BMW is in the midst of a new product cycle since 2016 which should drive market share gain. Rising localization further lowers unit content costs and improving profitability. The second generation X1 SUV was launched in 2016, followed by new 1 series in Mar17 and 5 series in mid-2017. The new X3 is likely to be launched in 3Q18, followed by next generation 3 series and potential all-new X2 in 2019. Loss-making own brand remains a drag on profitability but could improve with the formation of a new light vehicle JV with Renault.
Brilliance China Auto’s key business lies in the joint venture with BMW for the production of BMW 1, 2, 3 and 5-series sedans, X1 and X3 SUVs in China. The Group also manufactures and sells minibuses and automotive components under its own brands, namely “JinBei” and “Granse”. Other businesses include the manufacture of diesel and gasoline engines for use in minibuses, sedans, SUVs, and light duty trucks.
- Stronger than expected sales of higher margin models (eg. 5 series, upcoming X3 SUV) – In 1H18, net profit rose 54% y/y to CNY3.6bn, accounting 53% of consensus FY18 estimates. BMW JV profits was up 38% y/y to CNY3.7bn, led by 13% volume growth and 1.6% net margin expansion mainly due to new 5 series launch. Own brand minivan contributed positively with narrowing losses too. With X3 SUV ramping up sales, we expect continued strong profitability growth in 2H18.
- Searching for a win-win solution – Brilliance confirmed during 1H18 results briefing they were in discussion with BMW on future JV cooperation, including ownership structure, extending JV contract beyond 2028, capacity expansion with a potential third plant and additional new models. We think these potential plans reflect favourably on Brilliance’s strong partnership with BMW and should assuage the market’s worst fears of a potential BMW breakup with Brilliance.
- Risk-reward skewed to upside with bigger pie – With a bigger pie in the making (including models for exports eg. iX3 and feasibility study for potential X5 SUV localization), we see risk-reward skewed to the upside where the stock appears to have priced in the worst. In the event of any JV stake sale, management also guided any gains would be shared with shareholders given limited capex opportunities.