Guangzhou Auto:Robust 3Q17earnings growth with strength on all fronts
71% YoY 3Q17net profit rise thanks to strong sales and higher margins。
Guangzhou Auto (GAC) released its 3Q17results under PRC GAAP on 26October.Net revenue grew by 29.2% YoY to RMB16.3bn, mainly driven by a 28.9% YoYgrowth in Trumpchi local brand sales. GAC’s 3Q17gross profit margin improvedby 5.3ppt YoY to 22.1% thanks to economy of scale and improve1.2bn, up 1.4xYoY. On the back of 16.7% YoY sales growth at four major JVs (namely GuangqiHonda, GAC Toyota, GAC Fiat Chrysler and GAC Mitsubishi) thanks to strong SUVsales, total 3Q17earnings contribution from GAC's JVs and associates grew by38.9% YoY to RMB2.0bn. All in all, despite a 57.1% YoY jump in SG&A expensein order to drive sales, GAC’s 3Q17net profit still rose 70.8% YoY to RMB2.8bn.。
Deutsche Bank view - sales and earnings momentum to sustain beyond FY17E。
GAC’s 9M17net profit accounts for 86% of our original FY17forecast and88% of Bloomberg consensus, we consider the results marginally above DBand consensus expectations. We think these respectable results are mainlyattributable to a better-than-expected own-brand Trumpchi operations withmargin improvement vs. a comparative struggle seen in other domestic peers.After reviewing GAC's 3Q17financials, we raise our FY17-19revenue forecast forthe company by 1.2-4.5% mainly on higher Trumpchi sales assumption. Togetherwith better earnings outlook for GAC's major JVs on more new model sales andenhanced economies of scale, we also raise our FY17-19earnings forecast by2.2-5.9%. We base our target valuation at 11.5x FY18E P/E (from 10.5x FY18E)and believe this is justified given the FY16-19E three-year EPS CAGR of 30%.Our target price also implies a 2.2x FY18E P/BV, with a sustainable ROE of about21-22%, which we regard as reasonable.。
We have GAC-H shares as one of our top Chinese auto OEM Buys since we believethat its strong sales momentum can be sustained, with more passenger vehiclemodel launches in sight. Meanwhile, we maintain a Sell rating on GAC-A giventhe hefty price premium to GAC-H. Key upside risks for GAC-A are rapid auto salesand margin expansion, driven by successful new models. Key downside risks forthe GAC-H are weaker-than-expected sales and worse-than-expected margin.。