SAIC Motor:3Q17a small miss with higher selling cost and fla


    SAIC Motor released 3Q17 results after the market close on 30 October. Thecompany’s 3Q17 gross revenue grew 17.4% YoY to RMB211.6bn, on the backof 11.3% growth in vehicle sales volume during the period, probably due toproduct mix improvement. Meanwhile, SAIC Motor’s 3Q17 gross profit rose26.1% YoY to RMB29.7bn with 1.0ppt YoY gross profit margin improvement,possibly also due to better sales mix. Yet with a 46.7% higher selling expenseYoY and flat profit contribution from its JVs (despite 9.7% and 7.7% YoY salesvolume growth at SAIC Volkswagen and SAIC GM, respectively), 3Q17 net profitincreased only 8.1% YoY to RMB8.7bn. On a 9M17 basis, SAIC Motor’s net profitof RMB24.6bn was up 6.7% YoY, accounting for 70% of DB's FY17 forecastand 68% of Bloomberg's full-year FY17 forecast. We consider the results slightlybelow expectations as nine months' net profit accounted for 71-72% of full-yearnet profits in the past two years.

    Meanwhile, sales of SAIC Passenger Vehicle Company surged 62.3% YoY due tothe popularity of own brand SUV models. On a quarterly basis, since SAIC Motorreported a 9M17 net profit of RMB24.6bn, the profit guidance implies that thecompany’s 4Q17E net profit would be about RMB9.6bn, up by more than 10%QoQ and 7% YoY.

    With the originally popular products' sales momentum weakening and limitednew 'killer' products in sight, especially at the major earnings contributorChang’an Ford, we doubt that Chang’an can stage a strong earnings rebound inthe upcoming quarters. Although we raise our FY17-19net revenue forecast by2.8-8.6% on higher local brand sales and higher SUV mix assumption, we cutour FY17-19E net profit by 8.0-9.1%, mainly on lower margin assumptions for thelocal brands and the JVs amid competitive pressure.

    We raise our FY17-19 revenue forecasts marginally, by 3.7-5.2%, on higher salesvolume estimates, but trim our FY17-19 net profit forecasts 0.3-2.1% mainlyon lower consolidated EBIT margin assumptions. We value SAIC Motor at 9.5xFY18E P/E (from 9x FY18E given recent auto rector re-rating), which is above thecompany's historical trading average and close to the industry's long-term P/Eaverage. This is justified, in our view, as we expect SAIC Motor to achieve a threeyearnet profit CAGR of 7% in FY16-19. On a P/BV basis, we believe the company'simplied FY18E target P/BV of 1.5x is justified, considering its 16-17% sustainableROE.

    Key company downside risks include: 1) weak reception for its new modelsfrom various SAIC brands; 2) pricing pressure amid industry competition; and 3)worse-than-expected local brand profitability. Key upside risks include: 1) betterthan-expected sales volume and pricing; and 2) better-than-expected local brandprofitability.

    We value Chang'an at 7.5x FY18E P/E (from 7.0x, considering the sector reratingover the past few months), which is below the company's historical tradingaverage. In our view, this is justified, as we expect Chang'an to suffer net profitdecline going forward (-4% FY16-19E CAGR) vs. strong growth in the past (45%FY13-16CAGR). Given a lack of share price upside potential vs. our targetprice, we maintain our Hold rating. Key downside risks include: 1) weaker-thanexpectedvehicle sales, 2) pricing pressure and 3) worse-than-expected localbrand profitability. Key upside risks include: 1) better-than-expected new and oldmodels sales and 2) a stronger-than-expected earnings rebound at the local brand.

    Key downside risks include: 1) a weak reception for its new models from variousSAIC brands; 2) pricing pressure amid industry competition; and 3) worsethan-expected local brand profitability. Key upside risks include: 1) better-than- expected sales volume and pricing; and 2) better-than-expected local brandprofitability.

FY17E net profit to increase by 7% YoY.

47% YoY 3Q17net profit decline on margin contraction, despite flattish salesChang’an Auto released its 3Q17results earlier today. The company’s 3Q17net revenue increased 1.5% YoY to RMB17.3bn despite an 11.1% YoY drop inlocal brand vehicle sales volume to 286k units, probably due to increasing SUVsales mix, in our view. However, Chang'an's 3Q17gross profit margin eroded by10.6ppt YoY, probably due to fierce competition, in our view, offset the 6.7pptYoY drop in the SG&A ratio. In addition, there was an 27.2% YoY earningscontribution decline from its JVs/associates, driven by a 14.4% YoY sales volumedrop at Chang’an Ford, probably due to an aging product portfolio, in our view.Altogether, Chang'an's 3Q17net profit fell by 47.1% YoY to RMB2.4bn. On a 9M17basis, Changan's net profit of RMB5.8bn was down 24.9% YoY and accounted for64% of our original FY17earnings forecasts of RMB9.0bn. Therefore, we considerthe results a miss to our expectations.

    Deutsche Bank view – stable earnings growth and attractive yield in the price.

    DB view – stable earnings growth with attractive yield; Hold.

    Deutsche Bank view – competitive pressure makes us more downbeat

8% 3Q16 net profit YoY growth on decent sales at both local brands and JVs.

    Since SAIC Motor’s FY17 earnings growth is broadly in line with its volumegrowth, we do not see much surprises. Going forward, we envision a stablegrowth trajectory for the company, with steady growth in JVs mitigating thestrong local brand sales. As we do not expect much sales outperformance vs.

    Going forward, we expect SAIC Motor's 4Q17 sales momentum to be sustainedwith year-end sales rush and further product mix improvement. However, wethink that extra promotional efforts will be needed to push sales amid intensifyingcompetition. All in all, we envision a stable earnings growth trajectory for thecompany, which should support its generous dividend payout. We maintain Holdon SAIC Motor because we think the current valuation is fair.

    On 18 January after market closed, SAIC Motor announced preliminary profitguidance that its unaudited FY17 reported net profit is expected to increase byc.7% YoY to around RMB34.2bn. The company attributed the earnings growth tothe 6.8% YoY vehicle sales volume improvement. To elaborate on major JVs’ salesperformance, SAIC-Volkswagen recorded 3.1% YoY growth, SAIC-GM recorded6.0% YoY growth, and SAIC-GM Wuling recorded 0.9% YoY growth in FY17.

    the industry given the already-high total sales base, we have a Hold rating onSAIC Motor. We value the stock at 9.5x FY18E P/E and believe this is justified,as we expect SAIC to achieve a three-year net profit CAGR of 7% in FY16-19.