What's new

Chang’an Automobile announced that its subsidiary, ChongqingChang’an New Energy Automobile Technology, will bring in strategicinvestors.

Comments

Four potential investors – Nanjing Runke, Changxin Fund, LiangjiangFund and South Industrial Fund – together plan to invest Rmb2.84bn,including Rmb103mn for registered capital and the remainder forcapital surplus. According to the announcement, after the deal,Chang’an Automobile’s stake in Chang’an New Energy will drop from100% to 48.96%, and income from the latter will be recognized asinvestment return from associate.

Assessed value higher than book value. The book value and assessedvalue of Chang’an New Energy’s net assets are Rmb815mn andRmb2.724bn. The difference is mainly due to intangible assets （418alternative fuel vehicle [AFV] technology patents）， of which the bookand estimated value are Rmb302mn and Rmb1.929bn. We expect theevaluated appreciation of Rmb1.909bn, after deducting taxes, to berecognized by Chang’an Automobile as investment income. Chang’anAutomobile sold 87,000 units of AFVs in 2018, and net loss from theAFV business reached Rmb227mn in 2018 and Rmb197mn in 1Q19.

AFV remains a long-term strategic focus. The company in 2018 setup an AFV subsidiary to prepare for introduction of strategicinvestors, and it has made material progress in AFV technologyadvances. Looking ahead, we believe AFV remains a strategic focusfor Chang’an. While leveraging its technological advantage, Chang’anwill continue to work with leading firms from other industries tobetter control risk of new business expansion. Its partners includeBYD, CRRC, NIO, Huawei, State Grid and Teld.

Valuation and recommendation

Chang’an Automobile-A and -B are trading at 0.9x and 0.3x 2020eP/E. Given uncertainties over the deal and actual appraised value, wekeep our earnings forecasts unchanged. We maintain OUTPERFORMand keep our A- and B-share TPs at Rmb11.3 and HK$7.4, implying1.2x 2020e and 0.7x 2020e P/B, offering 33% and 108% upside.

Risks

Disappointing sales of new domestic-branded models; falling sales ofChang’an Ford.