On the morning of November 10, 2020, the board of directors of the company deliberated and passed a motion on increasing the proportion of cash dividends within three years after the issuance and listing of A shares, and agreed that within three years after the issuance and listing of A shares, the annual profit distributed in the form of cash is not less than 40% of the profits available for the current year. We believe that the rapid increase in the level of dividends will catalyze the return of its value; as the A-share offering is not expected to be priced lower than the company's net assets per share, it is expected that there will be a margin of about 50 per cent for the A-share price, maintaining the "buy" rating and raising the target price to HK $17.
The dividend ratio has entered the upstream channel, which will catalyze the return of value. The board of directors of the company deliberated and passed a motion on increasing the ratio of cash dividends within three years after the issuance and listing of A shares, and agreed that within three years after the issuance and listing of A shares, the annual profit distributed in the form of cash shall not be less than 40% of the profits available for the current year.
The dividend payout rate of the company remained between 13-16 per cent for a long time from 2010 to 2017, rising since 2017 and reaching 23 per cent in 2019, but it is still lower than the average level of domestic and international car companies (30-40 per cent). The 40% dividend payout plan announced by the company will significantly increase the level of dividends and catalyze the return of value.
Actively respond to the impact of the epidemic, rapid recovery of sales. In the first half of 2020, affected by the COVID-19 epidemic, the overall sales volume of China's automobile industry declined, of which the company was obviously affected by its headquarters in Wuhan, with a decline of 42.4% in the first quarter, and the epidemic slowed down in the second quarter. Due to the release of consumption and the impact of positive policies, China's auto market is recovering at an accelerated pace. The company's sales in the first half of the year fell 16.7% from the same period last year, slightly lower than that of the industry by 0.2%. Among them, sales outperformed the market in the second quarter, higher than 1.6% of the industry, reflecting the strength of steady growth and the ability of innovation and development. The overall negative impact of the epidemic weakened in the second half of the year, affected by economic recovery and positive policies, especially the control of overloading and the construction of "two new and one heavy" construction, sales further increased, and sales increased by 9.4 percent in the third quarter compared with the same period last year.
High-end electric brand "Lantu" launched, the pace of independent rectification and reform accelerated. Previously, the company mainly relied on joint ventures and commercial vehicles, but the development of Dongfeng's five independent brands (Fengshen, Fashion, scenery, demeanor, Qichen) has always been less than expected. In the first half of this year, the company began to promote the reform and adjustment of its own brand and the building of strategic models, focusing on solving the difficult problems in the development of its own-brand passenger cars, and made important progress in its own-brand high-end electric vehicle project. The "Lantu" brand released its first concept car on July 29 this year, and announced with a high profile that it would usher in great changes in self-driving, charging facilities, marketing network and other aspects. We expect that the launch of Lantu is expected to speed up the reform of Dongfeng's own brand and catalyze the company's valuation repair.
Risk factors: the loss of DPCA continues to expand; the bad debt of auto finance business increases significantly; the development of new energy vehicle business is not as expected.
Investment advice: under the impact of COVID-19 's epidemic situation, the company's performance declined to a large extent in the first half of 2020, but taking into account the improvement of the domestic epidemic situation, economic recovery and demand release, the overall operating situation of the domestic automobile industry improved in the second half of the year. Maintain the company's annual EPS forecast of 1.12 pound 1.27 pound in 2020-21-22. Considering the company's steady growth strength and determination to reform under the impact of the epidemic, as well as the company's R & D investment in key core technologies, the company is expected to return to the level of performance growth. Considering that the A-share offering is not expected to be priced below the company's book value, it is expected that there will be a margin of about 50 per cent for the A share price, maintaining the "buy" rating and raising the target price to HK $17, equivalent to twice the PB in 2020.