Meidong announced its FY19 results, significantly beating CMBI expectations. Revenue achieved RMB16.2bn (vs CMBI estimate of RMB15.1bn/ vs consensus estimate of RMB15.3bn), an increase of 46% YoY. NP was RMB551mn (vs CMBI estimate RMB476mn / vs consensus estimate of RMB519mn), an increase of 52%. EPS has increased by 51% to RMB0.48 while DPS has increased by 107% to RMB0.26.
- The Company continues to adhere to its "Mainstream luxury brand + SCSS" strategy while emphasizes the importance of operational efficiency. The Company's inventory turnover days fall to 17 days in 2019 from 28 days in 2018, the best among its peers. We believe Meidong will continue to reduce its inventory turnover days by further improving its operational efficiency. As a result, the ROE reached 35.7% (CMBI calculation) in 2019, for the first time exceeds 30%.
- The GPM decline in the after-sales segment was temporary and will likely to rebound in the future. It was mainly due to the new Porsche stores and the rapid growth of new car sales. Specifically, the Company opened 9 new stores in 2019 while putting effort to ramp up the 6 BMW stores in Anhui that have been acquired in 2018. A total of 15 stores account for 26% of the current stores. The after-sales vehicles has a relative young age dragging down the overall after-sales GPM. We believe the Company will evaluate the customer's return rate index to increase the after-sales gross profit margin.
- Supply-side shock from COVID-19 was limited whereas the Company will focus more on the balance of Supply-Demand. The Company's current inventory is about 0.3 months. The management does not expect any disruption on vehicle supply for now as some supply was either in OEMs warehouse or on freight. For the demand side, even though foot traffic in 1Q20 declined by 31%YoY, the Company’s order intake only declined by 12%YoY. More impressively, the after-sales value only declined by 1% in 1Q20 and reached a 4%YoY increase in Mar 2020. By taking active measures, the Company increased the Customer Conversion Rate from about 10% in 2019 to at most 25% in 1Q20. In terms of the after-sales segment, the Company's actively seeking business in the accident vehicle field. As a result, the proportion of accident vehicles has risen to 80-90% in Feb 2020 from about 50% in 2019. All the measures mentioned above showcase the excellent management capability of the Company.
- We raise the top-line forecast in 2020E by 3% to RMB20.6bn to reflect the increase of sales volume for a single store. Furthermore, we also raise our bottom-line forecast by 5% to RMB729mn in 2020E to factor-in the excellent cost control performance. Given its growth potential, we raise our TP to HK$13.7 (based on new 19.5x 2020E P/E) from initial TP HK$11.3 (based on initial 17.0x 2020E P/E). Reiterate BUY with an upside of 17%.
