H1 loss at Rmb830m.
   
FAW Car reported H116 revenue of Rmb8.49bn, down 38.3% YoY, and a loss ofRmb830m (vs. earnings of Rmb160m in H115), consistent with the company's preannouncedearnings. We attribute the substantial loss to: 1) H116 sales volume fallingsharply, by 33.4% YoY, with a decline in product prices and volume; and 2) grossmargin narrowing significantly, by 6.7ppt ppts YoY to 14.7%. Investment gains rose61.8% YoY to Rmb150m, which we believe was driven by Rmb124m investment gains(up 79.4% YoY) from FAW Finance, in which the company holds a stake.
   
Sales volume to remain sluggish on lack of product competitiveness.
   
In H116, sales volume from the Mazda brand fell 32.6% YoY to 27k units and thatfrom the Besturn brand fell 32.8% YoY to 50k units. The Mazda brand has weakproduct competitiveness worldwide and an increasingly smaller influence in China. Thecompany‘s investments in proprietary brands are much lower than those of otherautomakers. We believe its sales volume could remain sluggish in the near term.
   
Group listing still far away.
   
In June, FAW Car's controlling shareholder, FAW Group, announced its intention todelay fulfilling its pledge of resolving horizontal competition by another three years. Theproposal was rejected at that month’s shareholders’ meeting. We see a lot ofuncertainty over the progress and timing of a possible group listing, given thecomplexity of interests of all parties within the group.
   
Valuation: Maintain Sell.
   
We maintain our DCF-based price target of Rmb8 (8% WACC). The stock is trading atc2.0x 2016E PB. We believe the company's fundamentals are unlikely to support thecurrent valuation and maintain our Sell rating.