Dongfeng Motor's net profit attributed to the parent company rose 5.8 per cent year-on-year to 11.387 billion yuan in 2021, lower than the market and our expectations, mainly due to weak gross profit margin. Due to improved passenger car sales, revenue rose 4.2 per cent year-on-year to 113.008 billion yuan, but was offset by the commercial vehicle division. Due to increased production costs, gross profit margin fell 2.0 percentage points year-on-year to 12.6%. Due to the low base caused by the recovery in demand and the epidemic, the profit attributable to the joint venture increased by 24.3 per cent year-on-year to 11.8 billion yuan.

Sales will pick up 18.3% this year compared with the same period last year. Passenger car sales should grow faster (22.2% year-on-year), and both joint venture brands and independent brands have positive prospects driven by the model cycle. In addition, we should also see more new energy models.

We have lowered our shareholder profit forecasts for 2022 to 2023 by 6.9% / 4.0 respectively. After adjustment, we expect shareholder profits to increase by 16.9% / 11.2% / 15.4% respectively from 2022 to 2024 compared with the same period last year. We have mainly increased the sales of passenger car brands, but greatly adjusted the sales of commercial vehicle brands. We also reduce the gross margin assumption to reflect the price of plateau materials.

Despite the pressure on profit margins, there have been several positive signs since the beginning of 2022. Investment in new energy vehicles is strengthening in both joint ventures and independent businesses. Among them, the sales mix of new energy vehicles has risen to 10.2% in 2021 (compared with 2020: 3.1%). The company is one of the lowest valued companies in the automotive sector and we find it very attractive. It is also one of the companies with the highest dividend yield / dividend yield among automakers. We maintain Dongfeng Motor's investment rating as "Collection", but lower the target price to HK $6.57, equivalent to 3.5 times 2022 price-to-earnings ratio.