Brilliance Reports Strong BMW JV Results, but Dividend Disappoints

No-moat Brilliance China Automotive 01114 announced 2022 results with profitability from the BMW Brilliance Automotive joint venture. However, we believe the lack of a further dividend payout is a major disappointment versus market expectations. The company did not declare any additional dividends besides HKD 0.96 per share paid in February, which accounts for less than 20% of the net proceeds from the disposal of a 25% stake in BBA. Our biggest concern remains Brilliance’s corporate governance practice and the persisting uncertainties relating to unauthorized guarantees, unauthorized pledged bank deposits, and unauthorized fund transfers.

We have cut our fair value estimate to HKD 3.10 per share from HKD 9.90. Apart from lower assumptions for BBA’s profitability and earnings contribution, we also removed from our fair value estimate the net proceeds from the disposal of the 25% stake in BBA. Despite CNY 28 billion cash on hand and limited capital needs, we believe the cash is stranded as we doubt the company will pay it out as dividends or be able to generate reasonable returns through investing in the automobile value chain as it claimed.

The BBA joint venture delivered strong revenue and margin growth in 2022. Its revenue grew 10% year over year to CNY 236 billion on 2% year-over-year sales volume growth to about 665,000 units and an 8% gain in unit selling price on mix improvement with the X5 SUV contribution. On a 100% basis, BBA’s net profit increased 7% year over year to CNY 31 billion in 2022 with a slight drop in net margin to 13.2% from 13.6% in 2021. However, after the disposal of the 25% equity interest, BBA’s profit contribution to Brilliance plunged 38% year over year, which led to a 40% drop in Brilliance’s net profit on a consolidated basis, to CNY 7.1 billion from CNY 12.0 billion in 2021.