Results Review
2015 results lower than expectation
Harmony’s 2015 earnings rose 3.4% to Rmb563mn, 6.4% lowerthan our expectation. 2H revenue increased 12% HoH toRmb5.6bn, representing an increase of 8% over 2014. 2H netprofit increased 2% HoH to Rmb284mn, up 5% YoY.
Trends to watch
2015 still maintained growth thanks to the rise ofcomprehensive maintenance service. Comprehensivemaintenance service grew 75% YoY in 2015 to Rmb494mn, withits proportion of gross profit up 12% YoY to 19%. With rapiddevelopment, independent after-sales service outlets will be aprofit growth driver to the firm in the future.
Continuously increasing dividend payout ratio thanks toenhancing cash flows. Due to the contribution of after salesservice and inventory control (inventories in 2H declined 14%),operating cash flow increased Rmb1.2bn to Rmb1.6bn, and totalcash rose to Rmb3.5bn. The company proposed a final dividendof HK$0.12 per ordinary share, indicating a 27.8% payout ratio.
Expecting the proceeding of AFV project. Harmony's firstEV will be launched in 2017 and a higher-end EV from HarmonyFuteng will be launched in late 2018. We think Harmony's stockprice will be more related with the progress of the AFV project.
Earnings forecast
We cut our 2016 earnings by 7.4% to Rmb753mn and set 2017forecast at Rmb782mn.
Valuation and recommendation
Harmony is trading at 7x 2016e P/E, no premium compared withother dealer peers. We think its current valuation hasn't reflectedthe prospect of Harmony AFVs. But before any big progress ofAFVs appears, we see a lack of strong catalysts to boostvaluation. We cut TP by 13% to HK$7, implying 12.1x2016e P/E. Maintain BUY. Risk: price promotions keepreducing the GM of new vehicle sales.