Yongda released its 1H20 results. 1H20 top-line dropped by 4% YoY to RMB28.0bn, among which revenue from new car sales declined by 4% YoY to RMB23.6bn while revenue from after-sales service decreased by 7% YoY to RMB4.0mn. 1H20 bottom-line decreased by 28% YoY to RMB530mn (1Q20 -83% YoY / 2Q20 +21% YoY).
- Resumed to the high growth path in 2Q20. Due to the negative impacts of COVID-19, the bottom-line fell 83% YoY in 1Q20. However, the Company returned to its high-growth trajectory since 2Q20. New vehicle sales revenue increased by 14.5% YoY while after-sales service revenue increased by 15.4% YoY in 2Q20. Financial agent revenue increased by 13.0% YoY whereas GP from used-car transaction increased by 28.8% YoY. As a result, 2Q20 bottom-line achieved a 21% YoY growth.
- Optimizing the asset structure. The number of opened stores dropped to 230 from 234 at the end of 2019 as the Company sought to optimize its network structure in 1H20. In 1H20, eight luxury/ultra-luxury stores were opened while seven stores with weak profitability were closed on purpose. The proprietary finance balance shrank by 14.4% compared to the end of 2019, matching its new strategy on auto loan business. A potential spin-off/restructure of the proprietary finance segment will strengthen its balance sheet further. The Company completed a top-up placement at the end of Jun 2020 and raised approximately RMB880mn for network expansion (M&A + organic growth). We believe that Yongda will continue to expand its presence while optimizing its asset structure.
- Shining performance of BMW and Porsche. In 2Q20, Yongda’s BMW sales volume increased by 15.2% YoY while Porsche has increased by 7.8% YoY. In 2H20E, BMW will launch new models (3&5 series facelift version / 4 series new model / iX3 new model). Together with friendly OEM business policies, we believe its BMW will maintain the momentum in terms of both sales revenue and profitability. The Porsche performance was/will be restricted by tight supply in 2Q20/3Q20E. However, the Company has accumulated ample orders on hand (exceeding two months) which will underpin the delivery peak in 4Q20E. With the overall market recovery, we believe that Yongda's sales volume will achieve a 16% YoY growth (luxury/ultra-luxury +19% YoY / mid-/high-end +10% YoY) in 2H20E.
- We cut our bottom-line forecast by 19% in 2020E at RMB1.5bn to reflect the asset optimization in 1H20. Based on our 2020E forecast, the implied bottom-line growth rate for Yongda will be 32%YoY in 2H20E. However, we remain optimistic about its 2021E performance and expect a 35% growth rate in bottom-line given 1) positive outcome of asset optimization 2) M&A expansion potential; 3) efficiency improvement.
- Re-rating potential as strategy shifts. In 1H20, we observe a steady advancement in strategy shift as the Company claims. Asset optimization and strategy focus shift will enhance overall operating efficiency. The Company also has a strong cash reserve from top-up placement, providing future M&A expansion potential. We appreciate both the realization of strategy shift and high growth potential. We expect the Company will deliver a 32% YoY growth in 2H20E and 32% growth in 2021E. We take 9.0x 2021E P/E and raise our TP to HK$11.1 with an upside of 26.9% from initial TP HK$7.4 (based on initial 6.5x 2020E P/E). Reiterate BUY.
