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Dongfeng Motor Group Summary (July 2, 2014)

Core Content and Key Information

Dongfeng Motor Group (DBSV) is a leading automaker in China, partnering with Nissan, Honda, and PSA Group to produce both passenger and commercial vehicles. The report is based on a post-meeting business update and highlights the company's strong performance and future growth prospects.

Main Points and Analysis

Earnings and Price Target

• Price Target: Raised to HK$15.30 from HK$13.50, based on a revised price-to-earnings (PE) multiple of 9x (from 8x).
• Earnings Revision: FY14/15 earnings were revised up by 1% / 12%, reflecting a better outlook on sales and earnings growth.
• EPS Growth: Expected to grow by 11.8% in FY14 and 17.8% in FY15, surpassing the consensus forecast.
• Dividend Yield: Maintained at 1.6%, with consistent DPS at HK$0.22.

Sales and Market Performance

• Sales Momentum: In the first five months of 2014, JCEs (Joint Commercial Enterprises) reported sales volume growth of 20–26%, outperforming the industry's foreign brand segment growth of ~18%.
• DF-PSA Performance: Achieved the highest sales hit rate at 45%, with potential to exceed sales targets for the year.
• New Product Line-Up: A rich lineup of new models is expected to drive sales and earnings growth. Notable launches include:
  • DF-Honda: New small SUV and upgraded Spirior.
  • DF-Nissan: Strong momentum from the Qashqai SUV.
  • DF-PSA: New SUV (2008 model).
  • Self-Brands: Fengshen, Luiqi, and Venucia have new models planned for 2014, with Venucia achieving a 152% year-on-year sales increase.

Mid-Term Outlook

• Infiniti Localization: Dongfeng aims to localize the luxury brand Infiniti, with production starting in late 2014 and an SUV model planned for 2015. Sales of Infiniti grew by 54% in 2013 and 150% in 1Q14.
• PSA Investment: Dongfeng's direct investment in PSA has appreciated by 48% since April 2014, due to restructuring efforts. The goal is to achieve 1.5 million unit sales by 2020 under the three brands (Dongfeng, PSA, and Citroen).
• Overseas Focus: The ASEAN region is a key target for expansion.

Financial Highlights

Key Financial Metrics (FY Dec)

Earnings Growth

• FY14/15 Earnings CAGR: ~15%, showing good growth given the large earnings base.
• Earnings Risks: Potential risks include a sudden downturn in the Chinese auto market, excessive competition, and underperformance of new projects such as the JV with Renault, Volvo Commercial, and PSA investment.

Peer Comparison

Key Risks and Opportunities

• Opportunities:

  • Strong sales performance in 2014 and improved earnings outlook.
  • Diversified product lineup and local market adaptability.
  • Strategic partnerships with global automakers (Nissan, Honda, PSA) and expansion into overseas markets.

• Risks:

  • Sudden decline in the Chinese auto market.
  • Intense competition.
  • Underperformance of new ventures and potential losses from PSA investment due to mismanagement.

Conclusion

The report maintains a BUY recommendation with a price target of HK$15.30, based on improved earnings expectations and a strong product lineup. The company is well-positioned for growth with its diverse portfolio and strategic partnerships, but investors should remain cautious of market volatility and potential underperformance of new projects.