Steady JV operations subsidising self-brand operating deficits
- JV brands’ steady growth expected; eight new models to support earnings fundamentals
- Self-brand business expected to remain loss-making; additional investments required to roll out new models
- Decent yield of 8%
- Maintain HOLD; TP of HK$6.40 based on 3.8x PE FY22F
Bulk of earnings from JV brands are subsidising the self-brand operation. We expect the major Japanese JVs to remain the main earnings contributors, despite the current supply chain disruptions, given their scale and new model outlook. In FY21, the share of profits from JVs increased c.20% to Rmb11.8bn, despite a fall in total sales volume of c.9%, to about 1.9m units. This implies that the better revenue mix had helped to drive profits last year and we anticipate the JVs would adopt the same strategy this year, as we are not out of the woods yet in terms of the supply chain disruptions. Based on the new model rollout plans, we estimate total volume sales to post a CAGR of c.12% for FY21-23F and earnings contribution of Rmb13.5bn in FY23. Besides, smaller losses from the DF-PSA JV as a result of an improving vehicle portfolio are a plus for the group.
Self-brand auto business losses widened in FY21; unlikely to turn around in near term. Self-brand total sales volume rose 47% in 2021 to 377k units, and we project sales to increase at an annual rate of c.20% to about 560k units in FY23. DFG is investing to build the self-brand auto business, especially the NEV business. Its high-end VOYAH brand racked up a sales volume of about 7k in 2021 and the total NEV volume under the self-brand segment amounted to about 54k units – but it is yet to hit any meaningful scale compared to its Chinese peers. As a result, the total segment loss from vehicle sales hit Rmb5.7bn, up sharply from Rmb1.8bn in FY21. Therefore, we expect the self-brand business to remain loss-making in the near term, as the domestic auto brand market is highly competitive.
Decent yield to support share price downside; healthy financial position to support generous dividend payout. DFG raised its dividend payout slightly to 30% in FY21 from 28% a year ago, which translates to a yield of about 8%. It has net cash of Rmb9bn as of end-Dec 21 and, coupled with a decent earnings contribution from the JV, we anticipate the company to maintain a 30% payout, after considering the group’s capex requirement. In 2021, the group spent about Rmb15bn on capex.
Cut FY22F earnings due to rising raw material cost pressure. We reduced FY22F earnings by 8% given the supply chain disruption impact and pegged our target PE to 3.8x (1SD below mean) due to the overall auto sector being sold down (prev: 5x) to arrive at a new TP of HK$6.40. Maintain HOLD, as the self-brand is still loss-making and being subsidised by earnings from JVs.