MeiDong released its 1H20 results. 1H20 top-line increased by 23% YoY to RMB8.4bn, among which revenue from new car sales increased by 24% YoY to RMB7.5bn while revenue from after-sales service increased by 16% YoY to RMB960mn. 1H20 bottom-line increased by 28% YoY to RMB301mn. The Company declared an interim dividend of RMB0.15 per share, representing a 60% payout ratio.
- MeiDong delivered outstanding results in 1H20. Despite the negative impact of COVID-19, new car sales volume in 1H20 grew by 8% YoY (-3% YoY in 1Q20 / +15% YoY in 2Q20), while after-sales service volume increased by 9% YoY. The proportion of luxury brands in new car sales revenue increased to 84.3% in 1H20 from 80.0% in 1H19. Also, the proportion of luxury brands in after-sales revenue increased to 83.8% in 1H20 from 79.4% in 1H19. The expense ratio dropped by 0.57 ppt YoY in 1H20, offsetting a slight decline in GPM. As a result, the NPM increased by 0.12ppt YoY to 3.6% in 1H20. MeiDong continued to generate strong operating cash flow in 1H20 (+20.5% YoY to RMB624mn).
- Great management ability underpins its operating efficiency. By actively facilitating orders and delivery, MeiDong’s inventory turnover days dropped to 12 days (vs 23 days in 1H19). The unit revenue of incumbent stores increased by 19.9% YoY (new car sales revenue +20.7% YoY / after-sales revenue +13.5% YoY) in 1H20. The bottom-line was flat in 1Q20 (+0.4% YoY) and was resumed to its high growth path in 2Q20 (+43.2%YoY) swiftly. We believe that MeiDong will maintain its excellent operating efficiency given its strong management ability.
- Clear business objectives will foster the rapid growth of after-sales service. Thanks to its “Single City Single Store” strategy, MeiDong has a strong customer stickiness in after-sales service by nature. In addition, MeiDong currently focuses its business objective on CRR (customer return ratio) in order to further generate revenue in the after-sales segment. The average store age of MeiDong is about four years while the median is three years. We believe that its after-sales revenue will usher in rapid growth given 1) single city single store strategy; 2) clear objective; and 3) more mature stores. The increase in the proportion of after-sales revenue will also lift its GPM and NPM further.
- Potential M&A expansion backed by strong cash on hand. Although MeiDong only added two stores in 1H20 (+1 Lexus/+1 Porsche), we expect Meidong will newly open an additional five stores in 2H20E. In addition, the Company nearly doubled its cash balance in 1H20 (RMB 2.4bn on 30 Jun 2020 vs RMB 1.1bn on 31 Dec 2019). Meidong completed RMB1.1bn top-up placement in Jun, RMB790mn of which aiming for future M&A. If we take a single store price of RMB45mn as a key assumption, Meidong is expected to add 18 stores through M&A. We also appreciate the stringent criteria set up for M&A target selection. In order to conform to its overall business strategy, the potential target needs to have features of 1) single city single store, 2) familiar brand (Luxury brands + Toyota) and 3) reasonable payback period.
- We slightly adjust up our bottom-line forecast by 1% in 2020E at RMB736mn to reflect its great performance in 1H20. Along with overall market recovery, we believe MeiDong will continue to outperform in 2H20E given its operating advantage. Based on our 2020E forecast, the implied bottom-line growth rate for MeiDong will be 38%YoY in 2H20E. We also lift our 2021E forecast by 20% to reflect 1) higher after-sales revenue growth assumption and 2) higher operating efficiency.
- MeiDong still has upside potential in terms of valuation. The Company adheres to the “single city single store + luxury brand” strategy in the business expansion. Equipped with the excellent management team, MeiDong continues to increase its return on capital while expanding its business. We expect the Company will deliver a CAGR of 34% in NP between 2020E and 2022E. We take 34x 2021E P/E (corresponding to 1x PEG) and raise our TP to HK$33.7 with an upside of 34.1% from initial TP HK$13.1 (based on initial 19.5x 2020E P/E). Reiterate BUY.
