BAIC’s 2017 net profit decreased 64.6% yoy to RMB 2,253 million,largely below market and our expectation. The significant reduction inprofit is mainly due to the share of loss of RMB 34 million in its JVs /associates as compared to share of profit of RMB 4,217 million in 2016.This is due to Beijing Hyundai having suffered during the year with vehiclesales declining 31.3% yoy due to political tension with Korea and weakproduct cycle. Revenue increased 15.5% yoy mainly from the strongcontribution by Beijing Benz but dragged by Beijing brand as vehicle saleswas down 48.4%. Gross margin increased 3.9 ppts to 26.5% through strongsuperior margin improvement from Beijing Benz.
We forecast net profit to grow 174.6% / 37.1% / 11.2% in 2018 to 2020,respectively, on recovery on Beijing Hyundai and Beijing Brand andcontinuous improvement of Beijing Benz.
We maintain our cautious view for BAIC despite improvement in the Koreanbrand. Self-owned brands still face immense pressure and salessustainability issues still persist, while Beijing Benz sales is expected to slowon slower product cycle in the next few years. Therefore, despite thatsignificant profit improvement is expected in our forecasted period, webelieve it has been priced in. We keep our “Neutral” rating for BAIC, butrevise down TP to HK$9.74, representing 9.7x 2018 PER, 7.1x 2019 PER.