On Friday, BofA Securities adjusted its stance on Guangzhou Automobile Group Co., Ltd. (2238:HK) (OTC: GNZUF) stock, downgrading from Buy to Neutral. The firm also revised its price target to HK$3.60 from the previous HK$3.90.
The downgrade is primarily attributed to the diminishing performance of the company's Japanese brand partnerships, GAC Toyota (NYSE:TM) and GAC Honda (NYSE:HMC), in the Chinese market. These brands have been experiencing a decline in market share and face uncertainty in profitability.
The analyst at BofA Securities highlighted several factors influencing the downgrade, including the competitive pressures from rivals such as BYD (SZ:002594) and new market entrants like MONA, which is associated with XPeng (NYSE:XPEV).
These competitors are intensifying the landscape in China's business-to-business (B2B) market, which is also contending with a matured ride-hailing industry. This environment has dampened the sales volume outlook for GAC's electric vehicle subsidiary, GAC Aion.
In response to these market dynamics, BofA Securities has reduced its earnings per share (EPS) estimates for Guangzhou Automobile Group for the years 2024, 2025, and 2026 by 8%, 12%, and 10%, respectively. The reduction is due to anticipated lower investment income for the company.
The new price objective for GAC-H (Guangzhou Automobile Group) stands at HK$3.60, while the price objective for GAC Aion (GAC-A) has been set at RMB5.8, down from the prior RMB6.3.
Despite the downgrade to Neutral for GAC-H, the analyst noted that the stock is currently trading at 8 times the estimated earnings for 2024, which is considered not stretched when compared to its historical average of 9.7 times.
Conversely, the firm maintains an Underperform rating on GAC Aion, reasoning that its valuation appears stretched. The analyst pointed out that GAC Aion's valuation, at 23 times the estimated earnings for 2024, is 0.5 standard deviations above its five-year historical average for one-year forward earnings.
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