1H23 performance falls short of market expectations
The company announced 1H23 results: achieved revenue of 34.86 billion yuan, +11.1% year on year, -14.2% month on month; net profit of 4.1 billion yuan, -38.9% year on year, and -46.0% month on month. The 1H23 performance fell short of market expectations, mainly because the gross margin of new cars declined significantly due to increased competition for new cars.
Development trends
Profit from new vehicle sales is under pressure, and after-sales and new energy businesses have shown growth resilience. 1H23's new car dealership sales revenue was +6.5% year-on-year to 27.04 billion yuan, and new car sales volume was +11.7% to 85,759 units; of these, luxury brand sales revenue was +5.3% year-on-year to 23.67 billion yuan, corresponding sales volume +7.6% to 62,233 units. Affected by increased competition for new cars and the company's brand structure, the gross margin of new cars was -3.1 ppt to 0.5% year-on-year, and the gross margin for new cars is at a new low level in recent years. 1H23's after-sales business revenue was +17.8% year-on-year to 5.20 billion yuan, demonstrating the steady operation of the after-sales business. However, the extended after-sales business for new cars was hampered by increased competition in the industry, and the after-sales gross margin ranged from -2.1ppt to 43.1% year-on-year. The NEV business performed well, with total sales volume +116.5% to 16,240 units, of which independent NEV sales volume was +169.8% yoy to 7,687 units, continuously unleashing market potential. The company has a first-mover advantage in terms of electrification layout and has opened 38 new energy outlets. We believe that as the company promotes all-round strategic cooperation with leading new forces and cooperates with the electrification transformation of traditional brands, the new energy business is expected to continue to expand and become a new driving force for the company's growth.
Fine management helps reduce costs and increase efficiency, and the quality of operations continues to improve. Benefiting from the control of labor costs and marketing expenses, 1H23's sales and management expenses reached -4.4% month-on-month to 2.87 billion yuan. After deducting depreciation, amortization and rental expenses, these expenses ranged from -7.3% to 2.25 billion yuan over the previous month. The cost reduction effect was outstanding. The company's operating efficiency has been continuously optimized. Inventory accounts for -18.7% of capital to 6.23 billion yuan, operating cash flow of 1.1 billion yuan, inventory turnover days of 24.4 days, and overall balance sheet health. We believe that the company actively carries out fine management and uses digital tools to integrate resources, which is expected to promote sustainable and high-quality business development.
There has been a steady increase in used cars, and the supporting business model has been rapidly upgraded. 1H23's used car sales volume was +207.8% year over year to 19,916 units, revenue was +74.3% year over year to 2.45 billion yuan, and the overall ratio of new to old was +5.1 ppt to 45.4% year on year. Among them, the distribution ratio was 68.7%, and the transformation of the distribution model achieved remarkable results. We believe that the company's used car business is steadily improving, forming a competitive advantage in vehicle source management, channel expansion, and platform sharing. As retail rates increase and luxury brands increase, profit space is expected to further open up.
Profit forecasting and valuation
Due to the decline in profitability of the new car business, we lowered our 2023/2024 net profit by 54.2%/29.1% to 1,047 million/1,888 billion yuan. The current stock price corresponds to 5.2 times/2.9 times the price-earnings ratio of 2023/2024. Maintaining our outperforming industry rating, we simultaneously lowered our target price by 44.4% to HK$4.00, corresponding to 6.3/3.5 times P/E for 2023/2024, with 20.5% upside from the current stock price.
risks
Competition for new cars has intensified, and the restoration of profitability has fallen short of expectations.