Investment suggestion

Guanghui Baoxin's performance in 2018 was lower than expected, and we believe that the profitability of its product portfolio is under heavy pressure and the company's rating is downgraded to neutral. The reasons are as follows:

Seriously dragged down by the brand portfolio, the performance of 2018 fell by 30%; the company's operating income in 2018 was 36.72 billion yuan, an increase of 6.3% over the same period last year, and its net profit was 570 million yuan, down 30% from the same period last year. The decline in the company's gross margin 0.9ppt is the main reason for the sharp decline in the company's performance. Among its main distribution brands, BMW's discount increased gross profit margin fell more, while Jaguar Land Rover and Maserati's sales in China fell 21.6% and 32% respectively, and high inventory superimposed economies of scale declined, resulting in a sharp drop in profitability. The three brands account for more than 60% of new car sales, which is a big drag on the company's profits.

After-sales and financial leasing were less than expected and the growth momentum was weak; in 18 years, the growth rate of after-sales service revenue slowed to 19%, and gross profit margin fell 2.2ppt to 45.3%. At the same time, the scale of financial leasing business narrowed, and revenue fell 44% to 34.67 million yuan. The company increased the number of 5 dealer outlets in 17 and 18 years respectively, and the expansion rate was slow, and the driving force of the new store for the subsequent growth of the company was relatively small, while the growth of the same store was limited to the slowdown of sales growth in the industry and the decline in sales of some of the company's brands. as a result, the overall growth momentum of the company is weak.

Costs and operating efficiency need to be improved. The company's 18-year sales fee rate increased 0.6ppt to 5.4% compared with the same period last year, and there is still room for downward compression. The company's inventory turnover days increased by 3.6 days to 44.3 days, while ROE and ROA declined, and the company's operating efficiency needs to be improved.

What is the biggest difference between us and the market? We believe that the company's brand portfolio will continue to drag on gross profit margin and overall profitability this year.

Potential catalyst: a reduction in VAT and subsequent tariff reductions may bring end consumers a wait-and-see attitude and affect terminal inventory and gross profit margin.

Profit forecast and valuation

We adjusted the forecast of the company's gross profit margin and expense rate, lowered the company's 19-year profit forecast by 36% to 620 million yuan, and introduced a 20-year profit forecast of 680 million yuan. The company's current share price corresponds to 11.4x/10.3x 2019e/2020eP/E. For the above reasons, we downgraded the company to neutral and lowered our target price by 6% to HK $3.0, corresponding to 12x/11x 2019e/2020eP/E, which is 7% upside from the latest closing price.

Risk

Subsidies for BMW and Jaguar Land Rover exceeded expectations.