UBS: The target price for Brilliance China (01114) is cut by half to HK$2, reaffirming a "Neutral" rating.

UBS released a research report stating that the profitability of BMW Brilliance Automotive (BBA), a joint venture of Brilliance China (01114), is expected to deteriorate starting from the second quarter of 2026. Coupled with the companys upcoming interim dividend of HKD 0.50 per share, UBS has lowered its target price for Brilliance China from HKD 4 to HKD 2, reiterating a "Neutral" rating. The bank also reduced its BBA sales forecasts for 2026 to 2028 by about 10% and cut its BBA equity earnings forecast by 57%. UBS pointed out that BMW's new model, the Neue Klasse electric vehicle iX3, began pre-sales at the Chengdu Auto Show, priced from RMB 269,900, which is comparable to the Tesla Model Y and about 10% higher than the Xiaomi YU7. However, given the extremely competitive nature of the Chinese electric vehicle market, its sustainable sales and profitability outlook is low. Even if the iX3 can offset the decline in internal combustion vehicle sales and achieve a net profit margin of 3% or net profit of RMB 10,000 per vehicle, it would only compensate for the impacts of the transition from fuel vehicles, rather than result in a turnaround in joint venture profitability. The bank believes that whether the Neue Klasse can drive a recovery in BBA's profitability is facing significant challenges. In the first half of the year, Brilliance China's joint venture equity income reached RMB 974 million, translating to a net profit of approximately RMB 18,000 per vehicle, representing a quarter-on-quarter increase of 144%, but a year-on-year decline of 42%. The company declared an interim dividend of HKD 0.50 per share, equivalent to a dividend yield of about 20%. UBS estimates that after the dividend payout, the company will have approximately HKD 0.90 per share in cash, most of which is expected to be used for future dividend distributions. In terms of valuation, UBS has adjusted Brilliance Chinas valuation benchmark from a price-to-earnings ratio of 5 times the 2026 cash forecast to a price-to-book ratio of 0.5 times. The new target price of HKD 2 is primarily based on asset value, including 100% cash and cash equivalents of HKD 0.90 per share, and 0.5 times the book value of BBA at HKD 1.10 per share, which implies that BBA's profit margin will stabilize in the low single digits, with a return on equity of around 10%, far below historical levels.