BAIC Motor Corp:Hyundai JV drags down 1Q profits

Event

After the market close Thursday, BAIC Motor announced its 1Q results. Theshares had been suspended for the day ahead of the announcement.Revenue showed strong growth, rising 30.3% YoY, supported by healthygrowth at the Beijing Benz (BBAC) JV, with unit sales up 42.7%. The Beijingbrand posted 14.5% volume growth. Despite solid gains in profit at BBAC,investment gains, most of which are from the Hyundai JV, fell 45.8% YoY.Overall NPAT declined 46.5% YoY to Rmb870m. Full P&L in Figure 1on p. 2.

We expect momentum at BBAC to remain robust, driven by solid demand forthe GLA and GLC SUVs. The Hyundai JV should see better profitability from2Q with the recent launch of the new Elantra Lingdong, its top-volume model.We maintain our Outperform rating and target price of HK$8.10.

Impact

BBAC key profit contributor: We estimate that the profit contribution of theBeijing Benz JV to be Rmb928m net of minorities, up 20% YoY. This wasdespite lower forex gains seen in 1Q15on Euro weakness. Sales in 1Q of thenew GLA and GLC SUVs were almost twice the old GLK, but may not havenot yet match GLK’s profitability. The GLC should surpass the GLK as theGLC’s localisation rate is 60% vs 50% for the GLK. The C-Class maintainedgood momentum, with 1Q volume up 35% YoY, but the E-Class is on run-outahead of its 3Q (est) launch and is likely to be a drag on profits in 2Q.

Hyundai JV struggles: The weak demand for sedans in China has been achallenge for the Hyundai JV. Not only was the Elantra hit ahead of the newmodel launch in late March, but core models like the Mistra (-29% YoY) andSonata (-5% YoY) were weak in 1Q, and the Verna, due for a model changein 2H, dropped 46%. The new Tucson has averaged just over 11k/monthsince its launch last September, putting it slightly below the 12k the ix35usedto sell in 2014. The Rmb758m (-46% YoY) investment gain profit, most ofwhich is from the Hyundai JV, was nevertheless above the Rmb636m in 2Q15and Rmb454m in 3Q15, and should improve from 2Q with the new Elantra.

QoQ improvement for Beijing brand: We estimate losses from the Beijingbrand narrowed to Rmb835m in 1Q16from Rmb1,533in 4Q15but wereabove the Rmb561m loss in 1Q16. The brand has been successfully shiftingits focus to SUVs from sedans. Management told us it is committed tonarrowing the losses. Our current estimates assume the losses drop onlymarginally, so a narrowing would provide upside to our estimates.