What's new

Chang’an released a draft for a restricted A-share incentive plan.

Comments

New incentive plans to motivate employees. The plan grants nomore than 95mn restricted shares, accounting for 1.98% of totalequity base. The first batch includes 78.90mn shares (83.06% of thetotal), and would be granted at Rmb6.66/sh.

Assessment targets of plan to fuel earnings growth in the next 3years; limited impact from expense amortization. Based on 2019 netloss of Rmb2.65bn and targeted CAGR of net profit. We estimate thenet profit targets over 2021–2023at Rmb662mn, Rmb2.29bn, andRmb2.74bn. Based on the ROE target, we estimate net profit targetsat Rmb747mn, Rmb2.11bn, and Rmb2.42bn. Amortization expensestotal Rmb533mn, and would be booked over 2020–2024. The impacton net profit is limited, in our view.

In the near term, sales volume of domestic brands rapidly grew YoY in2Q20 and monthly sales of Chang’an Ford stabilized at more than20,000 units. The A-share price has exceeded previous high ofRmb12, and we believe that 2Q20 earnings delivery of domesticbrands and QoQ narrowing in investment loss will further boost shareprices. In the medium-to-long-term, we think the Chang’an Ford willgradually recover, and we believe that the upward cycle of the firm’sdomestic brand has just begun. With launches of new products, weestimate that annual sales volume of V-logo products will reach 1.2–1.5mn units, driven by CS-series SUVs and sedans and UNI series.

See page 3 for details.

Valuation and recommendation

Chang’an A-share and B-share are trading at 10.7x and 3.2x 2021eP/E. We maintain our 2020 and 2021 earnings forecasts,OUTPERFORM rating of A/B, and TPs at Rmb16 of Chang’an A (13x2021e P/E) offering 19% upside and HK$5.5 of Chang’an B (4x 2021eP/E) offering 20% upside).

Risks

Disappointing sales of new models; falling sales volume of Chang’anFord leading to loss.