UBS has revised its financial outlook for FUYAO GLASS (03606), lowering the target price from HKD 93 to HKD 85 while maintaining a 'Buy' rating.

The adjustment primarily reflects a 4% to 5% reduction in the firm's profit forecasts for the years 2026 through 2028, due to lower-than-anticipated domestic passenger vehicle shipments starting from the second quarter of 2026.

Analysts noted that while China's passenger vehicle sales continued to decline year-on-year in Q2 2026, FUYAO GLASS's domestic capacity utilization rate remained largely stable on an annual basis and improved by 3 to 4 percentage points sequentially, benefiting from the execution of new orders.

The bank anticipates that the company's average selling price (ASP) for automotive glass will see both year-on-year and quarter-on-quarter improvement in the second quarter, supported by an optimized vehicle model mix and increased penetration of higher value-added products.

Although new capacity ramp-ups have led to higher depreciation, amortization, and labor costs, stable natural gas purchase prices, limited impact from ocean freight volatility, and the higher gross margins of value-added products are expected to keep Q2 gross margin roughly flat year-on-year.

Operational profit for the second quarter is projected to remain resilient, benefiting from the company's active efforts to enhance operational quality and efficiency.

However, due to the continued appreciation of the Renminbi during the quarter, FUYAO GLASS is expected to record foreign exchange losses, which will pressure its reported earnings.

Looking ahead, UBS expects the company's operational performance to improve quarter by quarter in the second half of 2026.

On the demand side, the company has indicated that domestic automotive OEMs, buoyed by strong export growth expectations, have provided robust order guidance for Q3 2026, suggesting a potential recovery in the domestic business.

FUYAO GLASS also noted that sales in North America and Europe are expected to maintain double-digit year-on-year growth, supported by the delivery of new orders.

Regarding profitability, the full-year 2026 ASP increase for automotive glass is now expected to exceed the initial guidance of 6% to 7% year-on-year growth, primarily driven by a rising proportion of high value-added products.