2Q26 Core Earnings Meet Expectations, with Gross Margin Improvement a Key Focus

Overview

Morgan Stanley reviews Fuyao Glass Industry Group's 2Q26 results. Core operating performance broadly met expectations, but net profit was weighed down by FX losses and weaker auto production; market focus has shifted to gross-margin sustainability and 2H operating trends.

Core views

The company's 2Q26 operating profit rose 5% YoY to RMB2.8 billion, broadly in line with market expectations. Net profit fell 19% YoY to RMB2.3 billion, mainly because FX gains of RMB366 million in the prior-year period turned into FX losses of RMB364 million in the current period. Gross margin rose to 40.2%, showing a notable improvement despite higher natural gas, freight, and electricity costs in Ohio, U.S., potentially benefiting from a more favorable high-margin product mix and potential U.S. tariff compensation.

Analysis framework

The report compares quarterly results with market expectations, separates non-operating FX effects, and focuses on gross margin, product mix, cost pressures, regional market share, and the impact of the U.S. plant incident on subsequent earnings.

Methodology notes

• Valuation methodsDCF Valuation

  Discounted Cash Flow Valuation

  The A-share base target price uses DCF valuation; key assumptions include a 13% WACC, 8% mid-term growth rate, and 3% terminal growth rate.

• Relative ValuationA/H Share Valuation Discount

  Five-Year Average Valuation Discount

  The Hong Kong share base target price converts the A-share base target price at an HK$1.12/RMB exchange rate and applies a 15% five-year average valuation discount.

• Earnings AnalysisModelWare

  Earnings Forecasts and Consensus Comparison

  The report uses Morgan Stanley's ModelWare framework and references Refinitiv consensus data.

Asset mapping & comparison

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

• 3606.HK

  Fuyao Glass Industry Group Hong Kong Shares

  Strengths

  Improving gross margin, optimized product mix, and potential overseas market-share gains.

  Weaknesses

  Net profit is weighed down by FX losses, and the current share price is above the target price.

  Comparison

  The Hong Kong share target price is based on the A-share DCF base target price with a 15% valuation discount.

  Risks

  Slower China auto sales, delayed ramp-up at the U.S. plant, and rising energy and raw-material costs.

• 600660.SS

  Fuyao Glass Industry Group A Shares

  Strengths

  The base asset for DCF valuation, benefiting from improved operating profit and gross margin.

  Weaknesses

  Also faces FX, cost, and auto-production risks.

  Comparison

  The A-share base target price uses DCF valuation, with the Hong Kong share target price derived through conversion and a discount.

  Risks

  Weaker China auto demand and overseas operating uncertainties.

Key data

• 2Q26 Net ProfitRMB2.3 billion, down 19% YoYWeighed down by weaker auto production and RMB364 million of FX losses.
• 2Q26 Operating ProfitRMB2.8 billion, up 5% YoYExcluding non-operating impacts, broadly in line with market expectations.
• 2Q26 Gross Margin40.2%Up 1.7 percentage points YoY and 2.8 percentage points QoQ, a quarterly high since 2021.
• Hong Kong Share Rating and Target PriceEqual-weight; HK$53.50The closing price on 2026-08-18 was HK$56.75, implying approximately 6% downside.
• 2026E RevenueRMB51.6219 billionMorgan Stanley forecast.
• 2026E Earnings Per ShareRMB3.78Morgan Stanley forecast.

Impact & implications

The gross-margin improvement suggests that product mix and potential tariff compensation can partly offset energy, freight, and U.S. electricity cost pressures, but FX volatility and end-market auto production will continue to affect earnings delivery. If volume, ASP, and rebate trends improve, or U.S. insurance compensation exceeds expectations, earnings forecasts could be revised upward; otherwise, valuation may come under pressure.

Risks

• China auto sales growth is below expectations.
• Delayed ramp-up at the U.S. plant.
• Rising energy and raw-material costs.
• Continued FX losses due to exchange-rate volatility.
• Insurance compensation amount or recognition timing for the U.S. plant fire falls short of expectations.

What to watch

• 2H gross-margin trend and cost pass-through capability.
• 3Q volume, average selling price, and rebates.
• Impact of the U.S. plant fire and 3Q insurance compensation amount.
• Changes in China auto demand.
• Progress in gaining market share in the U.S. and Europe.