Brilliance Earnings: Stronger-Than-Expected BMW Results but Dividend Disappointed

No-moat Brilliance China Automotive 01114 announced first-half 2023 results with BMW profitability better than we expected. Therefore, we raise our fair value estimate to HKD 3.50 from HKD 3.10. However, we believe the lack of interim dividend payout again is another setback to market sentiment. The company did not declare any additional dividends to the HKD 0.96 per share declared in July and HKD 0.96 paid in February, which account for less than 40% of the net proceeds from the disposal of the 25% stake in BMW Brilliance Automotive, or BBA. For the rest of the cash, the company has proposed an up to CNY 1.36 billion capital contribution to the loss-making minibus operation Renault Brilliance Jinbei Automotive Company, or RBJAC. In addition, management mentioned that the company is also exploring various other investment opportunities such as co-operation with BMW on components supply.

Shares are in 3-star territory and fairly valued, in our view. Our biggest concern remains Brilliance’s corporate governance practice and persisting uncertainties relating to the restructuring of deeply troubled RBJAC. As RBJAC’s restructuring plan was approved by the court, Brilliance will have until May 2024 to complete the capital injection, after which Brilliance effectively owns 81% of RBJAC and will need to consolidate the business again after deconsolidation in 2022. We think investors are likely to stay on the sidelines until there is more clarity on the outlook and convincing signs of a corporate governance improvement.

BBA delivered solid revenue growth of 10% year over year to CNY 120 billion on 1) a 6% year-over-year sales volume growth to 334,076 units; and 2) a 4% gain in unit selling price on mix improvement with the X5 SUV contribution. However, BBA’s net profit, on a 100% basis, decreased 7% year over year to CNY 15 billion in the first half with a 2.3 percentage points drop in net margin to 12.5%, likely due to price competition and increased promotions.