Guangzhou Automobile 2238 HK Outperform Volume Growth Rate Peaked in 1H Price (At 09:22, 29 Jul 2016 GMT) HK$9.96
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HONG KONG Guangzhou Automobile 2238 HK Outperform Volume growth rate peaked in 1H Price (at 09:22, 29 Jul 2016 GMT) HK$9.96 Valuation HK$ 11.40 Event - PER 12-month target HK$ 11.40 . Guangzhou Auto (GAC) has achieved strong volume growth in 1H16, with unit Upside/Downside % +14.5 shipments up 31% YoY helped by the success of its own brand Trumpchi’s 12-month TSR % +18.3 GS4 SUV and the launch of Jeep production in China. We believe, however, Volatility Index Medium that this represents the peak for volume growth, which is likely to slow to 13% GICS sector Automobiles & in 2H on softer sales from the Honda JV and tougher comps for Trumpchi. Components Market cap HK$m 135,147 . The problem from a model mix perspective is that more of the growth is Market cap US$m 17,871 coming from low margin models, with growth from its higher margin JVs with Free float % 21 Honda and Toyota is more sluggish. As a result, we have lowered our 30-day avg turnover US$m 19.4 earnings estimates. We roll forward our PER to an average of 2016E and Number shares on issue m 13,569 2017E, based on a target PER of 9x as before, but we trim our target price to Investment fundamentals HK$11.40 from HK$11.50 on lower estimates. We maintain our Outperform Year end 31 Dec 2015A 2016E 2017E 2018E rating but prefer other automakers on lower valuations (see Fig 25). Revenue m 29,418 44,242 46,959 51,525 EBIT m 387 2,528 2,866 3,063 Impact EBIT growth % nmf 553.4 13.4 6.9 Reported profit m 4,212 6,140 7,469 8,493 . Single model risk at Trumpchi: The outstanding growth at GAC’s own brand EPS rep Rmb 0.65 0.95 1.16 1.32 EPS rep growth % 31.9 45.8 21.6 13.7 is due entirely to the GS4 SUV, which accounted for over 90% of 1H16 PER rep x 13.1 9.0 7.4 6.5 volume. The 144.6k units sold in 1H16 compares with the previous full-year Total DPS Rmb 0.20 0.29 0.35 0.40 Total div yield % 2.3 3.3 4.1 4.6 record volume for any Trumpchi model of 70.5k (GS5 SUV in 2014). Given ROA % 0.6 3.6 3.8 3.7 the fickle nature of Chinese consumers, there is no guarantee it can sustain ROE % 11.4 14.9 16.1 16.3 EV/EBITDA x 8.2 5.6 4.8 4.4 these high volumes or achieve similar success with another model. Net debt/equity % 1.0 5.2 -0.1 -6.7 P/BV x 1.4 1.3 1.1 1.0 . Jeep doing better than expected: We are pleasantly surprised by the 2238 HK rel HSI performance, & rec success of the Jeep Cherokee, launched in November 2015, and which history averaged monthly sales of 8.4k in 1H, ranking the 24th best-selling SUV in China. We are less optimistic that the new Renegade compact SUV will do as well, as Honda appears to have cornered the market with its Vezel/XR-V. Honda, Toyota – slow and steady: Honda and Toyota are both seeing lulls in their product cycles. Honda completed a renewal of its major products in 2H15, which helped it deliver 12% volume growth in 1H but we expect this to turn negative in 2H before the addition of the Avancier SUV late in 2H helps volumes return to growth. Toyota is hampered by a lack of capacity; we expect it to post 7.7% growth this year helped by the Highlander and hybrid Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Levin and 5.8% in 2017 on the back of the Yaris facelift. Source: FactSet, Macquarie Research, July 2016 (all figures in Rmb unless noted, TP in HKD) Earnings and target price revision . We lower our 2016E EPS by 22%, 2017E by 18% and 2018E by 13% as more of the growth is coming from low-margin vehicles. We trim our TP to HK$11.40 from HK$11.50 despite rolling forward to an average of 2016E and 2017E due to lower profit estimates. Analyst(s) Price catalyst Janet Lewis, CFA +852 3922 5417 [email protected] Zhixuan Lin . 12-month price target: HK$11.40 based on a PER methodology. +86 21 2412 9006 [email protected] Allen Yuan . Catalyst: Monthly sales; 1H16 earning in late August. +86 21 2412 9009 [email protected] Action and recommendation 1 August 2016 Macquarie Capital Limited . We maintain our Outperform rating but as the shares are more richly valued than many peers, we prefer Dongfeng Motor for exposure to growth from Japanese OEMs in China. Please refer to page 16 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research Guangzhou Automobile Analysis Fig 1 Macquarie vs consensus forecasts Rmb m Revenue EBIT Pre-tax profit Net profit Basic EPS 2014 Actual 22,383 -491 3,066 3,194 0.50 2015 Actual 29,418 387 4,386 4,212 0.65 2016 MRE – old 25,316 585 8,041 7,838 1.22 2016 MRE – new 44,242 2,528 7,283 6,140 0.95 2016 Consensus 40,647 1,691 6,839 6,290 0.97 2017 MRE – old 30,946 648 9,375 9,151 1.42 2017 MRE – new 46,959 2,866 8,753 7,469 1.16 2017 Consensus 44,825 1,849 7,732 7,148 1.11 2018 MRE – new 51,525 3,063 9,866 8,493 1.32 2018 Consensus 49,251 1,997 8,432 7,744 1.20 Source: Bloomberg, Macquarie Research, July 2016 Strong sales but more modest improvements in profitability . New models, brands spur volume growth: GAC has benefited by a raft of new models, primarily SUVs, that have contributed to strong growth over the past few years. It has also, however, been impacted by the decline in demand for mid-sized sedans like the Honda Accord and Toyota Camry. We believe in the past these have been major contributors to JCE (jointly controlled enterprise) profits, but their slowdown was a factor in lacklustre profits in 2014. SUVs helped to support the recovery in JCE profit in 2015, notably the new model of the Toyota Highlander and the successful launch of the Honda Vezel. FCA continues to weigh on earnings: We believe that the Fiat Chrysler JV (FCA) contributed a loss of over Rmb1bn in 2014 as sales of Fiat vehicle evaporated. While the successful launch of the Jeep Cherokee should reduce FCA related losses from 2016, the addition of a very expensive new factory in Guangzhou (Fig 13) is likely to keep the JV in loss until 2017 at the earliest. Further, with Fiat brand vehicles selling just Rmb9.3bn, we believe FCA needs to abandon the Fiat brand in China – it has already converted the most successful Fiat dealers to Jeep dealers – which could result in asset impairment charges. Hopeful of more profits from own brand: Despite the strong success of the GS4 SUV, which began to deliver strong volumes in 2H15, there was a minimal improvement in GAC’s operating margin in 2H15. This suggests that they have underpriced the vehicle for the features it offers. There was a jump in operating profitability for the own brand in 1Q16, and we assume some of this is sustainable for the full year, a key factor in our above-consensus EBIT estimates. This is, however, a risk to our estimates, as one quarter hardly establishes a track record. A second risk is that the strong success of the GS4 is not sustainable or transferable to other models. The next big launch for GAC Trumpchi is the larger GS8, and we don’t expect this to be a volume model. Expect strong 1H profit but slower growth in 2H: We expect 1H NPAT to post a 60.4% jump to Rmb2,624m on the back of improved profitability of the local brand. We also expect JCEs to post a 37% increase in profit as Honda in particular was very depressed in 1Q15 when it was paying big rebates on the Accord to destock excess inventory and the new Toyota Highlander only contributed one quarter. The 2H should see more muted growth, with NPAT up 35% YoY, within which JCEs should rise just 5% YoY as Honda sees volumes slip YoY in 2H. Fig 2 Trend in sales by brand – growth is starting to slow at Toyota and Honda Units 2013 % YoY 2014 % YoY 2015 % YoY 1H 2016 % YoY 2016E % YoY 2017E % YoY Trumpchi own brand 107,376 229.3% 135,049 25.8% 195,134 44.5% 159,421 140.1% 326,500 67.3% 349,000 6.9% GAC Honda 435,480 37.6% 480,060 10.2% 580,068 20.8% 273,987 12.0% 582,000 0.3% 666,000 14.4% GAC Toyota 303,088 21.2% 374,107 23.4% 403,088 7.7% 208,752 7.9% 434,000 7.7% 459,000 5.8% GAC Fiat-Jeep 48,375 68,433 41.5% 39,488 -42.3% 61,168 256.2% 146,000 269.7% 207,000 41.8% GAC MMC 43,036 63,199 46.9% 56,317 -10.9% 19,247 -37.4% 50,000 -11.2% 77,000 54.0% Source: Bloomberg, Macquarie Research, July 2016 1 August 2016 2 Macquarie Research Guangzhou Automobile .