20140221-DBS_Group-Dah_Chong_Hong_11页_238kb

Summary of Bloomberg: 1828 HK Equity | Reuters: 1828.HK

Core Content

This report from DBS Group Research provides an analysis of Dah Chong Hong (DCH), a diversified conglomerate involved in auto retailing, food & consumer product distribution, and logistic services. The report upgrades the stock rating from HOLD to BUY with a 12-month price target of HK$6.60, citing improved fundamentals and recovery in the auto sales sector in China as key catalysts.

Main Points

Rating and Price Target Upgrade

• Rating: Upgraded from HOLD to BUY
• Price Target: HK$6.60 (up from HK$6.20)
• Reason: Improved fundamentals and positive outlook for DCH, especially in the auto and food sectors

Auto Business Recovery in China

• DCH's auto business, particularly in China, is expected to improve in 2014 due to:
  • New car model launches (e.g., Bentley New Flying Spur)
  • Expansion of Bentley dealership network to nine stores
  • Recovery of Japanese car sales, which contributed ~60% of DCH's China volume
• Profit margins are expected to recover, with price discounting pressure less intense than in 2012, supporting margin improvement

Food Business Growth

• The food business is anticipated to recover from a low base, with:
  • Stronger market penetration via high-quality food items
  • Support from the company's logistics network in Shanghai, Xinhui, Xiamen, and Shenzhen
• The HK food business remains a key growth driver, with revenue increasing by 5.3% to ~HK$5 bn in FY13 and segment margin rising by 0.5 ppts to 5.5%

Valuation and Investment Outlook

• The stock is currently trading at 7.6x FY14 PE, which is below its historical average
• The analyst believes the current valuation is undemanding, given the 26% CAGR forecast for core earnings
• The HK$6.60 price target is based on a 10x historical average PE on FY14 earnings

Key Information

Financial Highlights

• EPS (HK$): 0.66 (FY14), 0.77 (FY15)
• Net Profit (HK$ m): 1,213 (FY14), 1,418 (FY15)
• ROAE (%): 12.9 (FY14), 13.7 (FY15)
• Net Debt/Equity (X): 0.5 (FY14), 0.5 (FY15)
• Pre-tax Profit (HK$ m): 1,690 (FY14), 1,962 (FY15)

Market Performance

• Market Cap (HK$ m): 9,252 (as of 21 Feb 2014)
• Issued Capital (m shrs): 1,832
• Free Float (%): 28.4
• Major Shareholders:
  • CITIC Group: 56.7%
  • Schroders Plc: 9.1%
  • JPMorgan Chase & Co.: 5.9%

Segmental Performance

• Motor & Motor-related Business:
  • Revenue: HK$35,964 (FY14), HK$38,781 (FY15)
  • Segment margin: 3.9% (FY13), 3.4% (FY14), 3.7% (FY15)
• Food & Consumer Products:
  • Revenue: HK$11,130 (FY14), HK$12,412 (FY15)
  • Segment margin: 2.5% (FY13), 4.1% (FY14), 3.4% (FY15)

Potential Catalysts

• Recovery of auto sales in China
• Expansion of Bentley dealership network
• Growth in the HK food business
• Improved profit margins due to reduced price discounting pressure

Peer Comparison

Valuation Metrics

• PE (X): 7.6 (FY14), 10.3 (FY13), 8.8 (FY12)
• P/Book Value (X): 0.9 (FY14), 1.0 (FY13), 1.1 (FY12)
• EV/EBITDA (X): 6.1 (FY14), 7.4 (FY13), 5.8 (FY12)
• Net Dividend Yield (%): 3.9 (FY14), 3.8 (FY13), 4.1 (FY12)

Conclusion

The report highlights that DCH is on a positive trajectory, with improving fundamentals in both the auto and food segments. The upgrade to BUY is based on stronger earnings expectations, recovery in the auto sector, and attractive valuation relative to historical averages. The HK$6.60 price target reflects the analyst's confidence in the company's ability to deliver growth and improve profitability in the coming year.