Key points of investment

BMW Brilliance interior and seat supplier, Shenqi joins the market to help grow

The company is a leading domestic supplier of automotive interiors and seats, and is a deep supplier of BMW Brilliance. In 2023, we achieved revenue of 5.14 billion yuan, a year-on-year decrease of 8.73%, and net profit to mother of 0.122 billion yuan, a year-on-year decrease of 18.89%. It is mainly due to the alternation of new and old products from BMW Brilliance, which have yet to be mass-produced. Revenue of 2.251 billion yuan was achieved in the first half of 2024, a year-on-year decrease of 17.03%; the return to mother was 0.198 billion yuan, an increase of 64.77% over the previous year, mainly due to the recovery of part of the bankruptcy and restructuring of Brilliance Group and Brilliance Renault Gold Cup in the first half of the year. Looking ahead, there are still 87.61 million yuan of debt to be recovered, and profits are expected to increase. In March 2024, the restructuring and delivery of Brilliance Group was completed, and Shenyang Automobile joined the company, which is expected to bring more support, help and change to the company.

BMW Group added 20 billion investment in Shenzhen, driving demand for spare parts for next-generation models

According to Marklines, China is the BMW Group's largest market and the world's largest producer. On April 26, 2024, BMW announced that it will deepen its presence in China and plans to invest an additional 20 billion yuan in the Shenyang production base, mainly for large-scale upgrades and technological innovation at the Dadong Plant, laying the foundation for starting localized production of BMW's “new generation” models in 2026. The biggest highlight of the new-generation model is the BMW “Panoramic View Bridge”, which can bring revolutionary and interactive innovation. We believe that the cockpit of the new-generation model will be fully upgraded, which is expected to drive up the demand and value of interior parts such as seats and instrument panels.

BMW Brilliance's business is the basic market, actively developing new customer growth

The company's sales revenue to the BMW Group accounts for nearly 90% of total revenue. We believe that as the BMW Group's strategic focus continues to lean towards China, the company is expected to receive more supporting orders. At the same time, the company is actively expanding its industrial chain layout. In July '24, it acquired BMW's second-tier plastic parts supplier Shifa, to better serve BMW while leveraging synergies. In addition to BMW, the company has actively sought opportunities to develop external markets and has set up relevant special classes to seek auto parts support shares from high-quality domestic automakers within the next two to three years.

Profit forecasting and valuation

First coverage, giving a “buy” rating. The company is the core supplier of BMW Brilliance. Benefiting from the BMW Group's deepening investment in China and Shenyang's automobile industry policy, the entry of Shenyang Automobile is expected to bring a new atmosphere at the management and business level. We expect the company's net profit to be 0.322, 0.344, and 0.401 billion yuan for 2024-2026, 0.25, 0.26, and 0.31 yuan/share for EPS, respectively, and 21, 20, and 17 times PE for the closing price on October 29, 2024. We selected auto parts suppliers Xinquan Co., Ltd., Tiancheng Automatic Control, Daimei Co., and Shanghai Yanpu as comparable companies. The average PE in the same industry in 2024-2026 was 34, 19, and 14 times, respectively. Taking into account the company's growth and safety margin, we gave the company a 30-fold PE valuation in 2024, corresponding to a target market value of 9.7 billion yuan and a target price of 7.37 yuan/share, corresponding to the closing price on October 29, with 40% room for increase. First coverage, giving a “buy” rating.

Risk warning

BMW Group's production and sales fall short of expectations; pressure to control raw material costs; risk of a shortage of high-end talents.