Huayu Automotive Alert:Reverse roadshows takeaways

Solid interior giant not losing out in technology competition; Buy.

    Huayu Automotive hosted a reverse roadshow in Shanghai on 5 May. Thedirector of the company's R&D centre demonstrated Huayu's strategic plan onautomatic driving assistance systems (ADAS). In addition, senior managementalso addressed investors' questions on its 1Q16 results announcement. Ingeneral, we think our investment thesis on Huayu remains intact withexpanding overseas contribution and future potential from Huizhongacquisition. Maintain Buy on attractive valuation.

    ADAS: limited mid-term contribution but showcased strong R&D capability.

    The director of Huayu's ADAS R&D center believes the intelligent car is thefuture and Huayu has been investing in related fields since 2011-12. The centercurrently employs more than 100 staff with annual investment of aboutRMB50-60m. The ADAS team plans to tap the market through radar andsensor fusion systems. While Huayu hasn't teamed up with any OEMs at themoment for the development of ADAS, the company will start delivering lowfrequencyradars to one of its customers in 2017 on a small scale, i.e. verylimited revenue contribution. We are pleased to see Huayu’s preparation inadvanced technology, which will sustain its competitiveness, in our view.

    1Q16: Yanfeng and Huizhong on-track.

    According to management, the slower net profit growth (than revenue growth)in 1Q16 was mainly due to a RMB110m one-off gain from asset disposal in1Q15. If excluding the one-off gain, net profit would have grown 6% YoY.

    Yanfeng, Huayu's interior business, recognized about RMB14.6bn revenue in1Q16, with RMB6bn from overseas due to the acquisition of Johnson Control's(JCI.N, Hold, USD40.50) interior business. Management commented that orderbook at Yanfeng remains robust and it has secured some new orders fromglobal OEMs (including premium brands) since incorporation in July last year.

    Regarding the newly-acquired Huizhong chassis business from its parentco, itrecorded about RMB3.8bn in 1Q16 revenue, up 7% YoY. According to Huayu,there was improvement in profitability at Huizhong during the period andmanagement foresees great potential in Huizhong through product integration.

    Deutsche Bank view – favorable outlook with expanding overseas sales.

    We think that the stable sales growth outlook at SAIC (600104.SS, Buy,CNY20.46) will continue to ensure a solid revenue source for Huayu in FY16-18. In addition, the expanding overseas sales of Yanfeng should provide anadditional growth driver. We maintain our Buy recommendation given whatwe see as attractive FY16E P/E valuation of 9x. Key downside risks are weakerthan-expected auto sales volume, an inability to acquire new customers,market share loss, and an unexpected increase in raw material prices.