Chongqing Changan Auto (A):Above expectations EPS on strong JV earnings;valuation fair

What surprised us

On Aug 29, Changan Auto reported 2Q16revenue/earnings at Rmb16.5bn/2.8bn, +11%/+7% yoy and -13%/+9% vs GHe. The higher-than-expectedbottom line was mainly due to: 1) higher JV profit esp. from its largest JVChangan-Ford, which reported 1H16NPM at 16% vs GHe 14.8% on productmix improvement as well as stricter cost control; 2) higher non-operatingincome mainly from government subsidies; which were offset by 3) lowerthan-expected local brands revenue and profitability on the toughervolume/pricing environment as a result of competition, esp. in thecompact SUV and sedan segments (which led to weak volume/price ofChangan key models EADO/CS75). In 2H16we expect volume contributionfrom new models (i.e., CX70/Aushan/CS15) and cost saving measures(offsetting price cuts) will kick in for local brands.

What to do with the stock

While we lower 2016-2018E revenue by 4-5% on lower local brandsvolumes, we increase EPS by 4%/1%/1% reflecting higher JV earnings.Accordingly, we raise our 2016E P/B vs. 2018E ROE-based 12-m TP forChangan A to Rmb17.82from Rmb17.63. Our Neutral rating is unchanged.Valuation looks fair, with the A shares trading at 2017E P/B of 1.5X, in linewith our A-share coverage average of 1.5X. Key risks: Higher/lower totalmarket; lower/higher volume/pricing/NPM of local brand and JVs.