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Brilliance China Alert:Share price rally supported by optimistic investor expectations

发布时间:2016-07-12    研究机构:德意志银行

Lots of investor interests during our China auto sector global marketing.

Brilliance’s share price rallied by 6% today and 14% this month, outperformingHSCEI’s 2% appreciation month-to-date. We think that the rally is attributableto 1) Brilliance BMW JV’s reporting of 13.1% YoY sales volume growth inJune, with gradual ramp-up of the new generation X1 SUV sales, and 2) lots ofinvestor interests in Brilliance as a China auto stock buy idea, in our view. Toelaborate on the second point, we had a round of China auto sector marketingaround the globe in the past 1.5 months. In our findings, investors seem wellaware of the solid China auto monthly sales YoY growth momentum in 3Q16Eamid low base. When discussing on stocks, one of the most frequentlymentioned names is Brilliance, on the back of a just-started new product cycle.

Deutsche Bank view – long-term positive while near-term volatility likely.

We are in general in line with investors’ optimism on Brilliance BMW for FY17Eon the back of 1) ramping-up of the new generation long-wheelbase X1 SUVsales, 2) introduction of an extra subcompact sedan based on the front-wheeldriveCompact Concept car, 3) mid-FY17E launch of the new generation 5series and 4) ramp-up of local engine production for more cost savings. All inall, we now envision an 18.7% YoY FY17E net profit growth for the JV with18.9% sales volume growth.

On the other hand, we would also like to highlight some factors that could leadto near-term share price volatility for Brilliance. To begin with, Brilliance BMWonly recorded 1.8% YoY sales volume growth in 1H16 despite better growthpace since March. Together with a lower 5 series sales mix and cost forpromoting the new 2 series Active Tourer, which did not sell well, earningsimprovement is unlikely for 1H16. Besides, while the JV shall experience salessupport from the new X1 in 2H16E, the upcoming launch of Beijing Benz newgeneration E Class could bring some pressure to the old 5 series.

Rolling over our target price benchmark to FY17E earnings; maintaining Buy.

On the back of slightly slower than expected sales in Brilliance BMW JV YTD,we trim our FY16E earnings forecast for Brilliance by 1.0%, with minimaladjustments (~0.1%) on FY17-18E earnings. Our target price is now based on9.5x FY17E P/E (from 10.0x FY16E P/E), reflecting our expectation of anearnings rebound, while the target is still at a prudent discount to theindustry's long-term trading average of 11x. This is justified, in our view, byBrilliance's FY15-18E three-year earnings CAGR of 16%. Our target price alsoimplies a 1.6x FY17E P/BV, with sustainable ROE of about 18-19%, which weregard as reasonable. Key downside risks for Brilliance would be weaker-thanexpectedreception for new models and inability to improve margins.

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