KEY HIGHLIGHT: On 29 Oct 2019, GAC Group announced its 3Q19 results with a significant earning miss. Revenue achieved RMB14,680mn in 3Q19, down 10% YoY while NP was RMB1,416mn, down 52% YoY. 9M19 revenue was RMB 43bn (-20% YoY) whereas NP was RMB6.3bn (-36% YoY). GPM dropped to 6.1% (vs 9.1% in1H19/ vs 18.9% in 3Q18), which is the single reason for the bottom line miss. We cut our TP to HK$9.05 but maintain BUY rating due to a potential performance rebound in 2020E.
- In 3Q19, the total sales volume of GAC Group was 508K units, a decline of 5.4% YoY. GAC Motor’s sales volume in 3Q19 was 90K units, down 28.6% YoY. GAC Honda’s sales volume in 3Q19 was 179K units, down 1.6% YoY. GAC Toyota’s sales volume in 3Q19 was 185K units, up 11.1% YoY.
- GPM dropped to 6.1% (vs 9.1% in1H19/vs 18.9% in 3Q18). The 12ppt decline in GPM come from: GS4 official retail price cut (-1.7%)/ destocking of Stage-5 inventory, Dealership renovation, NEV capacity build-up (-12.3%) / depreciation of the new factories in Yichang and Hangzhou (-1.0%)/ auto parts, financial, logistic and other businesses (+1.8%). We believe the margin will NOT significantly improve in 4Q19E due to 1) rebate policy continuation; 2) the pressure of remaining 30% stage-5 inventory; and 3) traditional season for the sales volume competition in 4Q. We expect the margin and earnings performance will stabilize and rebound in 2Q20E because of 1) new products to start rolling out in late Nov 2019; 2) the completion of destocking for Stage -5 inventory; and 3) the completion of sales channel upgrades.
- The Company was not well prepared for Stage 5/6 switch which erodes the bottom line earnings of about RMB600mn to RMB700mn in total. Even though the Company manages to bring the proportion of the Stage-5 inventory to 30% from 70%, we believe the overall margin will be still under pressure until 1Q19 as the retail discounts will remain.
- GAC Motor is in the middle of an adjustment period and will have a potential rebound in 2020E. GAC Motor’s sales volume in the 9M19 was 277K units, down 29.8% YoY. Affected by excessive inventory in 2018 and less-prepared Stage5/6 switch, the primary goal for GAC Motor was destocking in 2019. The total inventory was successively reduced by 580K units while the inventory index reverted back to less than 2 as of Sep 2019. As the destocking task completes and the new generation of star products such as the new GS4 rolls out, we believe GAC Motor will start to rebound in 2Q20E.
- GAC JVs with Honda and Toyota will maintain its momentum in 4Q19E and 2020E. GAC Honda will launch Breeze (皓影) in late 2019 while GAC Toyota will roll out Wildlander (威兰达) in Mar 2020. In addition, GAC Honda and GAC Toyota will both expand the production capacity of each by 120K units in 2020. We believe new products and capacity build-up will help the two JVs keep their great performance in the near term.
- NEV segment posed excellent performance in 2019 and will have a promising future. In 9M19, GAC’s NEV sales volume was 22K, up 100% YoY. The current planning capacity of NEV is 200K units, with a break-even point at 100K units. GAC Group will roll out two NEV models per year by exploiting its NEV platform.
- We revised down our top-line forecast in 2019E/20E/21E by 10%6%/5% to reflect the GAC Motor adjustment. We revised down our bottom line forecast in 2019E/20E/21E by 22%26%/19% to reflect the short-term margin pressure. Our TP is revised down to HK$9.05 (based on revised 8.2x 2020E PE) from HK$9.67 (based initial 6.50x 2020E P/E) with an upside of 16.36%. Reiterate BUY.
