margin management superior to peers and resilient, and product-mix upgrades partially offsetting volume pressure.

  Weaknesses

  2Q26 revenue growth is expected to be flat, weak auto production weighs on volumes, RMB appreciation causes foreign-exchange losses, and the Ohio plant fire affects US operating profit.

  Comparison

  The report expects Fuyao's gross-margin performance to be better than peers, with 2Q gross margin potentially flat year over year and higher sequentially.

  Risks

  Chinese auto sales below expectations, delays in US plant ramp-up, higher energy and material costs, and persistent geopolitical tensions.

Key data

• Stock ratingEqual-weightMorgan Stanley's relative rating system, indicating that risk-adjusted total returns over the next 12-18 months are expected to be broadly in line with the average of the industry coverage universe.
• Industry viewIn-LineCorresponds to the industry view for China Autos & Shared Mobility.
• Target priceHK$53.50The price target generally applies over a 12-18 month horizon.
• Current priceHK$54.30Closing price on July 6, 2026.
• 2026e EPSRmb3.782026E EPS disclosed in the table.
• 2026e revenueRmb51,621.9mn2026E net revenue disclosed in the table.
• 2026e ModelWare net incomeRmb9,871.2mn2026E ModelWare net income disclosed in the table.
• 2026e EBITDARmb14,547.1mn2026E EBITDA disclosed in the table.

Impact & implications

The investment implication is that short-term revenue weakness and disruption to the US business limit upside, while ASP growth and gross-margin resilience reduce the risk of earnings downgrades. As the target price is slightly below the current share price, the report does not signal a positive re-rating and instead emphasizes waiting for changes in auto production, overseas market share, and costs. An improvement in Chinese auto sales or faster US/EU share gains could lead to upward earnings revisions; further deterioration in Chinese auto sales, delays in US plant ramp-up, or higher energy and material costs would pressure profits and valuation.

Risks

• Downside risks include a sharper-than-expected slowdown in Chinese auto sales.
• Delays in US plant ramp-up could weigh on overseas earnings.
• Higher energy and material costs could compress gross margins.
• Foreign-exchange losses from RMB appreciation against the US dollar could continue to affect profit performance.
• The Ohio plant fire negatively affects 2Q US operating profit, and insurance coverage can only partially offset the impact.

What to watch

• Whether actual 2Q26 revenue growth reaches the flat-growth expectation.
• Whether automotive-glass ASP growth can continue to offset volume pressure.
• Whether gross margin achieves a flat year-over-year result and sequential improvement.
• Progress in restoring the Ohio plant after the fire, the amount of insurance proceeds, and recovery in US business profit.
• The trend in Chinese auto sales and the pace of US/EU market-share gains.
• RMB/USD movements and changes in foreign-exchange gains and losses.