47% YoY 3Q17net profit decline on margin contraction, despite flattish salesChang’an Auto released its 3Q17results earlier today. The company’s 3Q17net revenue increased 1.5% YoY to RMB17.3bn despite an 11.1% YoY drop inlocal brand vehicle sales volume to 286k units, probably due to increasing SUVsales mix, in our view. However, Chang'an's 3Q17gross profit margin eroded by10.6ppt YoY, probably due to fierce competition, in our view, offset the 6.7pptYoY drop in the SG&A ratio. In addition, there was an 27.2% YoY earningscontribution decline from its JVs/associates, driven by a 14.4% YoY sales volumedrop at Chang’an Ford, probably due to an aging product portfolio, in our view.Altogether, Chang'an's 3Q17net profit fell by 47.1% YoY to RMB2.4bn. On a 9M17basis, Changan's net profit of RMB5.8bn was down 24.9% YoY and accounted for64% of our original FY17earnings forecasts of RMB9.0bn. Therefore, we considerthe results a miss to our expectations.    Deutsche Bank view – competitive pressure makes us more downbeat    With the originally popular products' sales momentum weakening and limitednew 'killer' products in sight, especially at the major earnings contributorChang’an Ford, we doubt that Chang’an can stage a strong earnings rebound inthe upcoming quarters. Although we raise our FY17-19net revenue forecast by2.8-8.6% on higher local brand sales and higher SUV mix assumption, we cutour FY17-19E net profit by 8.0-9.1%, mainly on lower margin assumptions for thelocal brands and the JVs amid competitive pressure.    We value Chang'an at 7.5x FY18E P/E (from 7.0x, considering the sector reratingover the past few months), which is below the company's historical tradingaverage. In our view, this is justified, as we expect Chang'an to suffer net profitdecline going forward (-4% FY16-19E CAGR) vs. strong growth in the past (45%FY13-16CAGR). Given a lack of share price upside potential vs. our targetprice, we maintain our Hold rating. Key downside risks include: 1) weaker-thanexpectedvehicle sales, 2) pricing pressure and 3) worse-than-expected localbrand profitability. Key upside risks include: 1) better-than-expected new and oldmodels sales and 2) a stronger-than-expected earnings rebound at the local brand.

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