Market sentiment is rising on A-share auto

　　上汽集团(600104)

　　In the first three quarters, SAIC achieved total revenue of RMB498.7bn, down 14.8% YoY while NP was RMB16.7bn, down 19.9% YoY. In 3Q20, revenue was RMB214.9bn, an increase of 2.8% YoY while NP was RMB8.3bn, an increase of 17.4% YoY. We raise our TP to RMB33.9 (based on 13.5x 2021E P/E) with an upside of 23.3%, from TP RMB21.1 based on 11.5x 2020E P/E. Upgrade to BUY.

　　In 3Q20, GPM was 11.0%, down 2.4ppt YoY, reflecting intensified market competition. The expense ratio was 9.6%, down 2.3ppt YoY (tax exp -0.1ppt, S&D exp -2.0ppt, Admin exp -0.3ppt). The decrease in S&D exp ratio was mainly due to 1) implementation of the new accounting standard in the current period which moves the car loan interest subsidy from S&D expense to revenue recognition offset; and 2) the YoY decrease of logistic expense and advertising expense.

　　SAIC achieved a total investment income of RMB8.9bn in 3Q20, an increase of 19% YoY. Among which, investment income from JVs and associates was RMB6.6bn, an increase of 2.9% YoY. SAIC Volkswagen achieved sales of 454K units in 3Q20, down 4% YoY. SAIC GM achieved sales of 395K units, an increase of 3% YoY. We believe the main factor which contributes to YoY earning growth in 3Q20 was still the investment income from financial assets.

　　The sales performance of major JVs is still mixed. SAIC Volkswagen launched a mid-term facelift version Santana in Oct (-23% YoY in 3Q20). At the end of Oct, the first BEV based on the MEB platform, namely ID.4 was put into production. We expect both new models to drive the recovery of the Volkswagen brand. However, the Skoda brand fell 29% YoY in 3Q20, which is still expected to drag down the recovery of SAIC Volkswagen in the short term. For SAIC-GM, the sales volume of Excelle (英朗) in Sep exceeded 30K units after the re-launch of four-cylinder version. As a result, Buick achieved a 30% YoY growth in 3Q20. The sales of high-end brand Cadillac increased by 75% YoY given the strong performance in overall luxury segment. However, due to lack of brand power, Chevrolet declined by 47% YoY, dragged down the overall performance of SAIC GM.

　　The realization of certain catalysts gradually boosts market sentiment. SAIC Volkswagen officially released its first model ID.4 based on the MEB platform, marking a milestone on Volkswagen’s NEV roadmap in China market. We expect the market will re-evaluate SAIC’s NEV presence after the rollout of the "Development Plan for New Energy Vehicle Industry (2021~2035). In addition, we expect SAIC Audi project will have news coming out in 2021E. Forming the two-pillar (Audi + Cadillac) among the high-end brand will further enhance market sentiment on SAIC.

　　We raise our bottom-line forecast to RMB24.1bn in 2020E to reflect the strong 3Q20 results. Our revised NP forecast suggests that SAIC’s bottomline will grow 55% YoY in 4Q20E. At the same time, we revised up our NP forecast to RMB29.3bn in 2021E to reflect its great cost control. We raise our TP to RMB33.9 (based on 13.5x 2021E P/E) with an upside of 23.3% from initial TP RMB21.1 (based on initial 11.5x 2020E P/E). Upgrade to BUY.