EUR 850.00 For Business Accounts Only

Morningstar | Dongfeng Beats on Bottom Line; FVE Reduced to HKD 12.20 After Recent CNY Depreciation. See Updated Analyst Note from 30 Aug 2018

Despite a flat top line, no-moat Dongfeng Motor reported a strong first-half result that was boosted by a 44% jump in associate income from PSA Peugeot Citroen (UG FR) and a 23% reduction in advertising expenses relative to the year-ago period. Excluding the one-off impact of impairment losses, net profit for the first six months recorded 14% year-over-year growth, above our and consensus estimates. Owing to Dongfeng’s strong results, we lift our near-term assumptions for the company, but the resulting upward impact on Dongfeng’s fair value estimate was more than offset by the recent 7% devaluation of the Chinese yuan against the Hong Kong dollar. Taking everything into consideration, we lower our fair value estimate for Dongfeng Motor to HKD 12.20 from HKD 12.50.

During the first half of 2018, Dongfeng sold 1.51 million cars in total, up 3.5% year over year, trailing overall market growth. Despite aggressive sales targets previously set out by management, Dongfeng’s own brand remains lossmaking and weak, posting a sales volume decline of 5.7%. Poor performance from the own-brand side was lifted by 6.4% volume growth in sales of joint-venture brands like Honda and Peugeot, reaffirming our view that the company will continue to rely on its JVs to drive the bottom line. Despite growth in sales volume, profits from joint ventures posted a slight 0.2% decline, mainly owing to intensifying pricing competition and the almost three-month halt on CR-V sales over a previously announced engine issue.

The 44% jump in associate income relates to Dongfeng’s 12% stake in PSA Peugeot Citroen Group. In our note "Peugeot's 1H Surprises on Opel Vauxhall Profit; Raising FVE to EUR 16," we attribute strong numbers from PSA’s 2018 first-half result to the better-than-expected performance of newly acquired Opel Vauxhall. While we are now more optimistic regarding Peugeot’s outlook, less than 20% of Dongfeng’s bottom line is derived from share profits from Peugeot.

We tend to think that the 23% reduction in selling and distribution expenses will not be sustainable over the longer term, as most of the cost savings are derived from lower advertising spend. With new models lined up to be released in 2018-19, we expect Dongfeng to increase its advertising spending in order to boost sales volume.