China Grand Automotive:Improving fundamentals but new perps look fairly valued

Fundamentals improving for China Grand Auto, but we see limited upside to itsnew perps.

    China Grand Auto priced USD400mn of PerpC20s on Tuesday at 5.625%, vs.

    IPT of 6% area that was reported by Bloomberg. We are positive on thecompany’s fundamentals and expect its total debt/EBITDA to trend lower inthe medium-run from end-June’s 6x. Already in 1H17, we saw CHGRAU’sGPM improving to 10.4% from 9.1% from 1H16 and our calculated EBITDAmargin went up to 7.3% from 5.9% in 1H16. We expect CHGRAU’s margin tomoderately increase in 2018 YoY. The company already filed a pre-view for its3Q17 results back on the 17th, indicating that its 9M17 revenue was up 25%YoY to RMB112.1bn, and its operating profit grew up 52% YoY to RMB4.2bn.

    We have already seen some synergies between CHGRAU and HK-subsidiaryBaoxin, and the company continues to benefit from satisfactory upgradedemand and luxury demand. The new perps are trading at bid price:100.15/ask: 100.35, bid YTC: 5.57%/ask: 5.50% as we write and we initiate onCHGRAU 5.625% PerpC20s with a Hold rating as we see limited upside tothese bonds. Our fair value of CHGRAU new Perps is 5.2-5.4%, based on a1.2x perp-to-senior ratio of comparables in China as well as looking at otherChina perps with a high step-up structure (see later in this report).

    Pending equity placement to be credit positive; we expect CHGRAU’s new carsales growth rate to exceed that of the overall industry.

    China Grand Auto received CSRC’s approval for an equity placement of up toRMB8bn, but the share placement has not yet been executed. China’s largestautodealer stated that the planned use of proceeds of the new perps is forrepayment of debt and general corporate purchase. We continue to expectChina Grand Auto’s new car sales volume to outpace that of the industry(recall that CAAM data showed overall China registered only +2.4% YoYgrowth in new passenger vehicle sales volume for 9M17). We expectCHGRAU’s HK-listed subsidiary Baoxin to achieve good car sales and itsmargin should also trend up in 2018, given decent upgrade demand and newluxury model launches. Brilliance BMW X3 and new 3 series are expected tobe launched in China in 2018. Jaguar Land Rover has introduced Range RoverVelar in Sept and may launch domestic XE model late this year. Furthermore,this year’s M&A amount by CHGRAU thus far has been notably lower than thatof last year.

    Risks.

    Upside risks include stronger-than-expected margin improvement and sales,and conservative acquisitions. Downside risks include higher-than-expectedacquisitions, unexpected deterioration in margins, and any hiccups in itsannounced but not yet executed equity placement.