Zhongsheng announced its FY2020 results. Top-line was RMB148.3bn, up 20% YoY. Revenue from new car sales was RMB125.5bn, up 18%YoY, while the revenue from after-sales service was RMB20.2bn, up 14% YoY. Pre-owned auto sales business was included in the top-line for the first time, contributing RMB2.6bn. In 2020, bottom-line increased 23%YoY to RMB5.5bn (vs CMBI estimate of RMB5.2bn). The Company announced a dividend of RMB0.49 per share, representing a dividend ratio of 20%.
- Continuous optimization of geographic layout and brand mix. The number of stores reached 373 (218 luxury +155 mid-/high-end) at end of 2020, a net increase of 13 compared with the end of 2019. The Company has enhanced its presence in the existing brand + region (76% of its stores are located in the provincial capital and tier-1/2 cities, and 56% in East and South China), further strengthening its brands and regional advantages. Among its main brands, Benz +10 / Lexus +1 / BMW +6 / Toyota +4 stores. At the same time, the Company closed 4 stores to optimize the store structure.
- Maintain excellent operation efficiency. The share of new car revenue from luxury brands increased to 74.4% in 2020 from 71% in 2019. Benefiting from inventory management and optimization of supply/demand relationship, GPM of the new car increased to 3.0% in 2020 from 2.7% in 2019. Scale effects continue to play a role in expense ratio improvement. S&D expense ratio decreased by 0.12ppt to 3.86%. Admin expense ratio decreased by 0.05ppt to 1.51%. Through tax optimization, the effective tax rate was reduced by 1.3ppt to 27.3%. Inventory turnover days decreased to 23.3 days in 2020 from 30.4 days in 2019. Given supportive monetary policy after COVID-19, the financial penetration rate increased by 8.1ppt to 60.8%. Operating cash flow reached RMB9.3bn. We believe that the continuous improvement of operational efficiency reflects the superior management capabilities of the Company.
- We raised our 2021E earnings forecast by 1% to RMB6.8bn to reflect 1) strong growth in luxury vehicles and 2) expansion in pre-owned car sales. We expect earnings growth to achieve 22% in 2021E. We believe the Company will leverage its brand strength and customer base to accelerate its pre-owned car business. We raise our TP to HK$73.1(based on 22.0x 2021E P/E) with 34.3% upside from HK$64.3 (based on the initial 22.0x 2020E/2021E average P/E). Reiterates BUY.
- Pre-owned automobile sales under distribution model contribute to revenue mix for the first time in 2020. In 2020, the Company’s trading volume of pre-owned cars was 1.07mn, up 50% YoY (66,399 units in 2H20, +61.9%YoY). Pre-owned car sales volume under distribution models accounted for more than 20% of the Company’s total pre-owned car transaction volume, recorded to the revenue of RMB2.57mn for the first time. GPM of pre-owned car sales business is 7.6%, higher than that of new car sales. With the continued optimization of the pre-owned car policy and the improvement of the replacement penetration rate, we believe that the overall pre-owned car market in China will start to grow rapidly. Zhongsheng is expected to leverage its customer base of luxury brands to foster its pre-owned car business growth at a rapid speed. The Company will develop the pre-owned car business in the luxury brand and retail channel. Relevant after-sales service and financial service can be captured after a sizeable pre-owned car customer base was accumulated.
- The advantages as the leading player are gradually confirmed. The Company has been rated as investment grade rating (BBB -, baa3, BBB -) by major international credit rating agencies Standard & Poor's, Moody's, and Fitch. In May 2020, the Company successfully issued a new 5-year zero-coupon convertible bond of US $588 million. In Jan 2021, a $450 million five-year bond with a 3% coupon was offered to market. In 2020, the Company had an effective interest rate of 3.95%. We believe Zhongsheng will turn its cost advantage of financing into strong operational efficiency and high profitability. The Company will use its more than 5mn of customer base to rapidly expand its pre-owned vehicle business.
