We maintain our BUY rating and raise our target price to HK$ 12.00 from HK$ 10.50 for Guangzhou Automobile Group （GAC）， as we think that the worst is over for its homegrown brands especially with its current sales volume growth and gross margin improvement in FY21. We raise our sales volume projection for Aion by 35% and net profit for GAC Toyota joint venture by 7% in FY22E. We also project net profit for GAC to be around RMB 2.8bn in 1Q22E and RMB 8.8bn in FY22E.
1Q22 earnings preview. We expect GAC’s 1Q22E net profit to rise by 20% YoY to about RMB 2.8bn amid strong sales volume growth. We project equity income from joint ventures and associates to rise by 17% YoY to about RMB 3.9bn. Net loss for Trumpchi and Aion could be dragged down by raw-material price hikes in 1Q22E.
The worst appears to be over for homegrown brands. Both sales volume and gross margin for Trumpchi and Aion experienced a recovery in FY21. Despite headwinds in the supply chain industrywide, it appears to us that the worst is over for GAC’s homegrown brands. We expect sales volume for Trumpchi and Aion combined to rise 37% YoY to 0.61mn units and gross margin to widen by 3 ppts in FY22E.
GAC Toyota’s strong cycle continues; GAC FCA’s loss may narrow on Stellantis’ （STLA US, NR） intention to lift stake. Share of profit at GAC Toyota surged 31% YoY amid sales volume growth of 8% YoY in FY21. We expect its sales volume growth to accelerate in FY22E with a plethora of new models, which could further lift its net profit. We are of the view that share of loss from GAC FCA could narrow in FY22E or FY23E, should Stellantis lift its stake at the joint venture.
Valuation/Key risks. We use sum-of-the-parts （SOTP） valuation to factor in Aion’s planned spin-off. We value HK$ 6.0 per share for 75% of Aion based on 2.5x our revised FY22E P/S, HK$ 6.0 per share for JVs and associates based on 4.0x our revised FY22E P/E. We value 0 for Trumpchi. Accordingly, we maintain our BUY rating and raise our target price to HK$12.00 from HK$10.50. Key risks to our rating and target price include lower sales volume and margins at GAC especially for Aion and slower spin-off progress than we expect, as well as a sector de-rating.