BRILLIANCE CHI:Weak 3Q15performance in the price

2015 a difficult year. BMW Group reported 3Q15 results, with equity accounted investments income of EUR138m, down 18.8% YoY or 11.0% QoQ (versus EUR170m in 3Q14 and EUR155m in 2Q15). These figures are good indicators of Brilliance’s performance because they include the results of the company’s joint ventures: BMW Brilliance Automotive (Shenyang) and two Munich-based local JVs. We believe the weak performance in 3Q15 was due to challenging market conditions with high inventory for PVs, intense competition within the luxury space and, most damaging, the absence of new BMW-Brilliance models.

Better model lineup ahead. Despite the disappointments of 2015, we believe 2016F will be a good year for the company based on its rich pipeline of new models, including the 2-series Active Tourer in 1Q16 and next generation X1 in 2Q16 followed by the 5-series and the 1-series sedan in early 2017F. Given the enduring popularity of the BMW brand in China, these new models should stand up well against other German makes within the luxury space. Consider for example the X1, the first front-wheel-drive platform-based SUV. It is spacious and has superior functionality to other vehicles in its class, like the GLA and Q3. It will be available in two different wheelbase configurations. We look for Brilliance-BMW 2016F/2017F unit sales growth of 11%/10% YoY.

Maintain Outperform and HK$12.00 target price. We trim our 2015F earnings forecasts 4.6% to reflect the challenging operating performance in 3Q15 yet we maintain our HK$12.00 target price and Outperform rating on the stock to reflect our positive stance on Brilliance’s 2016F-2017F product cycle and the benefits to the overall PRC PV market of the purchase tax cut on 1 October. Our target price is based on 10x 2016F P/E. Based on its strong new model lineup for next year, we remain positive on Brilliance, the only listed PRC BMW joint-venture partner.