20140228-大和证券-An_attractive_entry_point_12页_487kb

Dah Chong Hong Holdings (1828 HK) Summary

Core Content

Dah Chong Hong Holdings Limited (DCH) is a diversified business conglomerate primarily engaged in motor vehicle sales, related services, food and consumer products, and logistics. The company is currently positioned to benefit from the consolidation in the auto dealership sector, with a strong focus on recovery and growth in its core auto business over 2014-16. The stock has a current target price of HKD6.19, down from HKD7.55, with an upside of 28.2% from the 28 Feb price of HKD4.83. The company maintains a Buy rating.

Main Growth Drivers

1. Commercial Vehicle Shipments Recovery

   • DCH expects a strong recovery in commercial vehicle (CV) shipments, particularly for Isuzu heavy-duty trucks (HDTs).
   • The company anticipates HDT demand to increase due to improved economic conditions and the second quarter being a peak period for purchases.
   • Orders for CV shipments have been recovering since 1Q14, with DCH raising its 2014 and 2015 CV volume forecasts.

2. Ultra-Luxury Italian Car Sales

   • Sales of Italian ultra-luxury cars like Ferrari, Maserati, and Lamborghini are expected to grow significantly over 2014-16.
   • Bentley sales are forecast to remain flat, but DCH's overall ultra-luxury car sales are expected to rise, contributing to a better revenue mix.
   • The company forecasts that ultra-luxury car sales will account for 51% of its China auto sales revenue by 2016, up from 47% in 2013.

Financial Outlook

• Revenue Forecast:

  • Mainland China auto revenue is expected to grow from HKD24,650m in 2013 to HKD38,566m in 2016.
  • Hong Kong/Macau auto revenue is forecast to increase to HKD7,309m in 2016.
  • The FMCG and logistics businesses are projected to account for 19-20% of total revenue over 2014-16.

• Profit Forecast:

  • Net profit is expected to rise from HKD901m in 2013 to HKD1,618m in 2016.
  • Operating profit is projected to increase from HKD1,432m in 2013 to HKD2,343m in 2016.

• Earnings Per Share (EPS):

  • Core EPS (fully-diluted) is forecast to grow from HKD0.494 in 2013 to HKD0.883 in 2016.
  • DCH's EPS growth is expected to outperform the Bloomberg consensus by 7-14% over 2014-16.

• Dividend Payout:

  • DCH is expected to maintain a 40% dividend payout ratio over 2014-16.
  • Strong free cash flow (FCF) recovery in 1H14 is anticipated, allowing the company to fund most of its dividend payments internally.

Key Financial Metrics

• PER (Price-to-Earnings Ratio):

  • 2014E: 7.5x (previously 9.5x for 2013E)
  • 2015E: 6.3x (previously 16.6x for 2013E)
  • 2016E: 5.5x

• PBR (Price-to-Book Ratio):

  • 2014E: 0.9x
  • 2015E: 0.8x
  • 2016E: 0.8x

• EV/EBITDA:

  • 2014E: 4.9x
  • 2015E: 4.5x
  • 2016E: 4.1x

• ROE (Return on Equity):

  • 2014E: 13.4%
  • 2015E: 13.8%
  • 2016E: 14.6%

• Net Debt to Equity:

  • 2014E: 35.5%
  • 2015E: 35.4%
  • 2016E: 34.8%

• Gross-Profit Margin:

  • Auto after-sales: 31.6% (2014E), 32.1% (2015E)
  • Auto segmental operating margin: 3.6% (2014E), 3.6% (2015E)
  • Food and consumer segmental operating margin: 4.1% (2014E), 4.3% (2015E), 4.5% (2016E)

Key Risks

• A further slowdown in economic growth.
• Delays in new model launches.
• Continued challenges in the FMCG and logistics sectors due to anti-corruption and austerity measures in China.

Shareholder Information

• Major Shareholder: CITIC Pacific Limited (56.6%)
• Shares Outstanding: 1,826 million
• Market Cap: USD1.14 billion
• 3m Avg Daily Turnover: USD3.62 million

Summary of Forecast Revisions

• Revenue Change (2014E): -14.0%
• Net Profit Change (2014E): -11.9%
• Core EPS (FD) Change (2014E): -12.0%
• Revenue Change (2015E): -20.5%
• Net Profit Change (2015E): -20.2%
• Core EPS (FD) Change (2015E): -20.3%

Conclusion

DCH is positioned for growth in its auto business, particularly in commercial vehicles and ultra-luxury Italian cars, with a strong balance sheet and consistent dividend policy. The company is expected to benefit from sector consolidation and a gradual improvement in its after-sales margins. Despite some downward revisions in earnings forecasts, the Buy rating remains unchanged due to the strong growth drivers and improved financial position.