Investment Summary

GAC Group's 2018 Q3 results grew slightly. Strong sales momentum of Japanese brand continues and self-brand start to recover in 2018Q4. It is expected that the Company will maintain steady growth in the future under the strong product cycle of the Japanese-brand JV. We revised the Company's 2018/2019 earnings forecast. We reaffirm the "Buy" rating with the target price to HKD 9.5. (Closing price as at 19 December 2018)

Net profit slightly increases by 6% in Q3

The Q3 revenue of GAC was down about 3.3% Y-o-Y to RMB16.31 billion, net profit attributable to the parent company up by 6% Y-o-Y to RMB2.95 billion, equivalent to an EPS of RMB0.29. Result slightly fell short of our expectations. In the first three quarters, the Company reported a revenue of RMB53.5 billion, up 3.64% Y-o-Y; net profit attributable to parent company stood at RMB9.86 billion, up 10.02% Y-o-Y, equivalent to an EPS of RMB0.97.

The promotion of self-owned brands expanded, leading to a significant decline in the GPM

In the Q3, the overall domestic auto market continued to be under pressure, and the pressure on price for self-owned brand's SUV models was in particular heavy. Against the backdrop of the slowdown in the growth of self-owned brand sales, the Company increased its discount promotion efforts, including a discount of RMB10,000 to its Trumpchi GS4 model. Additionally, the large R&D investment of a number of new businesses (new energy vehicles and next-generation auto models) also dragged down the overall gross margin, which was down 6.3 percentage points Y-o-Y and 1.9 percentage points M-o-M to the level of 18.0%.

With regards to expenses, the sales expense ratio increased by 1.2 percentage points. This was mainly due to the combination of increasing advertising and marketing expenses and logistics and storage expenses. The management (including R&D) expense ratio decreased by 0.4 percentage point Y-o-Y, and the financial expense ratio decreased by 1.1 percentage points Y-o-Y, mainly as a result of a Y-o-Y decrease in borrowings and a decline in average borrowing cost.

Japanese brands maintained strong, driving investment income to grow rapidly

The Q3 total sales volume of GAC reached 541,000 units, up 7.6% Y-o-Y, and remained stable. Specifically, the Y-o-Y growth rates of GAC Honda/GAC Toyota/independent brands/GAC FCA/GAC Mitsubishi Motors were: 0.01%/39.2%/0.8%/-37.6%/19%, and the sales volume increments were 24/46,908/1,066/-16,247/5,389 vehicles, respectively. GAC Toyota's heavyweight models Camry, Levin and Highlander maintained good prospects of performance, with their sales growth rates reached 130%, 12% and 22.3%, respectively. Outlander of GAC Mitsubishi Motors and Accord of GAC Honda both recorded good performances, making up for the decline of GAC FCA. Japanese cars maintain growth momentum, driving the investment income of GAC's joint ventures to increase Y-o-Y by 29.1%, equivalent to RMB575 million, which represented a new high after the listing of GAC and accounted for more than 80% of pre-tax profits. During the reporting period, GAC's net profit margin increased by 1.7 percentage points Y-o-Y to 18.3%.

The pace of sales is getting better, ensuring a future of stable growth

From the sales volumes of the first two months (October/November) in the Q4, sales volume of GAC Toyota improved, that of GAC Honda regained its momentum, that of GAC's independent brands continued to recover slightly, that of GAC FCA remained weak, and the sales growth of GAC Mitsubishi Motors slowed down, with their growth rates of 10.74%/65.8%/1.8%/-45.9%/-2%, respectively, sales volume increments of 14,723/46,074/1,558/-15,128/-462 vehicles, respectively. The overall sales volume of the Group maintained a double-digit growth rate.

In terms of new cars, GAC Mitsubishi Motors will have its new model Eclipse Cross come out at the end of the year. In 2019, GAC Honda will put on the market Acura RDX, the new model of Vezel. GAC Toyota will have Levin PHEV, the new-generation RAV4. The Group's independent brand Trumpchi has new GS5, new GA6 and MPV GM6, as well as two 100% electric models based on an exclusive platform. Overall, GAC's subsequent growth momentum is strong.

Investment Thesis

GAC Group's 2018 Q3 results grew slightly. Strong sales momentum of Japanese brand continues and self-brand start to recover in 2018Q4. It is expected that the Company will maintain steady growth in the future under the strong product cycle of the Japanese-brand JV. We revised the Company's 2018/2019 earnings forecast. We reaffirm the "Buy" rating with the target price to HKD 9.5, equivalent to 6.9/6.2x P/E ratio in2018/2019.

Financials

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