What's new

Changan Automobile announced plans to acquire 100% of the equity of Hefei Changan for Rmb440mn. After the acquisition, Hefei Changan will produce PVs under Changan Automobile's self-owned brands.

Comments

The acquisition aims to alleviate tight production capacity of Changan PV: After the acquisition, Hefei Changan will mainly produce the Benben MINI, CX 20 and Yuexiang. Currently, except for Raeton, all Changan brand PVs are produced at the Chongqing plant, with annual sales of 380,000 units in 2013 almost reaching its maximum capacity. Shift of Benben, CX20 and Yuexiang's production to Hefei can help alleviate the tight production capacity of Chongqing plant (combined sales volume of the above 3 models was 210,000 vehicles in 2013).

Acquisition cost lower than replacement cost: The construction cost of plant with annual capacity of 150,000 units is about Rmb1~1.5bn. The acquisition cost of Hefei Changan, together with the cost of upgrading production lines, is just Rmb500mn.

Product mix of Changan PV to further improve: The freed production capacity at the Changqing plant can further drive up sales volume of CS35 and EADO with higher ASP and profitability. In addition, new SUV model CS75 will be launched in 2014. We expect the proportion of CS35, CS75 and EADO in total sales of Changan PV to expand by 10ppt to 52% in 2014.

Valuation and recommendation

We maintain our 2014 earnings forecast and introduce 2015e EPS at Rmb1.63 (+40% YoY) given the Ford No. 3 Plant is scheduled to start production in 2H14 and the Hangzhou Plant in early-2015, and new models of the Escort, Edge and Taurus will be introduced. Changan-B is trading at 10x 2014e P/E. Maintain BUY and TP of HK$18.60.

Risks

Wider-than-expected losses from self-owned brands; fierce competition in mini vehicles market.