Annual Report Results Announcement
Total revenue for 2018 increased 6.3% year over year to RMB 36.72 billion (vs. about RMB 36.35 billion), gross margin fell 0.9 percentage points year over year to 7.6% year on year, and gross profit fell 29.9% year on year to RMB 570 million (vs. our forecast of approximately RMB 780 million). Factors such as 2Q18 policy fluctuation/2H18 The pressure on the car market has led to a decline in gross margin for new cars, a weakening of the new car sales brand structure (Jaguar Land Rover accounts for about 10.7%), a slowdown in automobile financial leasing, and an increase in the share of SG&A expenses are the main reasons why performance falls short of our expectations.
The gross margin of new cars may remain low
In 2018, the company's new car sales volume increased 7.8% year on year to 112,000 units (luxury car sales volume increased 11.8% year on year to 83,000 units/sales volume accounting for about 73.5%), new car sales revenue increased 4.8% year on year to RMB 32.20 billion (luxury car sales revenue increased 7.2% year on year to RMB 28.59 billion, sales revenue accounted for about 88.8%), and gross margin for new vehicles fell 1.3 percentage points year on year to 2.2%. We determined that 1) the market terminal demand was still relatively weak in March-April; 2) the decline in the VAT rate led to a decline in car company officials, including BMW and Jaguar Land Rover. Terminal demand is expected to be boosted, but the amplitude and sustainability of the boost remains to be seen; 3) Given the uncertainty of 2Q18E terminal demand recovery, policy risks, and the imminent return of the country VI switch, the view that the industry inflection point will remain unchanged; 4) It is expected that the gross margin of new vehicles will remain low (we expect the gross margin of the new vehicle company to remain low in 2019E).
Commission business performance is steady, after-sales gross margin is falling back/financial leasing progress is slowing down
In 2018, commission revenue increased 30.1% year over year to RMB 780 million; after-sales revenue increased 18.7% year on year to RMB 4.49 billion, gross margin fell 2.5 percentage points year on year to 45.3% year on year; automobile financial leasing revenue fell 44.1% year on year to RMB 350 million. We anticipate that 1) the gross margin of the after-sales business is expected to improve marginally but may still be under pressure in the short term; 2) the pace of development of the automobile financial leasing business may slow down; 3) the 2018-2020E automobile financial leasing/commission business revenue Cagr will be lowered to 12.6%.
Downgrade “holdings reduction” rating
We lowered the 2019E/2020E net profit from RMB 980 million/RMB 1.16 billion respectively to RMB 670 million/RMB 850 million, and we expect net profit to be about RMB 990 million for 202E. We lowered the DCF target price to HK$2.34 (corresponding to approximately 8.4 x 2019E PE) and lowered it to “reduce holdings”
ratings.
Core risks suggest that new car sales volume and gross profit are under pressure; auto finance is slowing down; after-sales and derivative business progress falls short of expectations; integration with Guanghui's business falls short of expectations; and market policy risks.
