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CSCI-Auto-GAC (2238 HK)：More headwinds ahead for the SUV market - 20180912

More headwinds ahead for the SUV market

• Tepid shipments of GS4 facelift will largely weigh on Trumpchi’s sales in 2H18 given its almost 50% product mix contribution.
• Slowdown in SUV sales growth in China may lead to higher expenses for Trumpchi particularly after price cuts by peers, in our view.
• We have trimmed our FY18E/19E earnings forecasts by 6.7%/3% respectively on assumption of a slowdown in SUV sales going forward and further margin squeeze following peers’ promotions.  Also, we have revised down our PT to HKD10.8 representing 54% potential upside, and thus maintain Buy.

Tepid sales of GS4 facelift to weigh on Trumpchi’s shipments in 2H18. Trumpchi’s average inventory-to-sales ratio has been largely alleviated from more than 3 months during 2Q18 to around 2 months in Aug-18 primarily on the back of old GS4 inventory destocking, with around 30k units of unsold vehicles (GS4 old version) in Jun-18 reducing to 20k units (GS4 facelift) in Aug-18 with barely any GS4 facelift sales recorded after its launch in Jun-18. Given the limited improvements in terms of configurations and design for GS4’s facelift compared to the previous model, we do not expect its shipment volume will be able to  recover anywhere close to the previous level of more than 30k units per month, particularly amid the recent slowdown in SUV sales growth. This would subsequently lead to more pressure on total Trumpchi shipments in 2H18 given GS4’s more than 45% total product mix contribution during 1H18.

Likely lower ASP for Trumpchi in 2H18. Trumpchi tended to post lower ASP in the second half of each year versus the first half due to lower growth of revenue versus that of shipment volume, which is likely attributable to the higher costs and dealers’ rebates being deducted from the revenue in the second half. Meanwhile, the company is also preparing to launch a new round of manufacturer-to-dealer’s incentives program for Sep-Oct, which will likely increase the current incentive amount in response to peers’ recent price cuts, in our view. In addition, we anticipate the contribution of compact models to continue to trend up in 2H18 on the back of the GS3 and GS4 facelift models, in contrast to a reduction in contribution from the full-size models despite GM8’s capacity will be ramped up to 4k units per month and GS5 facelift is scheduled to be launched during 2H18, and thus, we see downward pressure on ASP in the second half of the year.

JV Toyota raises target again in FY18E. Toyota has again raised its FY18E sales target, from 550k units to 580k units in light of the strong delivery of the new Camry (sales target raised to 170k units from 120k). In view of the new Camry and CH-R being the first two models to roll off the new TNGA platform, which will subsequently lead to higher fixed D&A costs in FY18E due to the additional investments to build the platform, anticipated strong shipments in FY18E should contribute to a modest profit hike, in our view.

Depressed valuation due to SUV concerns. We have trimmed our earnings estimates for FY18E/19E by 6.7%/3% respectively, given the slowdown in SUV shipments and further margin squeeze led by peers’ broad price cuts, and generated a new PT of HKD10.8, pegging on the FY19E 7.0X PER (Prev. FY18E 10x PER). Our new PT represents 54% potential upside, thus maintain Buy.