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Chang’an announced that it signed an agreement with Qianhai Ruizhi （a wholly owned subsidiary of Baoneng Automobile） on December 30 to sell its entire 50% equity stake in PSA.

Comments

One-off gains from appreciation likely to be booked in 2020. The consideration is Rmb1.63bn. As of November 30, 2019, the book value of the equity stake was about Rmb278mn, with assessed value of intangible assets for 100% of the company at Rmb4.778bn （up Rmb3.405bn due to appreciation of land use rights）。 Chang’an expects the deal to bring Rmb1.352bn of pre-tax profit in consolidated statements. It expects the sale to be completed in 2020, with related profits to be included in the same accounting period.

Disposing loss-making business to further reduce losses. Chang’an PSA recorded a 2018 loss of Rmb874mn. Over 9M19, Chang’an PSA had a sales volume of 2,000 units, with operating revenue of Rmb812mn and loss of Rmb2.233bn. Upon completing the deal, Chang’an would no longer have any shareholding in Chang’an PSA, thus ending related losses. Chang’an has been reducing losses and focusing on core businesses by introducing strategic investors to its subsidiaries and selling down its PSA stake, reflecting the resilience of the leading automaker amid the sector downturn. We expect the firm to further reduce losses by streamlining production capacity of Ford and Suzuki and introducing strategic investors and boosting brands of Auchan and Kaicene.

Valuation and recommendation

Chang’an A-shares and B-shares are trading at 1.0x and 0.4x 2020e P/B. Given higher earnings forecast for domestic brands and one-off gains from the equity sale, we raise our 2020 earnings forecast by 123% to Rmb4.5bn and introduce 2021 earnings forecast at Rmb6.0bn （Rmb3.0 excl. one-off gains）. Maintain OUTPERFORM for Chang’an A-shares and B-shares and raise TP by 6% to Rmb12 （1.2x 2020e P/B with 20% upside） and 5% to HK$7.8 （0.7x 2020e P/B with 66% upside）.

Risks

Disappointing performance of new domestic brand models; falling sales volume and continued losses at Chang’an Ford.