Guangzhou Automobile:Profit alert suggests weak 4Q16

After the market close Wednesday, Guangzhou Auto (GAC) announced apositive profit alert, indicating NPAT for the year to December 2016 would beup 30-55% YoY, representing a range of Rmb5,500-6,560m. This is below ourestimate of Rmb7,443m and consensus of Rmb7,285m. Further, it impliesthat 4Q NPAT ranged from a loss of Rmb100m to a profit of Rmb951m vsNPAT of Rmb1,508 in 4Q 2016 and 9M16 NPAT of Rmb5,609m. We believethe market will be disappointed with this result and there could be someselling pressure.

GAC delivered solid volume growth in 4Q, up 16.4% YoY, which suggests theprofit shortfall in 4Q relates to one-off factors. This could relate to write-offsrelated to FCA and in particular the Fiat brand. Fiat’s two models, the Viaggioand Ottimo, combined shipped only 1,080 units in 4Q. This is unsustainablefor a brand. We would view it as positive if GAC-FCA were to abandon theFiat brand and focus on building the Jeep brand, which has enjoyed successsince it launched the Cherokee in late 2015. The Cherokee and Renegade –launched in June 16 – sold 133k in 2016. We reiterate our Outperform ratingand target of HK$13.70.

Solid performance at GAC Honda & GAC Toyota: Among the factorssupporting the solid profit growth for the year, GAC’s release to the HKEXnoted the growth at its JVs with Honda and Toyota, with volumes up 10.1%and 4.6%, YoY. As volumes were supported by robust sales of SUVs like theHonda Vezel and Toyota Highlander, we expect profits grew ahead of sales.

In 2017 Honda’s sales should be supported by the recently launched Avancierfull-size SUV, however, Toyota’s lack of capacity is likely to limit sales growth.

Own brand doing well: GAC cited the solid performance of its own brandTrumpchi, which posted sales growth of 93.5% led by China’s second-bestselling SUV, the GS4, which sold 327k units. The success of the GS4 pushedGAC’s operating profit firmly into positive territory, with the OPM reaching5.3% in 1H16 vs -6.2% in 1H15. We expect this solid trend to continue.

Success of Jeep, synergies within group: Other factors that GAC citesinclude the success of Jeep. It notes that it turned a loss into a profit, but it isnot clear if this is just for the Jeep brand or for GAC-FCA overall. It alsosuggests the company is benefiting from economies of scale in partsprocurement, commercial services and financial segments, enhancingoperating performance.