Brilliance Auto shares accelerate as Goldman Sachs doubles target price

Shares of Brilliance China Auto surged on Thursday morning in Hong Kong after Goldman Sachs more than doubled its target price for the stock, citing a growing appetite among mainlanders for luxury cars.

The firm, which partners with BMW to build BMW Brilliance cars in China, shot up as much as 8.2 per cent to HK$23, before paring gains to trade at HK$21.85 at noon, still up 2.8 per cent.

Goldman Sachs raised the target price for Brilliance to HK$28.8 from HK$13.9, and upgraded it to buy from neutral. It said it expects BMW Brilliance cars to record double-digit growth in gross profit margin between 2019 and 2020, benefiting from rising demand among Chinese motorists for luxury cars.

Meanwhile, JP Morgan reiterated its overweight rating for Brilliance and set its target price at HK$32. The investment bank said this was because BMW and Brilliance Auto had agreed three years ago to extend their joint venture to 2028 and expected manufacturing capacity to reach 800,000 vehicles in the next few years.

Foreign carmakers need to partner with local companies to operate in China.

On Wednesday, media reports said BMW is looking to establish a separate joint venture with Great Wall Motor, China’s largest maker of SUVs. The partnership could focus on electric vehicles.

BMW declined to comment on the matter in a statement, but reiterated the extension in 2014 of its partnership with Brilliance to 2028.

“We will continue to invest in and develop this joint venture [with Brilliance],” the company said.

JP Morgan analysts said in their report that they were uncertain whether BMW would need to find a second partner in China, given that its current joint venture plans to launch several new models in coming years and has abundant capacity.

Great Wall Motor suspended trading on Thursday in Hong Kong, pending the release of an announcement “in relation to clarification of press articles” about the potential tie-up with BMW.

Great Wall Motor soared 14 per cent on Wednesday to close at HK$11.3, the highest in more than two years.

Goldman Sachs analysts assign each stock a buy or sell rating according to its total return potential relative to its coverage. It allocates the ratings in accordance with a global guideline that 25 per cent to 35 per cent of stocks be rated as buy and 10 per cent to 15 per cent as sell.

According to JP Morgan, an overweight rating means analysts expect the stock to outperform average total returns of stocks in the analysts’ coverage universe over next six to 12 months.