Investment suggestion
The company's 1H19 performance was lower than expected, the development of the company's new car business and financial sector were greatly affected by market factors, and there was greater uncertainty in subsequent growth. We downgraded the company to "neutral" and lowered the company's target price by 39.4% to HK $2.91. The reasons are as follows:
1H19's new car business fell sharply and its performance fell short of expectations; the company's 1H19 revenue fell 7.1% year-on-year to 17.43 billion yuan; and home net profit fell 33.6% year-on-year to 472 million yuan. Among them, other income (mainly commission income) fell 18% year-on-year, gross profit margin fell 0.5ppt year-on-year, sales and financial expense rates increased 0.4ppt and 0.7ppt respectively, becoming the main drag on the performance below expectations. In terms of business, the company's new car sales business was affected by factors such as large price fluctuations in the car market and sluggish demand in the first half of the year, with sales falling 5.6 per cent year-on-year and gross profit margin falling 1.6ppt to 4.7 per cent (middle and high-end gross margin is 0 per cent), a 17-year low.
The growth of the financial sector is slowing down, and the financing cost is under great pressure. Dongzheng Auto Finance Company, the main body of the company's financial sector, under the influence of the tight financing environment (the comprehensive capital cost of the company's 1H19 rose by 0.8ppt to 6.76%) and the service charge business (the handling fee decreased slightly by 1.4% compared with the same period last year), although the loan scale continued to grow by 18.3% to 9.97 billion yuan, the net profit decreased by 9.9% to 202 million yuan compared with the same period last year, which did not contribute much to the increase of the company.
The business model is still adjusting, waiting for growth to recover after integration. In the first half of the year, the company carried out business adjustments such as the spin-off and listing of Dongzheng Financial and the introduction of logistics business into war investment, and it still needs some time to integrate. At present, the company still has more than 10 4S stores authorized to open, waiting for the business model and network planning to be stable. Performance returns to growth.
What is the biggest difference between us and the market? We believe that in the current financing environment pressure, while the company's external network expansion rate slows, the company's financial sector follow-up growth is still facing greater uncertainty.
Potential catalyst: new car gross margin returns less than expected, financing costs continue to rise.
Profit forecast and valuation
We lowered the company's profit forecast for 2019 by 45.6% to 1.1 billion yuan, and introduced a profit forecast of 1.3 billion yuan for 2020. The company's current share price corresponds to 5.6x/4.8x 19e/20e Pamp E. combined with the above reasons, we downgraded the company to neutral, with a target price of 39.4% to HK $2.91, corresponding to 5.8x/4.9x 19e/20e Pamp E, which is 3.2% upside from the current price.
Risk
The growth of financial business exceeded expectations, and the cost of financing was lower than expected.