CSCI-Auto-BAIC (1958 HK)：Benz profit margin under pressure in FY18E - 20180608

Benz profit margin under pressure in FY18E

• We see immense pressure for the company to cut losses of its prop brand by a further RMB1bn in FY18E despite inclusion of the income from the assets sell-off.
• Strong Benz profit margin cycle may start to trend down in FY18E due to price cuts to facilitate destocking, higher parts costs and increasing Capex related to the setup of the NEV plants.
• With Benz being the major earnings contributor for BAIC, we have trimmed our FY18E earnings forecast on assumption of a lower Benz GPM going forward albeit the investment gains in 2H18. On downward revision in our FY18E/19E earnings estimates by 3%/13% respectively, we generated a new PT of HKD9.3 pegging on FY18E 8.0x PER (prev. FY17E 8.0x PER). Reiterate HOLD.

Narrowing losses of prop brand will be dragged by weak sales in FY18E. In view of the continued decline in capacity utilisation rate since 2017 amid sluggish sales, the company has disposed of its Shunyi (顺义) plant to BJ Benz and plans to spin off the low-margin MPV brand “Wevan” in order to reduce expenses and improve the utilisation rate. However, in our view, the company’s target to cut losses by another RMB1bn would be difficult to achieve despite including the income generated from the assets sell-off, due to the slowdown in shipment growth during the Jan-May period as well as less competitive models available in FY18E. Considering that the Wevan spin-off would likely reduce the prop brand’s shipments further by c.70k units in FY18E as compared to last year (Wevan sales were 77k units in FY17), we anticipate prop brand shipment growth will continue to post a low double-digit decline in FY18E. According to our estimate, the prop brand has made a loss of around RMB3bn-4bn in 2017, which is equivalent to an RMB15k loss for each car sold. Meanwhile, as the breakeven point is expected to be more than 700k units, we foresee the prop brand faces substantial pressure to narrow its losses by an additional RMB1bn in FY18E.

Benz profit margin cycle may start to trend down in FY18E. According to Daimler’s 1Q18 results, the share of profit from the Benz JV grew merely by 14.5% YoY, representing the fourth consecutive quarters of growth slowdown whilst it is also lower than the 16.1% YoY shipment growth for the first time in the previous eight quarters. In addition, BJ Benz’s 1Q18 net profit per vehicle has come in almost flat versus 1Q17 whereas gross profit per vehicle has declined slightly. As such, we expect the strong Benz profits margin cycle to start trending down in FY18E due to (1) more price cuts have been imposed on their best-selling models amid the intensifying competition (GLA have cut prices to cope with BMW X1) and to facilitate destocking of old models prior to the launch of its facelift models (GLC-L will be released in 2H18); (2) hike in the prices of some of its parts as a result of the limited supply from Daimler (9G-Tronic Transmission prices are higher than FY17); and (3) potentially higher Capex in FY18E versus last year (RMB3bn-4bn in FY17) with additional Capex being set aside for the setup of the NEV plants in Yizhuang (亦庄) and Shunyi (顺义), in particularly the Shunyi plant which has been scheduled to commence commercial operation by end FY19E with total planned investment of around RMB11.9bn. Thus, we anticipate Capex to come in higher for FY18/19E.

Lower Benz GPM may suppress valuation in the mid-to-long term. With Benz being the major earnings contributor for BAIC, we have trimmed our earnings estimate for FY18E on assumption of a lower GPM for Benz, despite some investment gains in 2H18. After having revised down our FY18E/19E earnings estimates by 3%/13% respectively, we generated a new PT of HKD9.3 pegging on FY18E 8.0x PER (prev. FY17E 8.0x PER); reiterate HOLD.