BAIC's shareholder profit rose 90.2% year-on-year to 3.858 billion yuan in 2021, higher than the market and our expectations, mainly due to higher government subsidies, exchange gains and effective cost control. Despite the decline in sales, revenue remained stable as the increase in average selling prices helped to offset the impact. Due to the rise in raw material prices and changes in the sales mix, gross profit margin fell 2.4 percentage points year-on-year to 21.4%. Similarly, its share of losses in joint ventures and joint ventures narrowed to 1.101 billion yuan.

Major brands are losing momentum. Beijing Mercedes-Benz's sales continue to perform poorly, dragged down by a shortage of chips and aging models.

The addition of the EQ series has yet to provide momentum for growth. As brilliance BMW and FAW Audi are adding some strong models, future growth will still be challenging. Similarly, we think Beijing Hyundai needs time to revitalize the brand. The IONIQ series will be their next weapon.

We cut our net profit forecasts for 2022 and 2023 by 7.8% and 2.6%, respectively. Compared with our last forecast, we assume that growth is slowing down. We mainly reduced the sales assumptions of Beijing Mercedes-Benz and Beijing Hyundai and lowered the gross profit margin.

Despite outperforming the market in 2021, we continue to be conservative towards the company mainly for the following reasons:

1) the improvement in performance in 2021 is mainly driven by non-operating income and some cost cuts, which may not be sustainable; 2) Beijing Mercedes-Benz, the main growth driver, is losing momentum and sales continue to outperform the market in January-February 2022; and 3) Beijing Hyundai is expected to have a long way to recover and can only see a turnaround after the launch of the new IONIQ series. We maintained BAIC's "neutral" investment rating, but lowered our target price to HK $2.70. Our target price is equivalent to 3.6 times 2022 earnings and 2.7 times 2023 earnings.