Transfer of a Beijing manufacturing facility for RMB5.8bn
On 23 February, BAIC Motor announced that the company proposed to sell itslocal brand's Beijing Branch facility in Shunyi District to Beijing Benz at theappraisal value of RMB5.84bn （composed of RMB3.98bn worth of land andproperty, RMB0.86bn of construction in progress and RMB1.00bn of inventoryand equipment）， subject to minority shareholders' and regulatory approvals.
While the consideration is above the fixed assets' book value of RMB4.80bn, BAICMotor will not realize any disposal gain since the gain will be offset under theconsolidated accounts with Beijing Benz also being a consolidated entity.
To elaborate on the to-be-transferred assets, they comprise two parcels of landwith a total site area of approximately 1.06m square meters, 34 buildings andvarious ancillary structures which were completed between 2013 to 2016. Theland use rights will not expired until 2061.
Deutsche Bank view - win-win for both the local brand and the Benz JVIn recent public occasions, BAIC Motor has been repeatedly stressed on itsefforts to refine its loss-making local brand business and cut losses. We think theproposed asset transfer will help to eliminate some of the local brand's underutilizedcapacities while reducing depreciation/amortization expenses （by a fewhundred millions yuan a year, in our estimate）。 Meanwhile, BAIC Motor alsoannounced on 25 February that Beijing Benz will invest more than RMB11.9bnin capacity expansion, including for new energy vehicles. As such, we think theasset transferal to the JV will help the new capacity to become available in ashorter period of time and alleviate the production bottleneck.
To conclude, we reiterate our Buy rating on BAIC Motor on 1） resilient BenzJV sales and profitability, 2） recovering Hyundai JV operation, and 3） lossnarrowingefforts at the local brand operation. Our SOTP target price implies anundemanding FY18E of 10.3x. Key downside risks are 1） weak reception for itsnew models and 2） loss-widening at the local brand.