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M Winning in the Aftermarket MM August 10, 2020 09:47 PM GMT China Autos & Shared Mobility Winning in the Aftermarket Despite a slowing new car market, we look for 7% CAGR revenue opportunities from the auto aftermarket in 2020-25. Auto dealers, especially for luxury brands, will remain the mainstay for after-sales services, while independent repair chain stores have a chance to shine. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MM Contributors MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ Shelley Wang, CFA Jack Yeung Tim Hsiao Equity Analyst Equity Analyst Equity Analyst +852 3963-0047 +852 2239-7843 +852 2848-1982 [email protected] [email protected] [email protected] MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ Frank Wan Gary Yu Eddy Wang, CFA Research Associate Equity Analyst Equity Analyst +852 2239-1229 +852 2848-6918 +852 2239-7339 [email protected] [email protected] [email protected] MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY & CO. LLC MORGAN STANLEY & CO. LLC Jenny Jiang, CFA Simeon Gutman, CFA Armintas Sinkevicius, CFA, CPA Equity Analyst Equity Analyst Equity Analyst +852 2848-7152 +1 212 761-3920 +1 212 296-5469 [email protected] [email protected] [email protected] MM China Autos & Shared Mobility Winning in the Aftermarket espite a slowing new car market, we look for 7% CAGR revenue opportunities from the auto aftermarket in 2020-25. Auto dealers, especially for luxury brands, will Dremain the mainstay for after-sales services, while independent repair chain stores have a chance to shine. Industry View require less servicing, thus we estimate after-sales demand per car China Autos & Shared Mobility — Cautious will shrink by 30-35% on EVs. That said, we believe the EV challenge remains distant, because: 1) EVs have similar demand for accident From To WHAT’S China MeiDong Auto Holdings Ltd repair and accessory sales, which account for 50-70% of existing CHANGED Price Target HK$25.00 HK$27.00 after-sales revenue, and have incremental demand for e-powertrain China Yongda Automobiles Services coolants; and 2) EV parc penetration is set to remain low at 20% by Price Target HK$12.00 HK$10.00 2030, while the ICE car parc keeps growing. Further, EV makers such China Zhengtong Auto Services as Tesla are outsourcing bodyshop services to other dealers and inde- Price Target HK$1.30 HK$1.10 Cango Inc. pendent repair stores, which creates extra revenue opportunities for Price Target US$5.20 US$5.90 luxury dealers. Profit shifting from new car market to aftermarket: We believe Stock implications: We look for luxury dealers to benefit from rising China’s automotive aftermarket sales will grow at a 7% CAGR in aftermarket demand. Among them, Zhongsheng (0881.HK) is well 2020-25, to a Rmb1.6trn revenue opportunity by 2025, and become positioned thanks to active efforts to extend warranty periods; the major profit driver for auto dealers and repair stores. We expect Meidong (1268.HK) has high growth potential from after-sales as a aftermarket growth to outpace flattish new car sales, and be sup- younger dealer group; Yongda (3669.HK) can benefit too, but to a ported by: 1) an increasing car parc, at a 6% CAGR in 2020-25, as the lesser extent, because it has 15-20% sales exposure to SAIC brands, vehicle population continues to expand despite minimal growth in and might lose some after-sales business to SAIC-backed Che Xiang new car sales; 2) an aging car parc, as we gauge the average vehicle Jia. Cango (CANG.N), as a leading auto transaction service platform, age in China at five years at the end of 2019, below the US at 12 years could benefit by facilitating aftermarket transactions in lower-tier and Japan at nine years. cities. Fuyao Glass (3606.HK / 600660.SS) has only 20% market share in the China aftermarket, versus 60-70% in OEMs, and has Luxury dealers will continue to dominate in the aftermarket: potential to further penetrate the aftermarket. Alibaba (BABA.N) Authorized dealers have been dominating China's aftermarket with and JD (JD.O) can leverage their large user base, and direct online 50-60% market share, we estimate; the remainder is mainly shared traffic to their offline aftermarket franchises. PICC P&C (2328.HK) across small mom-and-pop repair stores. We expect luxury dealers, could save costs by developing its own aftermarket supply chain. such as Zhongsheng and Meidong, to remain the mainstay after-sales channel for luxury cars sold, thanks to higher customer retention, an With this note, Shelley Wang takes coverage of Cango Inc. extended warranty period and greater intention to preserve used car Exhibit 1: value. Summary of price target changes Independent repair chain stores have an opportunity to shine: Company Ticker Rating Price target Meanwhile, thanks to the rapid development of e-commerce and New Old express logistics industries, we expect independent repair chain Zhongsheng 0881.HK OW HKD 60.0 60.0 stores, especially those backed by Internet companies and OEMs, Meidong 1268.HK OW HKD 27.0 25.0 such as Tuhu, Tmall Car (by Alibaba), Jing Che Hui (by JD) and Che Yongda 3669.HK OW HKD 10.0 12.0 Zhengtong 1728.HK EW HKD 1.1 1.3 Xiang Jia (by SAIC), to consolidate the industry with an 18ppt market Baoxin 1293.HK EW HKD 1.3 1.3 share gain from mass-market dealers and mom-and-pop stores. Cango CANG.N EW USD 5.9 5.2 EV challenge remains distant: EVs have a modularized and thus Source: Morgan Stanley Research simpler structure than internal combustion engine (ICE) cars and MM Contents 5 Order of Preference 41 Yongda: Financial Summary 6 Key Charts to Watch 42 Yongda: Estimate Revisions 7 Investment Summary 43 Yongda: Valuation Methodology 9 Profit Shifting from New Car Market to 46 Baoxin: Financial Summary Aftermarket 47 Baoxin: Estimate Revisions 13 Who Will Benefit from the Growing Aftermarket? 48 Baoxin: Valuation Methodology 16 Debate #1: Can China Auto Dealers Continue to Grow the Aftermarket Business? 51 Zhengtong: Financial Summary 19 Debate #2: Will the Aftermarket Disappear in the 52 Zhengtong: Estimate Revisions EV Era? 53 Zhengtong: Valuation Methodology 22 Stock Implications 56 Cango: Financial Summary 30 China Auto Dealer Valuations 57 Cango: Estimate Revisions 36 Meidong: Financial Summary 58 Cango: Valuation Methodology 37 Meidong: Estimates Revisions 38 Meidong: Valuation Methodology 4 MM Order of Preference Exhibit 2: Order of preference Zhongsheng Meidong Yongda Zhengtong Cango Baoxin 0881.HK 1268.HK 3669.HK 1728.HK CANG.N 1293.HK Rating Overweight Overweight Overweight Equal-Weight Equal-weight Equal-weight Trading Currency HKD HKD HKD HKD USD HKD Price Target 60.00 27.00 10.00 1.10 5.90 1.30 Current Price 48.75 22.85 8.21 1.06 6.09 1.36 Upside/(Downside) (%) 23% 18% 22% 4% -3% -4% Market Cap (in USD mm) 15,274.2 3,406.4 2,081.6 368.9 923.5 497.9 Avg Daily Traded Vol (in USD mm) 16.7 4.7 7.2 4.9 0.0 0.4 Morgan Stanley Estimates FY20e CNY CNY CNY CNY CNY CNY Sales 141,416 20,707 63,796 34,899 1,353 37,956 EBITDA 10,478 1,390 3,438 2,895 202 2,357 EBIT 9,019 1,170 2,944 2,287 202 1,804 EPS 2.21 0.66 0.79 0.22 1.55 0.21 FY21e Sales 163,978 27,420 72,539 36,890 1,697 40,626 EBITDA 12,774 2,075 4,140 3,162 442 2,681 EBIT 11,186 1,806 3,603 2,554 442 2,083 EPS 2.83 1.06 1.00 0.26 2.73 0.26 Valuation Multiples at Last Close FY20e P/E 19.9x 31.3x 9.3x 4.4x 27.3x 5.8x EV/EBIT 13.3x 20.7x 8.4x 6.8x 22.2x 6.4x EV/EBITDA 11.5x 17.4x 7.2x 5.3x 22.2x 4.9x EV/Sales 0.8x 1.2x 0.4x 0.4x 3.3x 0.3x FCF Yield 5.2% 0.6% 0.7% 65.5% NA -12.9% FY21e P/E 15.5x 19.4x 7.4x 3.7x 15.5x 4.7x EV/EBIT 10.5x 13.3x 7.0x 6.0x 10.1x 5.8x EV/EBITDA 9.2x 11.6x 6.1x 4.9x 10.1x 4.5x EV/Sales 0.7x 0.9x 0.4x 0.4x 2.6x 0.3x FCF Yield 6.2% 3.9% 12.0% 56.6% NA -18.5% Stock Price Performance 1 Month 4.3% 8.6% (11.7%) (21.5%) 7.4% 3.0% 3 Month 51.6% 68.5% 17.2% (10.9%) 19.9% 54.5% 1 Year 141.3% 328.7% 29.6% (57.9%) (4.2%) (8.7%) YTD 52.8% 123.6% 19.0% (61.9%) (33.4%) (8.7%) Source: Morgan Stanley Research, Thomson Reuters (consensus mean).
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