Leading auto glass player expanding overseas;initiating with a Buy

Deutsche Bank Markets Research Rating Buy Asia China Resources Construction Materials Company Fuyao Glass Date 14 December 2015 Initiation of Coverage Leading auto glass player expanding overseas; initiating with a Buy Reuters Bloomberg Exchange Ticker 3606.HK 3606 HK HSI 3606 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 11,501.2 12,928.2 13,128.3 15,460.0 17,334.0 Reported EPS FD(CNY) 0.96 1.11 1.03 1.09 1.16 DB EPS FD(CNY) 0.96 1.11 0.92 1.02 1.16 DB EPS growth (%) – 15.8 -16.9 10.3 14.3 PER (x) – – 16.4 14.8 13.0 Yield (net) (%) – – 4.2 4.5 4.8 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close A proven leading player with a growing global footprint; initiating with Buy ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 14 Dec 2015 (HKD) 18.10 Price target - 12mth (HKD) 25.00 52-week range (HKD) 22.50 - 13.56 HANG SENG INDEX 21,464 Sharon Ding Research Associate (-) - - sharon.ding@db.com James Kan Research Analyst (+852) 2203 6146 james.kan@db.com Price/price relative 121416182022243/159/15Fuyao GlassHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 5.7 20.5 – HANG SENG INDEX -4.2 -0.5 -7.7 Source: Deutsche Bank Key risks: Downside risks include slower-than-expected growth in the automobile market; unexpected costs in global expansion; intense competition and unfavorable foreign currency exchange fluctuation. Fuyao, a leading auto glass manufacturer with 114m sqm capacity as of 2014, is the largest auto glass player in China/the world (c.65%/21%DBe market share). The company is expanding into the US and Russian markets based on its strong relationship with global OEMs. We expect recurring NPAT to post a ~15% CAGR in 2015-17E, thanks to this new capacity in the US/Russia, lower natural gas price in 2016 and healthy auto demand growth (~6% CAGR in 2015-17E) in China. Its defensive operations and abundant cash position also help in cementing its leading position during the market downcycle. Trading on ~15x 2016E PE with a ~4% dividend yield, we initiate coverage with a Buy. Geographical expansion supports top line and bottom line Penetration of overseas markets is the key driver of the top line and bottom line, in our view. Fuyao expects to launch its US plant (12m sqm) in early 2016 and to bring Phase II of its Russia plant (8m sqm) into commission in late 2016. With a growing global footprint, we expect ~15% CAGRs in top line/bottom line (recurring) and EPS CAGR of ~12% in 2015-17E. We envision a gradual increase in auto glass ASP on new high-end functionalities such as head-up display (HUD), panoramic sunroof and privacy glass. Dedication makes a difference; a lower natural gas price also helps Fuyao accounts for 65% of the China auto glass market and 21% globally, and is unique in its almost exclusive focus on auto glass (~96% of its total FY14 sales). We believe this concentration has led to higher efficiency and the ability to cater to a wider range of vehicles and OEM clients. Its OPM is well above global glass peers’ (22% vs. 9% in FY14). We are comfortable about gearing and financials following its recent HK IPO. On the cost side, the recent NDRC natural gas price cut (effective 20 Nov) should reduce the cost of its LNG contracts in 2016 and lead to margin improvement. Industry leader with improving margin, ~ 4% dividend yield; initiating with Buy We use DCF to derive our target price of HKD25.0, using a WACC of 7.1% and assuming 0% terminal growth. The stock is trading at ~15x/13x 2016/17DBe EPS, ~34% lower than domestic peers and ~5%/18% lower than overseas peers of ~16x in 2016/17E. It is trading at ~2.2x 2016E PB, ~40% higher than global peers’ 1.5x, and ROE is ~65% higher. With its growing global footprint and improving margin, we rate Fuyao Glass a Buy. 14 December 2015 Construction Materials Fuyao Glass Page 2 Deutsche Bank AG/Hong Kong Model updated:14 December 2015 Running the numbers Asia China Construction Materials Fuyao Glass Reuters: 3606.HK Bloomberg: 3606 HK Buy Price (14 Dec 15) HKD 18.10 Target Price HKD 25.00 52 Week rang