长安汽车(000625)

16% YoY 1H17 profit drop on declining sales volume at local brand and JVs

Chang’an Auto released its 1H17 results after market close on 30 August. Thecompany’s 1H17 net revenue decreased 6.2% YoY to RMB32.1bn, on 0.2% YoYdecline in Chang'an brand sales volume to 729k units. 1H17 gross profit margindeteriorated by 2.4ppt YoY, probably due to fierce market competitions amongstlocal brands and consequent price promotions, in our view. Meanwhile, therewas a 26.4% YoY earnings contribution decline from its JVs/associates, causedby 11.9% YoY sales volume drop at Chang’an Ford JV, probably due to agingproduct portfolio and exhaustion of small-engine car demand after cutback intax incentive, in our view. Yet helped by an increase in government subsidies,Chang'an's 1H17 net profit only fell by 15.9% YoY to RMB4.6bn.

Deutsche Bank view �C unexciting portfolio unlikely to drive a 2H17E profitrebound

With the originally popular products' sales going downhill and a lack of new 'killer'products in sight, especially at the major earnings contributor Chang’an Ford, wedoubt if Chang’an can stage a strong earnings rebound in upcoming quarters.Hence, we trim our FY17-19E net revenue by 5.8-6.1% on lower local brand salesassumption. We also cut our FY17-19E net profit by 6.7-7.2% mainly on 1) lowermargin assumption for local brand amid competitions, 2) lower earnings fromChang’an Ford amid weak model sales, partially offset by an increase in subsidyincome.

We value Chang'an at 7.0x FY18E P/E (roll-over from 7.0x FY17/18E), which isbelow the company's historical trading average. This is justified, in our view, aswe expect Chang'an to suffer mild net profit decline going forward (-2% FY16-19ECAGR) vs. strong growth in the past (45% FY13-16 CAGR). Given a lack of shareprice upside vs. our target price, we maintain our Hold rating. Key downside risksinclude: 1) weaker-than-expected vehicle sales, 2) pricing pressure , and 3) worsethan-expected local brand profitability. Key upside risks include: 1) better-thanexpectednew and old models sales , and 2) a stronger-than-expected earningsrebound at the local brand.