2012 results in line

Revenue rose 11.0% YoY to Rmb29.46bn; net profit grew 49.4% YoY to Rmb1.45bn, or Rmb0.31/sh. In 4Q12, EPS was up 883% YoY and 273.5% QoQ to Rmb0.15.

Positives:

Changan Ford recorded strong growth. Revenue rose 15% YoY to Rmb54.8bn; net profit grew 21.8% to Rmb3.2bn. Sales volume increased 17.9%. In particular, sa les volume of the Focus jumped 56.8%, making it the best-selling compact car in China and driving a significant improvement in profitability.

HQ’s g ross mar g in jumped, indicating sig nificantly improved profitability of proprietary brands. Changan HQ’s gross margin rose 4.5ppt to 19.8. The transformation and upgrading of proprietary brands yielded results, with several new models launched. Profitability was further enhanced.

Negatives:

Expense ratio rose markedly and bank borrowings surged.Expense ratio rose 2ppt to 18.2%. Sales expense ratio climbed 0.9ppt to 8.9% due to increased advertising and promotions. Financial expense ratio rose 0.8ppt as bank borrowings surged.

Trends to watch

Changan Ford is expected to continue growing rapidly . At least ten new models will be introduced in the next three years and capacity and channel expansion sh ould also support growth. We raise the Kuga’s 2013 sales volume forecast to 90,000 cars and expect joint-venture revenue to grow 42.8%/18.7% in 2013/14e. Changan HQ expected to continue to reduce losses; more investment still needed for Changan PSA. We expect the p arentco to break even in 2013 as sales volume of new proprietary- b rand cars increases and product mix improves. Changan PSA requirescontinued investment over the next few years and is expected to cause an earnings drag of Rmb125~175mn (<5%).

Revised earnings forecasts

Raise 2013/14e EPS forecast 9.5%/9.2% to Rmb0.68/Rmb0.96.

Valuation and recommendation

Considering Changan Ford’s strong growth prospects in 2013/14 and the parentco’s improvement, we keep Changan-B at BUY, with a target price of HK$11.60.