Guangzhou Automobile (2238 HK):On cruise control

Strong 3Q13 numbers. Guangzhou Automobile (GAC) reported 3Q13 numbers under PRC GAAP with net income of RMB1.0b, up 180% YoY while JCE income topped RMB1.2b in 3Q13, up 121% YoY. We attribute the solid 3Q13 performance to (1) the continuing recovery of GAC’s Japanese JVs, GAC-Honda and GAC-Toyota; (2) sales momentum behind its new model line-ups; and (3) the narrowing loss from its own-brand vehicles and recently established JVs.

    On track recovery of GAC-Honda/Toyota. GAC-Toyota and GAC-Honda, the company’s two Japanese JVs, have shown further improvement in 3Q13. GAC-Honda’s unit sales were up 5.7% QoQ to 105k units while GAC-Toyota’s unit sales were up 5.6% QoQ to 79k units. We believe both JVs will continue to gain traction in 4Q13F-2014F given the JVs strong model line-ups, including the Honda Crider and Accord and Toyota’s Yaris and Auris. We expect JCE income for the two Japanese JVs to rise 47%/20% in 2013F/2014F.

    New operations slowly getting there. GAC’s own-brand “Trumpchi” vehicle saw better operating performance and improved unit sales of 50k in 9M13, up 72% YoY. We believe GAC-Fiat and GAC-Mitsubishi will remain in the red this year, but with increasing numbers of new models, improving economies of scale and the possibility of introducing the popular Jeep SUV, a better 2014F/2015F lies ahead.

    Maintain Outperform and raise target price to HK$10.50. We like GAC’s success in engineering a turnaround. We maintain our Outperform rating, raise our earnings forecasts by 12.2%/8.4% for FY13/14F, and raise our target price from HK$9.70 to HK$10.50, still based on 12x forward P/E.