Great Wall Motor and Brilliance China:A new Great Wall BMW JV in the formation?

News media reported JV discussion but no parties confirmed。

    The H share price of Great Wall Motor (GWM) went up 14.4% on 11October. Wethink that the rally was triggered by a news article in China's www.iautodaily.comreporting that BMW (BMWG.DE, EUR88.42, Buy) is planning to set up a secondChina JV with GWM and the two parties have already started to look for a plantlocation. As a follow-up to this news, Reuter news reported on midday 11Octoberthat an unidentified BMW executive confirmed the company's discussion withGWM, although that person does not know the discussion progress. Meanwhile,both BMW and GWM officially declined to comment on the news as of now.。

    Deutsche Bank view - too early to tell; recommendations on GWM andBrilliance maintained for now。

    At the moment, we think it is still early to tell whether a new BMW JV willeventually be set up in China, with the following considerations:

    BMW did not mention publicly in the past that they were interested infinding a second partner in China, and they claim that the growth plan atBrilliance BMW will continue as planned.。

    While GWM did express interests in tie-ups with foreign OEMs recently,we do not observe much synergy that the company can offer to BMW.。

    When SAIC Motor (600104.SS, CNY31.72, Hold) signed a memorandumof understanding (MOU) with Volkswagen (VOWG.DE, EUR147.2, Hold) inNovember 2016on future production and import of Audi brand products,there were public announcements made. As such, we believe that theBMW-GWM discussion, even if happening, is still preliminary and subjectto change.。

    All in all, while we think that a new BMW JV, if happening, should be a positiveto GWM in the long run given a potential new earnings stream, it is too earlyto gauge the impact and assign a valuation with the current information. Wewould therefore stick to our Sell recommendation on GWM considering thecompetitive pressure of its existing products, lukewarm YoY sales growth inSeptember despite new product ramp-up, and high sales comparison base for4Q17E. We value GWM at 7x FY18E P/E on -1% FY16-19EPS CAGR. Key upsiderisks are strong sales growth, margin recovery and new JV formation.。