Yongda Automobiles (Yonda)'s 2H23 net profit fell 59% HoH to RMB166mn, lower than our prior forecast by 12% due to lower-than-expected revenue and GPM of after-sales services. As the net margin fell to below 1% with deteriorated new-car GPM, cost control becomes the key to Yongda's profitability. We believe cost control is attainable in FY24E given network optimization. The company increased its dividend payout ratio to 53% in FY23, implying a dividend yield of 8%. The dividend payout ratio will probably not decline in FY24E.

2H23 earnings miss on after-sales services. Yongda's 2H23 revenue was 3% higher than our prior forecast due to higher new-car sales volume. Yet, its 2H23 GPM of 6.3% was 1.1ppts lower than our prior forecast as the GPM of after-sales services fell to 40.1% from 43.1% in 1H23, the lowest level since FY12 (IPO). Yongda's 2H23 new-car GPM of 0.2% also hit a record low level, which was still a bit better than our prior expectation, due to higher- than-peers GPM for BMW brand. The commission income and SG&A ratio in 2H23 were better than our prior forecast, thanks to higher unit income from the NEV agency business and better cost control. Yongda's 2H23 net profit of RMB166mn was lower than our prior forecast by 12%.

Cost control still the key to profitability. We cut Yongda's new-car sales volume forecast to 181,000 units (-7% YoY) in FY24E, given more stores were closed than expected in FY23. We project new-car GPM to fall to 0.2% in FY24E from 0.3% in FY23, as the GPM deterioration from other brands could offset the improvement from Porsche's. We project FY24E after-sales service revenue to rise 4% YoY, while its GPM may be flat at 41% as the negative impact from the new car market still exists. As the net margin fell to below 1%, the company's profitability becomes more sensitive to cost control. We forecast Yongda's SG&A expenses to narrow by RMB146mn YoY in FY24E, as automakers begin to lower their requirements for dealers in marketing expenses amid market changes and Yongda has been optimizing sales network. Therefore, we project Yongda's FY24E net profit to rise 14% YoY to RMB654mn.

Valuation/Key risks. We maintain BUY rating and cut target price from HK$2.80 to HK$2.70, still based on 7x our revised FY24E EPS. Key risks to our rating and TP include lower sales volume and/or margins, slower after- sales service growth than expected, higher operating expenses, as well as a sector de-rating.