1Q26 core earnings in line; 2Q margins become the key watchpoint

Overview

This report is Morgan Stanley’s review of Fuyao Glass Industry Group’s 1Q26 results. The company’s 1Q26 core operating performance was broadly in line with expectations: revenue grew YoY and gross margin continued to improve, but net profit was significantly dragged by FX losses. The report believes the overall investment thesis remains unchanged, with the market’s near-term focus shifting to 2Q margins, as well as changes in energy costs, volume, ASP, and rebates.

Core views

The key views are: first, the YoY and QoQ decline in 1Q26 net profit was mainly caused by FX losses, while operating profit still achieved YoY growth; second, revenue growth and gross margin expansion show the company still has advantages in market share and product mix; third, the current Equal-weight rating is maintained, and the target price is below the current share price, indicating an unremarkable risk-reward profile; fourth, natural gas and material costs, market share gains in the US/Europe, and China auto demand will determine subsequent earnings elasticity.

Analysis framework

The report uses a combination of earnings decomposition, YoY/QoQ comparison, margin analysis, and valuation framework, focusing on changes in revenue, gross profit, operating profit, net profit, EPS, and margins, while separately assessing non-operating FX impacts and core operating performance. On valuation, the A-share target price is based on DCF, while the H-share target price is derived from the A-share target price using an HK$1.12/RMB exchange rate and a five-year average 15% valuation discount.

Methodology notes

• Valuation MethodDCF Valuation

  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, 8% mid-term growth rate, and 3% terminal growth rate.

• Internal ModelMorgan Stanley ModelWare

  Morgan Stanley model framework

  Unless otherwise stated, the forecast metrics in the report are based on the Morgan Stanley ModelWare framework.

• Consensus ExpectationsRefinitiv Estimates

  Market consensus data

  The report notes that consensus data is provided by Refinitiv Estimates and is used to compare the company’s results with market expectations.

• Rating SystemMorgan Stanley Relative Rating System

  Equal-weight relative rating

  Equal-weight means that over the next 12 to 18 months, the stock’s risk-adjusted total return is expected to be broadly in line with the average of the industry under the analyst’s coverage, and it is not equivalent to the traditional definitions of buy, hold, or sell.

Asset mapping & comparison

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

• 3606.HK

  Core covered name, the H-share listed entity.

  Strengths

  YoY revenue growth, gross margin improvement, optimized product mix, and operating support from market share gains and ASP expansion.

  Weaknesses

  Net profit was dragged by FX losses, and the current share price is above the target price, making the near-term risk-reward profile unremarkable.

  Comparison

  The H-share target price is derived from the A-share target price, the HK$1.12/RMB exchange rate, and a five-year average 15% valuation discount.

  Risks

  Slower China auto demand, delayed ramp-up at the US plant, rising energy and material costs, and geopolitical disruptions.

• 600660.SS

  The same company’s A-share listed entity and the base asset for DCF valuation.

  Strengths

  Shares the same fundamentals as the H-shares and benefits from rising market share in automotive glass, gross margin improvement, and mid-term growth assumptions.

  Weaknesses

  Earnings are also exposed to FX, cost, and demand volatility.

  Comparison

  The A-share target price is derived from DCF valuation, with key assumptions of 13% WACC, 8% mid-term growth, and 3% terminal growth; the H-share target price is then translated at a discount on this basis.

  Risks

  China auto sales weaker than expected, slower-than-expected market share gains in the US/Europe, and higher-than-expected increases in energy and material costs.

Key data

• 1Q26 RevenueRMB10.413 billionUp 5% YoY and down 17% QoQ; the report believes the YoY growth reflects market share gains and ASP expansion, while the QoQ decline was mainly due to seasonality.
• 1Q26 Operating ProfitRMB2.179 billionUp 8% YoY and down 18% QoQ; broadly in line with market expectations after excluding non-operating impacts.
• 1Q26 Net ProfitRMB1.712 billionDown 16% YoY and 24% QoQ, mainly dragged by FX losses.
• 1Q26 FX ImpactFX loss of RMB439 millionCompared with an FX gain of RMB236 million in 1Q25, this had a clear negative impact on net profit.
• 1Q26 Gross Margin37.4%Up 2.0ppt YoY and 0.3ppt QoQ, supported by a more favorable product mix.
• 1Q26 EPSRMB0.66Down 15% YoY and 23% QoQ.
• H-share Target PriceHK$53.50Implies about 15% downside versus the closing price of HK$62.85 on April 21, 2026.
• Rating and Industry ViewEqual-weight / In-LineThe stock rating is Equal-weight and the industry view is In-Line.

Impact & implications

In terms of investment implications, the report conveys that “operational resilience is still decent, but valuation appeal is limited.” The company’s revenue and gross margin performance support the view of its medium- to long-term competitiveness, but FX, energy and material costs, US plant ramp-up, and fluctuations in China auto demand will affect earnings delivery. As the target price is below the current share price, the report does not provide a positive re-rating signal, and further confirmation from 2Q margins and demand data is needed.

Risks

• China auto sales growth comes in below expectations.
• Delayed capacity ramp-up at the US plant.
• Rising energy or material costs, especially pressure from natural gas costs on margins.
• Exchange rate fluctuations lead to non-operating profit and loss volatility.
• Geopolitical tensions may affect overseas business and valuation discounts.

What to watch

• Guidance on 2Q margins from the earnings call at 10:00 HKT on April 22, 2026.
• The impact of rising natural gas costs on gross margin and operating margin.
• Changes in 2Q volume, ASP, and rebates.
• Orders, penetration, and earnings contribution from AI smart glass-related opportunities.
• The pace of market share gains in the US and Europe.
• Whether China auto sales growth exceeds expectations or slows more sharply.