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CSCI-Initiation-Auto-Brilliance Auto (1114 HK)：Beneficiary of BMW’s major facelift cycle - 20171030

Beneficiary of BMW’s major facelift cycle

 

• We expect to see substantial expansion in Brilliance-BMW’s margins in FY18E, driven by rising ASPs and economies of scale on strong sales growth.
• Team-up with Renault in new model developments to narrow losses from the LCV business, with the potential to write-off of its loss-making Huasong 7, in our view.
• We initiate coverage on Brilliance Auto with a Buy rating and PT of HKD24.8, pegging on FY18E 13.0x PER, which is slightly above its historical average and well justified by its better growth prospects

Strong product cycle on facelift of major BMW models. Given the 3-Series, 5-Series and X1 are BMW’s best-selling models both in China and globally in the past few years, we expect a major facelift of these models will lead to a renewed product cycle in the current model line-up since FY17. The company has launched the new 5-Series and ramped up production in FY17E in a bid to rake in substantial sales contribution in FY18E. Meanwhile, the company is also aiming to localise production of the X3 SUVs in order to lower prices to compete with rivals. Also, the 3-Series with a major facelift in FY19E should lend support for sales growth to maintain its momentum on a longer-term perspective.

Rising ASP and strong volume drive margin expansion for BMW segment. Since the old 5-Series sedans have ceased production ahead of the capacity ramp-up of the new 5-Series sedans, we anticipate BMW 5-Series’ total shipments to drop by c.10% in FY17E. Meanwhile, we anticipate a 30% YoY growth in the sales of the new BMW 5-Series albeit a 4% uptick in ASP should compensate for the overall lower ASP in FY17E as a result of the higher sales of compact size models. As such, we believe a hike in ASP amid an increase in sales in FY18E will largely drive margin improvement in its catch-up with Mercedes Benz.

Team-up with Renault in a bid to turn around lose-making prop brand. Since the Shenyang Brilliance Jinbei (SBJ) has announced to team up with Renault to develop the LCV in a bid to narrow losses in the medium-term, we believe SBJ will aim to roll out more competitive LCV models starting from FY18E, leveraging on Renault’s competitive advantages in the LCV segment. Nonetheless, the company has booked impairment losses of RMB350mn related to the Huasong 7 in 1H17, though we do not anticipate additional impairment charges of more than RMB350mn will be booked in 2H17. On the other hand, auto parts and financing revenue, which makes up for an aggregate of c.20% of total revenue, will continue to be integral given the over 30% CAGR between FY14 and FY16, in particularly, in light of the rapid interest income growth in spurring GPM growth in offsetting SBJ’s sliding gross margins, to lead to a gradual improvement in the aggregate profit margins from FY18E onwards.

Still ample room for re-rating. We believe the company will be able to reduce LCV losses in the medium-term and BMW’s margins will see improvement in the short-term, whilst we also expect a higher ROE in FY18E on greater contribution from the BMW models. Accordingly, we initiate coverage on Brilliance Auto with a Buy rating and PT of HKD24.8, pegging on the FY18E 13.0x PER which is slightly above its historical average and justified by its better growth prospects.