长安汽车(000625)

9M18E net profit to drop more than 78% with net loss in 3Q18

Chang'an Motor released a profit alert after market closed on 12 October. Thecompany guides that its unaudited 9M18 net profit is expected to drop by77.6-86.2% to RMB800m-RMB1.3bn, with 3Q18E net loss of RMB310-810m (vs.net profit of RMB1.2bn in 3Q17). Chang'an attributes the earnings decline toa decrease in profit contribution from its JVs. According to Chang’an’s salesdisclosure, sales volume of the major JV Chang’an Ford was down 46.2% YoYin 9M18, with a 59.6% YoY sales plunge in 3Q18. This is probably due toweakened China auto sales as a whole and the JV’s product aging, thus a lackof competitiveness, in our view.

Deutsche Bank view - sales and earnings outlook improvement unlikely

Chang’an’s 9M18 net profit accounts for only 18-29% of our full-year earningsestimate. While we see downside risk to our forecast, we are not surprised bythe results given weak sales YTD. Although we expect the company's sales topick up sequentially with the ramp up of some key new models such as the newgeneration Chang'an Eado and the new generation Chang'an Ford Focus, we donot envision a strong sales or earnings recovery considering the soft auto marketand intense market competition. We maintain Sell on Chang'an given a lack ofstrong recovery in sight. Key upside risks include: 1) better-than-expected demandfor new models and sales rebound of old models, and 2) stronger-than-expectedearnings rebound at local brand operations.