Zhongsheng announced its FY19 results, beating market expectations. Revenue achieved RMB124.0bn (vs CMBI estimate of RMB124.4bn/ vs consensus estimate of RMB124.9bn), an increase of 15% YoY. NP was RMB4.5bn (vs CMBI estimate RMB4.5bn / vs consensus estimate of RMB4.3bn), an increase of 24%. EPS has increased by 24% to RMB1.98.
- Strong brand mix and geographical layout will foster future growth. In 2020, Mercedes-Benz will launch a new model GLB / new E-class model (Facelift version) while Lexus will launch a new RX model (Deluxe version) / new model LM. In 2019, 75% of the Company's stores are located in Tier 1/2 while 55% of its stores are located in eastern and southern China. Among them, Guangdong is the single largest province that Zhongsheng has the presence in. We believe the Company's business will benefit from economic growth in the relevant wealthy regions.
- Bottom-line performance certainty gradually increases as the business tiles to after-sales and value-added service. The proportion of income from after-sales/accessories and value-added services increased to 80% in 2019 from 77% in 2018. In Apr 2019, the Company launched new services (双包无忧) to improve customer stickiness in the after-sales market. In the value-added service field, the financial penetration rate increased by 3.4ppt in 2019. Furthermore, the used car transaction volume in 2019 increased by 30% with the New/Used ratio reached 15.3%. We believe the performance certainty will be further enhanced in 2020E as the Company’s bottom-line contribution tilts more to after-sales and value-added service.
- The proportion of luxury brands increased in the new car sales and after-sales market. In 2019, luxury brands accounted for more than 50% of the sales volume and accounted for 71% of new car sales revenue. Moreover, the revenue from luxury brands accounted for 53% of revenue from after-sales service, for the first time exceeded 50%. We believe that, with the gradual increase in the proportion of luxury brands in the two major business segments, the comprehensive GPM will steadily increase.
- Zhongsheng has a potential expansion time window through M&A will in 2020E. The Company's Capex in 2019 was RMB1,743mn, the lowest since 2014. At the same time, the Company improved its financial position in 2019 making its D/E ratio dropped from 70% to 62%. In 2019, OCF reached RMB7.8bn while CFF outflow was RMB4.7bn. We observed recent news from CADA that COVID-19 has caused 21 luxury brand dealers to exit the market. We believe that Zhongsheng is expected to take advantage of its scale advantages and excellent financial conditions to achieve external growth in 2020E.
- Given its potential M&A opportunities, we increased the Company's network expansion growth rate. However, considering that COVID-19 will likely affect the supply of new cars, we lower our forecast for the growth rate of new car sales volume in 2020E from 10% to 7%. However, benefiting from the rise in the proportion of luxury brands and the low demand elasticity of luxury cars, we expect the Company's new car sales revenue to increase by 12% to RMB118.5mn in 2020E. In the meanwhile, benefit from the gradual maturity of 109 new stores opened in the past three years and the increase in the proportion of luxury cars. We believe that the Company's aftermarket will achieve a 26% growth to RMB22.5bn in 2020E.
- We slightly adjust our bottom-line forecast in 2020E at RMB5.5bn. In addition, we believe great governance and excellent operating capability was not affected by COVID-19 at all. Our TP is maintained at HK$33.8 (based on initial 12.5x 2020E P/E) with an upside of 37.5%. Reiterate BUY.
