北京汽车（01958.HK）：Worst -than-expected FY17 profit, but unlikely to alter the recovery path

机构：德意志银行

评级：BUY

目标价：11.5港币

FY17E earnings to fall approximately 65% YoY 

On 13 February, BAIC Motor announced the company expects to record about 65% YoY decline in its FY17 net profit (i.e., to about RMB2.2bn). BAIC Motor attributes the significant earnings plunge to 1) competition in the China auto sector and 2) weak demand of Korean brand passenger vehicles and BAIC's local brand. Consequently, profitability of BAIC’s Hyundai JV and the local brand was badly affected. More details of BAIC Motor’s results will be released by the end of March.

Deutsche Bank view – local brand house cleaning possible; our optimism on FY18E remain 

In our FY17 forecast, we estimate that BAIC will register 33% YoY net profit decline to RMB4.3bn, with consensus expectations lower than ours. Based on the company announcement, its FY17 net profit will only account for 52% of our forecast. As such, we think consensus estimates are subject to downside risk. Since Beijing Benz has already reported a 62.2% YoY jump in FY17 after-tax profit (in EUR terms) while Beijing Hyundai's FY17 is marginally profitable, we reckon that BAIC Motor's FY17 earnings downside should come from a significant 2H17E HoH loss widening at the local brand operation despite improved sales volume HoH. We indeed think it is possible that BAIC Motor may have made some oneoff write-offs in that period.

Notwithstanding an overall disappointing FY17, we see solid trends in various entities of BAIC Motor. To elaborate, Beijing Benz's sales momentum stayed strong in January with 31.1% sales volume YoY growth. While Beijing Hyundai's sales were still down YoY, demand for the new generation ix35 SUV has been encouraging while more new SUV models (e.g. Kona) is upcoming. Although we still do not expect the local brand sales to drastically improve, a possibly lighter asset base could still help on loss narrowing, in our view.

All in all, we maintain our Buy rating on BAIC Motor as we believe the Benz JV’s robust net profit is sustainable, while the depressed valuation being applied to the Hyundai JV is excessive. This is because we do think the Hyundai JV’s profitability can be rebounded meaningfully in FY18E on sales improvement. Our SOTP target price implies undemanding FY18E of 10.3x. Key downside risks are 1) weak reception for its new models and 2) loss-widening at the local brand.