2Q26 Gross Margin Hits Record High; Underlying Earnings Remain Resilient Despite Weak Demand
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2Q26 Gross Margin Hits Record High; Underlying Earnings Remain Resilient Despite Weak Demand
Fuyao Glass's 2Q26 net profit was broadly in line with expectations, while gross margin remained at 38.9% excluding a one-off U.S. tariff refund; J.P. Morgan maintains a Neutral rating due to fair valuation and demand pressures.
- Reported 2Q26 gross margin was 40.2%, including a 1.28ppt one-off contribution from a U.S. tariff refund; excluding this, underlying gross margin was 38.9%, up 0.4ppt YoY and 1.5ppt QoQ.
- Excluding foreign-exchange effects, 2Q26 pre-tax profit rose 1% YoY and 21% QoQ, indicating relatively resilient underlying earnings amid weak Chinese auto production.
- 1H26 sales volume declined 3.4% YoY, but average selling price rose 7.4% YoY; excluding tariff-related accounting effects, underlying average selling price increased 8.7%.
- The company declared an interim dividend of RMB1.00 per share, up 11% YoY, with the payout ratio rising to 66%.
- The target price is HK$58.00, implying approximately 2.2% upside from the report-date share price of HK$56.75.
Report interpretation
Overview
Fuyao Glass reported 1H26 results, with 2Q26 net profit broadly in line with J.P. Morgan's expectations. Despite weak momentum in Chinese auto production and sales, the company maintained strong underlying gross-margin performance through improved capacity utilization and penetration of higher-value-added products. The report maintains a Neutral rating, viewing the current valuation as already largely reflecting fundamentals.
Core views
The report considers 2Q26 operating performance mixed: profits were relatively resilient after excluding FX disruptions, and gross-margin performance beat expectations; however, sales volume remained weak, average selling price growth decelerated, and overseas revenue growth was affected by the pass-through of U.S. tariff refunds to ARG customers. Key issues ahead are the sustainability of margin improvement and the recovery outlook for second-half volume and average selling price.
Analysis framework
The analysis focuses on quarterly income statements, gross margin, sales volume, average selling price, capacity utilization, and regional revenue growth. It assesses underlying operating performance after separating one-off accounting effects such as FX movements and U.S. tariff refunds; valuation uses a 2027 forward P/E approach.
Methodology notes
Separating U.S. tariff refunds and FX effects from operating performance
The report excludes the 1.28ppt gross-margin contribution from U.S. tariff refunds and excludes FX effects when assessing pre-tax profit, to evaluate the resilience of core operating earnings.
Setting the target price based on 2027 forward P/E
The HK$58.00 target price is based on 14x 2027 forward P/E, below the historical average of around 16x to reflect a slower demand environment.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Fuyao Glass - H (3606.HK)Directly Covered Company
- Strengths
- Global automotive-glass leader; new energy vehicles and ADAS increase value per vehicle; recovering capacity utilization; penetration of higher-value-added products; opportunities to expand market share in the U.S. and Europe.
- Weaknesses
- Weak Chinese auto demand pressures sales volume; average selling price growth has slowed; overseas revenue growth is weighed down by tariff-refund accounting treatment.
- Comparison
- The target valuation is 14x 2027 forward P/E, slightly below the historical average of around 16x, reflecting a weak demand environment.
- Risks
- Automotive-glass sales below expectations, greater pricing pressure, weaker FYSAM operating performance, higher depreciation and amortization from capacity expansion, and reduced export VAT rebates.
Key data
- 2Q26 Reported Gross Margin40.2%Up 1.7ppt YoY and 2.8ppt QoQ.
- 2Q26 Underlying Gross Margin38.9%After excluding the one-off 1.28ppt impact from the U.S. tariff refund.
- 2Q26 Pre-tax Profit GrowthYoY +1%, QoQ +21%Excluding FX effects.
- 1H26 Sales Volume GrowthYoY -3.4%Affected by weak Chinese auto production.
- 1H26 Average Selling Price GrowthYoY +7.4%YoY +8.7% after excluding tariff-related accounting effects.
- 1H26 Sales Rebate Rate1.16%Below management's FY26 guidance of around 2%.
- Interim DividendRMB1.00/shareUp 11% YoY, implying a 66% payout ratio.
- Target PriceHK$58.00Based on 14x 2027 forward P/E.
Impact & implications
In the near term, gross-margin and underlying earnings resilience supports valuation, but weak sales volume, uncertainty over demand recovery, and limited target-price upside constrain the case for a rating upgrade. Over the medium to long term, greater penetration of new energy vehicles and ADAS should increase automotive-glass value per vehicle, while Phase II U.S. capacity ramp-up and the exit of European competitors should help the company expand overseas market share.
Risks
- Automotive-glass sales volume may fall below expectations.
- Industry competition may increase pricing pressure.
- New capacity ramp-up may raise depreciation and amortization and compress margins.
- Reductions in export VAT rebates may affect earnings.
- FYSAM operating performance may be weaker than expected.
- FX volatility may continue to disrupt reported profit.
- U.S. tariff-related refunds and accounting treatment may affect comparability of revenue, average selling price, and gross margin.
What to watch
- Management guidance on the sustainability of gross-margin improvement.
- 2H26 sales volume, average selling price, and the recovery of Chinese auto demand.
- Whether capacity utilization can remain around the 82% level in 2Q26.
- Progress on Phase II U.S. capacity ramp-up and new model launches.
- European export expansion and changes in the competitive landscape.
- Actual recovery in overseas revenue and average selling price after tariff refunds.
- Whether the sales rebate rate rises toward management's FY26 guidance of around 2%.