BAIC Motor’s （"BAIC" or the "Company"） 2018 net profit increased by96.6% yoy to RMB4,429 million, roughly in line with the preliminaryresults announced in February. However, results missed market and ourexpectation. We think the weak recovery of Beijing Hyundai was one majorreason, as vehicle sales was only up 0.7% yoy despite the low base. Onceagain, only Beijing Benz delivered robust growth, with segment revenue up16.0% yoy. Gross margin dropped 2.1ppts to 24.4% as gross loss from theBeijing Brand widened and accounting reclassification also dragged BeijingBenz gross margin.
We roll forward our base year to 2019, and expect net profit to increase17.7%/ 25.6%/ 16.2% yoy in 2019 to 2021, respectively. Compared to ourlast forecast, net profit in 2019 and 2020 came in 13.6% and 7.6% lower. Thelarger reduction is again on the more conservative outlook for Beijing Brandand Beijing Hyundai. Meanwhile, Beijing Benz sales volume continued togrow yoy by 15.1%/ 10.7%/ 6.4% in 2019 to 2021, respectively, driven by theA-Class sedan, GLC-L and the facelifted C-Class.
Fundamentally, we think the company is strong in the auto universe, withprofit expected to grow at a CAGR of 19.8% in 2018 to 2021. However, wethink that the weak Beijing Brand and Beijing Hyundai will continue todepress valuation, seeing as the stock is trading at around 1 S.D. below themean. Moreover, we believe the uncertainty around Daimler AG’s plan onincreasing their stake in BAIC or Beijing Benz to continue to be a short-termrisk and a dominant factor on the trend of stock price. We believe theCompany’s stock price will be more information-driven rather thanvalue-driven. Therefore, we maintain our "Neutral" rating for BAIC, andrevise up TP to HK$5.00, representing 6.5x 2019 PER, 5.2x 2020 PER.