CHANGAN AUTO(000625)：NAVIGATING THROUGH PROFIT MARGIN PRESSURE

　　In 2Q23, Changan Auto posted ex-one-off attributable net profit (ANP) of Rmb28mn. If we eliminate the impacts of disruptive elements in the financial reports, the comparable net profit stands at around Rmb1.4bn.
　　Considering industry price competition and adjustments in the financial reporting, the 1H23 performance is understandable. From the medium to long-term perspective, Changan Auto’s substantial growth in the new energy vehicle (NEV) business in 2H23 and the positive trajectory of its brand position makes it our top pick in the A-share auto OEM sector.
　　Reiterate the "BUY" rating.
　　 After excluding factors such as impairments and losses in NEV, Changan Auto's operating profit for its self-owned brands in 2Q23 would amount to Rmb1.44bn.
　　In 2Q23, the Company achieved ANP of Rmb683mn and ex-one-off ANP of Rmb28mn (vs ex-one-off ANP of Rmb1.48bn in 1Q23). Apparent profits are under pressure. If we exclude factors such as asset impairments (related to models like CS85), government subsidies, losses from the Deepal, and non- cash amortization, the operating profit for its self-owned internal combustion engines (ICEs) would reach Rmb1.44bn, aligning with market expectations.
　　Based on the above conditions, we calculate that the per-vehicle profit for Changan Auto's self-owned ICEs (excluding Deepal) is Rmb4.7k (vs Rmb7.2k in 1Q23), placing the profitability of ICEs within the normal range of the industry currently. The ASP in 2Q23 reached Rmb101.1k, slightly down from Rmb108.8k in 1Q23 due to the impact of price competition. In 2Q23, the proportion of NEVs reached 22%, with Deepal S7 steadily gaining sales momentum.
　　In terms of sales structure, the self-owned brands achieved sales of 371k vehicles in 2Q23, including quarterly sales of 89k units for NEVs, resulting in a NEV penetration rate of 22% (+1ppt QoQ). Specifically, in 2Q23, Deepal NEVs accounted for 60.7k units in sales (including Deepal, Lumin, and Benni etc.), Avatr contributed 4.6k, and other self-owned models reached 306.1k.
　　The Company's most significant new energy product--Deepal S7, is steadily gaining traction, with a cumulative delivery of 9.197k by the end of Jul. The primary selling configuration for the model is the extended-range top variant priced at Rmb169.9k. Currently, Deepal S7 is progressing steadily, and its profitability is relatively healthy. Furthermore, at the Chengdu Auto Show on Aug 25, the new version of Deepal SL03 was also launched. We anticipate that the new SL03 will exhibit better profitability compared to the old model. Looking ahead to 2H23, we expect the Company's NEV penetration rate to continue to rise with the launch of models such as the Qiyuan A05, A06, A07, Q05, and PHEV models based on the P1+P3 architecture and reach 30% to 40% in 4Q23.
　　Deepal joins hands with Huawei's Intelligent Automotive Solution (IAS) Business Unit (BU) by signing a framework agreement for intelligent cooperation.
　　According to an announcement on Deepal's Weixin official account on Aug 16, it signed a cooperation framework agreement with Huawei. In the subsequent development of intelligent electric vehicle models under the Deepal brand, there is a possibility of adopting Huawei's smart automotive solutions. Considering that Deepal's pricing falls within the mainstream range of Rmb150k-250k, we anticipate that the collaboration between Deepal and Huawei might revolve around solutions related to mid-to-low computing power platforms. Previously, the "Avatr" brand showcased a collaboration model between Changan and Huawei: Avatr E11 incorporates Huawei's HarmonyOS cockpit and is equipped with the advanced ADS2.0 intelligent driving system, featuring three LiDAR sensors. The vehicle's urban NCA (Navigation on City Roads) function has been activated in five cities, providing a smooth user experience. According to Avatr's Weixin official account, the plan is to extend the "no map" functionality to 45 cities in the latter half of this year. Potential risks: Less-than-expected sales due to the slowdown of macroeconomic growth; weaker-than-expected promotion progress of new models and market acceptance; quality problems of models on sale; disappointing sales of all models. Investment strategy: Regarding profitability, we maintain our forecasts for recurring profits of the Company. We expect the 2023 profit for Changan Auto’s self-owned brands (fuel-powered vehicle business, excluding Deepal Technology) to be Rmb7.97bn, and the annual loss for Deepal Technology to be Rmb3bn, with consolidated statement to show a loss of Rmb1.5bn, corresponding to combined net profit of about Rmb6.5bn. However, considering the disruptive impact of non-recurring factors, we have slightly adjusted down our net profit forecast for the Company in 2023 to Rmb8.69bn (previously forecasted at Rmb9.26bn). We maintain our net profit forecast for 2024 at Rmb9.6bn and slightly increase our net profit forecast for 2025 to Rmb10.6bn (previously Rmb9bn). At present, the NEV industry is facing a “knockout competition”, which means only companies with a large sales scale can survive. Although Changan’s NEV business is currently operating at a loss, we believe that the NEV sales and brand influence will be crucial factors in creating long-term value for the Company. By adopting sum-of-the-parts (SOTP) valuation method, we assign Changan’s fuel-powered business 15x 2023E PE, corresponding to a market cap of Rmb119.5bn. The NEV business is an essential area of development for the Company, but due to short-term losses, it cannot be valued based on PE ratio. Based on the average 3x 2023E PE of NIO (09866.HK/NIO.N), XPeng (09868.HK/XPEV.N) and Li Auto (02015.HK/LI.O), we assign both Changan Deepal and Changan Avatr 3x 2023E PS, corresponding to a target market cap of Rmb79.2bn considering the shareholding ratio. We derive a total target market value of Rmb198.7bn, corresponding a target price of Rmb20, and reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。