Investment Summary

Net Profit Fell by 26% in the Middle of 2019

According to the interim results of BAIC, in 2019H1, the Company recorded a revenue of RMB87,764 million, an increase of 14.1% yoy, a net profit attributable of RMB2.09 billion, a decrease of 25.9% yoy; and an EPS of RMB0.25, while that of 2018H1 was RMB0.36.

Gross Margin Declined due to the Down-regulation of the Product Mix of Beijing Benz

The comprehensive gross margin of BAIC recorded 23.48%, a decrease of 3 ppts yoy. Though the revenue increased, the gross profit was basically flat, with a slight increase of 0.84%. This is mainly because Beijing Benz's low-priced Class-A models accounted for a larger share of sales, causing the product mix to be down-regulated. In H1, Beijing Benz recorded a sales volume, revenue and gross profit of 282,000 vehicles, RMB77.81 billion, and RMB22.02 billion, respectively, an increase of 11.9%, 10.8% and 0.16% yoy, with the average gross profit of single vehicle declined by 10%, approx. In H2, Beijing Benz will launch new models including the interim modified long-wheelbase GLC SUV, brand-new GLB SUV, EQC EV SUV, and A35-LAMG. With the increased demand for premium cars, we are confident that Beijing Benz will continue to maintain its sound growth momentum.

NEV Enjoyed Strong Sales Momentum, Leading Self-Brands to Reduce Losses

The gross margin of Self Brands of BAIC increased to -14.2% from -23.2% of the same period of last year, mainly due to 1) the growth of sales volume; 2) the increase in the proportion of new-energy models with relatively high gross profit; and 3) the impact of the decline of new-energy subsidy policy which offset part of the gross profit.

The gross profit of BAIC's Self Brands increased to -RMB1,414.9 million from -RMB1,551 million of the same period of last year, with a loss reduction of RMB136 million or 8.8%. In H1, Self Brands of BAIC sold 82,000 vehicles, an increase of 12.2% yoy, of which new-energy models sold recorded 54,000 vehicles, a significant increase of 263% yoy, which served as the main driving force. Revenue related to Self-Brands increased to RMB9,956.6 million, an increase of 49% yoy. The average unit price of Self-Brands increased by 30%, approx., and the average gross profit loss of single vehicle decreased by 20%.

In H2, the Company will divest officially the severely loss-making brands, Wei Wang and BJ, which will benefit the overall loss reduction of its Self-Brands. However, in view of the ongoing integration of BAIC Self-Brands and the adjustment to the domestic NEV market in H2, we are still cautious about the Self-Brands in the short term.

Beijing Hyundai Turned Gain to Loss

Due to the fierce price competition and the de-inventory of models of National V Standards, Beijing Hyundai recorded a finished vehicle wholesale of 276.000 vehicles in H1, a decrease of 27.3% yoy, causing the Company's attributable profit to turn to a loss of RMB365 million from a gain of RMB580 million of the same period of last year, which served as the main reason for the sharp decline of the Company's results. In H2, BAIC Hyundai will launch a number of products including the brand-new ix25 SUV, new Verna sedan, Generation-10 Sonata sedan and Fista and Encino EV models. We believe that, with the launch of new models and models of National VI Standards, the earning performance of Beijing Hyundai will be better than that in H1. However, it will still be difficult to improve significantly in the highly competitive auto market.

Investment Thesis

Given the latest financial data, we lower the profit forecast of the company in 2019/2020 to EPS of RMB 0.54 / 0.60. We will also revise target price to 4.73 HKD (7.9/7.2x for 2019/2020 P/E) and Hold rating. (Closing price as at 5 August 2019)

Financials

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