20150713-Oriental_Patron-Swimming_against_the_current_25页_2mb

报告摘要

Meidong Auto (1268 HK) Equity Research Summary

Core Content

Meidong Auto (MD) is a Chinese auto dealer with a strong growth outlook and an attractive valuation. The company has resumed its equity research coverage with a BUY rating and a target price of HK$2.31, representing a 57% upside from the current close price of HK$1.47. This valuation is based on a 10x FY16 PE and a forecast yield of 3.5%. MD is expected to achieve a 21-32% CAGR in sales and EPS over FY15-17, driven by store count expansion and a shift toward higher-margin luxury brands.

Main Points

1. M&A Strategy and Growth Prospects

MD is actively pursuing acquisitions, including 2 Honda stores and 3 Jaguar Land Rover (JLR) dealership licenses, which are either underperforming or not yet operational.
The company believes these acquisitions are cost-effective and will contribute positively to its sales and earnings.
MD has a proven track record in turning around underperforming dealerships, such as the Beijing Zhongye Toyota store, which improved from being the worst performer to ranking #2 among FAW Toyota stores within 9 months.
The absorption ratio is a key strength, allowing MD to support operating costs with after-sales services, which is higher than industry peers.

2. Store Expansion and Brand Diversification

MD plans to open 6 new stores annually, with a focus on Tier 2-4 cities, which offer inelastic demand due to low brand penetration.
By the end of FY17, 56% of its stores are expected to be Single City Single Brand (SCSB), enhancing customer loyalty and sales performance.
The company has a diverse brand portfolio, including BMW, Lexus, Porsche, Toyota, Honda, and after-sales services, with a projected 25% CAGR in store count from 19 in 2014 to 36 in 2017.

3. Brand Performance

BMW sales growth slowed in 2015 due to lack of new models and OEM pressure, but MD's young stores and SCSB strategy should still support fast growth.
Toyota rebounded in 2015, with 16.1% sales growth in Jan-May, thanks to new models like the New Corolla and Highlander.
Porsche and Honda showed strong sales performance, with 43.8% and 31.3% YTD growth, respectively.
Lexus and Hyundai underperformed, with -3.6% and -3.5% Jan-May growth, but are expected to improve with new models.

4. Margin Expansion

MD's gross profit (GP) margin is expected to increase from 10.2% in FY14 to 10.9% in FY17, while net profit (NP) margin is projected to rise from 2.9% to 3.7%.
The absorption ratio is a key driver of margin expansion, with MD's after-sales services contributing significantly to profitability.
Porsche has a notably higher new car sales margin (12%) compared to other brands (5.3%), which is expected to further enhance MD's profitability.

5. Industry Dynamics

The Chinese auto market has seen a slowdown in sales, with PV sales growth at 2.1% in Jan-May 2015, down from 6-7% in 2014.
Dealers are gaining bargaining power over OEMs, leading to lower inventory pressures and better margins.
Price wars have had a slight positive effect on dealers, as they help reduce inventory and improve financial performance.

6. Valuation and Recommendations

The current valuation is undemanding, with a P/E ratio of 6.4x in FY16 and P/B ratio of 1.6x.
The target price of HK$2.31 is based on 10x FY16 PE and 3.5% yield.
MD is positioned well to capitalize on the market consolidation, with strong capital access and strategic acquisitions.

Key Information

Market Cap: HK$1,617 million
Issue Shares: 1,100 million
Major Shareholder: Ye Family (68.41%)
Current Close Price: HK$1.47 (as of 10/7/2015)
Forecast EPS Growth: 36.3% in FY16, 23.9% in FY17
Expected Sales CAGR: 22.1% in FY15-17
Expected EPS in FY17: HK$0.286
ROE: Expected to rise to 27.3% in FY17

Conclusion

Meidong Auto is well-positioned to benefit from market consolidation, strategic M&A, and brand diversification. With a strong IT infrastructure, high absorption ratio, and focus on Tier 2-4 cities, the company is expected to deliver superior growth and margin expansion. Despite the slowdown in some key brands like BMW and Lexus, the overall outlook for MD remains positive, supported by attractive valuation and strong operational performance.