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Text | Liu Xiaodong

The automotive glass industry is a very hard-working industry. It is attached to the whole vehicle manufacturing industry. The traditional industrialization taste is very strong. The production scale is the first for cost control, quality control and technology upgrade, so it is easy to present an oligopoly situation.

By opening up a map of the world of automobile production, we can easily find the major regions of China, Europe, Japan and the United States. Due to economies of scale, the automotive glass industry affiliated with vehicle manufacturing has thrived in these places. In this inconspicuous industry, Fuyao Glass grows silently, climbing from the top of the pyramid from nothing.

This kind of business is Peter. Lynch is known as the flower of the desert – a company in the downturn: “These companies are known for their low cost, and the management saves like a ghost; the company tries to avoid borrowing; it refuses to divide the company into white-collar and blue-collar hierarchies. ."

“The company’s employees are well treated. The niche market is found in the market ignored by big companies, which creates an exclusive monopoly advantage. Therefore, these companies can grow rapidly despite being in a downturn.” (From Peter Lynch’s Victory over Wall Street")

These words actually fit the Fuyao Glass (3606.HK) and have to admire Peter. Lynch's thinking and summary.

First, Fuyao Glass News Review

As this article coincides with the release of the mid-year report, this is a pass that cannot be passed.

First, the semi-annual report disclosed:

The revenue of auto glass in China increased by 11.81% over the same period of last year, which is higher than the growth rate of auto industry output (from January to June 2017, the output of auto industry increased by 4.64%);

The revenue from auto glass overseas business increased by 17.78% over the same period of last year, exceeding the growth of auto glass revenue in China.

Analysis and interpretation:

In fact, China's domestic joint venture vehicles are facing the dual pressure of consumption upgrades and low-cost extrusion of domestically produced vehicles. The power to reduce costs will certainly exert pressure on upstream glass suppliers.

In this case, Fuyao Glass's main business income growth rate exceeded the vehicle production, the gross profit margin reached 42.98%, indicating that Fuyao's products are also upgrading.

Second, the semi-annual report disclosed:

The company plans to build an annual production capacity of 22 million square meters (excluding the edge plant of 1.08 million square meters) in Moraine, Ohio, USA. The company will invest US$105 million in this report period, as of June 30, 2017. The accumulated actual investment was 759 million US dollars. The main source of funds came from the company's fundraising and borrowing funds.

At present, the automotive glass project in Moraine, Ohio has completed the construction of a capacity of approximately 12 million square meters. From January to June 2017, Fuyao Glass USA Co., Ltd. achieved operating income of US$115,612,000 and net profit of US$1,444.1 million. The net loss was significantly narrowed year-on-year (real profit in June 2017 was US$495,200).

Analysis and interpretation:

Some progress in the United States has been slower than expected. At the beginning, it was the break-even in the second half of last year. The quarter-to-five breakeven in the quarterly report was finally profitable in June.

This should be related to the legal environment of the United States, the cultural conflict between China and the United States, and the professional quality of American workers.

Economics has a "learning by doing" curve. In short, practice makes perfect, Americans are also human beings, and I am more confident about the future of American Fuyao.

Again, the semi-annual report disclosed:

The total profit reached RMB 1,668,369,900, a decrease of 5.22% over the same period of last year, mainly due to the appreciation of the RMB, and the exchange loss was RMB 171,154,800 (the exchange gain from January to June 2016 was RMB 20,391,800). If this factor is deducted, the total profit for the reporting period will increase by 17.91% year-on-year.

Analysis and interpretation:

This section explains the main reason for the recent downturn in Fuyao's share price. The RMB depreciated by about 3 points this year. In this way, Fuyao’s US dollar assets are about 5.7 billion yuan, equivalent to 850 million yuan.

The semi-annual report revealed that there are already 760 million funds invested in the construction of the United States. This tells us that most of the exchange losses are book technical adjustments. After deducting this factor, Fuyao still maintains a good growth momentum.

Therefore, Fuyao’s mid-term report can be summarized in one sentence. China is in line with expectations. The United States is slow but worth looking forward to. The exchange rate loss will not affect corporate value in the long run. Falling is the timing of buying.

Second, a trusted leader

My attitude towards stocks is that if I don't want to take a decade, I won't hold it for a minute, so I value the leader of a company.

For start-ups, we must first conduct research and analysis on entrepreneurs, because the company will be branded with his own will from the beginning, and corporate culture is also an extension of his personal thinking.

Often ambitious leaders can't stand the test of morality, and strict adherence to rules and gradual leadership will make companies tend to be mediocre.

Mr. Cao Dewang, the founder of Fuyao Glass, achieved a satisfactory unity in both enterprising and adherence principles. Having such a leader is a very rare corporate endowment.

Mr. Cao Dewang was born in a poor family. He dropped out of school at the age of 14 and was unable to eat for a long time. He struggled to make a living under the eyes of discriminating people and tasted the hardships that ordinary people could not imagine.

This kind of experience usually completely defeats one person, while a few people will stand out with their talents and talents. Mr. Cao Dewang is one of the very few people. His early years of life formed his diligent and economical habits, his willingness to persevere in perseverance, and his strong desire to get rid of poverty. These are essential for entrepreneurship.

But what many people overlook is that his parents' words and deeds are taught. Cao Dewang's parents are devout Buddhists. Under the influence of their parents, Mr. Cao Dewang did not forget the book because of wealth. After the rich, he donated a total of 8 billion yuan.

A person who can be kind to strangers, we have reason to believe that he is responsible to the shareholders, responsible for the company and employees.

3. Survivors after negative list screening

My investment philosophy is inspired by Taleb's "Black Swan", that is, the deductive method is more accurate than the inductive method, and the investment is the negative list pushed by Munger. As for the logic and details of this, it will not be described here.

According to Buffett and Munger, my negative list mainly includes four aspects: corporate standards, management standards, financial standards and market standards. Fuyao Glass's performance in all aspects is perfect.

(1) Corporate guidelines

Fuyao Glass is a simple and easy-to-understand business. It has been in continuous development for 30 years since its establishment, and we are temporarily unable to see the possibility that vehicles do not use glass as a cockpit panel. In terms of the moat, Fuyao Glass is mainly to control cost capabilities, which we will discuss later.

(2) Management guidelines

In the long-term operation, Mr. Cao Dewang resisted the temptation of rapid expansion, did not do mergers and acquisitions, but also resisted the temptation of diversification, and did not do other glass products, which is very rare.

People are very prone to self-expansion in the face of such great success. Mr. Cao Dewang insisted on auto glass manufacturing for 30 years and deserves admiration.

For the minority shareholders, Fuyao Glass is also a model for listed companies. After the listing, the accumulated dividends are 8.3 billion. In recent years, the distribution ratio has exceeded 50% for seven consecutive years. The total dividends in 2014 and 2015 are 1.5 billion yuan respectively. 1.88 billion yuan, accounting for 67.68% and 72.21% of net profit.

(3) Financial criteria

In terms of financial ratio, Fuyao Glass is also very good.

The main business income has continued to grow for 30 years:

The return on net assets has remained above 15% for a long time:

EPS per share continues to grow:

The gross profit margin of sales has been above 30%:

A company that has grown for 20 years has been able to maintain this level and is very remarkable.

(4) Market guidelines

Value investors must not only choose a good company, but also choose a good buying price. At present, Fuyao Glass's P/B ratio is 3.6 times, and the dynamic P/E ratio is more than 18 times, which is not cheap. Buying needs to further analyze where his value is.

Where is the moat? The value analysis of Fuyao Glass

Value is a summary of the uncertainty of the future. First, we must have a reasonable and comprehensive forecast of the future development path, and then judge the value on this basis. The situation facing Fuyao Glass, I think it is very similar to Wei Guo in the Three Kingdoms period.

The annual output of global automobiles is about 85 million. The output of automobiles in the Chinese market reached 24.84 million in 2015, and the number in the United States and Europe is about 20 million. The four major auto glass manufacturers Fuyao Glass, Saint-Gobain, Banzizi and Asahi Glass account for more than 70% of the world. The market share is roughly a three-point situation.

Similar to Cao Wei's acquisition of the Central Plains, Fuyao Glass has occupied the Chinese market. China is the world's largest first-hand automobile production and sales market, and because our country's population base is huge, the economic development prospects are optimistic, and it is still far from the ceiling of Chinese automobile production. Fuyao Glass has a share of more than 60% in China and has already taken up the day.

Fuyao Glass is building factories in the United States and Russia. It can be compared with Wei Guo to start attacking Wu and He. If the success of the factory in the United States, then the land and people, and the glory of the automotive glass field will be enthroned in the East.

The core ability that Fuyao Glass relies on for the expansion of the world map is cost control. The gross profit margin of Fuyao Glass is over 40%, while the gross profit margin of rivals Asahi Glass and Saint-Gobain is only about 20%; Fuyao Glass has a long-term operating net profit margin of nearly 20%, and the operating profit margin of Asahi Glass's glass business in 2014 is only 0.1%. Saint-Gobain is also a low-profit level.

Under this circumstance, the competitor's business focus has shifted to special glass and electronic glass with high gross profit margin. The automobile glass is in a state of maintenance, and Fuyao can still invest heavily in research and development, and its research and development investment is three times that of Asahi Glass.

Why does Fuyao raise the gross profit margin to such a high level? Cao Dewang attributed the reasons to: quality improvement, cost control, and technological innovation.

If you want to spread the details and this is another article, here is an example:

On one occasion, due to the pressure from downstream manufacturers to reduce costs, Fuyao needed Japanese suppliers to lower the price by 15%. The Japanese side certainly could not accept it, and the two sides were deadlocked. At this time, Cao Dewang thought of a win-win solution and proposed that the Japanese side help Fuyao to reduce costs in the design of production processes and details.

For this Japanese company, process management capability is its most ready-made resource, so we sent the most professional personnel to help Fuyao improve production processes and control costs. Soon the cost of Fuyao dropped by about 20%.

The cost control ability of Fuyao Glass is not one-off. It is a continuous improvement of advanced and downstream enterprises, and it is a closed-loop continuous improvement system. Its power is rooted in the style of leaders and corporate culture. We can reasonably speculate that this moat can be maintained for a long time.

In this case, Fuyao's road to world expansion is very certain. We can give a reasonable guess about the future development of Fuyao Glass.

First of all, the probability of success in foreign expansion is very high. At present, the design capacity of the US factory is occupying one quarter of the US market.

According to Mr. Cao Dewang’s estimate at the investor meeting, the US gross margin is roughly the same as that of China, and he is also prepared to continue to expand production capacity. Taking down the United States, the three-point world will take the second, this is the best policy, so Fuyao Glass's share price has doubled its potential.

Secondly, if the expansion in the United States is hindered by the influence of culture and trade unions, and the worst is to maintain the current small capacity of production capacity, the US can not provide growth momentum. The current valuation of Fuyao Glass is slightly higher, roughly 10%~20 % of the downside, but the current possibility is small.

Because the Dayton factory in the United States does not have the possibility of establishing a trade union, the main problem now is that the workers are all newcomers and the defective rate is high. This can be improved gradually through learning.

Thirdly, as far as the auto glass product itself is concerned, it only accounts for less than 1% of the cost of the whole vehicle, and upgrading the grade of the glass used can better improve the consumer's perception of the car grade, so the consumption upgrade will also bring the auto glass. Product upgrades.

At present, the proportion of upgraded products such as low-e glass, hydrophobic glass and hub glass of Fuyao Glass is also increasing. This is a potential factor to enhance value, but it is difficult to quantify.

Fourth, due to the overcapacity of the whole vehicle, the stock capacity represented by the joint venture vehicle is desperately pressing the cost to compete with the domestically produced vehicles.

Therefore, this will bring about the possibility of a decline in the gross profit margin of Fuyao Glass, which is a factor in reducing the value.

Combining these four major roads for the future, I think that Fuyao Glass is a bottom-selling fund (the bottom of the value that can't fall), and the rise can have the potential to double the investment.

Funds suitable for long-term investment, low-risk preferences, and the need for dividend cash flow.

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