Brilliance China Automotive:Above expectations;BMW product cycle to improve further;Neutral

What surprised usOn March 24, Brilliance announced 2H16 earnings of Rmb1.88bn, +19% yoyand +34% vs. GHe. The above-expected results were mainly due to: 1)higher equity earnings from the BMW JV amounting to Rmb2.09bn vsGHe’s 1.84bn as a result of lower R&D spending and lower than expecteddealer rebate; 2) lower than expected minibus EBIT loss amounting toRmb416mn vs GHe Rmb530mn due to lower sales and marketing expensesand lower amortization of R&D investment. Management guided to 20%+yoy volume growth for the BMW JV in 2017E with 3 new products to belaunched in 17-18E (1 series in 1Q17, new 5 series in 3Q17, and X3 in mid-18E). The JV might also introduce a new small SUV model in 2019/20E intoChina. Meanwhile the capex of the BMW JV might decline from Rmb9bn in2016 to Rmb6.5bn in 17E and the utilization of the BMW engine plant willimprove further with more BMW models sourcing engines internally.

What to do with the stockWe increase 2017-19E EPS by 16%/9%/7% considering the strong BMWproduct cycle, lower dealer rebate and engine cost saving. We accordinglyraise our 12m PB-ROE based TP to HK$13.04, a 5.9% increase fromprevious HK$12.31 (with 10% valuation premium unchanged to factor inhigher growth beyond 2019E), and maintain our Neutral rating. Key risks:higher/lower luxury market volume/pricing; quicker/slower new BMWproduct volume/NPM; higher/lower cost saving from the new engine plant.