The company is the second largest automaker group in China. Its Japanese brands (Nissan and Honda) account for more than 70% and are the main source of profit. As Japanese market share increases and French Shenlong's reforms reduce losses, it is expected that the company will re-enter the growth stage. Furthermore, the company's dividend ratio continues to rise. Currently, the dividend rate is expected to exceed 5%, which has a high margin of safety. The company's EPS for 2019/20/21 is expected to be $1.78/1.98/2.09 respectively. The reasonable valuation is 6 times PE in 2020, and the target price is HK$10. For the first time, it covers the “buy” rating.
Company: China's second-largest automaker group. In 2018, the company sold 3.05 million vehicles, with a market share of 10.9%. The company's passenger car and commercial vehicle market share all ranked in the top 3. It owns a series of brands such as Dongfeng Nissan, Dongfeng Honda, Dongfeng Peugeot Citroen, and Dongfeng Commercial Vehicle. Joint venture brands contribute 85% of sales; the company's profit also mainly comes from joint venture revenue, accounting for 80-90% in 2015-2018. In 2018, the company achieved revenue of 107.7 billion yuan and net profit of 13 billion yuan. In terms of consolidated statements, in 2018, the company's commercial vehicle business accounted for 58% of revenue, passenger cars accounted for 39%, and auto finance accounted for 3%.
Industry: The growth rate is slowing down, and the pattern is divided. The automotive industry has continued to experience negative growth since the second half of 2018, and is expected to enter a period of slow growth of around +2% in the later stages. Against the backdrop of a slowdown in market growth, consumer demand for cost-effective mid-range and high-end car products is still strong, and the automobile consumer market is divided. The market share of Japanese cars has been recovering for a long period of time, and the market share has increased from a low of 17% in 2012 to 22% at present. Taking into account factors such as the warming of Sino-Japanese relations, the low fuel consumption of Japanese cars, and the competitive advantage of high cost performance, etc., it is expected that the Japanese share will return to more than 25% in the future as the mentality of automobile consumers becomes more mature.
Open source: Japanese companies account for a high share of profits, and benefit from an increase in Japanese share. The company's Japanese car sales account for 72%, contributing 2/3 of the company's profit, and 44.3% of the industry's market share. It will be an important target for benefiting from the Japanese market share and structural opportunities. As a long-term champion in Japanese sales, Dongfeng Nissan has a perfect product layout and an outstanding advantage in the new blue ocean of mid-size cars; Dongfeng Honda, as the new runner-up, has a capacity utilization rate of over 140% for a long time. It is expected that in 2019/20, it will successively increase production capacity of 9/150,000 vehicles, breaking through the sales bottleneck, and sales will continue to maintain a growth rate of +15% or more.
Saving money: Shenlong is vigorously reforming, and the legal system can be expected to reduce losses. French cars jointly operated by Citroen Motors were once the backbone of the company's sales volume, accounting for more than 25% of long-term sales volume and contributing more than 15% of profit. Beginning in 2017, due to a decline in product competitiveness, compounded by a slowdown in industry growth, Shenlong's sales volume declined rapidly and losses occurred. Losses further increased to about 3 billion yuan in 2018. This year, the company focused on reform and efficiency, and continued to push forward plans to reduce staff and production.
At present, Shenlong's break-even point has been reduced by 50% to about 180,000 vehicles. Loss-making offline production has dropped from about 100,000 vehicles last year to about 50,000 vehicles this year. A reduction in losses can be expected.
Risk factors: Demand continues to be sluggish, triggering a price war affecting the profitability of car companies; Citroen Motor's losses continue to expand; import tariffs have been lowered, reducing the profitability of high-end models and joint venture brands.
Investment suggestions: With the strong recovery of Japan and the expected reduction of losses by Shenlong, the company's profit will enter a stage of growth. The group's state-owned enterprise equity transfer to social security catalytic dividends will further consolidate the margin of safety. Compared with peers, the company's reasonable valuation is 6 times PE in 2020. The company's estimated net profit for 2019/20/21 was $134/147/15.4 billion, corresponding to 4.2/3.8/3.6 times PE in 2019-21. For the first time, it covered the “buy” rating, with a target price of HK$10.