The results in the first half of 2018 were lower than expected

Guanghui Baoxin announced the company's results in the first half of 2018: the company's operating income reached 17 billion yuan, an increase of 7% over the same period last year; the company's parent net profit reached 363 million yuan, down 10.1% from the same period last year, corresponding to 0.13 yuan per share, which was lower than market consensus expectations. mainly due to the company's new car sales and gross profit margin are lower than expected.

Trend of development

Profits fell in the first half of 2018, and gross profit margins on new car sales hit a record low. In the first half of 2018, Guanghui Baoxin's net profit fell 10.1 per cent from a year earlier and 9.5 per cent from the previous year, mainly due to a sharp drop in gross profit margin and an increase in expense rates. The company's gross profit margin on new car sales fell 1.49 percentage points from a year earlier and 1.42 percentage points to 2.0% from a month earlier, a record low, mainly due to expanded BMW discounts and weak Jaguar Land Rover sales. Due to the negative impact of its new car sales, the company's after-sales service gross profit margin fell 0.4 percentage points year-on-year to 47.1%.

Mergers and acquisitions lead to higher staff costs and exchange losses are a drag on profits. Baoxin has accelerated the pace of mergers and acquisitions since 2017, and the company acquired five stores in the first half of 2018. With the increase in the number of employees, the company's staff costs reached 532.8 million yuan, a year-on-year increase of 30 per cent. In addition, 1H18 recorded an exchange loss of 45.8 million yuan (the company recorded an exchange gain of 136 million yuan in the first half of 2017), resulting in a slowdown in the growth of the company's other income.

Sales and gross profit margins are expected to pick up and commission services are expected to maintain steady growth. Sales of domestic luxury brands rebounded between July and August, while BMW's discounts have shrunk by controlling supply, and the X3 is expected to help boost the company's gross margin in the future. In the first half of 2018, the company's commission income increased by 20 per cent year-on-year, accounting for an expanded share of overall gross profits.

Profit forecast

As we revised our forecasts for sales and gross profit margin for new cars, we lowered our 2018 profit forecast by 13.7% to RMB 857 million and our 2019 profit forecast by 18.2% to RMB 964 million.

Valuation and suggestion

At present, the company's share price corresponds to 6.0 times 2018 earnings and 5.3 times 2019 earnings. We maintain the company's "recommended" rating, but taking into account the sharp decline in investor risk appetite and lower earnings forecasts, we cut the company's target price by 29% to HK $3.2 (corresponding to 8.7 times 2018 and 7.7 times 2019, respectively). There is 40% room to rise compared with the company's current share price.

Risk.

The demand for passenger cars is lower than expected.