SAIC Motor Alert:Access China conference highlights 2017

SAIC Motor attended our Access China conference on 11 January. The following are the key takeaways from investor meetings:

    - SAIC expects China passenger vehicle (PV) sales volume to grow by about 6% YoY in 2017. To better capture a faster growth in the SUV segment, the company will launch 8 SUVs in FY17E vs. 5 in FY16. SAIC expects SUV to account for at least 30% of its total sales by FY18. Meanwhile, management thinks price competition in the SUV segment will intensify, especially for low-end SUVs.

    - SAIC will launch 3 new energy vehicle (NEV) models and targets to increase its NEV sales to 80k units in FY17E. A new Baojun EV and the RX5 PHEV will be the driver. Currently, the company’s NEV business is about break-even. Considering the recent subsidy cut of NEV, SAIC’s NEV business may still profitable only if they can reach their 80k target. The company is using a Korean NEV battery supplier now but they are ready to switch to local battery producers when needed.

    - Given recent purchase tax adjustment, management thinks profitability of different JVs will diverge based on the competitiveness of products. For instance, SAIC Volkswagen will probably perform well this year with multiple new model launches.

    - SAIC thinks the recent hike in commodity prices has limited impact on cost structure. To elaborate, a car needs 1-1.5t steel as raw material and hence even a significant change in steel price (e.g. RMB300-400) is negligible. In addition, considering SAIC’s scale and bargaining power, the company can also have suppliers to share the material cost increase in components.

    - SAIC local brand is profitable at operating profit level in FY16 if excluding R&D. In order to break even including R&D, the brand will probably need to sell about 700k units.

    Deutsche Bank view

    In 2016, SAIC achieved 10.0% YoY vehicle sales growth. Going forward, we envision a stable growth trajectory for the company. That said, we do not expect sales outperformance vs. the market from its core JVs given the already-high sales base. We, therefore, have a Hold rating on SAIC, given fair valuation of 8x FY17E P/E on the back of 7% FY16-18E two-year net profit CAGR. Key downside risks: 1) a weak reception for its new models, 2) pricing pressure amid intense industry competition, 3) worse-than-expected local brand operation. Key upside risks: 1) better-than-expected sales from major JVs, and 2) better-than-expected local brand sales and profitability.