DONGFENG MOTOR GROUP(489.HK)：2024 FULL-YEAR TURNED TO MEAGER PROFIT;LARGE CAPEX OUTLAY WEIGHS ON DIVIDEND PROSPECTS AHEAD-格隆汇

机构：中银国际
研究员：LOU Jia/Olivia NIU/Catherine SUN

　　In 2024, DMG’s total revenue added 6.9% YoY to RMB106.2bn, mostly driven by growing PV sales against demand pullback for CV sales. Thanks to stronger profitability for PV own-brand segment, the overall gross margin improved by 2.9ppts YoY to 12.8%. Combined with higher OPEX and substantial increase in government subsidies, the company turned to net profit of RMB58m from net loss of RMB3.9bn in 2023. Despite a notable improvement in operating cash flow and solid net cash position, the company did not propose any final dividends. Moving forward, given the lofty CAPEX spending over new launches and vehicle intelligence techs, we deem DMG may not consider enhancing shareholder return from dividend payment. In addition, we believe speculations regarding contract production partnership with Xiaomi and restructuring with Changan at the listco level are lack of execution timing and visibility, which may leave huge volatility for the share prices before any public disclosure specifying detailed actions. Maintain HOLD with higher TP of HK$4.20 by adopting 15x 2025E P/E.
　　Key Factors for Rating
　　Gross margin improvement in 2024 was partially offset by higher OPEX. In 2024, DMG’s total revenue added 6.9% YoY to RMB106.2bn, mostly driven by the growing passenger vehicles business whose segment revenue advanced 23.0% YoY to RMB52.1bn against a YoY decline of 4.7% for commercial vehicles sales. Thanks to the improving profitability for passenger vehicle segment (GPM of 12.9% in 2024 vs. 4.9% in 2023), the overall gross margin edged up 2.9ppts YoY to 12.8%. Despite higher OPEX, the operating loss significantly narrowed from RMB6.4bn in 2023 to RMB1.4bn in 2024, mainly attributable to higher government subsidies that added RMB2bn, in addition to increased gross profit. Total investment income (mostly contributed by JV brands) decreased 16% YoY to RMB1.1bn in 2024. As a result, the company turned to net profit of RMB58m from the net loss of RMB3.9bn in prior year.
　　Greater-than-expected CAPEX outlay weighs on cash dynamics and dividend prospects ahead. Benefiting from the improving profitability and better working capital management, the company saw a notable increase in operating cash flow in 2024 (+RMB8.2bn from prior year). Combined with heftier CAPEX of RMB17.8bn, the net cash position (excluding financial assets) increased to RMB25.6bn as of end 2024. However, the company did not propose any final dividends. During the earnings call, the mgmt. indicated that the company would continue its high CAPEX spending over NEV new launches and vehicle intelligence techs in next few years. Given rising cash-burn initiatives for self-owned PV brands amid smart EV transition and lofty CAPEX input, we anticipate the company may not consider enhancing shareholder return from its dividend payment in coming years.
　　Ambitious 2025 sales target. For 2025, the company aims to sell 2.15m units as combination of 1.77m PVs and 377k CVs, both of which to record double-digit YoY growth. By powertrain type, the company set to deliver 671k NEV models with 70% YoY surge. By region, the company targets to ship 420k units for overseas market. Back to financials, the company expected the self-owned brands to achieve breakeven for the full-year of 2025, mostly helped by better scale effect and improving product mix across entire brand fleets.
　　Valuation
　　At present, we maintained our net income forecast for 2025 at RMB2.1bn unchanged. At the same time, we deem the potential earnings upside may depend on the faster loss reduction for self-owned PV business and CV segment, as well as possible contract manufacturing service income through external partnerships. During the earnings conference, the mgmt. indicated that the self- owned PV brands set to achieve full-year breakeven in 2025 against operating loss of RMB1.3bn in 2024, on the back of surging delivery volume and better scale effect.
　　Over the past six months, DMG’s stock prices surged 2.5x with great volatility, primarily driven by rising speculative sentiment on the rumours of i) contract production partnership with external carmakers and ii) SOE restructuring at the shareholder level between DMG and Changan Auto.
　　Firstly, the street has rumoured that DMG is likely to provide contact manufacturing services to external carmakers with existing redundant capacities in Wuhan, which might help to improve DMG’s plant utilisation and overall profitability given its current extremely-high idle capacity of 1.5m units and low capacity run-rate (below 50%) at group level.
　　Secondly, in early February, multiple companies under the Dongfeng Motor Corporation (such as Dongfeng Motor Group and Dongfeng Honda) and China South Industries Group (CSGC, parent company of Changan Auto) simultaneously announced that they are in discussions with other state-owned enterprises regarding the restructuring plan. This triggered the speculation about the merge between the listco of DMG and Changan.
　　However, we are of the view that both rumours are lack of execution timing and visibility, which may leave huge volatility for the stocks before any public disclosure specifying detailed actions. In addition, we notice the share price of DMG has significantly outperformed the other party Changan since the announcement, which also departs from fundamentals.
　　We maintain HOLD with higher TP of HK$4.20 by adopting 15x 2025E P/E. Beyond that, we deem the net cash per share of HK$3.30 may give a support to its stock price.