Dongfeng Motor's net profit in 2019 was roughly flat (down 0.9 per cent) to 12.86 billion yuan, roughly in line with market and our expectations. Revenue fell 3.3% year-on-year, mainly affected by the passenger car division. Sales of commercial vehicles increased, while revenue from its segment rose 14.6% from a year earlier. Supported by the change in sales structure and the growth of auto finance business, gross profit margin rose 0.5 percentage point year-on-year to 13.3%. Profits attributable to the joint venture fell 5.3 per cent to 11.63 billion yuan, mainly dragged down by French brands, but Dongfeng Honda helped make up for the decline.

Japanese brands should be able to overcome their current weakness, but other brands may face greater pressure. Dongfeng Nissan and Honda may soon catch up because of brand reputation and quality, as demand for their cars is likely to rise first. We believe that as the competitiveness of models is still very weak, Dongfeng Shenlong's reform plan will face more pressure. Since the second half of 2019, independent brands have improved due to new passenger car models and better commercial vehicle sales, but may be affected by a weak passenger car product line.

We reduced shareholder profits by 27.0% in 2020 and 25.8% in 2021. After adjustment, we expect shareholder profits to fall by 19.7% year-on-year in 2020, but grow by 11.0% and 4.8% respectively from 2021 to 2022.

We maintain Dongfeng's "neutral" rating and lower our target price to HK $4.87 due to earnings and valuation cuts, equivalent to 3.7 times 2020 price-to-earnings ratio and 3.3 times 2021 price-to-earnings ratio. The company's valuation has continued to decline over the past few years, with a 12-month forecast price-to-earnings ratio of between three and four times. Our valuation is about the midpoint of the range, which we think is fair and reasonable.