1Q-3Q19 attributable net loss preannounced at Rmb2.4-2.8bn

Chang’an Automobile preannounced 1Q-3Q19 attributable net lossat Rmb2.4-2.8bn （vs. –Rmb1.16bn in 1Q-3Q18）， implying a 3Q19 lossof Rmb160-560mn （vs. –Rmb447mn in 3Q18）。 The company’spreannouncement is in line with our expectation.

Trends to watch

Non-recurring income falling; domestic brand business expected toturn profitable in 3Q19.

Domestic brands’ profitability is improving thanks to stabilizingsales volume and better product mix. In 3Q19, sales volume reached138,175 units for Chongqing Chang’an, 20,995 units for HebeiChang’an and 28,945 units for Hefei Chang’an. Product mix continuedto improve in 3Q19 with monthly sales volume exceeding 20,000units for CS35, CS55 and Eado and approaching 4,000 units for CS85.

CS75 Plus booked over 20,000 units sales volume in its first month,and order volume exceeded 30,000 units as of October 11, 2019.

Investment loss expanded QoQ; Chang’an Ford still facingchallenges. We estimate 3Q19 investment loss increased YoY andQoQ to Rmb400mn due to a YoY decline in sales volume of majorjoint-venture brands. Chang’an Ford’s 3Q19 sales volume increased40.1% QoQ, but stayed below the monthly break-even point of30,000 units. In addition, Chang’an Ford launched a number of newmodels in 3Q19, and related expenses increased.

Valuation and recommendation

According to Chang’an Automobile’s 3Q19 preannouncement, newdomestic-brand models are boosting sales volume and sales price asexpected. We still expect Ford to turn profitable thanks to recoveringsales volume and falling expenses. Chang’an A-shares and B-sharesare trading at 0.8x and 0.3x 2020e P/B. We keep our 2019-2020eearnings forecast, and maintain an OUTPERFORM rating on Chang’anA-shares and B-shares and target prices of Rmb11.3 （1.2x 2020e P/B,with 44% upside） and HK$7.4 （0.7x 2020e P/B, with 113% upside）。

Risks

Disappointing performance of new domestic-brand models.