DFG’s 2019 net profit was roughly flat （-0.9% yoy） at RMB12,858 million,roughly in line with market and our expectation. Revenue dropped 3.3%yoy, mainly affected by PV segment. CV sales increased and segmentrevenue was up 14.6% yoy. Gross margin improved 0.5 ppts yoy to 13.3%,as supported by changes in sales mix and growing auto finance business.
　　Share of profit for JV decreased 5.3% to RMB11,633 million due to drag fromFrench brands but DF Honda sales helped to offset the decline.
Japanese brands should be able to weather the current weakness, butothers may face stronger pressure. Due to reputable brand name andquality, DF Nissan and DF Honda should catch up faster as demand for theirvehicles may pick up first. DF PSA will face stronger pressure to itsturnaround plan as model competitiveness remains weak in our view.
　　Self-owned brands showed improvement since 2H19 due to new PV modelsand better CV sales, but vulnerability can be seen in thin PV product line.
We have decreased shareholders’ profit by 27.0% and 25.8% in 2020 and2021, respectively. After adjustment, we expect shareholders’ profit todecrease 19.7% yoy in 2020, but increase 11.0% and 4.8% yoy in 2021 to2022.
We maintain "Neutral" rating for DFG, and revise down TP to HK$4.87on lower earnings and valuation, representing 3.7x 2020 PER, 3.3x 2021PER. The Company’s valuation has continued to fall in the past few years,with 12M forward PER trading in a range of 3x to 4x. Our valuation is aroundthe mid-point of that range and we believe it’s fair and appropriate.