Impact of deepening EV eco-system on product competitivenes
- EV volume sales projected to exceed 300k level by 2023
- Investing in EV battery and NEV components to achieve better profitability
- Joint-ventures’ profit surge supported by new models
- Maintain BUY; TP unchanged at HK$9
What’s new
To further strengthen the EV business by investing more into the eco-system. Under the GAC AION brand, NEV volume sales surged 135% y-o-y to 125.3k units in 1H, despite a short operating history. The ability to launch new models is instrumental to sales growth. In 1H, strong sales of AION S, AION V and AION LX Plus boosted volume growth. GAC AION plans to roll several new models – AION V Plus (7-seater), AION S LFP, AION Y and AION LX Flagship (which will be equipped with L2++ autonomous driving capability) – to drive annual sales growth of 55% from FY21-23F towards 300k units.
To have better control over the NEV production processes, GAC AION is investing in a super iron lithium battery manufacturing plant (estimate Rmb11bn investment). Besides, the company is partnering Ganfeng Lithium to secure the supply of battery raw materials to support the EV battery operations. In addition, another Rmb2bn+ has been designated to support the production of electric drive system, motors, and controllers, which are crucial for NEV expansion.
GAC AION currently has annual capacity of 200k units and is doubling the capacity to support a larger production scale in 2023. By 2025, the production capacity will be further expanded to accommodate some 700k unit sales. Hence, the above new investments aim to support the group’s electrification transformation.
Streamlining the joint ventures. Currently, the main profit contributors are still from the two key Japanese JV partners, Toyota and Honda. Sales volume of GAC Toyota rose c.20% y-o-y to 500k units, while GAC Honda suffered a small contraction of c.4% to 537k units. A rich product portfolio from these two JVs has helped to generate some 30% increase of JV profits to Rmb7.7bn in 1H. This is the highest level in recent years, implying the two Japanese JVs have a strong market position in China.
Going forward, five new models, largely covering the NEV space are scheduled for launch in 2H. This is part of its JVs’ strategy to increase the offering of NEV models to ride on the industry trend.
GAC Toyota added new capacity of 200k units this year, lifting its total annual capacity to 1m units. GAC Honda will also have capacity expansion of 120k units, which will bring the total to around 900k units.
Efforts are being made to streamline the operations of GAC Mitsubishi and GAC FCA, including rolling out new models under GAC Mitsubishi and exit of FCA from the JV. We see this as positive as it would improve the performance of the joint ventures with better allocation of resources.
Self-brand expected to improve. While Trumpchi brand suffered a small decline in GP margins of 0.3ppt in 1H (largely due to raw material cost pressure and lockdown), total revenue and gross profit rose 40%/30% to Rmb49bn and Rmb2.1bn respectively, attributable to a 14% increase in sales volume. Trumpchi plans to have 3 new models in 2H, which is expected to further lift the performance of this self-brand unit.
In our view, GAC is one of the fast-growing NEV proxies which is trading at close to 2SD below mean. Maintain BUY with unchanged TP of HK$9, pegged to 8x FY22F PE (below 5-year historical average).
