Brilliance China Automotive reported 2018 net profit of Rmb5.8bn （+33% YoY）。 BMW-BrillianceAuto’s （BBA） net profit contribution reached Rmb6.2bn （+19.2% YoY）， backed by improving productmix and solid sales growth. Given BBA’s efforts to expand market share, we expect higher sellingexpenses and lower margin in 19E. We lower our diluted EPS forecasts from Rmb1.78 to Rmb1.35 in19E （+17.4% YoY）， from Rmb1.89 to Rmb1.36 in 20E （+1% YoY）， and forecast Rmb1.37 in 21E （+0.6%YoY）。 We lower our target price from HK$12.90 to HK$7.80 （5x 19E PE）， and with 5% upside, wedowngrade Brilliance to Hold rating.
Decent sales target. BMW-Brilliance Auto （BBA） realised total sales of 466k units in 2018 （+20.6%YoY）， backed by solid 5 Series, X1 sales and ramping-up locally produced X3 model. The companytargets 16% YoY sales volume growth in 19E. We believe the X3 model will be the company’s mainsales driver in 19E, and the new 3 Series and X2 models will continue boosting sales.
Margin pressure. Amid changing tariffs for imported cars, we note consumers are adopting a waitand-see approach for further retail discounts rising since 2H18. BBA’s net margin dropped from 9.4%in 17A to 9.0% in 18A, which we believe was mainly due to increasing rebates. Given BBA’s efforts toexpand market share, we expect higher selling expenses and lower margin in 19E. We forecast thenet margin to further drop to 8.9% in 19E.
Uncertainty of special dividend. In October 2018, BMW Group decided to acquire 25% of BBA fromBrilliance for Rmb29bn, increasing its total stake in BBA from 50% to 75%. The company announcedto return the proceeds to shareholders through special dividends, while the amount of dividend isunsettled, given the potential capital gain tax, dividend tax, and Brilliance’s projects that requirefurther funding.
Downgrade to Hold. Given BBA’s efforts to expand market share, we expect higher selling expensesand lower margin in 19E. We lower our diluted EPS forecasts from Rmb1.78 to Rmb1.35 in 19E（+17.4% YoY）， from Rmb1.89 to Rmb1.36 in 20E （+1% YoY）， and forecast Rmb1.37 in 21E （+0.6% YoY）。We lower our target price from HK$12.90 to HK$7.80 （5x 19E PE）， and with 5% upside, we downgradeBrilliance to Hold rating.