1H18 performance fell short of expectations
1H18's total revenue rose 7.0 per cent year-on-year to 16.98 billion yuan, gross profit margin fell 0.8 per cent to 7.7 per cent, the cost rate rose 0.5 per cent to 5.3 per cent, and net profit at home fell 10.1 per cent to 360 million yuan. We judge that policy fluctuations in the auto market led to a decline in luxury car consumption / higher terminal discounts in May-June, fluctuations in the RMB exchange rate ($800 million in debt exposure), and a slowdown in BMW's product cycle revision / financial leasing propulsion, is the main reason for the lower-than-expected results.
New car revenue growth slows, new car gross profit margin is under pressure
1H18 new car sales rose 10.3 per cent year-on-year to 51000, and new car revenue rose 5.5 per cent to 14.84 billion yuan. Of this total, luxury car sales rose 10.6 per cent to 37000, luxury car sales rose 4.2 per cent to 13.04 billion yuan, and new car gross profit margin fell 1.5 percentage points to 2.0 per cent. We judge that 1) in July, the market may partially absorb the impact of luxury car consumption caused by policy fluctuations such as lower import tariffs, and 2H18E sales are expected to grow steadily. 2) the main engine factory maintains the annual brilliance BMW sales guidance unchanged (20% year-on-year growth), and it is expected that the risk of pressure on the gross profit margin of 2H18E BMW new cars will still exist. 3) considering the risk of pressure on the gross profit margin of the new BMW / Jaguar Land Rover, we reduced the gross profit margin of 2018E new cars to 2.5%.
The performance of after-sales business is solid, and the promotion of financial leasing slows down.
1H18's after-sales revenue increased 19.4% year-on-year to 2.12 billion yuan, and its gross profit margin was about 47.1% flat compared with the same period last year. 2H18E's after-sales business is expected to have a solid growth prospect. 1H18 financial leasing revenue fell 4.4% year-on-year to 20.923 million yuan (mainly due to factors such as the end of Guanghui sublease), car commission income increased 20.4% year-on-year to 360 million yuan; due to macroeconomic / market policies / credit tightening and other factors, we reduced 2017-2020E auto derivative business (financial leasing / commission business) income Cagr to 13.0%.
Downgrade to "neutral" rating
Taking into account the impact of market policy fluctuations / credit tightening and other factors such as pressure on new car gross profit margin / slowdown in auto finance, we lowered the net profit of 2018E/2019E/2020E to 780 million yuan / 980 million yuan / 1.16 billion yuan respectively, lowered the target price of DCF to HK$2.37 (corresponding to 7.3x/5.8x 2018E/2019E PE), and downgraded to "neutral" rating.
Core risks suggest that new car sales and gross profit are under pressure; auto finance is slowing down; after-sales and derivative business is not as expected; integration with Guangzhou foreign exchange business is not as expected; market policy risk.