Guangzhou Automobile Group -A:Better-than-expected sales and earnings but still looks expensive

GS4 drove better-than-expected NP growth but valuation remains demanding

    Average monthly sales of the GS4 reached 26k units in 9M16, better than our 20kforecast from the beginning of the year. The big sales jump also caused earnings of theTrumpchi brand to beat expectations. Given these factors, we are raising our 2016-18Eearnings 43%/41%/42% and raising our price target 75% to Rmb14. However, wethink the market is still too optimistic on the company's growth outlook, particularlysince industry growth could decelerate markedly in 2017. GAC's current valuationrepresents a ~72% premium to the sector average and its A-H premium is 103%, farhigher than those of similar companies. Therefore, we maintain our Sell rating.

    GAC Trumpchi: Profitability improving as GS sales rise

    GS4 sales totalled 240k units in 9M16, making it a bestseller in the SUV segment. Dueto a phase III plant starting operation in H2, the soon-to-be-launched GS8 and GS3 willnot be subject to capacity constraints. Trumpchi's improving dealer penetration andupcoming new models should provide further support to ongoing robust sales growth.We forecast 2016/17E Trumpchi sales at 350k/450k units, up 86%/28% YoY, with netprofit (NP) of Rmb2.3/2.7bn, up 323%/21% YoY.

    GAC Fiat-Chrysler: Positive earnings likely in 2016 on strong Cherokee sales

    The Cherokee had average monthly sales of 8,400 units in 9M16, slightly better thanthe 8,000 we expected, while the locally-manufactured version of the Renegade(launched in June 2016) creates further earnings upside. We expect GAC Fiat-Chryslerto reverse its losses and turn a modest profit in 2016 as capacity utilization improves,with NP reaching Rmb320/1,240m in 2016/17E.

    Valuation: Raising PT to Rmb14, maintain Sell

    We are increasing our price target 75% to Rmb14. Broken down, 41% of the increaseis due to raising our 2017E earnings, 13% to rolling our model forward to 2017 from2016 and 10% to an increase in our average valuation for the industry. Our price targetis based on 11x 2017E PE, ~7% higher than the industry average, mainly due to ourexpectation that earnings growth will modestly outpace that of the industry after 2018.Our PT implies 1.8x 2017E P/BV, 5% lower than the industry average of 1.9x, mainlydue to our estimate that 2018E ROE will be slightly lower than the industry average.