In 1H23, DMG's revenue added 2.9% YoY to RMB45.7bn, whereas the attributable net profit plunged 77% YoY to RMB1.3bn, mainly due to substantial decrease of investment income from the company's two major profit contributors DF Nissan and DF Honda, both have faced mounting pressure in China since last year. For 2023, the management cut the full-year sales target from 3m units set at the year beginning to 2.59m units. With the substantial contraction of net profit, the P/E multiple (7.7x 2023E P/E) of DMG was passively pushed far above the historical average level of 4x, far from attractive in our view. Although its P/B multiple has slipped into historical low level, we do not see enough safe boundary given its net cash has decreased to RMB14.1bn as of end-1H23, equivalent to HK$1.8 per share. Thus, maintain HOLD with lower TP of HK$3.00 (8x 2023E P/E).

Key Factors for Rating

Revenue largely in line driven by CV sales recovery. In 1H23, total revenue added 2.9% YoY, largely in line with our prior estimates driven by the robust CV sales that surged 22.5% YoY with the industry-wide commercial car demand recovery, which was substantially offset by the PV sales pullback of 19.1% YoY with the weakening end-user demand. Affected by the downward sales volume, the revenue from financing service dropped 3.6% YoY.

Operating losses widened for both CV and PV segments. The 1H23 gross margin dipped from 11.7% in 1H22 to 10.9%, dragged by the CV segment whose gross margin deteriorated on intense price competition, in spite of the gentle gross margin recovery for PV segment. The operating losses widened from RMB202m in 1H22 to RMB857m in 1H23 on the worsening gross margin yet the SG&A ratio stabilised at c.18% YoY. At the operating level, the operating losses for both CV and PV segment exacerbated in 1H23 from 1H22, in contrast to the financing services with improved segment profit thanks to the consolidation of Dongfeng Peugeot Citroen Finance.

Substantial contraction of investment income due to the meager earnings from JVs. In 1H23, investment income plunged 69% to RMB1.7bn from RMB5.6bn in 1H22, mainly due to the substantial contraction from JVs' contribution which further suggested the unprecedented sales crisis for JV brands in China's market. For a breakdown, the income from associates slashed 11.3% YoY to RMB331m, mainly due to the decrease in investment income of Dongfeng Nissan Auto Finance. In the realm of JV, total earnings contribution slumped 73.1% YoY to RMB1.4bn from RMB5.2bn in 1H22, notching the record low in the past decade, within which the contribution from Dongfeng Motor shrank by approximately RMB1.8bn, Dongfeng Honda narrowed by RMB1.5bn and Dongfeng Honda Engine declined RMB365m over the corresponding period.

Earnings Forecasts and Valuation

We largely chopped down our 2023-24E net profit forecasts to RMB3bn/2.2bn, respectively to reflect our lower revenue estimates, and lower investment income projection given the worse-than-expected JVs contribution YTD. n For 2023, the management cut the full-year sales target from 3m units set at the year beginning to 2.59m units to reflect their lower sales target for PV sales by 490k units yet higher sales volume target for CV sales by 81k units. For its two primary JV brands DF Nissan and DF Honda, the company sharply cut the full-year sales target for DF Nissan by 132k units, while hacking that for DF Honda by 200k units, as these two major JVs have faced great pressure in China market.

Over the past decade, driven by steady investment income contribution from two primary Japanese JV brands, the net profit of DMG remained solid above RMB10bn during the past decade. However, as DF Honda and DF Nissan have faced unprecedented sales pressure in China market since last year, DMG are suffering stunning earnings pressures, which makes us believe the state-owned auto makers with greater exposure to JV brands may encounter similar operation dilemma during the industry-wide electric migration trend. Although DMG is actively seeking for electric transition opportunities for its own-brand businesses from both PV and CV prospects, we render the market feedback and growth outlook of its NEV offerings are less than satisfactory so far.

With the substantial contraction of net profit, the P/E multiple (7.7x 2023E P/E) of DMG was passively pushed far above the historical average level of 4x, which is far from attractive in our view. Although its P/B multiple has slipped into historical low level, we do not see enough safe boundary given its net cash has decreased to RMB14.1bn as of end-1H23, equivalent to HK$1.8 per share. Given all of the above considerations, we revised down our TP to HK$3.00 from HK$4.00, based on 8x 2023E P/E, which is equivalent to HK-listed SOE counterparts like GAC Group. Maintain HOLD rating.