The Bank believes that the interim results of Dongfeng Motor provide a good foundation for the annual earnings growth. Based on the impact of the financial crisis in the second half of last year, the overall sales volume of the company was 20% lower than that in the first half of the year, making the comparison base lower in the second half of this year.
In the off-season of traditional car sales in July, Dongfeng’s passenger and commercial vehicle sales increased by 75% and 68% respectively year-on-year, exceeding market expectations. According to unofficial statistics, the company’s sales in August increased by more than 50% year-on-year. When the sales volume of the Middle East’s wind doubling, Nissan’s sales were relatively weak.
The Bank believes that the healthy development and steady growth of the automotive industry is particularly important for the growth of GDP, which is based on the labor-intensive and indispensable part of internal demand. Assuming that domestic auto sales will decline for any reason in the next 6-12 months, we believe that the relevant authorities will only introduce more industry support policies, which will have a positive effect on Dongfeng’s sales for the rest of the year and next year. We believe that Policy risk before 2011 is still low.
We estimate that sales volume of passenger vehicles will increase by 51% year-on-year to 545,000 units in the second half of the year, which will increase the annual sales of this segment by 37% year-on-year to 996,000 units. For commercial vehicles, we estimate that sales volume will increase by 29% year-on-year to 142,000 units in the second half of the year, causing the division's annual sales volume to fall only 9% year-on-year to 302,000 vehicles. In 2009, overall sales increased by 23% year-on-year. As for 2010, the Bank expects passenger vehicle sales to increase by 15% year-on-year to 1.15 million vehicles, while commercial vehicle sales will increase by 10% year-on-year to 332,000 vehicles. In 2010, overall sales increased by 14% year-on-year.
In the 2010 earnings forecast, we expect gross margin and operating margin to increase by 0.6 and 0.4 percentage points to 18.5% and 8.4%, respectively, to reflect the continuous improvement of the product mix. The Bank forecasts that Dongfeng Motor’s net profit for the year and the next year will be RMB 4.96 billion (EPS: 0.576 yuan) and RMB 5.886 billion (EPS: RMB 0.683 yuan), which is an increase of 23% and 19% respectively year-on-year.
Dongfeng Motor's current price is equivalent to 12.6 and 10.6x 2009 and 2010 PER, taking into account the CAGR of 21% per share in the next two years and the company's leading position in the industry, the valuation is low, maintain the BUY recommendation, target price 10 yuan, which is equivalent to 13 times 2010 P/E.
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