Chongqing Changan Auto (A):Cut earnings on Changan Ford underperformance;remain Neutral

What's changed

Changan Ford May/YTD sales volume grew by -17.3%/+2.7% yoy vs. ourprevious growth forecast of +12.6% in 2016E, mainly due to a relativelyweaker than expected product cycle and limited SUV mix improvement.

Implications

Edge and Taurus (launched in May 2015/Nov 2015) contributedsignificantly to the Ford JV’s profitability in 2015, but we expect a relativelyflat product cycle going forward and limited SUV mix improvement (3.6%SUV mix increase vs. 10.8% industry avg. from 2015 to 2018E). Besides, itsmodels are maturing (no new models in 2016E except Kuga/Ecosportfacelift). On the back of weaker than expected volume delivery, we cut our2016E-18E volume forecasts by 2.5%/2.6%/1.8%, and our earningsforecasts by 3.6%/3.7%/3.0%, for the Changan Ford JV. As a result, overall,we cut our 2016E-18E EPS by 3.0%/2.9%/2.3% to factor in lowervolumes/earnings contribution from the Changan Ford JV.

Valuation

On lower Ford JV volume/profitability, we adjust our 2016E P/B vs. 2018EROE based 12m target prices accordingly for Changan A/B toRMB15.24/11.46 (from RMB15.67/11.78). Remain Neutral on both ChanganA and B.

Key risks

Higher/lower China car market, higher/lower volume/pricing/GPM of localbrand and JVs.