Brilliance China’s 1H19 shareholders’ profit decreased 9.4% yoy toRMB3,230 million, below our expectations. Both Brilliance BMW andminibus segment performance declined, in which share of profit from JV wasdown 3.4% yoy mainly on the decrease in net margin by 2.6 ppts to 9.0%.
Meanwhile, minibus business sales volume declined, alongside the increasein cost ratio due to increase in R&D, advertising and staffing costs.
The luxury segment remained relatively strong in 1H19, with car sales inChina up by 5.9% yoy. Penetration rate was up 3.0 ppts from 2018 to 14%in 1H19.
Brilliance BMW is preparing for long-term growth. Annual capacity isexpected to increase by 490,000 units by 2022, with both Dadong and Tiexipreparing for new localized models such as the iX3, X5 and electric 5-Series.
In the short term, we are expecting an X2 crossover and the new generation3-Series to support sales.
We have adjusted downwards shareholders’ profit by 9.3%/ 8.4%/ 8.5%in 2019 to 2021, respectively. We have fine-tuned sales volume forecastsbased on the current run rate, and have reduced margin assumptions onBrilliance BMW.
We maintain "Neutral" rating for Brilliance China, and revisedownwards TP to HK$7.84, representing 4.9x 2019 PER and 4.2x 2020PER. We believe that our valuation is fair, which is approximately the averagesince the announcement of sale of the JV stake in 4Q18. We believe thatmargin recovery will be a key determinant on any re-rating.