23H1 achieved operating income of 14.09 billion yuan, +10.6% year-on-year, and net profit of 39 million yuan, or -88.6% year-on-year. The decline on the profit side was mainly due to the fact that the US East adopted a strategy of reducing gross profit and high turnover in order to operate steadily in the context of fierce competition in the new car side market. 1H23's after-sales business is steadily expanding. The Tesla plate spray center has been opened. The zero service absorption rate has reached 120%, and the gross profit of the after-sales business has reached 50.1%.
The company's abundant cash on hand (1H23 net to cash ratio 11.0) will provide the company with sufficient measures to deal with risks and support the company to seize opportunities when suitable M&A opportunities arise. Due to pressure on the new 1H23 vehicle side and the industry's temporary high volatility, we lowered our net profit forecast for 2023/2024/2025 to $4.6/9.3/1.22 billion yuan (the original forecast was $11.3/14.0/1.74 billion). We gave Meidong Motor 18 times PE in 2023 (original valuation was 23 times PE), corresponding to a target price of HK$7.00 (original target price was HK$22.0), maintaining the “buy” rating.
23H1's revenue increased by 10.6%, and the gross margin of new vehicles was under pressure. 23H1 achieved revenue of 14.09 billion yuan, +10.6% year on year, of which new car sales revenue was 12.13 billion yuan (+8.7% year on year) and after-sales service was 1.96 billion yuan (+30.3% year on year), mainly due to the further boost in Porsche sales volume after the acquisition and integration of “star-chasing” stores. The sales revenue of the Porsche brand 23H1 reached 5.55 billion yuan, +33.6% year on year, accounting for 45.7% of new car sales revenue. The company's 23H1 gross profit margin was 1.0 billion yuan, -29.3% year on year, comprehensive gross profit margin of 7.1%, year on year -4.0 pcts; of these, gross profit margin on new car sales was 0.2%, year-on-year -5.0 pcts, and after-sales service gross profit margin was 50.1%, +0.3 pcts. The economic recovery rate in the first quarter was lower than the company's expectations, and there was a continuous oversupply in the luxury car market. As a result, on the new car business side, the US East was forced to sell cars quickly under a high turnover and low gross profit model to ensure stable cash flow and operations, causing the gross margin for new cars to drop sharply.
Exploiting the potential of after-sales business, the zero service absorption rate reached 120%. The absorption rate of 23H1 Meidong zero service increased sharply to 120% (22H1 was 96.9%), single-store after-sales service revenue increased 18.9% year-on-year, and after-sales business gross profit reached 50.1%, which was a good hedge against fluctuations in the new car side. 23H1 On the cost side, the company continued to strengthen cost control and optimize the size of stores and personnel. The cost rate during the 23H1 period was 5.6%, -0.5 pct year on year, of which the sales expense rate was 2.7%, the year-on-year -0.3 pct; the management expense rate was 2.8%, -0.2 pct. 23H1 achieved net profit of 39 million yuan, -88.6% year-on-year. Profitability declined sharply due to factors such as gross profit on new vehicles and non-cash amortization; net profit after adjusting for non-operating expenses such as interest costs and authorized dealer amortization was 250 million yuan, or -49.2% year-on-year.
High efficiency remains the same, actively responding to macro-level challenges. The company's 23H1 achieved sales of 31,000 new cars, +6.5% year-on-year. Among them, Porsche, BMW, and Lexus sold 6,464, 11,830, and 4,415 vehicles, respectively, and +38.2%, +12.0%, and -12.8% year-on-year. 23H1's overall same-store revenue was +11.3%, while same-store revenue excluding new stores and mergers and acquisitions was -2.0%. The company continued to optimize stores. 23H1 closed 1 Toyota store and the last Hyundai store, and added a Lexus store and a Tesla plate spray center. The company has also further strengthened inventory control. The number of inventory turnover days for 23H1 was 12 days, down 2 days from 22H1, and the number of inventory units dropped to 0.42 units. We believe that in a tough macro environment, efficient inventory turnover will help the company overcome potential risks more calmly.
A second Tesla board spray shop, 23H2, opened, with sufficient cash on hand to withstand risks. 23H2, the second Tesla plate spray center in the east of the US is about to open, which will further accumulate new energy after-sales experience. As of 23H1, the US East had 1.75 billion yuan in cash on hand. The net current ratio increased from 2.1 in 22H1 to 11.0 in 23H1, and the leverage ratio fell from 41.3% to 16.2%. While sufficient cash allows the US East to be more resilient to risks, it is also able to take action in a timely manner when there are suitable mergers and acquisitions.
Risk warning: the risk that demand in the high-end luxury car market will continue to decline; the risk that OEMs will put more inventory on dealers than expected; the risk that the intensity of the price war in the automobile industry will exceed expectations: the risk that NEV dealers' business expansion falls short of expectations
Investment advice: Meidong Auto still has industry-leading efficiency, high turnover capacity, and high cash reserve strength. We believe these characteristics of Meidong Auto will continue to protect Meidong Motor's performance after industry demand improves. As pressure on the sales side of new vehicles in the industry continues to increase, we lowered Meidong Motor's 2023/2024/2025 revenue forecast to 307/359/45.5 billion yuan (the original forecast was 331/399/48.4 billion yuan), and the net profit forecast for 2023/2024/2025 to 4.6/9.3/1.22 billion yuan (the original forecast was 11.3/14.01.74 billion yuan). The company's average PE valuation over the past year was around 20 times. Considering that Hong Kong stocks are still under some liquidity pressure, and there is some pressure on the new car business in the dealer sector, we gave a 10% discount on the valuation of Meidong Auto. We gave Meidong Motor 18 times PE in 2023 (the original valuation was 23 times PE), corresponding to the target price of 7.00 HK$7.00 (the original target price was HK$22.0), maintaining the “buy” rating.