Chang'an Auto Alert:1Q17earnings declined YoY on weak local brand margins and Ford JV sales

10.2% YoY 1Q17 net profit decline despite flattish overall sales volume.

    Chang’an Auto released its 1Q17 results today. The company’s 1Q17 net revenue declined 8.7% YoY to RMB16.8bn, despite 11.1% YoY growth in local brand vehicle sales volume to 461k units and increasing SUV mix. 1Q17 gross profit margin also narrowed by 82bps YoY, probably due to fierce competitions, in our view. Meanwhile, there was an 8.0% YoY earnings contribution decline from its JVs/associates, driven by 20.2% YoY sales volume drop at Chang’an Ford, probably due to aging product portfolio and exhaustion of small-engine car demand after cutback in tax incentive, in our view. Altogether, Chang'an's 1Q17 net profit fell by 10.2% YoY to RMB2.4bn.

    Deutsche Bank view - unexciting portfolio implies mild full-year growth at best.

    With the originally popular products' sales going downhill and a lack of new 'killer' products in sight, especially at the major earnings contributor Chang’an Ford, we doubt if Chang’an can stage a strong earnings rebound in upcoming quarters. Hence, we trim our FY17-18E net revenue by 1.2-1.3% on lower local brand ASP assumption. We also cut our FY17-18E net profit by 9.3-10.0% mainly on 1) lower gross margin assumption for local brand amid competitions and 2) lower pricing and margin assumptions for Chang’an Ford amid weak model portfolio, partially offset by lower local brand’s SG&A expense ratio assumption.

    We continue to value Chang'an at 7.0x FY17E P/E, which is below the company's historical trading average. This is justified, in our view, as we expect Chang'an to have milder net profit growth going forward (3% FY16-19E CAGR) vs. faster growth in the past (45% FY13-16 CAGR). Given a lack of share price upside vs. our target price, we maintain our Hold rating.