Racing towards a more diversified portfolio
- JCE profits impacted by lower sales volume
- Diversifying NEV model portfolio to meet rising market competition
- Self-brand profitability pressured by rising costs
- TP HK$5.20, pegged to 3.5x FY22F PE; Maintain HOLD
Dongfeng’s share of revenue from JVs declined by 24% y-o-y to Rmb53.8bn in 1H22 as a result of pandemic lockdown, which had interrupted the supplies of auto parts and sales. Nissan JV vehicle sales declined 11.6% y-o-y in 1H22 to 463k units, while Honda JV was down 13.1% y-o-y to 338k units. Sales performance was affected by pandemic and increase in oil price, pulling down demand. As a result, contributions from the JVs fell 19% to Rmb5.23bn, reflecting the challenging operating environment.
Government policies to stimulate vehicle purchase will benefit the JVs. 2H sales volume for the JVs is expected to grow 12% y-o-y, translating to FY22 volume sales 2.67m units.
Dongfeng Nissan started pre-sale of a new pure electric SUV ARIYA. A facelifted model of Altima was also unveiled recently in Chengdu Auto Show. A new version of QX50 will be launched by Infiniti in 2H22. In Jul-22, Venucia has also launched a special edition of V-Online SUV. While the JV is launching some new models but given that 7M22 total deliveries only hit c.48% of full-year target of 1.16m, it might be a challenge for the company achieve its target. Nissan, being the largest JV for Dongfeng, must lift its model refresh rate to remain competitive, since its sales had slowed in 1H.
Dongfeng-Honda JV rolling out a new SUV to drive future sales. A new XR-V model with upgraded system and ADAS capabilities was rolled in late-Aug-22. The JV has to speed up its EV strategy following the launch of the first pure electric vehicle, e:NS1, in Apr-22, featuring the latest connectivity technology Honda CONNECT 3.0. Besides, Honda China is setting up a JV with Dongfeng and GAC in late Sep-22 to centralize battery procurement to support Honda’s two JVs in China to support EV business expansion. Honda Japan plans to roll out a total of 10 new EV models under the e:N series by 2027 in China. Hence, vehicle sales is expected to improve in 2H as the JV ramps up production.
Dongfeng’s NEV initiative in the coming years. Dongfeng’s NEV sub-brand, Voyah, only sold 8,375 units in 7M22, translating to 27% of its full-year sales target of 31,000 units. A new model, Dreamer, was launched in May-22 as a high-end electric MPV with L2+ ADAS. Another new model will be released in 2H22. A Voyah Space, sales outlet for Voyah, was opened in Norway in 1H22, and overseas delivery of FREE will start in 4Q22. The company has set monthly sales target for Voyah Dreamer at about 2,000 units.
Dongfeng continues to move up the value chain and has introduced a new brand, M Hero, to target the premium electric off-road vehicle market. Two concept models built with China’s first electric off-road skateboard were displayed during the recent launch. Delivery will start in Jul-23 with sales target of 2,000-3,000 units for 2H23. We believe Dongfeng’s current NEV vehicle portfolio has to expand to be competitive. Dongfeng Fengshen targets to release NEV-only new models by 2024. Sales target for self-brand CV, PV and NEV is 1 million units each by 2025.
Self-brand sales performance was mixed; expect gross margin to improve in 2H22. Dongfeng’s self-brand recorded 43.5% y-o-y PV sales growth to 148k units in 1H22, lifting PV revenue by 86.4% y-o-y to Rmb19.8bn. However, due to commodity inflation, PV GP margin slipped 2.7ppts to 11.7% in 1H22. Dongfeng has been investing to upgrade its self-brand products with new models like Haoji SUV and upgraded version of Yixuan for launch in 2H22.
On the other hand, the commercial vehicle was hit by a weak macro climate and total volume sales fell 60% to 60k units in 1H and resulting in a 62% plunge in revenue. 1H22 segment margin was -3.7% vs +4.3% in 1H21. CV sales in 2H22 is expected to improve by 17% y-o-y to reach 63k units.
Overall, we anticipate 2H22 outlook of its self-brand to remain challenging.
Considering the weak 1H performance of 37% and 44% y-o-y fall in revenue and net profit, we have revised down our FY22/23F earnings estimates by 11%/9%. Our new TP of HK$5.20 is pegged to 3.5x FY22F PE (1SD below mean). Maintain HOLD given that the company NEV strategy is still at the early stage and sales volumes are low. Besides, its net earnings CAGR of about 3% FY21-23F is not attractive. An attractive yield of 9% should support the share price.