Ramping up NEV sales
- Exciting NEV growth prospects, supported by strong self- developed technology
- Expect key Japanese JVs to post steady earnings growth
- Anticipate self-brand improvement to continue on the back of scale benefit
- Maintain BUY; pegged HK$9.0 TP to 8x FY22F PE
NEV development encompasses key segments. GAC has been embarking on NEV development and investment for several years and is expected to reap benefits with high-end NEV models for sale. Currently, the company has launched its self-developed sponge silicon battery, which will be applied in more vehicle models in the coming years to boost the driving experience. Capacity expansion is also progressing as planned and is expected to reach 400k units by end-2022. The goal is to achieve a 50% NEV sales ratio by 2025 for its self-brand.
GAC AION is one of the fastest growing NEV proxy makers. FY21 has been an interesting year for GAC AION, and the strong sales momentum remains encouraging for 2M22. Last year, the company built up a 100% increase in NEV sales to about 120k units. The strong growth extended into 1Q22 with a 130% increase in sales for 2M22. GAC AION plans to roll out four new models in 2022 to further boost its NEV sales. Given its extensive R&D as well as investment into new capacity, we estimate GAC AION to record annual growth of 50% from FY21-23F in NEV sales, to 270k units. The group aims to achieve an NEV ratio of 50% within the self-brand segment.
Japanese JVs expected to generate steady earnings growth. While the auto industry was faced with major uncertainty in 2021, GAC’s major Japanese JVs have delivered a 6% expansion in revenue, to Rmb250bn, and decent earnings of some Rmb8bn to the group. In 2M22, the Japanese JVs continued to deliver good volume sales growth of 13%. Both the Toyota and Honda JVs have plans to rollout eight new models in 2022 as part of its growth strategy, including some electrified versions.
On the other hand, the GAC-FCA and GAC Mitsubishi JVs were the weaker performers within the group, as sales volume and revenue declined 12%-50% and 15%-40% in 2021, respectively, thus dragging the group’s profitability. We do not expect a near-term turnaround until the JVs fix its new model roadmaps to boost volume sales.
Overall, we estimate the JVs to record an FY21-23F earnings CAGR of 15%, to Rmb13bn for GAC, largely supported by robust sales volume growth of 10%-12% till FY23F.
Improvement in self-brand operation a plus, but recovery pace was derailed due to supply chain disruptions. As expected, the self-brand auto volume sales rose by 10% in FY21 to 324k units, due to a refreshed vehicle portfolio. GP margin on vehicle sales increased c.2ppt but was below expectations due to supply chain disruptions and a surge in raw material costs. We anticipate vehicle margins to improve this year with three new models in the market and a better mix. Gross profit increased c.70% in FY21 and projected to grow at an annual rate of 50% over FY21-23F, supported by the scale benefit and easing of cost pressure.
Maintain BUY. The overall auto sector valuation has been dragged down by the volatile market. We trimmed our FY22/23F net earnings estimate by about 3% and reduced our target FY22F PE to 8x (prev: 9x) due to the current supply chain disruptions. Our new TP is HK$9. GAC is trading at an attractive FY22F 6x PE, 1SD below its historical mean. Maintain BUY.