Dongfeng Motor Group (DNFGY, Financial)(HKSE:00489, Financial), the $10.2 billion Chinese state-owned automobile manufacturer headquartered in Wuhan, China, reported its annual results for fiscal 2016 last week.
Dongfeng Motor delivered sales decline to 122.4 billion Chinese renminbi ($17.769 billion) and 15.6% profit growth to 13.4 billion renminbi – 10.9% profit margin compared to 9.1% in 2015.
Dongfeng stated that the observable decrease in sales was mainly due to the decrease in sales revenue from Dongfeng Peugeot Citroën Automobiles Sales Co. Ltd.* in the period.
*Peugeot Citroën is a joint venture company between Dongfeng Motor, French Peugeot Citroën Netherlands Finance Co. Ltd. and Dongfeng Peugeot Citroën Automobiles Co. Ltd.
In review, Dongfeng gathered more profits in its joint ventures and associates averaging 15.7% growth to 13.6 billion renminbi.
Dongfeng also recorded an 11.3% market share in terms of total sales volume calculated based on the statistics published by the China Association of Automobile Manufacturers. In comparison, Dongfeng had 11.7% in 2015.
Dongfeng also sold 10.1% more in units totaling 3.16 million compared to 2.87 million units in 2015.
Valuations
Dongfeng ADR shares traded at incredibly cheap multiples compared to its peers. According to GuruFocus data, the Chinese carmaker had a trailing price-earnings (P/E) ratio of 5.8 times vs. the industry median of 17.8 times, a price-book (P/B) value of 0.73 times vs. the industry median of 1.67 times and a price-sales (P/S) ratio of 0.51 times vs. the industry median of 0.81 times.
Dongfeng also had a trailing dividend yield of 2.56% with a 15% payout ratio.
The Chinese carmaker also exhibited forward P/S and P/E figures of 0.5 times and 5.2%*.
*Average sales and earnings per share estimates for fiscal 2017 from Reuters.
Total returns
Dongfeng ADRs outperformed the broader Standard & Poor's 500 index this year with 23.8% total return vs. 6%, according to Morningstar data. In contrast, the ADR shares provided 5.1% total loss to its shareholders for the past three years compared to the index’s 13.4%.
(Annual Report)
Dongfeng Motor Group
Dongfeng Motor Group is a joint stock limited liability company incorporated in the People’s Republic of China.
Second Automotive Works, the predecessor of Dongfeng Motor Corp., the parent of Dongfeng Motor, was established in September 1969.
Dongfeng Motor is principally engaged in the manufacture and sale of automobiles, engines and other automotive parts and rendering of financing services.
The Chinese carmaker had a market share of 11.3% in total sales car volume in China as of December 2016. Most of Dongfeng Motor’s businesses are within the People’s Republic of China.
Dongfeng had four operating segments: commercial vehicles, passenger vehicles, financing service, corporate and others.
(Annual Report and 2016 Annual Results Bulletin, Dongfeng)
Commercial vehicles
The commercial vehicles segment mainly manufactures and sells commercial vehicles and related engines and other automotive parts. According to Dongfeng’s recent bulletin post, commercial vehicle units are trucks and buses.
In 2016, units sold for trucks rose by 10.4% to 327,300 while units sold for buses declined by 14.5% to 41,754.
In the same year, overall sales for commercial vehicles grew by 19% to 43.3 billion renminbi or 35.3% of total Dongfeng Motor Sales –Â excluding any eliminations.
Commercial vehicles also delivered a segment margin* of 0.6% or 266 million renminbi. In 2015, commercial vehicles delivered a 464 million renminbi loss.
*Segment results margin is profit before interest income, finance income and share of profits from joint ventures and associates.
(Annual Report and 2016 Annual Results Bulletin, Dongfeng)
Passenger vehicles
The segment is mainly concerned with manufacture and sales of passenger vehicles and its related engines and other automotive parts. Units sold under passenger vehicles include basic passenger cars, MPVs, SUVs and Cross-type.
In 2016, total passenger vehicles units sold rose by 10.5% to 2.79 million.
Despite these volume gains, passenger vehicle sales declined by 13% to 76.7 billion renminbi representing 62.6% of total Dongfeng sales – excluding eliminations. The segment also delivered segment margin of 1.8% vs. 2.9% in 2015.
(Annual Report and 2016 Annual Results Bulletin, Dongfeng)
Financing service
The segment mainly provides financing services to external customers and companies within the Dongfeng Motor Group.
In 2016, financing services improved by 22% to 2.34 billion renminbi. The segment carried the highest segment margin among all others with 54.7% vs. 56% in 2015.
Sales and profits
(Annual Report and 2016 Annual Results Bulletin, Dongfeng)
On the past three years, Dongfeng Motor Group had sales, profit growth and margin averages of 0.68%, 1.02% and 11.8%.
Cash, debt and book value
As of December, Dongfeng had 30.7 billion renminbi in cash and cash equivalents and 14.4 billion renminbi in total interest-bearing borrowings representing a debt-equity ratio of 0.14 times vs. 0.16 times in 2015.
Of Dongfeng’s 185 billion renminbi assets 2.9% were labeled as intangibles and goodwill. The car company had a book value of 103.6 billion renminbi compared to 91.5 billion renminbi in 2015.
Cash flow
(2016 Annual Results Bulletin, Dongfeng)
In 2016, Dongfeng recorded a remarkable 545% growth in its cash flow from operations to 3.6 billion renminbi. According to its press release, the car company recorded increased cash flow in trading payable, bills payable and other payable and accrued liabilities; trading receivable, bills receivable, prepayments, deposits and other receivables; loans and receivables generated from financial business; and deposits of financial business.
Capital expenditures were 3.52 billion renminbi leaving Dongfeng with 78 million renminbi in free cashflow compared to 3.11 billion free cash (out)flow. Nonetheless, Dongfeng paid out 2.84 billion renminbi to its shareholders.
(Annual Report and 2016 Annual Results Bulletin, Dongfeng)
As observed, despite Dongfeng’s weak free cash flow performance in recent years, the carmaker received significant cash flow from its dividends from joint ventures and associates (1). In 2016, Dongfeng received 9.2 billion renminbi in dividends.
In addition, Dongfeng had net cash outflows in terms of financing with 1.4 billion renminbi in borrowing repayments net proceeds.
Conclusion
Slightly weak overall sales performance for Dongfeng Motor in 2016 could be a quick deterrent to any conservative investor, but this decline came from 2015’s previous strong 117% sales growth and could be just signs of an acceptable attenuation.
The Chinese carmaker also exhibited hefty fire power in its balance sheet that investors would like.
Meanwhile, Dongfeng Motor does not impress when it comes to its free cash flow performance. Interestingly, Dongfeng Motor gathers much of its cash to pay to its shareholders from its dividends from other considerably beneficial business arrangements (see images in Notes).
(Dongfeng Motor Group and iShares S&P 500 Index, Financial Times)
Nonetheless, Dongfeng ADR shares showed a potential 47% upside should it trade at book value of $15 billion*. Asking a 20% margin would still indicate a possible 18% upside to $69 per Dongfeng ADR share.
*currency exchange used 1 USD = 7.75 HKD; 1 HKD = 0.89 CNY
In summary, Dongfeng ADR is a buy with $65 target price.
Notes
- Annual Report 2015:
Disclosure: I have shares in Dongfeng Motor Group ADR.
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