Yongda announced its FY19 results, generally in line with market expectations. Revenue achieved RMB62.7bn (vs CMBIS estimate of RMB61.4bn/ vs consensus estimate of RMB61.8bn), an increase of 13% YoY. NP was RMB1.5bn (vs CMBIS estimate RMB1.5bn / vs consensus estimate of RMB1.5bn), an increase of 18%. EPS has increased by 17% to RMB0.80. However, the Company surprises the market by not declaring any final dividend (vs normally 30%+ payout ratio in the past five years).
- The board of directors put forward a high-growth strategy for the management team starting from 2020. Prior to COVID-19, the Company raise its target growth rate by 5ppt for 2020E as compared with that of 2019. Chairman Cheung Tak On has increased his stakes by 1.5mn shares through three times on 10/11 Dec 2019 and 10 Jan 2020, with a weighted average price of HK$6.09 per share. This may suggest that the strategy shift claimed by the Company was credible.
- The operating efficiency was significantly improved in 2019. The average inventory turnover days decreased to 37 days in 2019 from 44 days in 2018. At the same time, the Company proactively controlled its proprietary loan book while shifting more attention to asset quality. As a result, the Company's CFO increased by RMB2.4bn in 2019 whereas CFF outflowed by RMB2.1bn. This directly reduced the adjusted financial exp ratio to 1.08% in 2019 from 1.23% in 2018.
- The COVID-19 impact was real but limited. Up to now, the Company's work resumption rate was close to 100%. Specifically, the new car sales business has resumed about 80% of the normal level while the after-sales service has been about 90%. The Company expects a complete recovery in April. It is estimated that the COVID-19 impact in 1Q20 accounts for about 10% of the full business. However, both government and OEMs introduced measures to restrict the impact. To help dealers, OEMs take measures such as 1) extend the interest-free period for inventory financing; 2) cancel 1Q assessment; 3) accelerate rebate redeem; 4) post more online marketing. The Company's current inventory for major brands is about one month, reflecting its good financial condition and resilience from the supply side impact.
- No declared dividend for 2019 surprised the market. The Company claims that it did not pay out any dividend for FY2019 for two main reasons: 1) to stay flexible on concern over the COVID-19 relapse in China; 2) potential M&A surface in 2020. The Company reiterates that it will declare a dividend representing a payout ratio of not less than 30% if the COVID-19 settles as expected/no good M&A opportunities.
- We raise the top-line in 2020E by 3% to reflect its 1) high-growth strategy and 2) potential M&A opportunities. However, GPM from new car sales fell to 2.35% in 2019 from 2.37% in 2018, lower than CMBIS estimates. To reflect the epidemic impact on short-term leasing business, the optimization of its loan book and our new GPM forecast, we adjust down our bottom-line forecast in 2020E by 2ppt to RMB1.9bn. Given its growth potential, we raise our TP to HK$7.4 (based on new 6.5x 2020E P/E) with an upside of 29% from initial TP HK$6.6 (based on initial 5.7x 2020E P/E). Therefore, we upgrade our rating to BUY from Hold.
