The current situation of the company
Zhengtong Motors released the main financial data of Wuhan Zhengtong, a wholly-owned subsidiary, in the first quarter of 2018: revenue rose 40.14% year-on-year to 10 billion yuan, and net profit increased 54.01% to 321 million yuan.
Comment
The new store led the distribution business to exceed expectations. Wuhan Zhengtong is mainly engaged in the 4S store distribution business of the listed parent company, and we believe that its strong growth is mainly due to the new sales revenue and profits brought by the new stores as well as the upgrading of the sales structure. In 2017, Zhengtong added 19 4S stores (the total number increased to 110), of which 95% were luxury car stores, leading to an improvement in the brand structure. In the first quarter, sales of core brands such as BMW, Audi, Mercedes-Benz, Volvo and Jaguar Land Rover rose 14%, 31%, 16%, 37% and 4% respectively from a year earlier, while driving the growth of original stores.
Financial business is expected to accelerate growth. The company currently has more than 2 billion yuan in core capital, so it is possible to significantly increase lending and assets. Dongzheng Auto Finance, a financial subsidiary, has set up 400 financial service outlets, which will help to expand the access channels for offline users. The company controls the bad debt rate (about 0.3%) by selling financial products through its own offline channels, which also helps to accelerate the growth of financial business in 2018.
SCMCS stores are expected to contribute revenue from this year. On January 1 this year, the company added 10 new strategic operations management partnership (SCMCS) stores to enter the company's sales network, management and human resources system. We expect SCMCS stores to contribute 3.5 billion yuan in revenue this year, and the model is expected to be further promoted.
Valuation proposal
Considering that 4S stores exceeded expectations in the first quarter, and new stores and SCMCS stores are expected to maintain growth, we will raise our profit forecasts for 2018 and 2019 by 21.2% and 23.2% to 2.03 billion yuan and 2.78 billion yuan, respectively. The current share price corresponds to 5.8 times 2018 earnings and 4.2 times 2019 earnings. We maintain our recommended rating and target price of HK $11.8, corresponding to 11.4 times 2018 earnings and 8.4 times 2019 earnings, respectively, with 98% upside from the current share price.
Risk
The integration of new stores and SCMCS stores is not as expected.