The performance is in line with Yingchao, and the luxury car market is recovering
- Revenue increased 22%, net profit fell 55%, mainly due to one-time expenses such as acquisitions - gross margin fell 3 percentage points to 8.8%, mainly due to a decline in gross margin for new cars - Management saw signs of recovery in the luxury car market
- We lowered our forecast and updated our target price to HK$19.76
Meidong Auto announced its fiscal year 22 results, in line with earlier earnings warnings.
Revenue +22%, net profit - 55%. In 2022, East America achieved revenue of 28.654 billion yuan (+22% YoY) and net profit of 521 million yuan (-55% YoY), both in line with previously announced profit forecasts.
We attribute the results to 1) slow growth in the luxury car market in 2022 and 2) one-time expenses (around RMB 329 million). If one-time expenses are added, the net profit of the US East will be 850 million yuan, and the decline will narrow to 27%. In the second half of the year, East America's revenue increased 36% to 15.996 billion yuan.
Gross margin fell 3 percentage points to 8.8%. In 2022, East America's gross margin fell 3 percentage points to 8.8%, the lowest level since 2013. Although 70% of East America's revenue comes from Porsche and BMW, these two brands were negatively affected by the escalation of the price war, which led to a drop in margin.
In the second half of the year, gross margin fell 5.3 percentage points to 7.4% (compared to only 0.3 percentage points to 10.5% in the first half of the year).
Revenue from new vehicle sales increased 21% in 2022, but gross margin fell 3.4 percentage points to 3.4%. In 2022, East America sold 67,871 new vehicles (+10% YoY), including 11,790 Porsches (+107% YoY) and 23,611 BMWs (-5% YoY). Meidong grew to become one of the largest Porsche dealers. However, due to the influence of the macro environment, the profit margins of Porsche and BMW both declined, leading to a decline in the profit margin of Meidong New Cars.
The luxury car market is recovering. According to management, passenger traffic has improved to nearly the same level as in October 2021. Management expects recovering passenger traffic to be converted into revenue soon. In the first 2 months of '23, Porsche's sales in China increased 20% year over year to 13,758 units (up 11.14% respectively compared to 2M21/2M19). We expect the ultra-luxury brand to benefit from China's recovery in 2023.
Our view: Meidong remains our first choice in the auto dealership industry because of 1) efficiency advantages, 2) ambitious expansion plans, and 3) excellent brand portfolio. We've lowered our predictions. Our new target price is HK$19.76, based on 20x FY23EP/E.
Risks: 1) Luxury car sales are weaker than expected; 2) the price war is more intense than expected; 3) Policy support is weaker than expected.