DongFeng Motor Group released the first half of the year results announcement. In the first half of 2021, the company achieved operating income of 69.9 billion yuan, an increase of 38% over the same period last year. The company's first-half net profit reached 8.6 billion yuan, an increase of 137% over the same period last year, in line with the previous Yingxi forecast (more than 130% compared with the same period last year). The company also announced a special dividend of 0.4 yuan per share, corresponding to a dividend yield of 40%. We believe that the company's operating conditions have significantly improved, while the valuation is in the attractive range, with a strong allocation value. Therefore, we reiterate the company's buy rating and raise our target price to HK $18.50.

The performance in the first half of the year was excellent. The company sold 1.42 million cars in the first half of the year, up 25% from the same period last year. Of these, 1.08 million were passenger cars, up 22 percent from the same period last year, while 350000 were commercial vehicles, up 33 percent from the same period last year. The company's expense rate in the first half of the year decreased by 0.9 percentage points to 8% compared with the same period last year, and the operating efficiency improved. The company's core profit in the first half of the year reached 4.6 billion yuan, an increase of 38% over the same period last year, and the profitability of its own brand was restored. The investment income reached 7.1 billion yuan, an increase of 70% over the same period last year, and the profits contributed by the joint venture company further increased. Among them, Dongfeng limited profit increased by 415 million yuan compared with the same period last year, Dongfeng Honda increased by 1.347 billion yuan compared with the same period last year, and the loss of Dragon Motor narrowed by 199 million yuan compared with the same period last year. The company's first-half net profit reached 8.6 billion yuan, an increase of 137% over the same period last year.

Lantu's first model, Free, will be delivered in the third quarter. In early August, the company announced Lantu Free orders, 43 days on the market to harvest a large order of 3689 vehicles. Lanto Free has two kinds of power system models: add-on and pure electric, in which the added-program version is expected to replicate the success of competitive ideal ONE and solve the current mileage anxiety of pure electricity consumers. As a medium and large SUV, Lantu Free is priced at 31-360000 yuan, which has a strong performance-to-price ratio compared with the traditional luxury SUV. We believe that the Lantu brand will enable Dongfeng Group to successfully enter the high-end new energy market.

The company released the "Dongfeng from the Wind" brand transformation plan at the Shanghai Auto Show, and some of the core technologies gradually landed. The company plans to reach 1 million sales of Dongfeng commercial vehicles, autonomous passenger vehicles and new energy vehicles by 2025, and the scale of Dongfeng independent brand will enter the top three in the industry. The company's sales of new energy vehicles in the first half of the year were eye-catching, with sales of 45000 vehicles, an increase of 289% over the same period last year. In the field of self-driving, the company's L4 class 5G self-driving car Sharing-VAN, L4 class self-driving taxi Robotaxi, 5G port self-driving container truck have achieved different scenarios of operation. In July, the company's Zhixin Semiconductor sixth-generation IGBT power semiconductor products were officially offline. In August, the company completed the review of the full-power fuel cell project, and Dongfeng hydrogen Boat plans to start demonstration operation in the third quarter. We believe that the company's technical reserve will be gradually recognized by the market.

The valuation is in the range of attraction. We estimate that the company's dividend will reach 0.85 yuan in 2021, and the dividend yield corresponding to the current stock price will reach 13%. At the same time, the company's current stock price corresponds to the price-to-book ratio of 0.4 x 2021E, which significantly deviates from the reasonable valuation level. Taking into account the better-than-expected results in the first half of the year, we correspondingly raised the company's 2021 profit forecast by 36% to 18,397 million yuan, and the net profit in the second half of the year is expected to increase by 37% compared with the same period last year.

We expect the company's stock price to be accompanied by 1) continued growth in sales and performance, 2) mass production and delivery of Lantu Free models, and 3) positive factors such as updates on the listing progress of gem will be revalued. So we give the company a price-to-earnings ratio of 7.2x in 2021 (the previous target price is based on the price-to-earnings ratio of 7.0x in 2021) and raise the target price to HK $18.5, a potential increase of 128.1%. Maintain the buy rating.