GAC announced its 1Q20 results. Revenue achieved RMB10.9bn, a decrease of 24%YoY. NP was RMB118mn, a decline of 96%YoY. EPS decreased by 96%YoY to RMB0.01. Even though the FY19 results disappointed the market, we believe GAC has several catalysts include 1) strong model pipeline in 2020E; 2) local policy support in Guangdong; 3) inventory replenishment; 4) excellent performance of GAC Toyota/Honda. These will underpin its performance from 2Q20E. We maintain BUY rating and downgrade our TP to HK$8.6 from HK$10.9.
- Market share continues to rise by 0.56ppt in 1Q20. As of the end of Apr, total production resumed to 100% plan capacity. All upstream parts supplier/logistics partner resume to work on 20 Mar. In terms of supply chain risk, the Company has adequate parts inventory until the end of May and does not expect any production disruption for now. For downstream, all 2,542 4S dealer stores have fully resumed working. GAC Group's overall inventory was 188K at the end of 1Q20, a decrease of 39% YoY. As we mentioned in our previous reports, we believe the Company has space for replenishing its inventory from 2Q20E.
- GAC Motor was improving in 1Q20. In 4Q19, GPM from local brands sales dropped to a historical lowest level given 1) operating deleverage; 2) official price cut because of destocking; 3) reclassify amortization of intangible assets into COGS from admin exp. In 1Q20, the new GS4 sales volume reached 26.2K, an increase of 28.4% YoY compared with a 45% YoY drop in the overall PV market. As a result, the core profit has a QoQ improvement (RMB -1.1bn in 1Q20 vs RMB -2.5bn in 4Q19). Furthermore, the one-time warranty exp/decoration exp recognized in 2019 will not affect the performance in 2020E. We believe the local brands will continue to improve in the rest of 2020E.
- GAC Toyota has restored swiftly while GAC Honda has lagged behind due to the large supply exposure of Hubei. In the last week of Apr, the online referral data of GAC Toyota went up 33%YoY/foot traffic up 13%YoY while the online referral data of GAC Honda was up 10%/foot traffic up 21% YoY. The two new models of GAC Toyota and GAC Honda also had good sales in 1Q20 (Breeze 20K/Month and Willander 15K/Month). We believe the two Japanese JVs will swiftly rebound to the normal condition when COVID-19 was controlled in China given 1) high cost-effectiveness and 2) good brand recognition.
- The fast growth of GAC NEV may raise valuation multiple in the future. In 1Q20, GAC NEV sold 4.4K, an increase of 83% YoY. On 27 Apr 2020, Aion V, the third model under GAC NEV, was rolled out. There is an A0 class SUV in the pipeline that will also be released at the end of 2020E. Together with Aion S/LX, GAC NEV will cover the price range from RMB100K to 300K with good product recognition. We expect the profitability will critically improve as GAC NEV meets its target of 60K in 2020E.
- GAC Group remains as our top pick. The share price has a correction after GAC announced its FY19 results, providing a good entrance point given 1) local brand improvement and 2) swift recovery of two JVs. We revised down our bottom-line forecast to RMB7.9bn (a 22% cut from previous forecast) in order to reflect the GPM drop from COVID-19 impact/operating deleverage. Therefore, we cut our TP to HK$8.6 (based on initial 9.6x 2020E P/E) with an upside of 22.4% from initial TP HK$10.9 (based on initial 9.6x 2020E P/E). Reiterate BUY rating.
