BAIC's net profit for the first half of 2018 rose 186.1% year on year, slightly lower than our expectations. Revenue increased 15.2% year on year to RMB 76.90 billion. The increase was mainly driven by Beijing Mercedes-Benz. Beijing Mercedes' car sales increased 19.5% year on year. Its average sales price was driven by E-Class and C-Class, which rose 0.7% year on year. However, the poor performance of Beijing brands has hampered overall performance. Sales of brands in Beijing fell 33.6% year-on-year in the first half of the year. The own-brand segment's revenue fell 20.7% year over year, and continued to generate gross losses during the period. However, benefiting from the optimization of the Beijing Mercedes-Benz product portfolio, the company still recorded a 0.4 percentage point increase in gross margin, and the overall gross margin increased to 26.6%. On the other hand, the profit attributable to the joint venture company recorded RMB 582 million, a significant improvement compared to the loss of RMB 132 million in the same period last year.

We adjusted our earnings forecast for 2018 to 2020 by 6.3%/-9.7%/-4.8%, respectively. Due to the slowdown in growth prospects, we have reduced sales of the Beijing brand and Beijing Hyundai. Furthermore, Beijing Hyundai's gross margin was cut to reflect their more aggressive pricing strategy.

We maintained our rating as “neutral” and lowered our target price to HK$7.00, equivalent to 6.8 times the 2018 price-earnings ratio and 5.7 times the 2019 price-earnings ratio. We expect Beijing brands to continue to drag down during our forecast period. We think it will be difficult to recover sales in the current competitive environment, and there are no new developments in Weiwang's spin-off, which means there may be even greater losses this year. Meanwhile, Hyundai is under pressure after disappointing sales in July, and the outlook remains uncertain.