1Q20 earnings preannounced to grow 123.9–135.8% YoYChang’an preannounced its attributable net profit rose to Rmb500–750mn in 1Q20, from a loss of Rmb2.1bn in 1Q19. Non-recurringgains were Rmb2.2bn and recurring net loss was Rmb1.45–1.7bn in1Q20, lower than market expectations.

Trends to watch

1Q20 sales volume significantly outperforms industry; demandrecovers rapidly in March. Sales of both domestic brands and Fordsignificantly outperformed the industry and enjoyed a leadingrecovery in March, in our view. Sales totaled 18,000 units for CS75and exceeded 10,000 units for EADO, CS35, and Oshan X7 in March.

Improving domestic brand earnings to offset YoY increase in JVlosses. Excluding non-recurring gains and losses, 1Q20 net loss wasRmb1.45–1.7bn and the recurring net loss decreased by Rmb460–710mn (vs. a recurring net loss of Rmb2.1bn in 1Q19).

Sales of Chang’an Mazda fell sharply in 1Q20 and sales of Chang’anFord declined in March. Therefore, we think Chang’an Mazda maybreak even and other JVs, including Chang’an Ford, may recordslightly higher losses. This would expand the investment loss byRmb400mn YoY and imply losses of domestic brands narrowed byabout Rmb1bn YoY in 1Q20, in our view. See page 3 for details.

Valuation and recommendation

We slightly lower our 2019 earnings forecast 1% to -Rmb2.65bn, inaccordance with the 2019 results preannouncement. Given thenegative impact from COVID-19 on sales and earnings and Rmb2.2bnin non-recurring gains, we raise our 2020 earnings forecast 4% toRmb5.7bn (Rmb3.5bn excluding non-recurring items) and lower our2021 earnings forecast 8% to Rmb6bn. Chang’an A-shares andB-shares are trading at 7.9x and 2.6 x 2021e P/E. We maintainOUTPERFORM on Chang’an A-/B-shares but cut our target prices 13%to Rmb12 (10x 2021e P/E) and 42% to HK$4.5 (3x 2021e P/E), bothimplying 21% upside.

Risks

Auto demand falls more than expected; sales of new domestic-brandmodels disappoint.