Fuyao Glass continues to upgrade its product mix, while overseas destocking and the recovery of its US plants are the key near-term variables

Overview

The report summarizes Fuyao Glass's 2Q26 earnings and key takeaways from its non-deal roadshow call, focusing on high-value-added product penetration, overseas aftermarket destocking, US fire-related compensation, and the ramp-up of the new plant. Morgan Stanley believes the product-mix improvement is sustainable and the pressure on overseas sales volume is temporary, but maintains an Equal-weight rating because the current target price is below the share price.

Core views

First, the report believes Fuyao Glass's product-mix upgrade remains underway. High-value-added products accounted for 59.68% of automotive glass revenue in 1H26, up 8.03 percentage points YoY, with smart glass and switchable glass contributing 3.87 percentage points of the increase. Management expects growing automotive intelligence worldwide to continue increasing the adoption of these products, improving the product mix and supporting the average selling price. This change is already reflected in pricing: the average selling price of automotive glass increased 7.4% YoY in 1H26; because tariff reimbursements were deducted from revenue, the increase was 8.7% excluding the tariff impact. Second, the pricing improvement has not yet fully translated into incremental revenue because overseas aftermarket destocking weighed on sales volume. Automotive glass sales volume declined 3.4% YoY in 1H26, mainly because overseas aftermarket automotive glass customers reduced inventories in 2Q26, which also slowed overseas revenue growth during the quarter. Morgan Stanley views this as a temporary headwind rather than a deterioration in overseas competitiveness and expects Fuyao to continue gaining overseas market share. The key issues going forward are when destocking will end and whether a recovery in sales volume, combined with the higher average selling price, can reaccelerate overseas revenue growth. Third, the US business is in a phase of recovering from fire-related losses and ramping up new capacity. The fire at the US plant caused losses of USD19.66mn, and USD6.5mn in insurance compensation was received in 2Q26; management expects to receive a further USD10.88mn in 3Q26. Meanwhile, utilization at the second US plant was 0% in 2Q26, and management expects it to rise to 20%-30% in 3Q26 and further to 50% in 4Q26. The insurance proceeds can partially offset the fire-related losses, while the sequential increase in capacity utilization will determine the pace of the US business recovery; if the ramp-up is delayed, the recovery timeline will also shift accordingly. Morgan Stanley's ModelWare table shows net revenue increasing from RMB45,787.4mn in 2025 to RMB66,985.4mn in 2028, EBITDA increasing from RMB13,164.4mn to RMB19,394.8mn, and ModelWare net income increasing from RMB9,312.3mn to RMB13,653.7mn. According to the report's table, earnings per share based on the consensus methodology are RMB3.57, RMB3.78, RMB4.53, and RMB5.23, respectively; Refinitiv consensus earnings per share are RMB3.66, RMB3.90, RMB4.58, and RMB5.26, respectively. The corresponding P/E declines from 16.9x in 2025 to 9.6x in 2028, EV/EBITDA declines from 12.2x to 6.9x, the dividend yield increases from 3.5% to 6.1%, and the free-cash-flow yield increases from 5.1% to 8.4%. These forecasts reflect growth in revenue, profit, and cash returns but do not alter the report's relatively neutral rating. Regarding valuation, the H-share base-case target price is derived from the A-share base-case target price using an exchange rate of HK$1.12 per RMB1 and incorporating the five-year average 15% valuation discount associated with the different investor bases. The A-share target price is derived through DCF, with key assumptions including a 13% weighted average cost of capital, comprising a 15.3% cost of equity and a 6.3% cost of debt, an 8% medium-term growth rate, and a 3% perpetual growth rate. The resulting H-share target price is HK$53.50, approximately 8% below the HK$58.30 closing price on August 19, 2026. The report therefore assigns an Equal-weight rating and an In-Line industry view rather than a more positive relative rating based on the operational improvement.

Analysis framework

The report first extracts management commentary from the 2Q26 earnings release and non-deal roadshow call, then breaks automotive glass revenue into three dimensions: product mix, average selling price, and sales volume, distinguishing the effects of tariff accounting and overseas destocking. It subsequently tracks the sequential recovery path of insurance compensation for the US fire and utilization at the second plant and incorporates this operating information into Morgan Stanley ModelWare financial forecasts. For valuation, the report first calculates the A-share target price using DCF and then derives the H-share target price based on the exchange rate and the H shares' historical discount to the A shares.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of automotive glass sales volume, average selling price, and product mix

  The report separately examines the decline in sales volume, growth in the average selling price, and changes in the share of high-value-added products to explain revenue performance and the sources of slower overseas revenue growth.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analysis of overseas aftermarket automotive glass destocking

  The report attributes the pressure on overseas sales volume in 2Q26 to aftermarket customers reducing inventories and accordingly judges the impact to be temporary, while using changes in overseas market share to assess the demand recovery and competitive performance.

• Valuation MethodDCF Discounted Cash Flow

  A-share DCF valuation and H-share discount conversion

  The report estimates the A-share target price using a 13% weighted average cost of capital, an 8% medium-term growth rate, and a 3% perpetual growth rate, then derives the H-share target price using an exchange rate of HK$1.12 per RMB1 and a five-year average valuation discount of 15%.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare framework

  The report uses ModelWare to present standardized forecasts for revenue, EBITDA, net income, valuation multiples, dividend yield, and free-cash-flow yield, linking operating assumptions to the valuation conclusion.

Asset mapping & comparison

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

• Fuyao Glass Industry Group (3606.HK)

  The H-share covered by the report, whose operating performance is directly related to high-value-added product penetration, overseas market share, the aftermarket inventory cycle, and the recovery of the US plants.

  Strengths

  The share of high-value-added products has increased significantly, with smart and switchable glass driving product-mix improvement; the average selling price of automotive glass has risen, and the report expects overseas market share to continue increasing.

  Weaknesses

  Sales volume declined 3.4% YoY in 1H26, while overseas aftermarket destocking in 2Q26 slowed overseas revenue growth; the US plant incurred fire-related losses, and the second plant remains in the ramp-up phase.

  Comparison

  The H-share target price is based on the A-share DCF target price, converted at HK$1.12 per RMB1 and applying a five-year average valuation discount of 15%.

  Risks

  China auto sales below expectations, a delayed ramp-up at the US plant, and rising energy or material costs could create downside pressure.

Key data

• Revenue share of high-value-added products59.68%Share of automotive glass revenue in 1H26, up 8.03 percentage points YoY.
• Contribution from smart and switchable glass3.87 percentage pointsContribution to the YoY increase in the share of high-value-added products in 1H26.
• Automotive glass average selling price growthYoY +7.4%1H26 data; up 8.7% YoY excluding the tariff impact.
• Automotive glass sales volume growthYoY -3.4%1H26 data, mainly affected by overseas aftermarket destocking in 2Q26.
• Fire-related losses at the US plantUSD19.66mnLosses caused by the fire at the US plant.
• 2Q26 insurance compensationUSD6.5mnFire-related insurance compensation already received in 2Q26.
• Expected additional insurance compensation in 3Q26USD10.88mnManagement expects to receive it in 3Q26.
• Utilization at the second US plant0% / 20%-30% / 50%Corresponding respectively to the 2Q26 actual level, management's 3Q26 expectation, and management's 4Q26 expectation.
• Net revenue forecastRMB45,787.4 / 51,621.9 / 59,194.8 / 66,985.4mnCorresponding respectively to 2025, 2026 estimate, 2027 estimate, and 2028 estimate.
• ModelWare net income forecastRMB9,312.3 / 9,871.2 / 11,821.6 / 13,653.7mnCorresponding respectively to 2025 through 2028.
• P/E16.9x / 13.2x / 11.1x / 9.6xCorresponding respectively to 2025 through 2028.
• EV/EBITDA12.2x / 9.6x / 8.0x / 6.9xCorresponding respectively to 2025 through 2028.
• Dividend yield3.5% / 4.4% / 5.3% / 6.1%Corresponding respectively to 2025 through 2028.
• Core DCF assumptionsWACC 13%; medium-term growth rate 8%; perpetual growth rate 3%WACC includes a 15.3% cost of equity and a 6.3% cost of debt.
• H-share target price conversion assumptionsHK$1.12/RMB; 15% discountBased on the A-share target price and applying the five-year average valuation discount.

Impact & implications

The report believes that increasing penetration of high-value-added automotive glass can continue to improve the product mix and average selling price, while overseas aftermarket destocking is the main source of near-term pressure on sales volume and revenue. Additional insurance compensation in 3Q26 and higher utilization at the second US plant from 3Q26 to 4Q26 are expected to support a gradual recovery in the US business; however, the HK$53.50 target price is below the share price on the report date, so the operational improvement has not yet translated into a more positive relative rating.

Risks

• Upside risk: Operating performance could exceed the report's base case if China auto sales growth is higher than expected.
• Upside risk: Overseas growth could be stronger than expected if market-share gains in the United States and Europe accelerate.
• Upside risk: An end to geopolitical tensions could improve the operating environment.
• Downside risk: China auto sales could slow more than expected.
• Downside risk: The ramp-up in capacity utilization at the US plant could be delayed.
• Downside risk: Energy or raw-material costs could rise.

What to watch

• Track the share of high-value-added products in automotive glass revenue and the contributions from smart and switchable glass.
• Monitor when overseas aftermarket automotive glass destocking ends and whether overseas revenue growth can recover.
• Verify the additional USD10.88mn in insurance compensation that management expects to receive in 3Q26.
• Track whether utilization at the second US plant can reach 20%-30% in 3Q26 and 50% in 4Q26.
• Monitor China auto sales and changes in Fuyao's market share in the United States and Europe.