-BMW group announced the result in the third quarter of 2014. Its investment returns up 37% yoy to 170 million Euros, corresponding to RMB 1.3 billion Yuan. According to our estimation, the investment returns contributed by BMW Brilliance in the third quarter will amount to RMB 1.4 billion Yuan, and the cumulative investment returns contributed in the first three quarters will exceed 5 billion Yuan, corresponding to EPS before tax about 1.01 Yuan, which indicates that the result in the first three quarters has already exceeded the result in the full year of last year by around 40%.

-BMW Brilliance has totally delivered about 70 thousand units in the third quarter of 2014, strongly upping 33% yoy, while the growth in the first two quarters was respectively 51% and 26%. SUV model X1 ups 94% yoy to 11.9 thousand units and 3-SERIS ups 73% yoy to 24.8 thousand units, while 5-SERIS was basically flat, slightly upping 3.2% to 33.6 thousand units.

How we view this

Based on three causes, we believe that the growth ratio of BMW Brilliance will slow down in a short term. However, in terms of a middle and long run, benefited from the major background of improving localization and updating consumption, we are still positive about premium cars' future development in China. We think that at the moment, it is hard to substantially change the approach of domestic premium cars' sales system in a short time, namely, the anti-monopoly investigation and parallel import have a slight influence on the powerful position of OEM car manufacturers, which, on the opposite, is good for BMW Brilliance to speed up its nationalization so as to highlight its cost advantage

Investment Action

According to above, we lowered our target price to HK$15.67, based on 12.3/10.7/8.8xP/E in2014/2015/2016, but raise the rating to ¡§buy¡¨.

Result of BMW Brilliance in the third quarter continues to have a rapid growth

BMW group announced the result in the third quarter of 2014. Its investment returns up 37% yoy to 170 million Euros, corresponding to RMB 1.3 billion Yuan. According to our estimation, the investment returns contributed by BMW Brilliance in the third quarter will amount to RMB 1.4 billion Yuan, and the cumulative investment returns contributed in the first three quarters will exceed 5 billion Yuan, corresponding to EPS before tax about 1.01 Yuan, which indicates that the result in the first three quarters has already exceeded the result in the full year of last year by around 40%.

Sales momentums remain robust

BMW Brilliance has totally delivered about 70 thousand units in the third quarter of 2014, strongly upping 33% yoy, while the growth in the first two quarters was respectively 51% and 26%. Benefiting from the expanded production capacity, 3-SERIS and X1 were the detailed segments which had the rapidest growth judging from vehicle models. SUV model X1 ups 94% yoy to 11.9 thousand units in the third quarter this year, and 3-SERIS ups 73% yoy to 24.8 thousand units.

On the other hand, due to the limited production capacity of Dadong plant, the sales volume of 5-SERIS in the third quarter was basically flat, slightly upping 3.2% to 33.6 thousand units. Before the expansion project is put into operation, we believe that the increment of BMW Brilliance's sales volume will be still mainly contributed by 3-SERIS and X1 in a short period of time.

The company's sales target in 2014 is 260 thousand units, up over 30% yoy, and the sales volume achieved in the first three quarters has accounted for 80.8% of the target, so it will be a high probability event to outperform the target for the year.

Production capacity expansion advances steadily

In order to successfully implement the new future strategy planning issued in July this year and expand the production line of domestic car models, the promotion work of BMW Brilliance's total production capacity is being steadily carried out. The expansion engineering of Dadong plant is planned to be accomplished in April next year. By the end of 2015, the total production ability of BMW Brilliance in Shenyang will be raised from the current 300 thousand units per year to 400 thousand units per year. And it is hopefully to be continuously raised to 600 thousand units approximately in 2016.

After the new engine factory of BMW Brilliance is built, three-cylinder and four-cylinder gasoline engines will be officially put into production in 2016, supporting the new future small cars' introduction. This will have positive promotion effects on Brilliance BMW's production amount and profits.

It may slow down in a short time, but will not impact the long term advantage

Based on the following causes, we believe that the growth ratio of BMW Brilliance will slow down in a short term:

1) The nearest new model, 2-series, will not be released until the fourth quarter of 2015; the new generation of X1 is likely to be launched in 2016; the new generation of the fifth series is planned to be launched in 2017. In a short period, there is a lack of new models.

2) Confronted with competitors' challenges, (for instance, competitive new models of Benz and Audi are released one after another), BMW¡¦s dealers are under a growing pressure of de-stocking and price-off promotions.

3) The expansion project of Dadong factory is in progress, which may affect the 5-series¡¦ ' production ability.However, in terms of a middle and long run, benefited from the major background of improving localization and updating consumption, we are still positive about premium cars' future development in China. We think that at the moment, it is hard to substantially change the approach of domestic premium cars' sales system in a short time, namely, the anti-monopoly investigation and parallel import have a slight influence on the powerful position of OEM car manufacturers, which, on the opposite, is good for BMW Brilliance to speed up its nationalization so as to highlight its cost advantage.

Valuation

We believe that, after experiencing the explosive growth in past few years, the increase rate of China's luxury car market begins to slow down, with structure-based and pluralism market development trend becoming apparent, so BMW's accelerated introduction of segmentation products is conducive to continuous development of new segment markets.According to above, we lowered our target price to HK$15.67, based on 12.3/10.7/8.8xP/E in2014/2015/2016, but raise the rating to ¡§buy¡¨.

Click Here for PDF format...