Yongda (3669 HK) released FY20 full-year results. Revenue was RMB68.5bn, up 9% YoY, among which revenue from new car sales up by 10% YoY to RMB58.2bn while revenue from after-sales services up by 8% YoY to RMB9.6mn. FY20 NP increased by 10%YoY to RMB1.6bn (vs CMBI estimate RMB1.5bn). Benefiting from the recovery of China's overall auto market after COVID-19, 2H20 NP increased by 48.2% to RMB1.1bn. The Company declared a dividend of RMB0.288 per share, representing a 35% payout ratio, higher than its historical level over the past five years.
- The Company maintains excellent operating conditions, focusing on (ultra-) luxury brands. The number of stores increased to 213 in 2020 from 206 at the end of 2019. In 2020, the Company took the initiative to close/ transfer 13 branches with weak profits, so as to improve the brand structure and network layout and increase the efficiency of the assets. The new car sales volume of Yongda in 2020 increased by 3.7% YoY to 204.6K units, among which Porsche +12.7% YoY / BMW +6.8% YoY. Luxury brands accounted for 84.0% of new car sales revenue in 2020, up from 82.7% in 2019.
- The financial situation continued to improve. The Company's gross profit margin on new vehicles increased by 0.32ppt to 2.67% (BMW 2.65%, Porsche 7.36%) thanks to increased sales of its two major brands, while its gross profit margin on after-sale services remained stable at 46.01%. In 2H20, the S&D+ Admin expense ratio decreased by 0.49ppt, mainly due to 1) the scale effect brought by the growth of revenue; 2) while controlling fixed expenses, part of salaries was changed from fixed to floating. The Company's financial expense ratio in 2020 decreased by 0.25ppt, mainly due to 1) decrease of inventory turnover days from 36.8 days in 2019 to 30.8 days in 2020; 2) operating cash flow improved significantly, up 39.4% YoY to RMB5.7bn; 3) expansionary monetary policy under the background of post-COVID 19 recovery. By the end of 2020, the Company's net debt ratio dropped by a significant 44.6ppt to 54.1%, laying the foundation for earnings growth and future expansion.
- 2021E to increase the used-car business. The Company sold 52,280 used cars in 2020, up 26.6%YoY. The gross profit of used-cars was RMB175mn, up 27.3%YoY. In 2H20, the replacement ratio increased from 21% in 1H20 to 25%-26%. Benefited from the VAT reform (the new policy was implemented on 1 May 2020), the Company has decided to actively expand the used-car car dealership business from the traditional brokerage business, which will be launched in 2021E. The Company will take advantage of the brand advantages of 1) official certification and Yongda certified used-cars; 2) transition opportunity for used-cars wholesale to retail under the background of increasing market replacement rate; and 3) digital platform which empowers O2O used-car business, in order to seize the development opportunities of the used-car market.
- Yongda will continue to expand the business of NEVs. The Company's sales volume of NEV (including plug-in and hybrid models) in 2020 increased by 13.8% YoY to 10,271 units. The Company will set up a new organizational structure and an independent team to expand the business of NEV, and focus on the asset-light operation model. Yongda currently cooperates with new players such as Tesla (2), XPEV (3), and WM Motor (6), and maintains communication with other players. The Company's NEV business will mainly focus on 1) acting as a showroom partner and delivery agent; 2) battery-charging business, etc. We believe that the new energy vehicle business is expected to lift the Company's overall market space.
- We expect re-rating given recent events. Previously, the valuation multiple of Yongda lagged behind its peers, mainly due to 1) the existence of proprietary finance and leasing business, and 2) ambiguous future of several business lines. We have noted that the Company has taken measures such as stripping non-core assets to continuously improve its operating conditions, and has clarified the business layout of "(ultra-) luxury + NEV+ used-car". It is expected that its valuation will converge to that of top peers. We remain optimistic about the overall luxury car market in 2021E with a high growth rate. The Company's new acquisition of six BMW stores (completed by Nov 2020) will begin to contribute to the Company's earnings in 2021E and support its high earnings growth.
- We raise our bottom-line forecast by 5% in 2020E at RMB2.1bn to reflect 1) strong luxury vehicle growth and 2) used-car business expansion. We expect the Company will deliver a 30% YoY growth in 2021E. As we stated previously, we take 15.0x 2021E P/E and raise our TP to HK$18.6 with an upside of 30.4% from the initial TP HK$11.1(based on initial 9.0x 2020E P/E). Reiterate BUY.
