FY17E earnings to fal approximately 65% YoY
On 13 February, BAIC Motor announced the company expects to record about65% YoY decline in its FY17 net profit （i.e., to about RMB2.2bn）。 BAIC Motorattributes the significant earnings plunge to 1） competition in the China autosector and 2） weak demand of Korean brand passenger vehicles and BAIC's localbrand. Consequently, profitability of BAIC’s Hyundai JV and the loca brand wasbadly affected. More details of BAIC Motor’s results wil be released by the endof March.
Deutsche Bank view – loca brand house cleaning possible; our optimism onFY18E remain
In our FY17 forecast, we estimate that BAIC wil register 33% YoY net profitdecline to RMB4.3bn, with consensus expectations lower than ours. Based onthe company announcement, its FY17 net profit wil only account for 52% of ourforecast. As such, we think consensus estimates are subject to downside risk.
Since Beijing Benz has already reported a 62.2% YoY jump in FY17 after-tax profit（in EUR terms） while Beijing Hyundai's FY17 is marginally profitable, we reckonthat BAIC Motor's FY17 earnings downside should come from a significant 2H17EHoH loss widening at the loca brand operation despite improved sales volumeHoH. We indeed think it is possible that BAIC Motor may have made some oneoffwrite-offs in that period.
Notwithstanding an overal disappointing FY17, we see solid trends in variousentities of BAIC Motor. To elaborate, Beijing Benz's sales momentum stayedstrong in January with 31.1% sales volume YoY growth. While Beijing Hyundai'ssales were stil down YoY, demand for the new generation ix35 SUV has beenencouraging while more new SUV models （e.g. Kona） is upcoming. Although westil do not expect the loca brand sales to drastically improve, a possibly lighterasset base could stil help on loss narrowing, in our view.
Al in all, we maintain our Buy rating on BAIC Motor as we believe the BenzJV’s robust net profit is sustainable, while the depressed valuation being appliedto the Hyundai JV is excessive. This is because we do think the Hyundai JV’sprofitability can be rebounded meaningfully in FY18E on sales improvement. OurSOTP target price implies undemanding FY18E of 10.3x. Key downside risks are1） weak reception for its new models and 2） loss-widening at the loca brand.