1H20 results in line with our forecast

Chang'an Automobile announced 1H20 results: Revenue rose 9.7%YoY to Rmb32.78bn and net profit attributable to shareholders grew216.2% YoY to Rmb2.6bn. In 2Q20, revenue increased 53.0% YoY toRmb21.22bn and net profit attributable to shareholders jumped1,471.8% YoY to Rmb1.97bn. 1H20 results were in line with thepreannouncement and our expectations.

Trends to watch

JV brands reduced losses; Ford sales volume stabilized and productmix improved. In 2Q20, net investment income reached Rmb1.55bn.

Specifically, investment income from JV and associated companiesreached Rmb0.14bn and rose Rmb0.81bn QoQ, thanks todisinvestment from loss-making assets, and improved sales volumeand structure. We think ASP will continue to increase steadily asExplorer and Lincoln models should account for a higher proportionof total sales volume.

Advertising expenses increased due to launches of new models;domestic brands continued to suffer losses but sales volumeincreased. In 2Q20, the firm recorded one-off income of Rmb1.4bnfrom selling its stake in PSA and an income of Rmb1.4bn fromchanges in fair value of financial assets. Excluding investment incomefrom JV and associated companies, domestic brands recorded arecurring net loss of Rmb0.96bn （down Rmb68.5mn YoY）。

Overall expense ratio dropped 4.6% YoY in 2Q20 thanks to increasedrevenue. We think main models continued to generate high earnings.

However, domestic brands continued to suffer losses due to risingraw material prices, inefficient cost reduction, and higher advertisingexpenses, as well as losses at Weiche, Auchan and the new energyvehicle business.

See page 3 for details.

Financials and valuation

We maintain our 2021 earnings forecasts and lower our 2020 forecast21.2% from Rmb5,719mn to Rmb4,508mn, as domestic brandscontinue to suffer losses. The B-share is trading at 3.9x 2020 and 2.9x2021 P/E. The A-share is trading at 12.8x 2020 and 9.6x 2021 P/E. ForB-share we maintain OUTPERFORM and our TP of HK$5.50 （5.2x 2020P/E and 3.9x 2021 P/E）， offering 33.2% upside. For A-share wemaintain OUTPERFORM and our TP of Rmb16.00 （17.0x 2020 P/E and12.8x 2021 P/E）， offering 33.1% upside. Risks: Sales volume of newproducts disappoints.