BRILLIANCE CHI:2Series AT –first at bat

Event

The launch of the Active Tourer 2Series (2Series AT) on 21Marchrepresents the first of six new locally made models for BMW Brilliance (BBA)through 2019. In our view, BBA has the most visible product pipeline amongleading OEMs in China on a multi-year basis – and we are just in the firstinning. To underpin this program, however, BBA has had to make substantialinvestments in new capacity. Coupled with the costs related to the run-out ofold models, we believe the turning point for margins will be in 2018.

In an ideal world, we would be prepared to value Brilliance China (BCA) on10x 2018, indicating a fair value of HK$16.10, but the short-term nature of theHong Kong market leads us to stick to our target of 10x average 2016/17E.Thus we lower our target price to HK$9.60to reflect our lower earningsestimates. We maintain our Outperform.

Impact

Recovering from whiplash: Investors can be forgiven if they are sufferingfrom whiplash from the 35% plunge in BCA’s net profit in 2015, a sharp turnfrom the 47% NPAT gain in 2013and the 60% jump in 2014. Costs related tothe capacity expansion as well as a jump in marketing costs were the mainfactors behind the sharp decline in profits. Looking ahead, we believemarketing costs related to the run-out of old models, particularly the 5Series,will weigh on profitability until 2H 2017.