Maintain BUY. Yongda's 1H23 net profit fell 40% YoY to RMB 407mn, slightly lower than our prior forecast but higher than some investors' pessimistic expectation. Yongda's 1H23 earnings YoY decline was between Zhongsheng (881 HK, NR) and Meidong (1268 HK, HOLD). We expect Yongda's new-car GPM to improve slightly HoH. We see meaningful earnings upside potential, should Yongda be more aggressive on cost reduction. In addition, the company announced interim dividends for the first time with a payout ratio of 50% (vs. 40% for prior final dividends), resulting in a yield of 7.3% now.

New-car GPM all-time low in 1H23. Yongda's 1H23 revenue was 4% higher than our prior forecast, due to higher average selling prices. However, its GPM of 7.5% was 0.6 ppt lower than our expectation, mainly due to lower new-car GPM of only 0.5% in 1H23. Its SG&A expenses were higher than our forecast by RMB 225mn, which was offset by higher other income in 1H23. Excluding extraordinary items related to the disposal of a 60% stake at a BMW 4S store, its other income in 1H23 was RMB 136mn higher than our prior forecast due to higher-than-expected auto finance commission income. Yongda's 1H23 net profit of RMB 407mn was lower than our estimates by RMB 39mn.

Porsche to improve, BMW likely stable and cost control still the key to profitability. We project Porsche's new-car GPM at Yongda to lift 1.6 ppts HoH in 2H23, as Porsche has decided to cut full-year target by about 10%. We see an improving product mix for BMW, but it still heavily relies on subsidies in 2H23. Therefore, we expect 2H23 new-car GPM to improve slightly HoH to 0.6%. As the net margin fell to below 2% with deteriorated new- car GP, the company's profitability becomes more sensitive to cost control. We project SG&A ratio to be lowered by 0.2 ppt HoH and therefore forecast 2H23E net profit to rise 16% HoH to RMB 470mn.

Valuation/Key risks. We project Yongda's net profit to rise 40% YoY to RMB 1.2bn in FY24E, amid higher revenue contribution from after-sales services, more diversified income and probably more rational sales targets from OEMs. We maintain our BUY rating but cut target price from HK$ 6.50 to HK$ 5.00, still based on 7x our revised FY24E P/E. Key risks to our rating and TP include lower sales and/or margins, slower after-sales service recovery than our expectation, as well as a sector de-rating.