The contribution of passenger car sales performance has improved significantly, and the profitability has increased rapidly in the past two years.
The company's annual report income in 2017 is 35.474 billion yuan (the same below), and the net profit is 1.191 billion yuan, the best level in history. In the first half of 2018, the company's revenue recorded 18.768 billion yuan, an increase of 20.1% over the same period last year, and net profit recorded 711 million yuan, an increase of 37.8% over the same period last year.
The company's growth has accelerated in the past two years, on the one hand, because of faster revenue growth, and on the other hand, it has also benefited from a significant improvement in gross margins on new car sales. The company's gross profit margin on new car sales was only about 3 per cent in 2015-2016, rising to 4.9 per cent in 2017 and 6.3 per cent in the first half of 2018. The improvement of the gross profit margin of new car sales has directly contributed to the rapid improvement of the company's overall gross profit margin and profitability in the past two years.
Auto finance business is developing rapidly, and profit contribution continues to improve.
The company has an auto finance license (held by its Dongzheng Finance) and can engage in the car loan business, which is where Zhengtong Motor has an advantage over other car dealers. The company's auto finance business has grown from scratch in recent years and continues to grow at a high speed. In 2017, the revenue of the business reached 522 million yuan, an increase of 31.3% over the same period last year. In the first half of 2018, the company's auto finance business income reached 365 million yuan, a year-on-year growth rate of as high as 50%. In terms of profit contribution, the company's reported net profit of auto finance business reached 378 million yuan in 2017, accounting for about 32% of the company's net profit. In the first half of 2018, the reported net profit of auto finance business increased by 50% to 276 million yuan, accounting for about 39% of the company's net profit.
From the perspective of the development trend of the industry, there is still much room for improvement in the penetration rate of auto finance, which provides a good opportunity for the continuous expansion of the company's auto finance business. It is expected that Zhengtong's auto finance business will act as an important driver of the company's profit growth in the next few years.
Positioning luxury car dealers and service providers, the future growth is still guaranteed.
Although the overall growth of the passenger car industry has encountered bottlenecks at present, in the context of the stock market, car replacement and consumption upgrading are expected to support and promote the rapid growth of the luxury car market segment. The company locates luxury car dealers and service providers, and most of its revenue and profits come from luxury car-related business. we believe that the company will fully enjoy the continued growth of the luxury car segment in the future.
Profit forecast and rating
We expect luxury car sales to remain stable in the second half of 2018. However, due to a significant decline in the overall prosperity of the industry, the company is expected to be under pressure on the gross profit margin of new car sales in the second half of the year.
We predict that the company's net profit will be 1.51 billion yuan in 2018, down from 37.8% in the first half of the year.
At present, the valuation of Zhengtong Motor is in a historically low range, and the value of long-term investment is gradually highlighted. The company's luxury car sales and after-sales service business is expected to benefit from the continuous improvement of domestic luxury car penetration and the continuous expansion of market segmentation for a long time. In addition, the company's auto finance business is in the ascendant, and there is huge room for growth in the future, which will become an important growth point of the company's profits. However, considering that the domestic passenger car market has entered a significant negative growth in the third quarter, and there is no sign of easing or reversing for the time being, we believe that the valuation of the dealer industry is still likely to be under pressure in the short and medium term. We temporarily give Zhengtong a neutral rating before the emergence of an obvious stock price catalyst.
Risk hint
The growth rate of luxury car sales was lower than expected; the gross profit margin of new car sales fell more than expected as a result of increased competition in the industry.