DFG’s 1H19 net profit attributable to equity shareholders increased5.3% yoy to RMB8,499 million, better than expectation. Despite a 16.4%yoy drop in revenue, results outperformed mainly due to 1） improvement ingross margin as sales mix was better after more contribution from profitableCV and auto finance business; 2） a 30.0% yoy decrease in other expensesdue to less provision on water and electricity; and 3） increased shared ofprofit from JV thanks to better DF Honda sales and the absence ofimpairment charges in 1H19.
We have increased shareholders’ profit by 8.2%/ 5.2%/ 3.5% yoy in 2019to 2021, respectively. We have fine-tuned sales volume of major PV brands,which saw both revenue and share of profit of JVs lowered after the revision.
Improvement is mainly coming from saving from other expenses.
We maintain "Reduce" rating for DFG, but revise up TP to HK$6.43,representing 4.0x 2019 PER, 3.9x 2020 PER. The Company’s stockgenerated 3-month return of 17.5%. We believe that investors bought on lowvaluation. Despite the low valuation, currently trading at 4.4x 12M forwardPER, we do not expect a strong re-rating in the future as the Company’soutlook is rather weak due to 1） 1H19 outperformance was mainly on costreduction saved from other expenses; 2） we expect positive impact fromHonda to fade in 2H19 due to their prior year recall issue, which was over inSep. 2018. Meanwhile, growth of Nissan is to be benign due to its largeportfolio; and 3） French brands such as DPSA and DF Renault remain weakas model pipeline and other issues （management changes and after-salesquality） should continue to linger in the short term.