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Brilliance China (1114 HK) Summary

Core Content

Brilliance China, a subsidiary of Brilliance Auto Group, is primarily driven by its 50:50 joint venture with BMW, BMW Brilliance Automotive Ltd. The joint venture is a key contributor to the company's net profit, with the main products being the 3-series, 5-series, and X1. The company is on track to meet its full-year target for 2014, with year-to-date sales growing by 33% year-over-year (y/y) to 115,880 units.

Main Points

• Sales Growth:

  • In 2013, BMW Brilliance sold 206,729 units, with the 3-series, 5-series, and X1 accounting for 30%, 60%, and 10% of total sales respectively.
  • In the first five months of 2014, sales increased by 33% y/y, with the 3-series growing by 45% y/y, the 5-series by 11% y/y, and the X1 by 140% y/y.
  • For 2014, the total BMW vehicle sales are expected to grow by 32% y/y to 273,532 units, with the 3-series up 43%, 5-series 13%, and X1 110%.

• Product Launches:

  • Brilliance China plans to launch the 316i in 2Q14, the plug-in version of the 5-series in 4Q14, and a high-end version of the Jinbei MPV by the end of 2014.
  • The i3 electric vehicle is expected to be launched in 3Q14.

• Profitability:

  • The net margin of the BMW-Brilliance JV improved to 9.4% in 2013, despite a shift in product mix towards lower-margin models.
  • The company expects the net margin to remain steady at 9.4% in 2014.
  • The core mini-bus segment continues to be loss-making, but the company's overall net profit is expected to grow by 26% y/y to Rmb4,263m in 2014.

• Valuation:

  • The target price of HK$15.0 is based on a 2014e EPS of Rmb0.85 and a 14x target PE multiple.
  • The current share price of HK$13.1 indicates a potential upside of 15.0%.
  • The company is rated as a Buy, with a 14x PE multiple that is above the historical average of 12.5x since January 2011.

Key Information

• Market Position: Brilliance Auto Group is the seventh largest automaker in China in 2013, with total sales of 777,000 units.
• Performance:
  • In 2013, the company's net profit grew by 47% y/y to Rmb3,374m.
  • Sales volume for the core segment grew by 1.5% y/y to around 85,000 units in 2014.
• Risks:
  • Unexpected slow-down in sales due to macroeconomic factors or stricter government measures.
  • Intense price competition leading to lower profit margins.
  • Potential delays in new model launches.
  • Higher than expected losses from the mini-bus segment.
  • Increased R&D expenses related to new energy vehicles.

Financial Highlights

Industry Outlook

• Automotive Sales:
  • In 2013, total automobile and passenger vehicle sales in China rose by 13.9% and 15.7% respectively to 22.0m and 17.9m units.
  • CAAM estimates that 2014 will see total automobile sales of 23.74-24.18m units, with a growth rate of 8-10%.
• Sales Restriction Impact:
  • Vehicle sales restrictions are expected to have a limited impact, primarily affecting first-tier cities.
  • Buyers are likely to purchase vehicles sooner to avoid the restrictions, leading to front-loaded sales in 1H14.
• Competitive Landscape:
  • Foreign carmakers like General Motors and Ford are gaining market share in China.
  • Brilliance China is focusing on the 3-series for marketing efforts due to its strong growth.

Major Shareholders

• Huachen Automotive Group: 42.48%
• Franklin Resources: 18.02%

Investment Summary

• Share Price: HK$13.1
• Target Price: HK$15.0
• Upside: 15.0%
• Rating: Buy
• Market Cap (HK$ m): 37,763
• 12M Daily Turnover (HK$ m): 111.42
• 12M Volatility (%): 38.0
• 12M Hi/Lo (HK$): 7.92-14.66
• DVD Yield (%): 0.75

Valuation Summary

Growth Outlook

• Capacity Expansion: The BMW joint venture expanded production capacity in 2013 to allow for a maximum annual production of 400,000 units, with an estimated utilization rate of 68%.
• New Plant: The Tiexi plant, completed in October 2013, mainly produces 3-series and X1 vehicles, contributing to the strong year-to-date sales growth.
• Product Mix Shift: The product mix is shifting towards the 3-series, which is becoming a key growth driver.
• R&D Expenses: R&D expenses are expected to remain stable in 2014 and decline as a percentage of sales due to fast volume growth.

Valuation and Risks

• Valuation: Brilliance China's valuation at 12.4x 2014 PE is at the high end of its peers' range (excluding BYD) due to its luxury branding, high ROE, capable management, and strong volume growth.
• Risks:
  • Unexpected slow-down in sales due to macroeconomic factors or stricter government measures.
  • Intense price competition leading to lower profit margins.
  • Potential delays in new model launches.
  • Higher than expected losses from the mini-bus segment.
  • Increased R&D expenses related to new energy vehicles.