Since the peak adjustment in February 2021, only a very small proportion of high-quality blue chips can surpass the previous high again this year and set new historical records.

$Fuyao Glass Industry Group (600660.SH)$ / $FUYAO GLASS (03606.HK)$ is a typical representative of them.

Since hitting a low point in May last year, Sealand Glass's A-share price has rebounded by 90% at one point, hitting a historical high, while the Shanghai and Shenzhen 300 Index saw a -2.5% decline during the same period, significantly outperforming the market. Hong Kong-listed Sealand Glass has also risen by over 97% since May last year, with the stock price approaching a historical high.

Sealand Glass's stock price surge against the market trend is mainly due to its own alpha performance, offsetting the significant drag of the market beta. From this perspective, Sealand Glass's current fundamental performance and expectations should be good.

Investments are based on future expectations. So, how about the growth prospects of Sealand Glass in the future?

01 Fundamental Background

On October 17, Fuyao Glass released this year's third quarter report. In the first three quarters, revenue was 28.3 billion yuan, an 18.8% year-on-year increase, with a net income attributable to the parent of 5.479 billion yuan, a 32.79% year-on-year increase. Excluding exchange losses, decreased gains from equity investments, among other income, the total profit for the first three quarters increased by 49.4% year-on-year.

In 2019-2020, due to the impact of the global automotive market downturn and the COVID-19 pandemic, Fuyao Glass's net profit attributable to the parent company declined for two consecutive years.

Subsequently, with the surge of new energy vehicles in 2021, Fuyao Glass's performance growth returned to high-speed growth - from 2020Q3 to 2024Q3, the net profit attributable to the parent increased from 1.723 billion yuan to 5.479 billion yuan, with a compound annual growth rate as high as 33.5%.

In the context of the intensifying turmoil in the automotive industry, Fuyao Glass' achievements can be considered quite impressive.

Looking at profitability. As of the end of the third quarter of this year, the company's sales gross margin is 37.8%, a 2.47% increase year-on-year, reaching a new high since 2021. The latest net margin is 19.37%, hitting a new six-year high, approaching the over 20% records set in 2010 and 2018.

Profitability has significantly improved, with three main factors:

Firstly, the usa factory, along with continuous optimization of production capacity utilization and other operations, has narrowed the gap in profitability compared to the domestic market. In the first half of 2024, the net margin in the usa market was 11.52%, a 4% increase year-on-year.

Secondly, the prices of raw materials led by soda ash and natural gas have dropped significantly, driving the gross margin level to rebound. In particular, the main contract price of soda ash has dropped from around 3000 yuan/ton in January last year to the current 1450 yuan/ton, a decrease of over 50%.

Thirdly, the scale effect and the company's cost reduction and efficiency improvement measures have led to a steady decline in the total expense ratio. Among them, the sales expense ratio has decreased significantly from 7.4% in 2020 to the latest 4.3%, the management expense ratio has dropped from 10.43% to 7.36% during the same period. The research and development expense ratio has slightly increased.

Looking at the dividend situation. Since its listing in 1993, fuyao glass has paid dividends every year, with a cumulative amount of 51.2 billion yuan, and the average dividend rate over the years is 55.9%. From 2020 to 2023, the dividend payout ratios were 75.26%, 82.95%, 68.6%, and 60.27% respectively. The dividend payout ratio has been decreasing in the past two years, mainly due to large capital expenditures and capacity expansion by the company.

Overall, fuyao glass has seen accelerated performance growth and profitability in the new energy autos market boom, which is the core reason for its significant stock price rise against the market trend.

02 Expect a rise in both volume and price

Regarding the growth prospects of fuyao glass, here, we will analyze from two dimensions: volume and price.

From a global perspective, automobile sales have maintained growth over the years, except for the subprime crisis in 2008 and the COVID-19 crisis in 2020. In 2020, global automobile sales plummeted by 14% to 79.67 million units, but gradually recovered each year. By 2023, sales had reached 92.45 million units, exceeding the pre-epidemic level of 2019 and approaching the historical peak of 95.66 million.

Global automobile sales volume will expand overall with global economic growth in the future, albeit at a slower pace.

In such a large global automobile market, how will the automotive glass market share be distributed?

In 2023, Fuyao Glass holds a high market share of 34% globally (domestic market share of 70%), compared to just 10% in 2010 and 28% in 2020. Fuyao Glass currently has the highest global market share, significantly surpassing AGC, Saint-Gobain, and NSG.

The total market share of these four companies exceeds 90% globally, indicating that the automotive glass industry is highly monopolistic with a very strong market structure. It will be difficult for other competitors to enter and compete for the market share against these major players.

Behind this high level of monopoly lies the fact that the automotive glass industry has a high barrier to entry:

On the one hand, it operates under a heavy asset-based model, with long investment return curves, making it difficult for foreign capital to enter the industry easily. On the other hand, automotive glass is not ordinary float glass; it requires long-term accumulation of technology. Due to product characteristics and transportation costs, the production layout tends to be more scattered, requiring global operational capabilities.

In the future, Fuyao Glass's market share is expected to continue to rise. According to Guosen Securities research, Fuyao Glass's market shares in China's OEM, China's aftermarket, Europe, USA OEM, and USA aftermarket will increase from the current 70%, 30%, 20%, 30%, 40% to 80%, 50%, 30%+, 40%+, and 50%+ in the medium to long term.

Why can Fuyao Glass continue to increase its market share? In our view, there are mainly two aspects:

On the one hand, Fuyao Glass has long been focused on producing automobile glass, continuously improving raw material cost, manufacturing cost, labor cost, energy cost, etc., reducing comprehensive costs continuously, maintaining strong product competitiveness.

On the other hand, Fuyao Glass also benefits from the continuous expansion of market share of domestic Chinese automobile brands. Due to various potential supply chain factors, Chinese domestic car manufacturers are more willing to use domestic brand's automobile glass.

After the outbreak of the electric vehicles market, Chinese automobiles have taken the lead in electrification, intelligence, and networking, far exceeding the traditional German, Japanese, and Korean car manufacturers in competitiveness. In the future, the market share captured globally will continue to expand, so Fuyao Glass will benefit effortlessly.

In addition to the above logic, the usage of glass per vehicle is also gradually increasing.

Firstly, the proportion of SUV models is increasing. According to the data published by the China Association of Automobile Manufacturers, the SUV market share in China in 2023 is 47.8%, with a 0.7% advantage over sedan market for the first time. This trend is even more pronounced in 2024, with SUV market share reaching 49.6% in the first half of the year, exceeding sedan market by 4%. SUVs have larger space, so the amount of glass per vehicle is larger compared to sedans.

Secondly, there is an upgrade in the shape of automobile roofs, from closed roofs to small sunroofs (0.2 square meters), to panoramic sunroofs (0.5-0.9 square meters), and then to sky windows (1.3-1.4 square meters).

In the Chinese market, the proportion of vehicles without sunroofs and with small sunroofs is decreasing, while the proportion of panoramic sunroofs and sky windows is gradually increasing, which is beneficial for increasing the area of glass used per vehicle, rising from approximately 4 square meters in 2019 to 4.2 square meters in 2023. In the future, with the continuous increase in the penetration rate of sky windows, the area of glass used per vehicle will further increase.

In short, the slight increase in global car sales, changes in market structure, changes in SUV market share, and trends in car roofs are all beneficial to Fuyao Glass's breakthrough in terms of volume.

Of course, in a good business, it is not only important to increase sales volume, but more crucially, the unit price must continuously increase. If both are present, then this is undoubtedly a good "money printing machine" track.

With the explosion of the new energy car market, there is an upgrade in demand for automotive glass products, leading to a continuous upward pricing trend. In 2023, Fuyao Glass's glass price is 213.2 yuan/square meter, a 5.94% year-on-year increase, mainly driven by the increase in the proportion of high value-added products such as intelligent panoramic sunroof glass, adjustable light glass, head-up display glass, and ultra-insulated glass. The proportion of high value-added products in 2023 increased by over 9% compared to the previous year.

With both volume and price rising, Fuyao Glass has a solid foundation for potential future business performance growth.

03 Looking to the future from a capital expenditure perspective

If Fuyao Glass aims to continuously increase market share in the future, then expanding capital expenditure to increase production capacity is essential. Historically, Fuyao Glass's capital expenditure has always led income growth.

Since 2010, Fuyao Glass's first round of capital expenditure peak was mainly from 2010 to 2013, increasing from 1.07 billion yuan to 1.88 billion yuan, with the revenue reflected in 2015, climbing to 13.6 billion yuan.

The second round of capital expenditure peak was from 2014 to 2016, increasing from 2.79 billion yuan to 3.59 billion yuan, mainly for preparing production bases in Russia, the USA, as well as domestically in Shenyang, Tianjin, and others. According to the 2-3 year construction and production cycle, starting from 2016, Fuyao Glass should have entered the harvest period. However, coinciding with 2017-2019, the global economy was not very robust, with the global automotive market maintaining a sustained downturn trend, impacting Fuyao Glass's performance which was not too ideal.

Nevertheless, the new production capacity in 2021-2023 was able to be released in a wave, ultimately reaping dividends, with revenue continuously increasing from 23.6 billion yuan to 33.16 billion yuan.

The third round of capital expenditure started in 2021, with the amount increasing from 2.33 billion yuan to 4.47 billion yuan in 2023. 2024 saw more aggressive investment, announcing investments of 3.25 billion yuan and 5.75 billion yuan respectively to greatly expand glass production capacity in Fujian and Hefei.

Looking from the perspective of the capital expenditure cycle, the performance growth certainty in the future for 2025-2026 is relatively strong, with the potential for significant expansion of global market share, while most competitors' capital expenditures remain in a contracting state.

For example, AGC Inc., the global market share second-ranked company in Japan, saw a drastic drop in capital expenditure from 80.4 billion Japanese yen in 2019 to 24.7 billion Japanese yen in 2023, in stark contrast to Fuyao Glass's continuous significant expansion.

In summary, Fuyao Glass is in a high-quality track, set to benefit from a 'rise in volume and price' dividend, further augmented by capital expenditures expected to enter a harvest period in the next 2-3 years, with performance growth maintaining a high growth rate as foreseeable.

Based on this overall logic, Northbound funds express their attitude with real money and silver. As of September 30, northbound funds held 24.3 billion yuan in Fuyao Glass, ranking 14th in A-share heavy-weight stocks; with a holding proportion of 20.89%, ranking 1st.

The entire capital markets are also actively pricing Fuyao Glass. Currently, the latest PE ratio is 21.9 times, above the median valuation of the past 10 years (19.13 times), at a reasonable level, neither undervalued nor overvalued.

Of course, Fuyao Glass also faces some potential risks. Approximately 45% of the company's overseas revenue is from the United States market, with over 40% concentrated in the U.S. market. In August of this year, the U.S. company was subject to a surprise investigation by several U.S. law enforcement agencies, including the Department of Homeland Security, causing significant market panic and subsequent proof that it was a false alarm.

For example, Fuyao Glass established a production capacity base in Russia to meet the demand in the European market. However, due to geopolitical factors, the current utilization rate of 1.3 million sets of production capacity is only around 60%, significantly lower than other major production bases.

In summary, the geopolitical risks are one of the main operational risks faced by Chinese companies including Fuyao Glass, and it is worth monitoring and staying vigilant.

Editor/Somer