Huayu Automotive Alert:Revising up FY16E on strong China PV sales
Robust auto production momentum leading to a strong 4Q16EWith China passenger vehicle (PV) production volume finishing at 24.4m units(+15.5% YoY) and SAIC Motor, Huayu’s largest OEM customer, recording10.5% YoY vehicle production growth, we revise up our FY16 revenue andearnings forecasts for Huayu by 7.6% and 5.6%, respectively. For 4Q16, weexpect Huayu to deliver a 66.5% YoY net profit growth (before 4Q15restatement on Huizhong inclusion) to RMB1.3bn on 40.2% YoY net revenuegrowth to RMB26.8bn but partly offset by 44bps gross margin contraction.
During the quarter, China PV production growth rate accelerated to 17.3% YoYfrom 9M16’s 14.7%. PV sales growth also increased, by 15.3% in 4Q16indicating strong sales momentum and healthy industry sales/productionbalance. Meanwhile, SAIC registered 12.9% YoY growth in vehicle productionin 4Q16 with SAIC-Volkswagen JV up 5.0% YoY and SAIC-GM up 4.7%.
Deutsche Bank view – lifting earnings and TP on auto sales; maintain BuyWe raise our FY16-18E revenue by 5.4-7.6% to reflect stronger-than-expectedFY16 China PV production volume. As a result, we lift our FY16-18 earningsforecasts by 4.1-5.6%, partially offset by weaker-than-expect margins. Ourtarget price is based on 10.0x FY17E P/E (from 10.5x average FY16/17E P/E),about 15% below Huayu’s mid-cycle P/E of 11.8x. This is justified, in our view,as we expect Huayu to deliver a 12.4% two-year net profit CAGR in FY16-18E.
We forecast China’s PV sales to increase by 4.5% YoY in 2017E and 4.0% YoYin 2018E. We believe that the stable sales growth outlook at SAIC (600104.SS,CNY25.00, Hold) will continue to ensure a solid revenue source for Huayu inFY17-18E. In addition, the expanding overseas sales of its interior trimsubsidiary Yanfeng after the set-up of the new interior trim JV with JohnsonControls (JCI.N, USD43.95, Hold), should provide an additional growth driverfor Huayu. We maintain our Buy rating given attractive FY17E P/E valuation of8.5x and 3.8% dividend yield. Key downside risks are weaker-than-expectedauto sales, inability to acquire new customers and market share loss.