881.HK Research Summary

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  • Zhongsheng (881.HK)

    Research Summary

    Rating: Buy

    Target Price: HK$101

    ZENG Siyang, Michael

    Updated on October 30, 2016

  • Key Investment Theses

    The Dealerships Inventory Level has fallen below warning line. New car sale in China keeps climbing against the backdrop of sluggish growth. Outlook of the industry of auto dealership is stable.

    Zhongsheng is the largest Benz dealership in China, taking up over one-tenth share (units sold). Benz is the largest source of car sale revenue, taking up about one fourth. Benzs units sold has surged in recent years. The coming of new E Class in August will boost the sale of Zhongsheng.

    2

  • Key Investment Theses

    The management thinks highly of Toyota and Lexus due to high quality of the former and over-demand of the latter. Zhongsheng will continue cooperation with the automaker on the basis of close relationship.

    Zhongsheng acquired Hainan Joyer to tap into Hainan market successfully. In the restructuring earlier this year, some stores in Northern China were given up. Management emphasizes that quality of M&A actions should be primary goal despite of numerous M&A opportunities.

    3

  • Key Investment Theses

    Second-hand car business, one of future directions,

    yields higher profit margin than new car, as high as

    5% and saw 11.7 thousand transactions in 1H16.

    The considerable drop in finance cost reflects the

    impact of decline in interest and inventory level.

    4

  • Business Model of Auto Dealership

    Basic Business: New Car Sale Buy in first and sell out later

    High volume of revenue with low profit margin

    To attract customers

    Value Added Business: Post-sale & Financial services Repair & maintenance, used car disposal, accessories & modification,

    finance & insurance

    Low volume of revenue with high profit margin

    To monetize the portfolio of customers

    Other Business: Related Industry & Business E.g., forward integration, channel expansion

    5

  • Business Model of Auto Dealership

    New Car Purchase

    Rental / Repair & Maintenance

    Used Car Disposal

    6

    Accessories & Modification

    Finance & Insurance Agency

    4S Store

    OEM

    Insurance

    Company

    Bank & Auto

    Finance Firm

    New Car

    Finance Product

    Insurance Product

    Independent

    Supplier Parts & Accessories

    Core Lifecycle of Cars

  • Auto Dealership in China

    Low market concentration

    Business structure gap between Chinese dealers and dealers in mature markets

    Frequent M&A transactions and new business explorations in last few years

    OEMs with stronger market power

    Emerging sectors parallel import, O2O sale, new energy car, IOV & smart car

    Much uncertainty

    7

  • Competitive Landscape

    25%

    75%

    2015 New Car Sales in China

    Top100 Dealerships Others

    8

    Rank Name Revenue(RMB) Sales

    1 China Grand Auto 90,700,035,201 678,190

    2 Sinomach Auto 64,189,320,000 222,908

    3 Zhongsheng 59,142,607,000 260,353

    4 Pang Da Auto 56,374,978,176 450,724

    5 Lei Shing Hong Auto 52,208,903,075 117,422

    6 Yongda Auto 45,118,896,000 134,441

    7 HXQC 38,182,904,877 215,998

    8 GWQM 30,750,224,679 236,264

    9 Zhengtong Auto 29,785,763,000 95,409

    10 Baoxin Auto 29,015,725,864 71,046

    SourceTop100 Dealerships Ranking 2015 by China Automobile Dealers Association

  • Business Structure Gap

    82.3%

    2.2% 8.9%

    3.8% 2.8%

    China Top100 Revenue StructureNew Car Sale

    2nd Car Sale

    Parts & Repair

    Finance & Insurance

    Others

    9

    29.5%

    3.9%50.7%

    15.5%

    0.4%

    China Top100 Gross Profit Structure

    57.5%22.9%

    14.8%

    4.2% 0.6%

    US Average Revenue Structure

    20.6%

    10.8%

    41.0%

    26.6%

    1.0%

    US Average Gross Profit StructureSourceTop100 Dealerships Ranking 2015 by China Automobile Dealers Association

  • Recent Major M&A Transactions

    10

    Disclosure Date Target Acquirer Value Status

    Aug 20, 2016 Shenzhen Pengfeng China Grand 1,006 mRMB In progress

    Acquire stores in Guangdong and access stores in Hunan

    Feb 6, 2016 Dalian Prestige China Grand Undetermined In progress

    Acquire premium-brand store in Northeast China

    Sept 15, 2015 Baoxin China Grand 9,768 mRMB Completed

    Enhance brand portfolio with Baoxins BMW location network

    Mar 31, 2015 Hainan Jiahua Zhongsheng 455 mRMB Completed

    Access Hainan auto market and enhance Lexus location network

    SourceAnnouncements and reports of companies

  • Emerging sectors

    11

    Parallel

    Import

    - Importing cars without OEMs

    permission to provide more and

    cheaper choices

    - Risks: regulative barriers, limited

    car sources, immature maintenance

    systems

    - E.g., traditional dealers, general

    distributors

    New

    Energy

    Car

    O2O

    Sale

    IOV &

    Smart Car

    - Exploiting digital technologies and

    Internet to enable more convenient

    driving experience

    - Risks: safety concerns, regulation,

    no unified standards

    - E.g., internet enterprises, OEMs

    - Cars using cleaner energies

    (mainly electricity)

    - Risks: technology bottleneck,

    infrastructure requirements, capital

    barriers

    - E.g., OEMs(major and minor)

    - Buying cars from online stores and

    getting car offline

    - Risks: capital requirements,

    undeveloped habits

    - E.g., traditional dealers, OEMs, e-

    commerce platforms, start-ups

  • Company OverviewNAME Zhongsheng Group Holding Limited

    CATEGORY Automobile Retailing, Maintenance & Repair

    LISTING DATE March 26, 2010

    MARKET CAPITALIZATION 15.541 Billion HKD

    STOCK PRICE 7.240 HKD

    PRICE-EARNING RATIO 29.31 (based on 2015 annual earning)

    PRICE-BOOK RATIO 1.17

    DIVIDEND YIELD 0.69%

    52-WEEK RANGE 3.170 8.380

    INDEX CONSTITUENT HSCI, Index: Consumer Goods, HSHKMI, HSGCI

    12SourceAASTOCKSas of September 30, 2016

  • Price Trend

    13SourceBloombergRearranged, as of September 23, 2016

    -20%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    140%

    160%

    180%

    Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

    HSINDEX 881.HK

  • Income Statements

    14

    KRMB 1H2016 1H2015 2015 2014

    Revenue 31,742,203 100.0% 26,886,947 100.0% 59,142,607 100.0% 54,786,660 100.0%

    Car Sale Revenue 27,553,189 86.8% 23,241,798 86.4% 51,842,665 87.7% 47,961,591 87.5%

    (Profit Margin) 3.0% 2.7% 2.6% 3.3%

    Post-sale Revenue 4,189,014 13.2% 3,645,176 13.6% 7,299,942 12.3% 6,825,069 12.5%

    (Profit Margin) 47.8% 45.3% 45.5% 46.9%

    Gross Profit 2,824,651 8.9% 2,275,623 8.5% 4,669,193 7.9% 4,774,823 8.7%

    Other Incomes 560,972 1.8% 501,397 1.9% 1,104,143 1.9% 944,500 1.7%

    SDA Expense (1,938,483) -6.1% (1,709,973) -6.4% (3,763,409) -6.4% (3,354,945) -6.1%

    Operating Profit 1,447,140 4.6% 1,067,047 4.0% 2,009,927 3.4% 2,364,378 4.3%

    Finance Cost (487,027) -1.5% (610,940) -2.3% (1,295,697) -2.2% (1,272,568) -2.3%

    Income Tax (281,905) -0.9% (135,650) -0.5% (234,329) -0.4% (314,727) -0.6%

    Net Income 612,981 1.9% 310,405 1.2% 460,964 0.8% 750,905 1.4%

    SourceAnnual and Interim Reports, Rearranged

  • Income Forecast

    2016E 2017E 2018E

    Revenue(kRMB) 73,756,689 80,159,776 83,840,340

    YoY Change 24.7% 8.7% 5.0%

    Net Income(kRMB) 1,092,641 1,707,162 2,005,418

    YoY Change 137.0% 56.2% 17.5%

    EPS(RMB) 0.51 0.80 0.93

    P/E 19.25 12.32 10.49

    P/B 1.54 1.37 1.21

    ROE 8.8% 12.1% 12.5%

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  • Valuation Comparison

    Market

    CapPrice P/E P/B

    6 Months Ended June 30, 2016

    Revenue

    (kRMB)ROE(%) ROA(%)

    881.HK Zhongsheng 15.541B 7.240 29.31 1.17 31,742,203 5.47 1.63

    1293.HK Baoxin 6.189B 2.420 22.86 1.07 10,871,401 N/A N/A

    3836.HK Harmony 5.940B 3.770 8.22 0.86 4,928,161 5.15 2.76

    1828.HK DCH 5.771B 3.150 10.13 0.6420,121,000

    (kHKD)2.44 0.81

    1728.HK Zhengtong 5.437B 2.460 7.47 0.54 14,596,154 2.94 1.01

    3669.HK Yongda 5.284B 3.570 8.67 1.06 18,709,529 8.79 2.11

    CategoryAutomobile Retailing, Maintenance & Repair, Market cap more than 5B

    16SourceAASTOCKSResults Announcements of Companiesas of September 30, 2016

  • Valuation Comparison

    17

    7

    9

    11

    13

    15

    17

    19

    21

    23

    28-Sep-15 28-Oct-15 28-Nov-15 28-Dec-15 28-Jan-16 28-Feb-16 28-Mar-16 28-Apr-16 28-May-16 28-Jun-16 28-Jul-16 28-Aug-16

    881 1728 3836 3669

    SourceBloombergResults Announcements of CompaniesRearranged

    P/E

  • Valuation Comparison

    Zhongsheng maintains a higher level of P/E (from 15

    to 20 times) than those of its competitors (from 7 to

    11 times)

    The high valuation multiple of Zhongsheng probably

    benefits from concentrated and stably developing

    business, while rivals strategies are more diversified.

    18

  • Summary

    We can expect a stable auto market and recovered

    revenue for Zhongsheng. The net income for 2016FY

    will be at least 1,225 million RMB. If we give a P/E

    from 15 to 20, then the price should be 9.96 to 13.28

    HKD.

    19

  • Author Contact

    ZENG Siyang, Michael

    Research exper