Core view: In 2022, affected by the epidemic and industry price competition, the East American business showed strong cyclicality. The performance fell short of expectations, but it still showed strong operational resilience. In the future, with its leading “α” advantage, the company operates steadily, is expected to obtain better opportunities for mergers and acquisitions, and release profit elasticity that exceeds expectations during the industry's upward cycle.
Adjust profit forecasts to maintain the “increase in holdings” rating. In 2022, due to the impact of the pandemic and industry price competition, Meidong Auto's profit fell short of expectations. The auto dealer industry is highly cyclical. When supply is less than demand, demand and gross margin both rise. Conversely, demand and gross margin both fall, and consumers expect positive feedback from falling prices to further damage gross profit margins. Currently, user demand is still slowly recovering. Considering the speed of future consumption recovery and the uncertainty of the evolution of price wars, we adjusted Meidong Auto's net profit forecast for 2023-2025 to 6/10/14 billion (the previous forecast for 2023-2024 was 1,400/1.8 billion yuan respectively). Meidong Auto is the company with the fastest inventory turnover in the industry. Its efficient and steady operation is expected to turn the crisis into an opportunity and maintain its “increase in holdings” rating.
The strong cyclicality of the industry is reflected, and the company's performance in the second half of the year fell short of expectations. Meidong Auto achieved net profit of 178 million yuan to its mother in the second half of 2022, down 72% from the previous year. The performance fell short of expectations, mainly due to oversupply in the market and a significant decline in gross margin for new car sales. In the second half of the year, the company's gross margin for new car sales was 1.98%, down 5.03 percentage points from the previous year and 3.22 percentage points from the first half of 2022. Looking at the whole year, the company achieved net profit of 521 million yuan to the mother, a year-on-year decrease of 55.3%. The gross margin of new car sales fell 3.4 percentage points to 3.4% from 6.8% in 2021. Among them, the gross margin of luxury brands fell 3.6 percentage points to 3.8% from 7.4%, and the gross margin of high-end brands fell 2 percentage points from 3% to 1%. In terms of after-sales service, the company's after-sales revenue increased 22% year on year, and gross margin was 49%, roughly the same as in 2021.
Inventory turnover is still excellent, and the company strives to operate steadily. In 2022, the pandemic led to a decline in demand, compounded by oversupply in the electric vehicle industry, triggering price competition in the industry, and the industry's gross margin declined. Furthermore, the US East acquired StarChase Auto in May 2022, which resulted in dealership rights amortization costs of about 100 million yuan and one-time expenses of 56 million yuan, putting pressure on performance in the short term. At a time when the industry was underperforming, we observed that East America still maintained good operating efficiency. The company's inventory turnover was 11.5 days, up from 5.8 days in 2021, but it remained healthy and remained ahead of the industry. The company achieved an ROE of 12.5% even in such difficult circumstances in 2022. Furthermore, since the company's merger and acquisition of StarChase in May, the operating efficiency of StarChase has improved markedly. Compared with 2021, the sales volume of Chasing Star stores increased by 5.4%, sales revenue increased by 12.6%, and after-sales revenue increased by 24%, confirming that the company's operations have strong replication capabilities.
The leading “α” advantage is expected to help East America turn the crisis into an opportunity. Meidong is the company with the best inventory turnover in the automobile dealership industry. Affected by a strong business cycle, its performance is under pressure in the short term. We believe that the core value of automobile dealers is to take inventory risks for automakers. In a market environment where supply exceeds demand, the transformation of automakers from a direct management system to a dealer model is a probable event, but its recovery time is uncertain. We anticipate that in 2023, Meidong Auto will shift its focus from scale expansion and growth to efficient and steady operation to maintain a healthier cash flow and balance sheet.
In the industry's downturn, M&A opportunities will increase dramatically. On the basis of maintaining its own steady operation, Meidong is expected to get better M&A opportunities. When the industry cycle rises, the US East is expected to use its leading “α” advantage to release profit elasticity that exceeds expectations.
Risk warning events: risk of industry price war; risk of agency brand weakening.