Guangzhou Auto (2238 HK) – Continued supply chain pressure
• FY21 net profit of CNY7.5b grew 26% year-on-year (YoY), driven by investment from its joint ventures which gained 19% YoY.
• GAC local brand incurred ~CNY5b net loss in FY21, with higher input costs contributing to a delay in the breakeven target for Aion and Trumpchi.
• Valuations have corrected, reflecting near term challenges from chip supply constraints and higher raw material costs, which the firm is hopeful could ease in 2H22.
FY21 net profit of CNY7.5b grew 26% year-on-year (YoY), driven by investment from its joint ventures which gained 19% YoY. GAC incurred ~CNY5b net loss on its local brand business, which included research institution net loss, Trumpchi and Aion net loss which the firm highlighted is under control particularly for Aion whose operating loss was partially offset by new energy vehicles (NEV) credit sales revenue and costs from its equity incentive plan).
4Q21 net profit increased 113% YoY to CNY2.05b, helped by margin expansion in its local brand operations (GAC Trumpchi and GAC Aion-the group’s electric vehicle operation) which also saw decent sales volume growth. Gross margin increased 0.6 percentage points (ppt) YoY to 8.3%, a decent improvement compared to previous quarters. Investment income also grew 57% YoY driven by volume growth at its Japanese joint ventures. Lower operating cost and fair value gain also helped in the bottom-line growth.
For 2021, GAC production and sales volume grew 5.1% and 4.9% YoY last year. For GAC Motor, sales volume grew 10% YoY to 324.2k units while Aion sales volume increased 101.8% YoY to 120.2k units. NEV sales volume grew +77.4% to 142.9k units last year. Capacity utilization rate for 2021 was 75.9% overall, which comprised of 102% for GAC-Honda, 120% for GAC-Toyota and 55% for GAC Motor including Aion.
Chip supply constraints and higher raw material costs continue to be challenges for the industry, particularly after the surge in input costs this year. The firm shared that for the local GAC brand, limited chips have constrained its supply chain and production, which is sourced from Infineon. The firm is hopeful that Infineon’s capacity expansion plans may go smoothly, which will ease pressures on this front potentially in 2H22.
Raw material cost increase was estimated to be about CNY7b for FY21. The firm was unable to hit breakeven for Trumpchi last year due to significant raw material price increases and chip supply constraints which hurt profitability of its local brands by an estimated CNY2b, which ended the year in net loss (flat YoY). The firm remains optimistic it may achieve breakeven status for Trumpchi in 2022, which has already reached three years in its production development cycle and has seen improvement in its sales volume.
Measures taken so far by the firm include adjusting production plans and working more closely with suppliers to achieve alternative sourcing for chips and auto parts. Out of an estimated 150 types of chips that supply has been affected, the firm has identified solutions for some 85 types through alternative sources and the remainder are work in progress. Switching to alternative suppliers is estimated to raise development costs by ~CNY300m this year, which is included in the FY22 annual budget. For GAC-Toyota, chips impact is relatively less severe with supply taken from Renesas.
Upcoming catalysts in 2H22 expected include GAC Aion’s Series-A financing, and a public listing potentially in 2023 possibly in the STAR market. GAC Aion has announced fundraising of CNY2.56b for 6.55% stake, which suggests post money valuation of GAC Aion of about CNY39.2bn. The group plans to keep the balance stake of 93.45% post the fundraising.
Targets in 2022 include 15% YoY growth in its group sales volume, +20% in GAC Motor sales volume (~400k units) and AION sales volume target of 250k 300k units. AION’s break-even point is estimated to be at the 300k-400k units annual sales volume level, with breakeven target of 2021 disrupted by the increase in battery costs.
ESG Updates
GAC is rated for its ESG, which pegs the firm below the median score amongst global peers. Research has noted a material jump in its recall rates (+64% of sales in 2020, vs prior three year average rate of 21% for 2017-2019) and related party transactions compared to FY19, while the inclusion of the corporate behaviour theme in the governance assessment has also contributed to the downgrade. The company is also noted to lag peers in adopting strong product quality practices. The group is viewed to be on par with peers in mitigating vehicular GHG emissions risks, with higher number of new energy vehicles sold in 2020 (+36.2% YoY) and a lower average fleet GHG emissions from a year ago (-2.3%). GAC is also viewed to be on par with peers on labor related risk management with similar labour practices as its domestic peers that are state owned. BUY. (Research Team)