20140415-光大证券-Strong_Product_Line_Ahead_15页_214kb

Guangzhou Auto (2238 HK) Summary

Core Content

Guangzhou Auto (GAC) is a major player in China's automobile industry, with a strong product lineup expected to be showcased at the Beijing Auto Show from April 23 to 29. The company is anticipated to achieve a 23% year-on-year (y/y) increase in sales volume to 1.22 million units in 2014, driven by new models from its joint ventures (JVs) and self-owned brands.

Main Points

• New Models Launch:

  • Guangqi Honda will introduce new generations of Fit and Odyssey, as well as an A-class SUV, by the end of 2014.
  • GAC Toyota will launch an all-new mid-end sedan based on the Corolla platform.
  • GAC Fiat will release the Ottimo, a 2-box version of Viaggio, in 1Q14.
  • Trumpchi will roll out major upgrades to its GA6 sedan and GS6 SUV.

• Sales Volume and Profit Growth:

  • Sales volume is expected to grow by 23% y/y to 1.22m units in 2014.
  • Profit from JVs and associates is projected to rise 30% y/y to Rmb5.2bn, with net profit increasing by 60% to Rmb4.2bn.
  • Guangqi Honda and GAC Toyota, which together account for 75% of GAC's sales, are the most profitable units and contribute over 90% of the total JV profit.

• Valuation:

  • Target price of HK$10.4 is based on 2014e EPS of Rmb0.66 and a 12.5x PE multiple.
  • The current share price of HK$8.81 suggests an 18.0% potential upside.
  • The company is rated as a Buy.

• Market Share:

  • In 2013, GAC ranked 6th in China's motor vehicle sales with 1,004,615 units sold.
  • China auto brands saw a decline in market share to 39.3%, down from 40.3% in 2013.

• Industry Outlook:

  • The Chinese automobile industry experienced a steady growth trend in 2013, with total car sales rising 13.9% y/y to 22.0m units.
  • 2014 is expected to see a 8-10% growth in total car sales, with 23.85-24.29m units anticipated.
  • Sales restriction policies in first-tier cities are expected to have limited impact, with potential front-loading of sales in the first half of the year.

• Emission Standards:

  • Stricter environmental standards may lead to increased demand for energy-efficient vehicles like hybrids and electric cars.

• Foreign Ownership Relaxation:

  • Relaxation of foreign ownership could pose a threat to China auto brands due to potential pricing advantages of foreign automakers.

• Production Capacity:

  • GAC's JVs have sufficient production capacity to support the expected sales growth, with no bottleneck issues.
  • Guangqi Honda's production capacity is expected to increase to 600k units by 2015 and 720k units by 2016.
  • GAC Toyota's capacity remains at 380k units for 2014, with expansion in progress.
  • GAMC has started construction of new capacities.

Key Financial Data (2012-2014E)

Sales Volume by JV (2010-2013)

• Guangqi Honda (50% stake):
  • Sales grew significantly, with 435,022 units sold in 2013.
• GAC Toyota (50% stake):
  • Sales increased to 299,287 units in 2013.
• GAMC:
  • Sales rose to 106,378 units in 2013.
• GAC Fiat:
  • Sales surged by 300% in 2013.
• GAC Mitsubishi:
  • Sales increased by 1477% in 2013.
• GAC Gonow:
  • Sales declined slightly in 2013.

Sales Volume by Vehicle Type (2013)

• Passenger Vehicles:
  • Accounted for 981,175 units, representing 98% of total sales.
• SUV:
  • Sold 232,561 units, with a 78% y/y growth.
• Commercial Vehicles:
  • Sales declined by 26.8% to 23,440 units.

Growth Outlook

• 2014 Sales Target:
  • Passenger vehicles are expected to grow by 23% to 1.214m units.
  • GAC's overall sales volume is projected to grow by 23% to 1.22m units.
• Growth Drivers:
  • New models and product upgrades.
  • Mild price increases.
  • Sales front-loading due to new restrictions.

Risks and Considerations

• Sales Restrictions:
  • May lead to short-term front-loading of sales, with a potential 2-3% reduction in annual sales.
• Foreign Ownership:
  • Could threaten domestic brands with pricing and quality advantages from foreign automakers.
• Emission Standards:
  • May favor energy-efficient vehicles, impacting sales of traditional models.

Conclusion

GAC is well-positioned for growth in 2014 with a strong product lineup and expansion plans. The company's valuation is considered reasonable, with a target price that suggests a positive outlook. Despite potential challenges from sales restrictions and foreign competition, the company's focus on its own brands and JVs is expected to drive continued performance.