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October 10, 2006

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October 10, 2006 Hong Kong Equity | Automobile Company in-depth Zhongsheng Holding 中升控股 (881 HK) ACCUMULATE Riding on the luxury cars boom Share Price Target Price Zhongsheng is a leading auto dealer focusing on luxury brands including Audi, HK$22.55 HK$25.40 Mercedes-Benz, BMW (“ABB”) and Lexus in China. The group becomes the largest dealer of Lexus (with ~22% market shares) and the second largest dealer of Mercedes-Benz (with ~10% market shares) in China. The continuous rising of China / Automobile / Auto Dealers disposable income results in a consumption upgrade, which will drive Zhongsheng’s sales growth. Due to the rapid expansion of luxury brands network, 30 April 2018 we expect Zhongsheng to record an impressive earnings growth in 2018E. Initiate ACCUMULATE with TP of HK$25.4 and a 13% upside potential from here. Alison Ho (SFC CE:BHL697) More room to grow luxury car business: The top 8 luxury car brands sales rose by (852) 3519 1291 17.7% yoy in China in 2017, which outperformed the industry growth of 3%. The upbeat [email protected] of luxury cars demand is likely to continue in the coming future on the back of rising number of young drivers and increasing disposable income in China. Zhongsheng’s luxury cars sales accounted for 66% of new car sales in 2017, which is lower than its Latest Key Data peers (Zhengtong = 88%, Yongda=79%) due to a relative high contribution from Toyota Total shares outstanding (mn) 2,267 sales (17%) to its new car sales. Given the rapid expansion of its luxury brands’ network, Market capitalization (HK$mn) 51,122 we believe the group has more room to grow its luxury car sales going forwards. Enterprise value (HK$mn) 69,907 12M daily turnover (HK$mn) 66.6 New models of ABB fuels Zhongsheng’s demand: ABB will launch a variety of new 12M volatility (%) 37% models in 2018. Especially for Audi, it will enter into a new product cycle and introduces PEG FY16-18E (x) 0.6 16 new models this year. Besides, Benz and BMW will also launch the hot models such ROE avg FY16-18E (%) 21 as long wheelbase GLC, 525Li, X3, etc. We expect that Zhongsheng will enjoy the boom P/B FY18E (x) 2.1 in 2018E. Net debt/equity FY18E (%) 78 See robust gross profit margin ahead: Zhongsheng intends to focus their expansion on ABB and Lexus network in the future. Mercedes-Benz and Lexus accounted for 30.6% Performance (%) and 11% of the group’s new car sales and they had GPMs of 6% and 5.3% (other luxury 1M YTD 12M brands’ GPM = ~4%), respectively in 2017. The high contribution and GPMs of these two Absolute 3 26 107 brands can strengthen Zhongsheng’s competitiveness. The fast expansion of ABB + Relative to HSI 4 25 84 Lexus network is likely to support the margins growth of Zhongsheng in the future. Remain a high borrowing level: In order to expand luxury brands network and sustain Major Shareholders (%) inventory level, we believe it’s hard for Zhongsheng to reduce their borrowing level in Huang Yi 57.7 the short terms. Jardine Matheson 20.0 Capital Research & Management Co. Initiate with an accumulate rating. Zhongsheng is the leading luxury car dealership and 1.9 is well positioned to capture the fast-growing luxury car opportunities. We initiate Accumulate rating with target price of HK$25.4, suggesting 13% upside potential. Our Auditor target price is based on the valuation of DCF methodologies with WACC of 8.5% and Ernst & Young terminal growth of 3%. This implies a forward (FY18E) P/E of 11.4x and forward (FY18E) P/B of 2.4x. Investment Summary Price Chart Turnover (HK$mn) Price (HK$) FY-end Dec 2016 2017 2018E 2019E 2020E Turnover (RMB mn) 71,599 86,290 100,474 113,687 126,673 400 Zhongsheng Hldg. 25.0 Chg (%) 21 21 16 13 11 HSI 350 Net Profit (RMB mn) 1,860 3,350 4,000 4,726 5,445 20.0 Chg (%) 304 80 19 18 15 300 EPS (RMB ) 0.867 1.517 1.811 2.140 2.465 250 15.0 Chg (%) 304 75 19 18 15 200 P/E (x) 21.0 12.0 10.1 8.5 7.4 10.0 P/B (x) 3.6 2.6 2.1 1.8 1.5 150 P/OCF (x) 8.7 7.7 7.6 6.3 5.4 100 EV/EBITDA (x) 11.6 8.2 6.8 5.9 5.2 5.0 DPS (RMB) 0.267 0.295 0.453 0.535 0.616 50 Yield (%) 1.5 1.6 2.5 2.9 3.4 0 0.0 Source: Company data, Bloomberg, Orient Securities (Hong Kong) 17-Apr 17-Jul 17-Oct 18-Jan 18-Apr Source: Bloomberg, Orient Securities (Hong Kong) Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1 Hong Kong Equity | Automobile Company in-depth Sustained momentum for luxury car market Vehicles sales grow slowly but steady Figure 1: Accumulated sales volume of The sales volume of vehicles crept up 2.8% yoy, to 718 million units in Q1 2018, vehicles in China according to China Association of Automobile Manufacturers (CAAM). Due to no tax Mn Accumulated sales volume of reduction for the passenger cars with engine capacity of 1.6L and below, we saw that the Units vehicles % YOY growth(%) buyers have little incentive to buy a new car and the vehicle sales is likely to grow slowly 35 50 in 2018. 30 40 25 20 30 15 20 Luxury car brands enjoy buoyant sales 10 5 10 Although the passenger car sales in China only edged up by 1% yoy to 24.71 mn units in 0 0 2017, the sales volume of China’s top 8 luxury car brands rose by 17% yoy to 2.4 mn units, 2010 2011 2012 2013 2014 2015 2016 2017 2009 mainly attributable to the consumption upgrade and growing number of wealthy 2018Q1 individuals. In particular, Audi, BMW and Mercedes-Benz (“ABB”) are the most popular Source: Wind data, Orient Securities (Hong Kong) luxury brands, which accounted for 74% of top 8 China luxury cars sales in 2017. Apart from that, the second-tiers luxury brands such as Cadillac, Land Rover, Lexus, Volvo and Lincoln delivered an impressive growth in 2017, especially for Cadillac and Lincoln, which achieved growth of 50% and 66% respectively. Due to growing brand recognition, we believe the luxury car sales remain buoyant going forwards. Audi to rebound strongly in 2018 After the settlement of a dispute with dealers in May/2017, Audi’s sales accelerated in 2H2017(+13.8% yoy in 2H2017 vs -12.2% yoy in 1H2017) and its 2017 sales finally rose by 1.1% yoy to 597,866 units in China and surpassed Mercedes-Benz and BMW to become the best-selling luxury brand. Audi is going to launch 16 new models, we thus forecast that it will maintain a sales momentum in 2018. BMW - continuous expansion in China BMW was top 2 luxury car seller in China in 2017, which sales volume rose by 15.1% yoy to 594,388 units in 2017. Thanks to the launch of 525Li, 530L and X3, we believe BMW will achieve a strong growth in the upcoming year. Mercedes-Benz - the fastest growing company among ABB in 2017 Mercedes-Benz ranked No. 3 among luxury car sellers, which sales volume rose by 25.9% yoy to 587,868 units (exclude Smart-branded cars) in 2017, it grew at a CAGR of 24.4% during the period 2012-2017 and became the fastest growing brand among ABB. Figure 2: Luxury car sales in 2017 Units 2016 sales volume (LHS) 2017 sales volume (LHS) 2017 YOY Growth (RHS) 700,000 597,866 594,388 587,868 70% 600,000 60% 500,000 50% 400,000 40% 146,399 132,864 300,000 175,489 30% 200,000 114,410 20% 54,124 100,000 10% 0 0% Audi BMW Mercedes-Benz Cadillac Land Rover Lexus Volvo Lincoln Country of Germany U.S. Britian Japan Swedan U.S. origin Source: Internet data, Orient Securities (Hong Kong) See last page for disclaimer. 2 Hong Kong Equity | Automobile Company in-depth Audi, Mercedes-Benz and BMW’s prices We made a comparison of prices of Audi, Mercedes-Benz and BMW: Figure 3: Prices of Audi, Mercedes-Benz and BMW Domestic Brands Type Model Price (Thousand RMB) Comments Made Above 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 A4L, A6L and Q5 accounted for 1000 64% of Audi’s sales in 2017: A4L A1 Audi’s A4L, BMW’s 3-series and Benz’s C class have similar and A6L are mid-size sedans A3 performances and price ranges which cost between RMB292,800 A4L and RMB698,000. A4L and A6L A5 accounted for 19% and 24% of Sedan Audi’s overall sales, respectively, A6L Audi in 2017. Another star model- Q5 A7 (SUV) costs RMB399,600 to A8 RMB519,200, which accounted Q3 for 21% of audi’s sales in 2017. SUV Q5 Audi will launch A6Mix this year Q7 and it may further boost its sales. A class C Class and E Class dominated B class Mercedes-Benz’s sales: The C class mid-size sedan models - C class Sedan CLS class and E class dominate Benz’s sales, Mercedes E class their prices range is from RMB312,800 to RMB634,800.
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