Huayu Automotive Alert:1Q17in-line amid mild China auto production growth

Gross margin expansion and stronger JVs income offset SG&A increase.

    Huayu released its 1Q17results after market close today. The company’s 1Q17gross revenue rose by 7.1% YoY to RMB34.0bn, slightly faster than passengervehicle (PV) production volume growth of 6.8% YoY in China during the period.Meanwhile, Huayu’s 1Q17gross profit grew 15.1% YoY to RMB4.8bn with1.0ppt YoY gross profit margin improvement driven by improving efficiencyand good momentum on overseas business, according to the company.Together with 1) 22.5% YoY growth in profit contribution from JVs/associates;

    2) RMB41.6m of finance income in 1Q17vs. RMB15.3m finance cost in 1Q16;

    and 3) a lower effective tax rate, but partly offset by 1) 25.6% YoY increase inSG&A expenses and 2) 40.4% YoY decrease in non-operating income, 1Q17net profit increased 7.1% YoY to RMB1.5bn with flattish net profit margin.DB view – 1Q17profit in-line; maintain Buy on valuation and attractive yield.

    As Huayu’s 1Q17net profit accounted for 22% of our FY17E earnings forecastand 24% of consensus, we consider the results largely in-line. Our target priceis set at 10x FY17E P/E (unchanged), about 15% below Huayu’s mid-cycle P/Eof 12x. This is justified, in our view, as we expect Huayu to deliver 11.0%three-year net profit CAGR in FY16-19E. We think that the stable sales growthoutlook at SAIC (600104.SS, CNY27.25, Hold) would continue to ensure a solidrevenue source for Huayu. The expanding Yanfeng’s overseas sales shouldalso provide an additional growth driver. We maintain our Buy rating givenattractive FY17E P/E valuation of 9.5x. Key downside risks are weaker-thanexpectedauto sales volume, an inability to acquire new customers, marketshare loss, and an unexpected increase in raw material prices.