Brilliance China’s 2018 shareholders’ profit increased 33.0% yoy toRMB5,821 million. Excluding the impairment losses on assets, recurringincome would have increased by 20.1% yoy, below our expectation by 13.5%on missed Brilliance BMW JV net profit margin, but roughly in line with themarket. Share of profit of JV was RMB6,245 million, up 19.3% yoy, mainly onincreased vehicle sales, but net margin dropped 0.4ppts to 9.0% onadditional rebates to dealers. On the other hand, the minibus segmentcontinued to be loss-making but showed signs of improvement. Segment losswas RMB 709.6 million, and was about 19.8% better than 2017 afterexcluding impairment charges.
Strong model pipeline ahead for Brilliance BMW. Besides the new3-series, the new X2 will be localized in 2019, becoming the 7th localizedmodel for BMW.
We have fine-tuned our earnings forecast, and we expect shareholders’profit to increase yoy by 34.0%/ 18.7%/ 15.3% in 2019 to 2021,respectively. It also represents an increase of 0.5% and 4.3% in 2019 and2020 from our previous forecast. Mild changes as reduced marginassumption largely offset strong volume expectation.
The new X3 and 3 Series are expected to drive volume and expected marginto gradually improve, resulting in strong net profit growth. Therefore, webelieve the JV is still very strong fundamentally. However, as the stock pricehas rallied 27.0% YTD, we expect upside is limited without stronger catalysts.We downgrade to "Accumulate" rating for Brilliance China, and revisedownwards TP to HK$8.51, representing 4.7x 2019 PER and 4.0x 2020PER.