Chongqing Changan Automobile Company Limited:Ford JVs 2Q17profits hit a ten-quarters low,reduce target price to Rmb16.8

A read-through of Ford Motor’s 2Q17 results showed Ford China JVs (including CA Ford and JMC Ford) 2Q17 earnings decreased 31% YoY to Rmb1.34 bn, which is the lowest in the last ten quarters. Ford JVs' contributed 90% of total Chang'an group's 2016 earnings, thus, Chang'an 2Q17 earnings is likely down 50% YoY to Rmb1.4 bn.

    Ford China JVs earnings drop was mainly driven by margin & selling price decline-net margin down 5.7 pp YoY / 2.3 pp QoQ to 10.7% (a three year-low). We attribute this notable margin drop to its middle-size SUV Kuga’s official price cut since April 2017.

    We expect the stock price to react negatively to the results miss as it may aggravate investors' concern on its earnings power outlook. We revise down Chang'an 2017-19E earnings by 30-36% with a lower margin and sales volume assumption for Ford China JVs, resulting in a lower target price to Rmb16.8 (from Rmb17.0).

    Upside risk is volume spike from Chang'an local brand's strong new products, especially the just launched CS55 middle-size SUV, CS95 large size SUV and Linmax 7-seat MPV.