Dongfeng Motor Group’s （"DFG" or the "Company"） 1H19 net profit attributable to equity shareholdersincreased 5.3% yoy to RMB 8,499 million, better than expectation. The increase was mainly due to increasedcontribution from joint ventures, particularly Dongfeng Honda. Meanwhile, sales of commercial vehicles andimprovement in auto finance business increased gross margin on its own business （excluding share of profit from JVsand associates）。 Nonetheless, own business turned to loss of RMB218 million as compared to a profit of RMB231million in 1H18.
Revenue dropped 16.4% yoy to RMB48,447 million. The decrease was mainly affected by passenger vehicles（“PV”） which has decreased 44.6% yoy to RMB10,911 million as vehicle sales from self-owned brands, namelyFengshen and Liuqi （PV） vehicle sales decreased by 37.8% yoy and 28.1% yoy, respectively. The decrease ofrevenue is partially offset by the improvement of commercial vehicle （CV） business, which saw vehicle sales up by3.9% yoy in 1H19, better than industry growth. Moreover, the auto finance business saw revenue increased 33.1%yoy as driven by further auto finance penetration and sales from Nissan.
Gross margin improved 2.2 ppts yoy to 16.1%. The improvement was mainly due to changes in sales mix asrevenue was contributed by better margin business from CVs and auto finance increase.
Share of profit from joint ventures increased 11.4% yoy to RMB6,785 million. DF Honda was one of the majorcontributions due to the increase in vehicle sales （+13.3% yoy） during the period. Moreover, the Company alsobenefited from a low base as some of the JVs recognized significant impairment from last year. Share of profit wasdragged by 1） DPSA which recorded a significant decrease in vehicle sales （-60.1% yoy） during the period and 2） DFNissan which vehicle sales slightly decreased by 1.7% yoy.
The Company’s stock has generated 3-month return of 16.3%. We believe that investors bought on low valuation.
Despite low valuation, currently trading at 4.4x 12M forward PER, we do not expect a re-rating in the future asCompany outlook is rather weak given its current brand portfolio. We expect positive impact from Honda to fade in2H19 due to their prior year recall issue, which was over in Sep. 2018. Meanwhile, growth of Nissan is to be benigndue to its large portfolio. French brands such as DPSA and DF Renault remain weak as model pipeline and otherissues （management changes and after-sales quality） should continue to linger in the short term. We may slightlyincrease our earnings forecasts in the our next Company Report but should maintain investment rating of “Reduce”。