Building a more diversified portfolio
- Beijing-Benz is introducing a new EQE model in 2H22 to strengthen its market position
- Capital injection to support Beijing-Hyundai’s future product innovation
- BAIC self-brand losses widened in 1H; lacks NEV exposure to ride on industry trend
- Maintain HOLD; HK$2.20 TP pegged to 4x FY22F PE
What’s new
Due to pandemic lockdowns and supply chain disruptions, BAIC’s vehicle production and sales were negatively impacted in 1H22. Revenue and gross profit declined by 7% and 13% y-o-y to Rmb83.7bn and Rmb18.6bn respectively. GPM margin was 22.2%, representing a decline of 1.4ppts, largely due to weaker Mercedes Benz car sales in the 1H (fell by about 16%). The self-brand’s losses also widened by 6% in 1H22 to Rmb2.6bn, and hence, core net earnings declined by 22% to Rmb2.25bn.
Mercedes Benz JV beefing up its position as a leading domestic luxury brand. Vehicle sales started to rebound in Jun-Jul with y-o-y growth of 66%. The brand owner launched a EQE new model in late-August 2022. It is the first Chinese-produced pure electric model that has adopted the EVA platform. EQE is competing in the mid-to high-end luxury sedan segment. Having the competitive advantage of luxurious branding, EQE would be the next sales driver for BJ-Benz. We expect the JV’s volume sales to reach 638k units in FY22, 10% y-o-y growth.
BJ-Hyundai performance slipped in 1H22 due to weak sales. BJ-Hyundai recorded sales volume of only 109k units in 1H22, representing 44% y-o-y decline. Eight new models were developed in 1H22. The seventh generation ELANTRA, tenth-generation Sonata and the TUCSON L N Line 20th anniversary editions, are being mass produced currently. Between 2022-2024, BJ Hyundai plans to release 4 sedans, 4 SUVs and 2 NEVs, to strengthen its product portfolio. We estimate BJ-Hyundai sales to increase 35% h-o-h to 148k units in 2H22.
Due to continual losses in the past few years, both BAIC and Hyundai have decided to inject an additional US$942m to strengthen the balance sheet to undertake new projects, such as new model developments and overseas business expansion.
BAIC’s self-brand outlook remains challenging. The self-brand had sales of 22k units in 1H22, representing 21.4% y-o-y decline. The company launched a new smart compact SUV that was co-developed Huawei, MOFANG, in July and has booked 3,600 units. It features the Harmony OS intelligent operation vehicle system that supports all-scenario driving. MOFANG is expected to drive up sales of its self-brand division in 2H22
Given its lack of NEV exposure, BAIC has entered into a Share Subscription Agreement with BAIC BluePark in July 2022. BAIC BluePark is a unit of BAIC Group that focuses on NEV development. The subscription would facilitate sharing of technology and expertise in new energy development and prepare BAIC for electrification. Also, BAIC is building three platforms, of which two are for NEVs.
Earnings revisions. We revised down net earnings for FY22/23F by 4%/3%, factoring in the weak 1H performance. Our TP of HK$2.20, is pegged to 4x FY22F PE (1SD below mean). The earnings outlook of the company is not exciting, as the profits from the BJ-Benz JV are used to cover the losses at the self-brand unit. Besides, lack of NEV models could affect the self-brand’s business outlook.
