GAC Group (GAC)'s 1Q24 results were largely in line with our prior estimates and we maintain our FY24E net profit forecast of RMB5.4bn. We are more conservative than management about Aion's sales volume and profitability, as we believe that Aion needs quality growth (brand upscale, overseas expansion etc.) in FY24E to lay out foundation for long-term development. We are of the view that Trumpchi's PHEV solid sales growth could be overlooked by investors. It appears to us that its margins could also be resilient.
1Q24 earnings in line. GAC's 1Q24 revenue and GPM were 2% and 0.7ppt higher than our forecasts, respectively. Such beat was offset by its higher- than-expected SG&A expenses. Equity income of RMB1.8bn in 1Q24 was about RMB150mn lower than our estimates. Accordingly, GAC's net profit of RMB1.2bn in 1Q24 was about RMB166mn lower than our prior forecast. We estimate Aion's net loss (100% consolidated) in 1Q24 was about RMB100mn, higher than our projection.
Aion's profitability on track, Trumpchi's margins appear to be resilient. Although the company targets sales volume of 0.65mn units and breakeven at net level for Aion in FY24E, we maintain our prior forecasts of 0.5mn units and net loss of RMB2.2bn at the 100% consolidated level in FY24E. We believe that brand upscale and overseas expansion could be more crucial than profitability this year. Trumpchi continued to make profit in 1Q24 despite the price war, according to management. It appears to us that Trumpchi PHEVs' GPM could be more resilient than expected. Management expects Trumpchi's net profit to rise substantially YoY in FY24E.
Equity income to remain flat in FY24E without restructuring burden. Equity income's slight miss in 1Q24 should come from GAC Toyota. We are of the view that the redesigned Camry and stimulus measures could help GAC Toyota stabilize its profitability for the remainder of the year. GAC Honda's net profit per vehicle in 1Q24 was at a similar level as that in FY23, which slightly exceeded our expectation. We maintain our FY24E equity income forecast of RMB8.3bn.
Valuation/Key risks. Accordingly, we maintain our FY24-25E NP forecasts. We have also added our FY26E estimates. We use sum-of-the-parts (SOTP) valuation to factor in Aion's planned spin-off. We value Aion at HK$3.3 per share, based on 0.7x (unchanged) our average FY24-25E revenue estimates. We value HK$2.2 per share for JVs and associates based on 3x our average FY24-25E EPS (see details in Figure 4). We maintain BUY rating and target price of HK$5.50. Key risks to our rating and target price include lower sales volume and margins especially for Aion and a sector de-rating.
