Huayu Automotive Alert:1H16a small beat;overseas business expansion on track

30% revenue growth partially mitigated decline in margins

    Huayu Automotive released its 1H16 results after market close. The company’s1H16 gross revenue edged up by 29.9% YoY to RMB61.3bn, achieving 55% ofour FY16E revenue forecast. The revenue growth was likely driven by 1)growth in passenger vehicle (PV) production volume in China during the perioddue to government’s tax stimulus on small-engine car purchases and 2) theinclusion of Yanfeng’s overseas interior trim business since 2H15. Meanwhile,Huayu’s 1H16 gross profit grew 27.6% YoY to RMB8.3bn with 0.2ppt YoYgross profit margin contraction. Together with 7.6% YoY growth in profitcontribution from its JVs/associates, but partially offset by 37.1% YoY jump inSG&A expenses (largely due to the inclusion of overseas interior trim businesssince 2H15, in our view), 1H16 net profit increased by 6.0% YoY to RMB3.1bn,achieving 56% of our FY16E profit estimate and 57% of consensus. On aquarterly basis, 2Q16 revenue increased by 27.2% YoY to RMB29.6bn andJVs/associates income grew by 5.0% YoY to RMB821.9m, probably due toOEM’s robust production in 2Q16. As a result, 2Q16 net profit increased by8.7% YoY to RMB1.6bn.

    Deutsche Bank view – favorable outlook with expanding overseas sales intact

    We think that the stable sales growth outlook at SAIC (600104.SS, CNY23.53,Buy) will continue to ensure a solid revenue source for Huayu in FY16-18E. Inaddition, the expanding overseas sales of its interior trim subsidiary Yanfengafter the set-up of the new interior trim JV with Johnson Controls (JCI.N,USD45.06, Hold), should provide an additional growth driver for Huayu. Wemaintain our Buy rating given attractive FY17E P/E valuation of 8.6x and 3.7%FY17E yield. Key downside risks are weaker-than-expected auto sales volume,an inability to acquire new customers and market share loss.