Beijing Automobile recorded a net loss of 88.4 million yuan in the third quarter of 2021 (compared with a net profit of 674 million yuan in the third quarter of 2020), the first quarterly loss since the second quarter of 2017. In the first three quarters of this year, the company remained profitable, with a net profit of RMB 2.67 billion, accounting for 77 per cent of our full-year forecast. The performance is roughly in line with our expectations. All three major brands weighed on the company's performance in the third quarter of 2021 due to a decline in sales. Beijing Mercedes-Benz / Beijing Hyundai / Beijing brand sales fell 48.5% / 22.7% / 15.3% respectively in the third quarter of this year compared with the same period last year.

Beijing Mercedes-Benz did not perform well. Due to the shortage of chips, sales fell sharply, well below the market average. More EQ series are expected to be launched in the future, including EQA and EQB. We expect Beijing Mercedes-Benz's sales to fall 14.6% year-on-year in 2021, but will rebound by 28.6% in 2022.

Beijing Hyundai faces more concerns because the contribution of the new model is not as strong as expected. Over the past year, the brand has launched a new generation of Sonata, Elantra and Mingtu, but only Elantra can provide better sales results, while Sonata and Mingtu sales are still low.

We cut our net profit forecast for 2021 by 12.9%, but raised net profit by 7.6% in 2022 and 7.8% in 2023. The decline in net profit this year is mainly due to lower sales, especially Beijing Mercedes-Benz and Beijing Hyundai.

We are conservative about the company, especially considering that Beijing Mercedes-Benz faces growth challenges in the face of supply chain constraints. At the same time, we continue to expect weak performance for Beijing Hyundai and Beijing brands. We maintained BAIC's investment rating as "neutral" but lowered its target price to HK $2.86. Our target price is equal to 6.5 times 2021 earnings and 3.6 times 2022 earnings.