Huayu Automotive Alert:1H17profit a small miss on gross margin and SG&A

6% profit growth on 12% revenue and 17% JV contribution YoY

    Huayu released 1H17results after market close on 24August. The company’s1H17gross revenue edged up by 11.5% YoY to RMB68.4bn, achieving 51% ofour FY17E revenue forecast. The revenue growth was likely driven by growthand new model launches from key OEM customers and good momentum onoverseas business, according to the company. Meanwhile, Huayu’s 1H17gross profit grew 12.7% YoY to RMB9.4bn with 15.2bps YoY gross profitmargin improvement. Together with 17.4% YoY growth in profit contributionfrom its JVs/associates, but partially offset by 16.5% YoY jump in SG&Aexpenses, 1H17net profit increased by 5.5% YoY to RMB3.2bn, achieving 45%of our FY17E profit estimate and 49% of consensus.

    On a quarterly basis, 2Q17revenue increased by 24.5% YoY to RMB36.8bnand JVs/associates income grew by 33.9% YoY to RMB1.1bn. Offset by 24.5%YoY growth in SG&A expenses due to increasing overseas sales, 2Q17netprofit increased by 11.8% YoY to RMB1.8bn.

    Deutsche Bank view – attractive valuation with expanding overseas sales

    We raise our FY17-19E revenue by 2.1-6.2% to reflect slightly better-thanexpected1H17revenue growth. However, with lower margin assumptions andJV earnings contribution, we adjust down our FY17-19E earnings forecasts by2.5-6.1%. Our TP is based on 10.5x FY18E P/E (unchanged), about 10% belowHuayu’s mid-cycle P/E of 12x. This is justified, in our view, as we expect Huayuto deliver a 12.0% FY16-19E three-year net profit CAGR. We think that theexpanding overseas sales of its interior trim subsidiary Yanfeng should providean additional growth driver. Maintain Buy on attractive FY18E P/E of 9.2x and5.8% dividend yield. Key downside risks: weaker auto sales; inability to acquirenew customers; and unexpected increase in raw material prices.