In 3Q22, GAC's total revenue surged 51.3% YoY and 24.6% QoQ to RMB31.7bn, largely in line; net profit soared 1.4x YoY but declined 15.7% QoQ to RMB2.3bn, below expectations of RMB2.8bn-3.0bn. Operating loss widened to RMB2.0bn in 3Q22 from RMB1.5bn in 2Q22, scratched by an unexpected impairment loss of RMB655m related to Trumpchi models and R&D centre. In 3Q22, investment income slid 11.7% QoQ to RMB3.8bn, weaker than QoQ sales performance of major JV brands, mainly attributed to increased promotion activities. For other JVs, we deem GAC-FC will not impact GAC’s financials given the zero book value in equity investment, but GAC Mitsubishi, with persistent loss-making, may have potential risk for impairment loss in 4Q22 or next year. We revise down our net profit forecasts for 2022-24E to RMB9.0bn/8.4bn/8.2bn, respectively, to reflect higher impairment loss assumptions and lower margin outlook. Maintain BUY with lower TP of HK$7.00 (8x 2022E P/E).
Key Factors for Rating
Wider-than-expected operating loss at consolidated business in 3Q22 due to impairment loss. In 3Q22, total revenue surged 51.3% YoY and 24.6% QoQ to RMB31.7bn, weaker than sales volume growth of own-brands Trumpchi and Aion (67.0% YoY/28.6% QoQ). Despite better economies of scale did improve utilisation rate, gross margin eroded from 6.6% in 2Q22 to 6.4% in 3Q22, which we attribute to: (i) higher sales mix from Aion which currently bears lower margin than Trumpchi; (ii) escalating promotional efforts to maintain market share. In addition, the company recognised an impairment loss of RMB655m (related to Trumpchi models and R&D centre) in 3Q22, which is a bit surprising as historically the company usually booked impairment loss in 4Q for most years. Overall, operating loss widened to RMB1.96bn in 3Q22, from c.RMB1.5bn in 1Q22/2Q22.
3Q22 investment income slightly below expectations on promotions from major JVs. In 3Q22, despite investment income more than doubled YoY from the low base in 3Q21 on chip shortage, it dropped 11.7% QoQ to RMB3.8bn, weaker than QoQ sales performance of major JV brands. Sales volume of Guangqi Honda and GAC Toyota increased 48.6% QoQ and 4.5% QoQ in 3Q22, respectively, while that of GAC Mitsubishi soared 203.1% QoQ. We reckon the weaker-than-expected investment income was mainly attributed to increased promotion activities in 3Q22. In particular, as some models from GAC Toyota are not eligible for purchase tax cut policy, GAC Toyota provided additional promotions in order to enhance its product competitiveness against peers. For GAC-FC, as it has terminated production since 2Q22, without any book value in equity investment, we estimate the JV did not negatively impact the company’s financials in 3Q22 and afterwards. For GAC Mitsubishi, given its persistent loss- making pressure, we anticipate the large-scale goodwill (RMB2.9bn) related to GAC Mitsubishi may have potential risk for impairment loss from 4Q22 onwards.
Earnings Outlook and Valuation
Despite GAC’s earnings slightly missed expectation in 3Q22 owing to impairment loss at headquarters, we reckon GAC’s YTD results, with earnings growth of over 50% YoY in 9M22, have performed quite strong among traditional OEMs, thanks to strong growth momentum of GAC Toyota in terms of both sales volume and net profit. For own brands, although their sales volumes YTD have come in better than expected, especially for GAC Aion, consolidated business did not achieve loss reduction, mainly due to meager profitability of Aion at present.
Since the company used to recognise large amount of impairment loss in years with strong earnings performance (such as 2017), we anticipate the company will likely further book impairment loss in 4Q22. In addition, although Japanese JVs representative of Toyota have witnessed strong product cycle in recent years, we deem their sales volumes and margins may face headwinds in coming years given the slow pace in electrification transformation amid the intensified competition in China.
Therefore, we revise down our net profit forecasts for 2022-24E by 2-18% to RMB9.0bn/8.4bn/8.2bn, respectively, to reflect higher impairment loss assumptions and lower margin outlook for JVs. Now its shares trade at 5.9x 2022E P/E and 6.3x 2023E P/E, below its historical average level of 8.4x P/E. We trim our TP from HK$9.00 to HK$7.00, based on 8x 2023E P/E (previously 8.5x 2022E P/E). Maintain BUY.