“Ryota” declined significantly, and its performance fell short of market expectations. GAC Group's net profit in 2023 fell 44.5% year on year to 4.43 billion yuan (RMB, same below), lower than the market and our expectations of 18.3%/13%. Mainly, the decline was higher than expected by the market and Toyota. Annual revenue was 129.7 billion yuan, up 17.6% year on year. Strong growth was mainly driven by sales growth of GAC Trumpchi and GAC Aian (sales volume of Trumpchi and Aian increased 12%/77% year on year respectively in the first half of the year). The gross margin increased from 3.4% in 2022 to 4.3% in 2023, benefiting from GAC Trumpchi MPV sales growth and scale effects. Sales expenses increased sharply by 57.9% year over year, leading to a 19.9% increase in operating losses. Joint venture profits fell 39.5% year over year, which was affected by the decline in sales volume of “Ryota” and the decline in profits. The development of independent brands has had a great impact on joint venture brands positioned in the mass market.

The independent brand “electricity is lower than oil”, and it is expected that “Liangtian” profits will continue to be under pressure. We believe that GAC Toyota and Honda's sales volume in 2024 will still be under great pressure. From the “same price of oil and electricity” last year to “electricity is lower than oil” this year, as many independent brands lowered their sales prices again in the first quarter of this year, it had a big impact on the sales volume of Japanese brands positioned in the mass market in particular. However, car companies that have achieved “lower electricity than fuel” and that have lower prices for plug-in hybrids than fuel vehicles have had a big impact on joint ventures. In addition to pressure from fuel vehicles, the penetration rate of new energy from joint ventures is still extremely low, which is another major factor affecting sales. In February 2024, the penetration rate of new energy vehicles of mainstream joint venture brands was only ~ 7%. Furthermore, although “Liangtian” has accelerated electrification transformation in the field of new energy, the current product strength of “Liangtian” new energy models is still insufficient. In the first two months of 2024, GAC Toyota and GAC Honda sales declined by 34.3%/18.9%, respectively.

Joint venture profits are under pressure and remain neutral. We lowered our 2024/25 profit forecast by 21.5%/23.9% to reflect the impact of the decline in joint venture profits. Under increasingly fierce competition, the company's profits are under pressure in the short term. We maintained our neutral rating and lowered our target price to HK$3.34 (previously HK$4.43), corresponding to the projected price-earnings ratio of 7.4 times in 2024 (equivalent to the 5-year average).