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Equity Market Summary: Zhongsheng Holding (881 HK)

Core Content

This document provides an analysis of the equity market in Hong Kong, with a specific focus on Zhongsheng Holding (881 HK), a leading 4S auto dealer in China. It highlights the company's performance, growth drivers, and strategic direction in the context of the broader automotive sector.

Main Market Overview

• Hong Kong Equity Market Performance:

  • HSI: +0.81%
  • HSCEI: +1.01%
  • Turnover: HK$105bn (+2% from 30-day average)
  • SSE Composite: -0.18%
  • SZSE Component: -0.49%

• Sector Performance:

  • Iron & Steel: +2.2%
  • Textiles: +1.7%
  • Auto: +1.6%
  • Insurance: +1.6%
  • Food: +1.6%
  • Pharma & Bio: +80.0%
  • Construction: +70.8%
  • Apparel: +67.5%

• Stock Tracking:

  • XIANGXING INTERN (8157): +26.0%
  • OURGAME INTERNAT (6899): +25.6%
  • SHIS LTD (1647): +25.5%
  • PFC DEVICE INC (8231): +25.0%
  • NATURE HOME HOLD (2083): +17.7%
  • CHI HO DEVELOPME (8423): +148.3%

Key Growth Drivers

1. Luxury Car Market Momentum

• Overall Vehicle Sales: Increased by 2.8% yoy in Q1 2018, but growth is expected to be slow.
• Luxury Car Sales:
  • Top 8 luxury brands: +17% yoy to 2.4 mn units in 2017
  • ABB (Audi, BMW, Mercedes-Benz): Dominated the market, accounting for 74% of top 8 sales
  • Cadillac and Lincoln: Achieved 50% and 66% yoy growth, respectively
• Audi's Rebound: Expected to rebound strongly in 2018 due to new models and resolved dealership disputes
• BMW's Expansion: Launched new models (525Li, 530L, X3) and is expected to grow in 2018
• Mercedes-Benz's Growth: Fastest-growing brand among ABB in 2017, with a CAGR of 24.4% from 2012-2017

2. Zhongsheng Holding's Strategic Position

• Market Leadership: Ranked No. 2 in China Top 100 Dealer Groups in 2016
• Brand Portfolio:
  • Luxury brands: Mercedes-Benz, Audi, Jaguar & Land Rover, Volvo, BMW/MINI
  • Mid-to-high end brands: Toyota, Nissan, Volkswagen, Chrysler, Honda
• Dealership Network:
  • Operates 286 4S stores across more than 24 provinces
  • Focus on luxury brand expansion to enhance revenue and gross profit growth

3. Sales and Revenue Growth

• New Car Sales:
  • Accounted for 86.6% of total revenue and 28.7% of profit contribution in 2017
  • Expected to grow by 21.4% and 16% yoy in 2018E and 2019E, respectively
• Luxury Brands Contribution:
  • Expected to increase from 66.0% in 2017 to 68.7% and 70.3% in 2018E and 2019E
• Projected New Car Sales Revenue:
  • 2018E: RMB87,141 mn
  • 2019E: RMB98,754 mn

Key Financial Forecasts

• Total Revenue:

  • 2018E: RMB100,474 mn (+16.4% yoy)
  • 2019E: RMB113,687 mn (+13.2% yoy)

• Gross Profit:

  • 2018E: RMB10,255 mn (+18.1% yoy)
  • 2019E: RMB11,652 mn (+13.6% yoy)

• Gross Profit Margin (GPM):

  • Overall GPM expected to increase to 10.2% in 2018E and 10.2% in 2019E
  • New car GPM expected to rise to 4.3% in 2018E and 4.4% in 2019E
  • After-sales services GPM expected to remain stable at 48.9%

After-Sales and Value-Added Services

• After-Sales Services:

  • Revenue and profit contribution: 13.4% and 54.2% of total in 2017
  • Expected to grow by 15% and 12% yoy in 2018E and 2019E, respectively

• Value-Added Services:

  • Car insurance, finance, and second-hand sales: Profit rose by 39.4% yoy to RMB1,789 mn in 2017
  • Expected to grow by 23.6% and 18.3% yoy to RMB2,210 mn and RMB2,615 mn in 2018E and 2019E

• Second-Hand Car Sales:

  • Trade volume increased by 41.2% yoy to 38,484 units in 2017
  • Expected to grow by 50% yoy in 2018-19E due to product mix enhancement

Strategic Expansion and Profitability

• Network Expansion:

  • Focused on luxury brands, with new stores for ABB, Lexus, and Volvo in 2018
  • Luxury brand stores increased from 57 in 2013 to 151 in 2017 (CAGR 27.6%)
  • Mid-to-high end brand stores grew from 113 to 135 (CAGR 4.5%)

• Inventory Management:

  • Inventory days for Mercedes-Benz and Lexus are at reasonable levels (30 and 20 days)
  • BMW and Audi have higher inventory days (40 days), but expected to improve in 2018 due to new product cycles

• Expense Ratios:

  • Selling expenses ratio: 3.8% - 3.9% (expected to remain stable)
  • G&A expenses ratio: 1.6% (stable in 2018E-19E)
  • Financial cost ratio: Expected to decline from 1.25% in 2017 to 1.16% and 1.04% in 2018E and 2019E due to economies of scale

Dividend and Profit Outlook

• DPS (Dividend per Share):
  • Expected to increase by 53% in 2018E due to improved cash flow and a payout ratio of 25%

Analyst Certification

• The report is authored by Alison Ho, who certifies that:
  • All views reflect her personal opinion
  • No compensation is tied to the report's recommendations
  • She is not supervised by the Investment Banking Department
  • No quiet period restrictions apply
  • No trading in the stock covered in the report within 30 days prior to its release
  • No financial interest in the listed company

Disclaimer

• This report is for informational purposes only and should not be considered as investment advice
• Orient Securities (Hong Kong) Limited may have conflicts of interest and is not liable for any losses resulting from reliance on this report
• Information may change without notice, and past performance is not indicative of future results
• The report is not directed to any jurisdiction where distribution would be illegal

This summary captures the core content, key financial forecasts, and strategic focus of Zhongsheng Holding (881 HK) in the context of the broader equity and automotive markets.