BAIC’s 1Q18 net profit increased 17.5% yoy to RMB 1,595 million, in linewith growth expectations. The net profit increase was mainly driven byBeijing Benz, in which vehicle sales increased 16.1% yoy in 1Q18, thanks toC-Class and E-Class contribution. However, underperforming self-ownedbrands resulted in widening loss. Meanwhile, the decline in 1Q18 vehiclesales of Beijing Hyundai also dragged share of profit from invested entities,down 30.5% yoy in 1Q18.
Due to the share placement, EPS has been diluted and has beenadjusted downwards by 1.3%, 2.3% and 3.3% in 2018 to 2020,respectively. Other than that, we maintain our key assumptions unchanged,expecting recovery in 2018 onwards.
The Company is currently undergoing a major overhaul, such as transferringmanufacturing capacity to Beijing Benz and spinning off Wewan. Further,political tension with Korea has been set aside for the moment, and recoveryof Korean brands is now down to new model launches. Comparison base willbe lower in the coming quarter and should see strong improvement. Thevaluation is trading at a very low point, with just 6.9x 12M forward PER; 1S.D. below the mean. We upgrade to "Accumulate" rating for BAIC butrevise down TP to HK$ 8.41, representing 8.5x 2018 PER, 6.3x 2019 PER.Our valuation aligns with the long-term average, and with improvementcontinuing and expected to be bolder in the next few quarters, we believe ourvaluation is reasonable.