UBS: Lower Fuyao Glass Industry Group (03606) target price to 85 Hong Kong dollars, maintain "buy" rating.

UBS released a research report stating that the target price of Fuyao Glass Industry Group (03606) has been lowered from HK$93 to HK$85, maintaining a "buy" rating. This adjustment primarily reflects lower-than-expected domestic passenger car shipments from the second quarter of 2026, leading to a 4%-5% decrease in profit forecasts for 2026-2028. The bank stated that although Chinese passenger car sales continued to decline year-on-year in the second quarter of 2026, Fuyao Glass Industry Group's existing domestic production capacity utilization rate remained roughly stable year-on-year and increased by 3-4 percentage points compared to the previous quarter, benefiting from the execution of new orders. The bank expects Fuyao's average selling price of automotive glass in the second quarter to improve year-on-year and quarter-on-quarter due to optimized vehicle structure and increased penetration of high value-added products, providing positive support to the average price. While the ramp-up of new capacity led to increased depreciation and labor costs, the bank expects the gross margin in the second quarter to remain roughly stable year-on-year, considering stable natural gas purchase prices, limited impact of fluctuating ocean freight rates, and higher gross margins on high value-added products. The bank expects Fuyao's operating profit in the second quarter to be resilient, benefiting from the company's active efforts to improve operational quality and efficiency. Due to the continuous appreciation of the Chinese yuan in the second quarter, Fuyao is expected to record foreign exchange losses, putting pressure on its reported earnings. The bank expects Fuyao Glass Industry Group's operating performance in the second half of 2026 to improve gradually. On the demand side, the company has indicated strong order guidance for the third quarter of 2026, as domestic OEMs are expected to benefit from strong export growth, leading to a potential recovery in domestic business. Fuyao also mentioned that sales in North America and Europe can maintain double-digit year-on-year growth due to the delivery of new orders. On the profit side, the expected increase in the average selling price of automotive glass for the full year of 2026 is expected to exceed the initial guidance of 6%-7% year-on-year growth, driven by the increasing proportion of high value-added products.