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Chang’an’s October sales volume was 164,018 units, largely flat YoYand up 2.6% MoM. Chang’an recently attended our investmentconference.

Comments

Earnings of domestic brand continue to improve; Focus on Chang’anpassenger vehicles and stopping loss at Oshan and Kaicheng.

Chang’an passenger vehicles recorded MoM growth in Septemberand October as rising sales volume, improving product mix and costcutting boosted profitability. Its recurring net profit is improvingquarter by quarter. The high-quality growth is driven by rising ASPfrom better products, engine system and new products. In 4Q19, weexpect profitability of domestic brands to improve as ramp-up ofhigh-margin products enhances product mix.

For Ford, we suggest attention to cost and expense control in thenear term, new models and distributor network improvement inthe medium term and new product cycle based on local R&D in thelong term. Chang’an Ford’s monthly sales volume has stabilized at15,000-20,000 units since June, and YoY decline has narrowed.

Other joint ventures working on reducing loss. The firm is putting its50% stake in PSA up for sale. Chang’an Suzuki has a productioncapacity of 100,000 units in Chongqing, and we expect the firm tofurther lower production capacity going forward.

Valuation and recommendation

Chang’an A-share and B-share are trading at 0.9x 2019e and 0.3x2020e P/B, which are considered low in the auto sector. If sectorsales volume growth turns positive YoY as expected in December,we expect improvement in market sentiment and sector valuation.

Maintain 2019–2020 earnings forecasts and OUTPERFORM with TP atRmb11.3 (1.3x 2020e P/B with 40.4% upside) and HK$7.4 (0.6x 2020eP/B with 109.0% upside).

Risks

Disappointing performance of new self-developed models; fallingsales volume and continued loss at Chang’an Ford.