1H19 performance fell 12% year-on-year
Total revenue increased 2.2 per cent year-on-year to 17.35 billion yuan (of which new car sales accounted for about 86.7 per cent of 15.04 billion yuan, up 1.3 per cent year-on-year), gross profit margin was about 7.8 per cent year-on-year (of which, new car gross profit margin was about 2.0 per cent year-on-year). Net profit fell 12% year-on-year to 320 million yuan (about 47.3% of our full-year profit forecast).
The gross profit margin of 2H19E new car is flat or slightly improved compared with the previous month.
1H19 luxury brand new car sales rose 10.2% year-on-year to 41000 vehicles (accounting for about 75.2% of total sales), while luxury brand new car sales revenue increased 3.1% year-on-year to 13.44 billion yuan (about 89.4% of total new car sales revenue). We judge that 1) the 2H19E industry may show a marginal improvement trend, and the demand for luxury cars is relatively robust; 2) BMW benefits from the new 3-Series / X2 domestic / X1 modification, and the 2H19E sales are expected to be robust / the new car gross profit margin will stabilize; 3) the reduction of Jaguar Land Rover wholesale sales target may be conducive to stabilizing discounts / improving market supply and demand, and the drag on 2H19E Jaguar Land Rover profits is expected to weaken. 4) the gross profit margin of 2H19E new vehicles is expected to be flat or slightly improved compared with the previous month (2019E company new vehicle gross profit margin is about 2.2%).
After-sales gross margin falls, financial leasing / commission business growth slows down
1H19 after-sales revenue rose 8.2 per cent year-on-year to 2.29 billion yuan, gross profit margin fell 1.6 percentage points to 45.5 per cent, car financial leasing revenue rose 2.5 per cent year-on-year to 20 million yuan, and commission income rose 6.5 per cent year-on-year to 380 million yuan. We judge that 1) the after-sale gross profit margin may be improving; 2) the growth rate of derivative business is slowing down (among which, auto financial leasing business may remain stable), and the revenue of 2018-2020E auto derivative business (financial leasing / commission business) is expected to Cagr to 6.7%.
Upgrade to "neutral" rating
In view of the impact of the slower growth of derivative business, we reduced the net profit of 2019E/2020E/2021E to RMB 650 million / 810 million / 930 million respectively, and lowered the target price of DCF to HK$1.61 (corresponding to about 5.9x/4.8x 2019E/2020E PE). The current share price (corresponding to the 5.6x/4.5x2019E/2020E PE) may have partially reflected the fundamental downside risks; it was upgraded to a "neutral" rating in view of the sector valuation repair expectations driven by the marginal improvement in the 2H19E industry.
Core risks suggest that new car sales and gross profit are under pressure; auto finance is slowing down; after-sales and derivative business is not as expected; integration with Guangzhou foreign exchange business is not as expected; market policy risk.