Huayu Automotive:3Q17profit in line;top-line growth mitigates increasing expenses

13% YoY earnings growth with flat margin despite SG&A expense expansion

    3Q17gross revenue edged up by 12.1% YoY to RMB35.4bn. The revenue growthwas likely driven by production growth and new model launches from key OEMcustomers and good momentum on overseas business. Meanwhile, Huayu’s3Q17gross profit grew 12.4% YoY to RMB4.7bn with a mild 6bps YoY gross profitmargin expansion. Together with 10.3% YoY growth in profit contribution from itsJVs/associates, but partially offset by 18.8% YoY jump in SG&A expenses, 3Q17net profit increased by 12.9% YoY to RMB1.6bn. On a 9M17basis, Huayu’s netprofit of RMB4.8bn was up 7.8% YoY and accounted for 72% of our previousfull-year FY17earnings forecasts of RMB6.7bn (73% of Bloomberg consensus).Therefore, we consider the results in line with our expectation.

    Deutsche Bank view – favorable outlook intact with attractive valuation

    We raise our FY17E revenue by 1.5% to reflect slightly better-than-expected 3Q17revenue growth. However, with lower margin assumptions, we adjust down ourFY17E earnings forecasts by 0.7%. For FY18-19E, we increase revenue forecast by9.0-9.3% and net profit by 0.6-2.1% to factor in the impact from recent acquisitionof the remaining 50% stake in Shanghai Koito auto lamp JV.

    Our TP is based on 12x FY18E P/E (from 10.5x, given the sector re-rating over thepast few months), in-line with Huayu’s mid-cycle P/E of 12x. This is justified aswe expect Huayu to deliver a 12.8% FY16-19E three-year net profit CAGR. Theexpanding overseas sales of interior trim subsidiary Yanfeng and acquisition ofauto lamp business should provide an additional growth driver. Maintain Buy onattractive FY18E P/E of 11.3x and 4.8% dividend yield. Key downside risks: weakerauto sales and unexpected increase in raw material prices.