Jiangling Motors -A:Earnings dragged down by gross margin contraction;may not reverse in near term

Q1-Q3 net profit down 29% YoY, missing our estimate.

    Jiangling's Q1-Q3 net profit was Rmb1.09bn (-29% YoY), significantly missing ourestimate, as it represented only 52% of our 2016E net profit. Q3 net profit wasRmb390m (-15% YoY), core revenue was Rmb6.4bn (+29% YoY), and gross margincontracted 1.5ppt YoY to 24.2%, mainly due to a decline in product prices. Selling andadministrative expense ratios rose 0.4/0.1ppt to 7%/8.6%, mainly because of a sharpgrowth in promotion expenses and R&D spending.

    Q3 sales rebounded, driven by recovery of S350 and pickups.

    Q3 sales rose 20% YoY to 63,531 units, mainly driven by the launch of the newYusheng S350, whose average monthly sales rose to c3,000 units. The company'spickup sales also recovered. Overall sales remained sluggish in Q1-Q3, down 2% YoYto about 184,521 units in total. Ford Transit/JMC light-duty trucks/JMC pickups/Yusheng SUVs posted sales growth of -2%/-11%/+5%/-16% YoY. Considering thatthere are only a few new models and they have yet to ramp up, we believe the currentrebound in sales volume may not be sustainable.

    We remain cautious in our outlook for Yusheng S330 sales.

    The company launched the Yusheng S330 in late September. We expect sales of thenew SUV model to contribute meaningfully to overall sales volume in October.

    Positioning it as a compact urban SUV, the company prices the model at Rmb88,800-142,800. Rival products include the Hover H6, Chang'an CS75 and Trumpchi GS4.

    Given intensifying competition in this SUV class and the limited distribution channelsand brand awareness of Yusheng, we are relatively cautious in our outlook for its salesvolume and estimate monthly sales to average about 5,000 units in 2017.

    Valuation: Maintain Neutral rating and Rmb27 price target.

    Our price target is based on DCF and assumes an 8% WACC.