We are of the view that our FY22E net profit estimates of RMB 8.8bn is on track with 1Q22 results beat, solid demand for Aion and strong earnings from GAC Toyota and GAC Honda. We maintain BUY rating and our target price.
1Q22 earnings review. GAC’s 1Q22 net profit of RMB 3.0bn was 6% higher than our prior estimates in our report published on 8 Apr 2022. The positive surprise mainly came from equity income from joint ventures (JVs) and associates, or more specifically from GAC Toyota and GAC Honda. GAC’s gross margin, which reflects the profitability for Trumpchi and Aion, was 1.9 ppts lower than our expectation. SG&A expenses were lower than our estimates.
2Q22 and FY22 outlook. According to management during the earnings call, Aion currently has orders backlog of almost 70,000 units, about 20,000 of which came from this month, showcasing its resilient demand. We estimate Aion starts to deliver vehicles with higher prices in Jun 2022, as it raised prices twice (at the beginning of Mar and Apr 2022, respectively), should the supply chain recovery be on track. Therefore, we expect slightly higher average selling prices for 2Q22E but similar gross margin amid rising battery costs.
We are of the view that our FY22E net profit estimates of RMB 8.8bn is on track with 1Q22 results, solid demand for Aion and strong earnings from GAC Toyota and GAC Honda. Therefore, we maintain our earnings forecasts during FY22-24E.
Stimulus measures in Guangdong province to benefit GAC’s sales. We are of the view that GAC should be one of the automakers that could benefit the most from the recent stimulus measures in Guangdong. Retail sales volumes in Guangdong province in 1Q22 accounted for 46%/21%/20%/21% for Aion/Trumpchi/GAC Honda/GAC Toyota.
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 FY22E P/S, HK$ 6.0 per share for JVs and associates based on 4.0x our FY22E P/E. We value 0 for Trumpchi. Accordingly, we maintain our BUY rating and our target price of HK$ 12.00. 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.