Fuyao Glass -A:OP in line but weak earnings on FX losses;initiating Fuyao A with Hold

OP numbers in line but FX losses。
Fuyao released 3Q17results after market close on Wednesday. NPAT slightlydecreased 1% YoY to RMB2.14bn in 9M17, representing only 67% and 66% ofDB's whole year estimate and Bloomberg consensus, respectively, mainly due toFX losses of RMB300m+ in 9M17as a result of RMB appreciation against theUSD. If we strip out FX losses, Fuyao’s bottom line actually increased 24% YoYin 9M17, in line with our estimate (please refer to table below).。
US auto glass turned profitable in 3Q17; management optimistic aboutinternational operations。
According to management at the results call yesterday, the US auto glass plantstarted to make a profit in 3Q17with earnings of USD1.6m+, vs over USD10mof losses in 1H17. Management expects the momentum to continue as efficiencyimproves. The second phase of the US project (capacity: 2.5m sets) is completedas planned and management expects it to ramp up in Feb 2018. In addition,management sees no significant challenges in gaining market share in the US,citing improving efficiency, customer satisfaction, and R&D abilities as the mainreasons.。
Initiating on Fuyao-A with a Hold; risks。
With this report, we initiate coverage of Fuyao A shares (600660.SS) with a Holdand a target price of RMB23. The valuation is derived from the currency translationof our H-share target price, which is set using DCF methodology, with a WACC of7.1% (cost of equity at 8.4%, risk-free rate at 3.9%, market risk premium of 5.6%,beta of 0.8) and terminal growth of 0%. The stock is trading at 21.6x 2017DBeEPS with 2017-19DBe EPS CAGR of 12%. We believe the valuation is fair, andthus initiate with a Hold. Fuyao A is trading at 21.6x 2017DBe EPS with 2017-19DBe EPS CAGR of 12%. A share peers are trading at 23x 2017E EPS and 2017-19EPS CAGR of 17%. Also, Fuyao is an exclusive, leading auto glass player with 65%market share in China and over 20% globally, and we believe it has competitveedge. Risks: Fuyao may face challenges during its international expansion, suchas fluctuations in currency exchange rates, political and economic instability, etc.Also, automobile glass industry is competitive, thus there is pressure on Fuyao'smarket share if it cannot compete effectively. Other risks include: higher or lowerraw materials and fuel prices; changes to the incentives provided by the PRCgovernment could materially reduce Fuyao's profitability, e.g. a change in thepreferential income tax rate.。德意志银行
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