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Chang’an announced that August's sales volume was 138,654 units （down 16.0% YoY; down 31.0% MoM）。 The firm’s August sales volume dropped sharply MoM due to power rationing in Sichuan and Chongqing, with inventory to sales ratio returning to low levels.

Comments

Power rationing in Sichuan and Chongqing weighs on output, sales; September production scheduling to boost market confidence.The firm’s August wholesale volume fell 31.0% MoM to 138,654 units, due to power rationing in Sichuan and Chongqing. The firm plans to produce more than 250,000 units in September as power rationing ends, with 3Q22 wholesale volume reaching 580,000 units. The firm has maintained its full-year delivery target, and its guidance is solid. For self-owned brands, sales volume of Chongqing Chang’an fell 54.1% MoM to 45,989 units, Hebei Chang’an volume was 4,699 （down 13.4%）， and Hefei Chang’an was 9,761 units （down 49.6% MoM）。

For joint-venture brands, monthly sales volume was 24,522 units for Chang’an Ford （+3.9% MoM） and 5,316 units for Chang’an Mazda （down 33.6% MoM）。 In terms of cost reduction, the firm plans to cut costs by Rmb2.6-2.7bn in 2022, and it reduced costs by more than Rmb1bn in 1H22. We expect the firm to cut costs further in 3-4Q22 to increase earnings.

Demand for AFVs solid; channel expansion continues. Among core models, orders on hand for Deep Blue SL03 exceed 40,000 units, and the first 1,883 units were delivered in August. We expect output and sales of this model to accelerate as the impacts of power rationing subside, and forecast deliveries to reach 70,000 units in 2022, with the average monthly sales volume over September-December surpassing 20,000 units. Orders for the Lumin exceed 60,000 units, which reflects robust demand, in our view. The small-form AFV model sold more than 10,000 units in August.

Aside from robust demand for AFVs, the firm has also continued expanding sales channels. There are 450 Deep Blue order centers, with plans to expand the number to more than 600 by end-2022. Meanwhile, orders for Avatar 11 exceeded 20,000 units, in line with our expectation. Over September 5-11, the firm started customer test drives for Avatar 11, and we expect this will boost sales volume.

Accelerating smart transformation; Zhuge Intelligence debuts.The firm is implementing its strategy of "software-defined vehicles" under the "BeiDou TianShu" plan. The firm plans to invest more than Rmb80bn in key sectors such as AFVs and digitalization by 2025. The firm has established a 2030 sales target of 4.5mn intelligent connected vehicles （ICVs）。 The firm has a clear strategic direction and plan, in our view. On August 26, the Zhuge Intelligence brand was launched at the automaker's annual technology ecosystem conference. The brand represents the development of core experiences （“Zhuge Interaction”， “Zhuge Intelligent Driving”， and “Zhuge Ecosystem”） that meet users' needs in full-scenario intelligent assisted driving. Zhuge's intelligent decision-making features are supported by a powerful central computing platform and end-cloud integration services. Zhuge Intelligence’s first model, CD701, will be based on software defined architecture （SDA）， and the firm has a 2024 target for its launch. We believe the firm will continue to enhance its competitiveness through smart transformation led by users’ needs.

Financials and valuation

Chang’an A-shares and B-shares are trading at 19x and 5x 2022e recurring P/E. We maintain OUTPERFORM for both A-shares and B-shares. We maintain our 2022 and 2023 earnings forecasts. We maintain our TPs of Rmb23.00 for A-shares （30x 2022e recurring P/E with 59.8% upside）， and HK$6.50 for B-shares （7x 2022e recurring P/E with 50.8% upside）。

Risks

Disappointing rebound of sector demand and/or performance of new models.