Fuyao Glass's core margins remain resilient, but slowing growth prompts A/H-share ratings downgrade to Neutral

Overview

This report reviews Fuyao Glass's 2Q26 results and reassesses its growth, earnings forecasts, and valuation. Goldman Sachs believes the company has maintained resilient core margins through penetration of high-value-added products, market share gains, and cost controls. However, stagnating global automotive production, a higher existing market share base, and slowing overseas revenue will significantly lower its future growth trajectory, prompting the downgrade of both its A-shares and H-shares from Buy to Neutral.

Core views

The key tension in the 2Q26 results was weak revenue growth alongside strong margin performance. Revenue and net profit were 3% and 8% below Goldman Sachs estimates, respectively, while quarterly revenue increased only 0.2% yoy and operating profit growth slowed to 5%, both among the slowest levels since 1Q23. Revenue growth decelerated markedly from 5% yoy in 1Q26, even though the decline in global automotive production narrowed from 2% in 1Q26 to 1% in 2Q26; management mainly attributed the weak revenue performance to the delivery schedules of overseas automakers. Net profit fell 19% yoy, mainly because 2Q26 recorded an Rmb364mn foreign-exchange loss, compared with an Rmb301mn foreign-exchange gain in 2Q25. Margins, however, showed clear resilience. The 2Q26 gross margin was 40.2%, up 1.7 and 2.8 percentage points yoy and qoq, respectively, and above Goldman Sachs's 37.5% estimate, with US tariff refunds providing a one-off contribution of 1.28 percentage points. Excluding this impact, gross profit was approximately Rmb4.5bn, 0.1% above Goldman Sachs estimates, and gross margin was 38.9%, still up 0.4 percentage points yoy and 1.5 percentage points qoq. EBIT was 7% above Goldman Sachs estimates, while the operating margin improved 1.0 percentage point yoy, reflecting how penetration of high-value-added products and cost controls offset weakness in the automotive market, particularly in China. The volume-price mix further illustrates the sources of margin improvement. Total 1H26 revenue was Rmb22.0bn, up 2% yoy; automotive glass revenue was Rmb20.3bn, up 4% yoy. Automotive glass sales volume fell 3% yoy, but the average selling price increased 7.43%, exceeding management's guidance of 6%-7%. Domestic and overseas automotive glass revenue increased by 4.8% and 2.6%, respectively, while the China and ex-China automotive production figures cited by the company declined by 6% and 1%, respectively, indicating continued market share gains. High-value-added products accounted for 59.7% of total 1H26 revenue, up from 57.6% in 1Q26; panoramic sunroof glass, HUD glass, and tempered laminated glass represented 14.34%, 12.55%, and 7.97% of revenue, respectively, up 2.84, 1.63, and 2.16 percentage points yoy. Goldman Sachs continues to view Fuyao as the global leader in automotive glass and recognizes that the company has maintained an average operating margin of over 20% since 2000 across multiple demand cycles, continuously expanded its domestic and overseas market shares, and delivered an ROE above peers. However, the growth environment is changing: Goldman Sachs estimates that global automotive production will shift from a 4% CAGR in 2023-2025 to zero growth in 2026E-2028E, while the company has already secured relatively high market shares domestically and overseas. Consequently, the company's revenue and net profit growth are expected to slow from 18% and 25% in 2023-2025 to 9% and 9%, respectively, in 2026E-2028E. Further market share gains and higher product value per vehicle can still support growth, but are unlikely to fully replicate the previous pace. For 2026E, Goldman Sachs forecasts revenue of Rmb49.3bn, up 8% yoy, comprising an 8.2% increase in average selling price and a 0.5% decline in sales volume; gross margin is expected to reach 39.0%, up 1.7 percentage points yoy. Driven by gross margin improvement and a stable operating expense ratio, EBIT is expected to grow 16%, with the EBIT margin reaching 23.8%, up 1.8 percentage points yoy; net profit, however, is expected to grow only 5%, mainly due to foreign-exchange losses associated with renminbi appreciation. Following the results, Goldman Sachs cut 2026E EPS by 6% due to slowing revenue and year-to-date foreign-exchange losses, but raised 2027E and 2028E EPS by 3% and 6%, respectively, based on stronger gross margins from high-value-added products and cost controls, with no foreign-exchange gains or losses forecast for the latter two years. There are still signs of improvement in overseas and other businesses. The company expects European revenue growth to outpace the US and plans to continue gaining share from local competitors. The US business recorded an operating margin of 11.8% in 1H26, below 12.38% in 1Q26 but above 11.2% in 1H25, demonstrating operational resilience following the fire at the Ohio plant early in the year. Management believes cost inflation in natural gas and freight is gradually normalizing, with declines in soda ash and freight costs expected for the full year; as orders recover in 3Q, the Rmb7.7bn capital expenditure plan for 2026 remains unchanged. In the aluminum trim business, the company expects European revenue to stabilize in 2026 following the 2025 strategic adjustment and targets breakeven, while the domestic business's operating margin rose from 2.3% in 1Q26 to 7.4% in 2Q26. Cash flow improved significantly, although leverage increased. Free cash flow was Rmb3.0bn in 2Q26, a substantial improvement from Rmb-779mn in 1Q26 and Rmb1.7bn in 2Q25; period-end net cash was Rmb1.1bn, above Rmb560mn in 1Q26 but below Rmb2.1bn in 2Q25. Days sales outstanding was 67 days, longer than in 1Q26 but shorter than in 2Q25; days payable outstanding was 117 days, longer both yoy and qoq; inventory days were 93 days, slightly lower qoq but higher yoy. The total debt-to-equity ratio rose to 55%, compared with 51% in 1Q26 and 45% in 2Q25; the total liabilities-to-assets ratio increased to 48%, versus 47% and 46% in the respective comparison periods. The valuation and rating changes reflect the lower growth trajectory and prior relative performance. Goldman Sachs lowered its A-share valuation multiple from 18.5x to 16x and maintained a 10% P/E discount for H-shares relative to A-shares; the report summary states that the target prices are now based on blended 2026E/2027E EPS, while the investment thesis section separately lists A/H-share valuations of 16x/14.4x 2026E P/E. The 12-month A/H-share target prices were lowered from Rmb73/HK$73 to Rmb65/HK$64, implying 12% and 11% upside. From the beginning of the year through the report date, the A/H-shares fell 10% and 13%, respectively, outperforming the 24% decline in the autos and auto parts sector; since their addition to the Buy list on July 24, 2023, the A/H-shares have risen 72% and 93%, respectively, versus gains of 21% and 45% for the CSI 300 and Hang Seng China Enterprises Index over the same period. Goldman Sachs believes the previous relative strength has already reflected continued market share gains and higher average selling prices driven by high-value-added products. As the new target price upside is limited relative to the coverage group, it downgraded both listings from Buy to Neutral.

Analysis framework

Goldman Sachs first compares 2Q26 revenue, gross profit, EBIT, and net profit with its own forecasts and with yoy and qoq data, then breaks operating performance down into sales volume, average selling price, product mix, market share, costs, and foreign-exchange effects. It subsequently adjusts its 2026E-2028E earnings forecasts based on global automotive production assumptions, domestic and overseas market share potential, and management's operating guidance. Target valuations are determined using the coverage group's average P/E and the company's growth and ROE characteristics relative to peers, after which ratings are adjusted based on the relative return potential implied by the target prices.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of automotive glass revenue into sales volume and average selling price

  The report decomposes revenue growth into changes in sales volume and average selling price: 1H26 sales volume fell 3%, but average selling price increased 7.43%, indicating that pricing and mix improvements from high-value-added products were the main sources of growth in automotive glass revenue and margins.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Linkage among global automotive production, market share, and company growth

  The report uses global automotive production as the basis for industry demand, then incorporates changes in Fuyao's market shares in China and overseas to assess its revenue trajectory. The expected shift in industry production from prior growth to stagnation is the key assumption behind the downgrade to the company's medium-term growth.

• Valuation MethodPE/PEG valuation

  Target price valuation based on expected EPS and peer P/E multiples

  Considering the company's lower future growth than peers but higher ROE, Goldman Sachs lowered the A-share target P/E from 18.5x to 16x and maintained a 10% discount for H-shares, using these assumptions to calculate the 12-month target prices.

• Company Fundamentals and Financial FrameworkWorking capital cycle

  Analysis of accounts receivable, accounts payable, and inventory turnover days

  The report compares changes in accounts receivable, accounts payable, and inventory days in 2Q26 with the previous quarter and the prior-year period to assess working capital efficiency, and evaluates the financial position alongside changes in free cash flow, net cash, and leverage.

Asset mapping & comparison

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

• Fuyao Glass Industry Group (A) (600660.SS)

  The company's A-shares are directly covered by the report, with the rating downgraded from Buy to Neutral and a 12-month target price of Rmb65, representing 12% upside.

  Strengths

  Global leader in automotive glass, with continued domestic and overseas market share gains, higher average selling prices and margins driven by high-value-added products, and ROE above peers.

  Weaknesses

  Slowing global automotive production and a relatively high existing market share will lower future revenue and net profit growth, while foreign-exchange losses also weigh on 2026.

  Comparison

  The 16x target P/E is in line with the average blended 2026E/2027E P/E of Goldman Sachs's mobile technology coverage group; the company's growth is below the peer average, but its ROE is above the peer average.

  Risks

  Weaker-than-expected automotive and EV sales, price competition caused by new entrants, and higher tariffs or taxes on global automotive components.

• Fuyao Glass Industry Group (H) (3606.HK)

  The company's H-shares are directly covered by the report, with the rating downgraded from Buy to Neutral and a 12-month target price of HK$64, representing 11% upside.

  Strengths

  Represents the same global automotive glass business as the A-shares, benefiting from overseas market share gains, penetration of high-value-added products, and cost controls.

  Weaknesses

  Slowing overseas revenue growth, weak global automotive demand, and foreign-exchange fluctuations may affect earnings delivery.

  Comparison

  The H-shares maintain a 10% P/E discount to the A-shares, while the report separately lists a target valuation of 14.4x 2026E P/E.

  Risks

  Weaker-than-expected automotive and EV sales, competition from new entrants, and changes in overseas tariff and tax policies.

Key data

• 2Q26 revenue performanceyoy +0.2%, 3% below GSeGrowth slowed from +5% yoy in 1Q26, mainly due to the delivery schedules of overseas automakers.
• 2Q26 gross margin40.2%+1.7 percentage points yoy and +2.8 percentage points qoq, above GSe of 37.5%.
• 2Q26 gross margin excluding tariff refunds38.9%US tariff refunds provided a one-off contribution of 1.28 percentage points; adjusted gross margin was +0.4 percentage points yoy and +1.5 percentage points qoq.
• 2Q26 net profityoy -19%, 8% below GSeMainly dragged down by an Rmb364mn foreign-exchange loss, versus an Rmb301mn foreign-exchange gain in 2Q25.
• 1H26 total revenueRmb22.0bnUp 2% yoy.
• 1H26 automotive glass revenueRmb20.3bnUp 4% yoy; sales volume fell 3% yoy, while average selling price increased 7.43% yoy.
• High-value-added product share59.7%Share of total revenue in 1H26, up from 57.6% in 1Q26.
• High-value-added product mixPanoramic sunroof 14.34%; HUD 12.55%; tempered laminated glass 7.97%Revenue shares increased by 2.84, 1.63, and 2.16 percentage points yoy, respectively.
• 2026E revenue forecastRmb49.3bn, yoy +8%Assumes average selling price of +8.2% yoy and sales volume of -0.5% yoy.
• 2026E profitability forecastGross margin 39.0%; EBIT margin 23.8%Gross margin +1.7 percentage points yoy, EBIT expected to rise 16% yoy, and EBIT margin +1.8 percentage points yoy.
• 2026E net profit growth+5%Foreign-exchange losses associated with renminbi appreciation constrain net profit growth.
• EPS forecast revisions2026E -6%; 2027E +3%; 2028E +6%The near-term cut reflects revenue and foreign-exchange losses, while the increases in the latter two years reflect stronger margins.
• US business 1H26 operating margin11.8%12.38% in 1Q26 and 11.2% in 1H25.
• 2026 capital expenditure planRmb7.7bnOrders recovered in 3Q, and management maintained the original capital expenditure plan.
• 2Q26 free cash flowRmb3.0bnRmb-779mn in 1Q26 and Rmb1.7bn in 2Q25.
• 2Q26 period-end net cashRmb1.1bnRmb560mn in 1Q26 and Rmb2.1bn in 2Q25.
• 2Q26 leverageTotal debt-to-equity ratio 55%; total liabilities-to-assets ratio 48%Both metrics increased from 1Q26 and 2Q25.
• 12-month target pricesA-shares Rmb65; H-shares HK$64Both were previously 73; implying 12% and 11% upside, respectively.

Impact & implications

The report believes Fuyao Glass's high-value-added products, market share gains, and cost controls can continue to protect margins amid industry weakness and support higher medium- to long-term earnings forecasts. However, global automotive production approaching zero growth, the company's already high market share base, and foreign-exchange headwinds make it difficult for revenue and net profit to sustain the rapid growth seen in 2023-2025. Following significant prior outperformance against the benchmarks, target price upside is limited relative to the coverage group, resulting in a rating change to Neutral.

Risks

• If global automotive production grows faster than expected, the company could generate higher revenue through stable market share in China and overseas market share expansion.
• If penetration of high-value-added glass products proceeds faster than expected, product mix, average selling prices, and margins could exceed forecasts.
• If raw material and energy costs decline, the company's profitability could improve further.
• If automotive or EV sales in China and globally are weaker than expected, the company's sales volume and revenue will face downward pressure.
• If more manufacturers enter the automotive glass industry, short-term price competition could hurt the company's revenue and profitability.
• Higher global import and export tariffs or taxes on automotive components could primarily affect overseas revenue; overseas revenue accounted for 47% of total revenue in 2025.

What to watch

• Monitor whether 2026E-2028E global automotive production meets Goldman Sachs's baseline assumption of zero growth.
• Monitor the share of high-value-added products, automotive glass average selling prices, and their continued contribution to gross margin.
• Monitor market share gains in Europe and the US business's margin performance following the fire at the Ohio plant.
• Monitor the renminbi exchange rate and the impact of foreign-exchange gains and losses on 2026 net profit.
• Monitor changes in natural gas, soda ash, and freight costs, as well as progress on the Rmb7.7bn capital expenditure plan.
• Monitor whether the European aluminum trim business can achieve breakeven and whether the domestic operating margin can continue to improve.
• Monitor new entrants in automotive glass, potential price competition, and changes in global tariff and tax policies.