Changan Auto's NEV Business Grows in 2H23, Making it a Top Pick in A-Share Auto OEM Sector

CHANGAN AUTO(000625)：NAVIGATING THROUGH PROFIT MARGIN PRESSURE

Changan Auto's 2Q23 ex-one-off attributable net profit (ANP) was Rmb28mn. If we eliminate the impacts of disruptive elements in the financial reports, the comparable net profit stands at around Rmb1.4bn. Although the 1H23 performance was impacted by industry price competition and adjustments in the financial reporting, the Company's substantial growth in the new energy vehicle (NEV) business in 2H23 and the positive trajectory of its brand position make it our top pick in the A-share auto OEM sector. From a medium to long-term perspective, we 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). 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.

Changan Auto's per-vehicle profit for 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.

The Company's 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). 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.

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. We anticipate that the collaboration between Deepal and Huawei might revolve around solutions related to mid-to-low computing power platforms.

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. By adopting sum-of-the-parts (SOTP) valuation method, we assign Changan’s fuel-powered business 15x 2023E PE, corresponding

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