Huayu Automotive Alert:FY16a small beat on strong China vehicle production

16% earnings growth with strong auto production; 52% dividend payout

    Huayu’s FY16 gross revenue edged up by 17.8% YoY to RMB124.3bn. The revenue growth was likely driven by 1) growth in passenger vehicle production in China during the period due to tax stimulus on small-engine car purchases and 2) growth in Yanfeng’s overseas interior trim business. FY16 gross profit grew 26.4% YoY to RMB17.7bn with 0.9ppt gross margin expansion. Together with 19.6% YoY growth in profit contribution from its JVs/associates but partly offset by 25.3% YoY jump in SG&A expenses, FY16 net profit increased by 16.1% YoY to RMB6.1bn, slightly beating our expectation by 5%. On a quarterly basis, 4Q16 net profit grew 14.7% QoQ (28.9% YoY) to RMB1.6bn with 3.1ppt QoQ gross margin improvement.

    Deutsche Bank view - overseas expansion on track with favorable outlook

    We raise our FY17-18E revenue by 3.8-5.3% to reflect stronger-than-expected overseas revenue growth. Together with higher margin assumptions, we lift our FY17-18 earnings forecasts by 4.5-5.5%. Our TP is based on 10.0x FY17E P/E (unchanged), about 15% below Huayu’s mid-cycle P/E of 12x. This is justified, in our view, as we expect Huayu to deliver a 11.0% FY16-19E three-year net profit CAGR. We think that the stable sales growth outlook at SAIC (600104.SS, CNY24.67, Hold) will continue to ensure a solid revenue source for Huayu in FY17-19E. In addition, the expanding overseas sales of its interior trim subsidiary Yanfeng should provide an additional growth driver. We maintain Buy given attractive FY17E P/E valuation of 8.5x and 6.2% FY17E dividend yield. Key downside risks: weaker-than-expected auto sales volume, an inability to acquire new customers and market share loss.