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Author: Xiao Li Fei Dao, Editor: Xiao Shi Mei

Since the beginning of the year, the A-share auto parts sector has fallen 12%, but Fuyao Glass has bucked the trend and surged 33%. What is even more surprising is that northbound funds have continued to increase their holdings in Fuyao Glass over the years, and the current market value of their holdings is 23 billion, exceeding BYD's 21 billion. The latest shareholding ratio is as high as 23.4%, ranking first among all A-share companies.

How did Fuyao Glass become the stock with the largest foreign investment ratio at the end of May this year?

【Steady growth in performance】

Since Fuyao Glass went public in 1993, the company's performance has maintained a good growth momentum all year round. The revenue scale has increased from just over 100 million to 33.16 billion yuan in 2023, and the net profit attributable to the parent company has expanded from tens of millions to 5.6 billion yuan in 2023.

Of course, the company has also encountered some setbacks. Especially from 2018 to 2020, the company's revenue stagnated and its parent company's profit fell sharply, from 4.12 billion yuan to 2.6 billion yuan, a cumulative decline of 37%.

The reasons are: first, glass prices are at a relatively low level due to supply and demand issues. Second, the COVID-19 pandemic in 2020 caused a sharp drop in global auto sales by 13%, with the US market hitting a 10-year low and many European countries falling by more than 25%.

Starting from 2021, although the epidemic has not yet subsided, China's new energy vehicles have begun to explode, driving a sharp rebound in demand for automotive glass. In addition, glass prices have continued to rise, driving performance back to a high growth state. From 2021 to 2023, the compound annual growth rate of revenue and profit will reach 18.5% and 33.8%. In the first quarter of 2024, it increased by more than 25% and 51% year-on-year.

Looking at profitability, from 2018 to 2023, Fuyao Glass's gross profit margin has fallen from a record high of 42.6% to 35.4%. Net profit margin has fallen from 20.3% to 17%. The latter has a smaller decline, which shows that the three expenses are under better control.

The company's gross profit margin declined not because of the decline in terminal automotive glass prices, but on the contrary, it maintained an overall upward trend. Market Value Observer believes that this is mainly due to the sharp increase in upstream energy and soda ash prices, which has put some pressure on profitability.

In fact, the gross profit margin of China's auto parts sector in 2023 is only about 18%, and the net profit margin is only about 5%, which is far lower than the profit level of Fuyao Glass. Compared with its peers, the company's gross profit margin exceeds that of Xinyi Glass and is much higher than that of its overseas competitors, such as Nippon Sheet Glass, Asahi Glass and Saint-Gobain.

▲Gross profit margin levels of 5 automotive glass giants, source: Wind

It can be seen that after a few years of brief setbacks, Fuyao Glass's performance has recovered quickly. In the long run, the fundamentals are relatively strong and the growth potential is good, which is also one of the reasons why northbound funds have a large position.

[A good monopoly business]

A company's excellent performance in the past does not mean that it will remain so in the future. In the future, if Fuyao Glass wants to maintain good growth in performance, it needs support from the industry. Fortunately, global automotive glass is a monopoly business with high barriers.

In 2023, the global automotive glass market will exceed US$15 billion. With the slight increase in automobile sales and the rise in the center of glass prices, there will still be a lot of incremental market share in the future.

In fact, the global automotive glass market has already shown a highly monopolistic structure. According to Marklines data, the top five global manufacturers in 2021 are Fuyao Glass, Asahi Glass, Sheet Glass, Saint-Gobain, and Xinyi Glass, with market shares of 28%, 26%, 17%, 15%, and 8%, respectively. Among them, Fuyao Glass has a monopoly of 65% in the Chinese market.

This also means that several major manufacturers will continue to divide up the market pie. Internally, the trend of the strong is also quite obvious, and Fuyao Glass is expected to continue to expand its market share. According to data from institutions cited by People's Daily, it has risen to 34% in 2023.

The most important reason for the current monopoly pattern is that the business barriers for automotive glass are very high. This asset-heavy model will hinder the influx of capital from outside the industry.

Because glass is fragile and has high transportation costs, automotive glass manufacturers generally build manufacturing plants near vehicle manufacturers. This means that in order to gain more market share, the production capacity layout must be decentralized and global. In addition, the investment in glass production lines is huge. It costs about 40 million euros to 60 million euros, 70 million US dollars and 200 million yuan to build a production line with an annual capacity of 4 million square meters in Europe, the United States and China.

Fuyao Glass previously planned to produce 5.5 million sets of glass per year in the United States, with an investment of $400 million. Such a heavy asset model, with great uncertainty in the benefits it will generate, has deterred off-market investors.

▲ Investment amount of a single project of Fuyao Glass, source: Guojin Securities

In addition, there is a high demand for customized automotive glass, which places high demands on suppliers' design, development, and supporting capabilities. In particular, automotive glass products have been upgrading, requiring manufacturers to continuously invest in research and development to promote value-added products to meet market demand. From 2019 to 2023, Fuyao's R&D investment increased from 813 million yuan to 1.4 billion yuan, and the R&D expense rate remained at 4%.

In addition, the cycle from supplier certification to the final customized product launch is often as long as several years. Once the two parties establish a cooperative relationship, it is highly likely that it will cover the entire life cycle of the new car model, making it difficult for competitors to enter.

It can be seen that the barriers to entry in the automotive glass industry are quite high, and the market structure will gradually move towards a monopolistic trend, and the players present can enjoy such a huge market cake alone. From this perspective, Fuyao Glass will be able to continue to reap the industry dividends in the future.

[Quantity and price increases are still expected]

The global automotive glass market is huge and has a good market structure. As the automotive glass company with the highest market share in the world, Fuyao Glass is expected to maintain high growth in future performance. This can be analyzed from two dimensions: quantity and price.

First, the continued explosion of new energy vehicles will drive the demand for single-vehicle glass and support the sales growth of Fuyao Glass.

In 2023, global auto sales will reach 92.72 million units, up 11.9% year-on-year, up 0.7% from 2019, and 3.1% less than the historical peak in 2017. As the scarring effect of the epidemic fades and the global economy recovers, global auto sales are expected to continue to grow, but the overall growth rate will be relatively slow.

In addition, the use of glass per car is still expected. As a historical example, in the 1950s, the glass area of ​​a car was only 2.2 square meters, but it has increased to 4.2 square meters since the 21st century.

In the future, with the increasing penetration of new energy vehicle skylight glass, it is expected that the glass area of ​​a single vehicle will continue to increase. You should know that the glass area of ​​a small skylight is only 0.2-0.6 square meters, the glass area of ​​a panoramic skylight is 0.5-1.2 square meters, and the glass area of ​​a panoramic skylight is as high as 1-2 square meters.

In November 2023, the penetration rate of skylight glass in the Chinese automobile market was 14%, while it was only about 2% at the beginning of 2021. Some institutions predict that the penetration rate will be as high as 55% or more by 2025. In this segment, Fuyao Glass accounts for 91% and 89% of domestic fuel vehicles and new energy vehicles (2021 data). Fuyao Glass will be a beneficiary of this wave of glass product upgrades.

In order to cope with the potential growth demand in the future, Fuyao Glass is still expanding its production capacity in many places around the world. At present, its overseas production capacity is 6.8 million sets, mainly concentrated in the United States and Russia, and its domestic production capacity is 34 million sets, distributed in Fuqing, Changchun, Chongqing, Shanghai, Guangzhou and other places. Around the beginning of 2024, Fuyao Glass invested 3.25 billion and 5.75 billion respectively in Fujian and Hefei to vigorously expand its glass production capacity.

Second, the unit price of Fuyao Glass continues to rise and has room for further growth.

From 2016 to 2023, the price per square meter of Fuyao Glass increased from 152 yuan to 213 yuan, with a compound annual growth rate of 4.94%.

With the rapid development of automobile electrification and intelligence, automotive glass products have been significantly upgraded, especially skylight glass and AR-HUD front windshield (PS: augmented reality head-up display, which reasonably overlays and displays some driving information in the driver's field of vision, such as dashboard data, navigation images, etc.).

In the past, the price of traditional sunroof glass was about 100 yuan per bicycle, the price of panoramic sunroof glass rose to 300-800 yuan, and the price of skylight glass further rose to about 900 yuan. The price of ordinary front windshield was about 200 yuan, while the price of AR-HUD front windshield was about 1,000 yuan. It should be noted that AR-HUD has gradually become a standard feature of mid-to-high-end models.

In terms of price, Fuyao Glass has also taken action on the manufacturing cost side. In order to ensure supply and save costs, Fuyao Glass has built float glass production lines in many places, with an independent supply and sales ratio of more than 90% (float glass accounts for 34% of the cost of automotive glass). Furthermore, the company has begun to deploy silica sand plants upstream, and already has four major factories in Hainan, Hunan, Inner Mongolia, and Liaoning, further reducing the cost of glass production. Of course, in addition to float glass, the cost of raw materials such as energy and soda ash also has a considerable risk of fluctuations, which the company cannot control and may have a greater impact on production costs.

In short, the unit price of the company's automotive glass is expected to continue to rise due to product upgrades, and the company is also extending its business upstream in an attempt to continuously reduce production costs. Both are conducive to increasing product profit margins and driving stronger profitability.

In summary, the company's good performance over the years, the large scale of the global automotive glass market, high barriers and monopoly, and the potential "increase in both volume and price" growth expectations are the core factors that foreign investors dare to invest heavily in Fuyao Glass. In addition, the current PE valuation of the company is 20.8 times, which is below the valuation center for many years. Therefore, Fuyao Glass's future capital performance may be worth looking forward to, and it is expected to usher in the Davis double-click effect.

Disclaimer

The content of this article related to listed companies is the author’s personal analysis and judgment based on the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.); the information or opinions in the article do not constitute any investment or other business advice, and Market Value Observation shall not bear any responsibility for any actions arising from the adoption of this article.