Dongfeng Motor Group （"DFG" or the "Company"） announced that the Company and Renault has enteredinto a non-binding memorandum and preliminary understanding, in which Renault will transfer its 50% equityinterest of Dongfeng Renault to the Company. Upon completion, Dongfeng Renualt will cease to engage inbusiness activities related to the Renault brand.
We expect the effect to be immaterial.
　　1. Financial impact to be limited. The Dongfeng Renault joint venture （the "JV”） has a paid up capital ofRMB4,706 million. Upon completion of the transfer, we expect the Company to record slight investmentgain/loss in the transaction depending on the agreed price of the share. The operation of the JV is immaterial tothe Company, in which it only possess production capacity of 110,000 units and 2019 sales was only 18,607units, which represents a yoy decline of 62.9% yoy. As such, the JV was loss making in 2019. Therefore, theJV restructuring should be considered one-off support to 2020 profitability.
　　2. Long-term impact. We believe that it could be wise to make such a move since the brand has beenunderperforming in the market. The lack of new products is one of the main reasons of the weakness, while theweak industry environment in 2018 and 2019 has also contributed to operating pressure for the brand. Webelieve that huge investment is needed for the brand to turn around to improve model competitiveness. In theannouncement, Renault will continue to provide support to Nissan and the Company in the field of NEVs andintelligent networked vehicles.
The Company’s stock was one of the worst performers in our coverage, generating YTD negative return of 33.0%.
　　Valuation is at the lowest point, currently trading at 3.4x 12M forward PER, which is close to 2 S.D. below the mean.
　　The weakness of the stock price is mainly due to the Company's factories mostly being located in Hubei, theepicenter of the novel coronavirus outbreak in China. Production resumed in mid-March, but roughly one month laterthan other OEMs. As a result, sales has underperformed in 1Q20. We believe downside risk of the share price is notsignificant due to the extremely low valuation, but upside gain will largely depend on the recovery of demand andproduction pickup. We have a “Neutral” investment rating for the Company, with TP of HK$7.75, representing4.3x 2020 PER, 3.9x 2021 PER.