DFG’s 2018 net profit attributable to equity shareholders decreased7.7% yoy to RMB12,797 million. During the year, a number of impairmentsrelated to receivables and financial assets were recorded, amounting toRMB1,006 million. Excluding such impairments, profit would only drop by0.5% yoy, which would align with market consensus but miss our expectationby 8.4%.
A similar story for 2019. Japanese brands to continue to outperform newmodels in the market which should help both DF Nissan and DF Hondaachieve yoy growth. Meanwhile, weakness should continue for self-ownedbrands and French brands including DF PSA and DF Renault.
We roll forward our base year to 2019. We expect the Company’sshareholders’ profit to decline 6.0% yoy in 2019 but improve yoy by5.7% and 14.0% in 2020 to 2021, respectively. While their own business isexpected to continue to slump in our forecasted period, share of profits fromJV will continue to grow thanks to Japanese brands but sales decline in DFPSA will impact more in 2019. Meanwhile, share of profits from associates isto grow steadily with the outlook of PSA Group expected to be solid.
We downgrade to "Reduce" rating for DFG. We revise down our TP toHK$6.86, representing 4.2x 2019 PER, 3.9x 2020 PER. Despite having thelowest valuation in the auto universe, we believe our valuation is fair asgrowth outlook is comparatively unexciting and investors are more cautioustowards JV brands due to the uncertainty around the future shareholdingstructure.