2023 results fall short of our expectations
The company announced 2023 results: annual revenue of 72,595 billion yuan, +0.8% year over year; net profit to mother of 573 million yuan, -60% year over year; corresponding 2H23 revenue of 37.734 billion yuan, -7.1%/+8.2% year on month, and net profit to mother 166 million yuan, -77.9%/-59.2% year on month. Due to the company's 2H23 profitability declined a lot, the 2023 results fell short of our expectations.
Development trends
Increased competition affected new car sales, and the after-sales and used car businesses showed resilient performance. New car sales are under pressure due to increased competition and model price cuts. New car sales revenue in 2023 was -3.0% YoY to 56.439 billion yuan, and luxury brand sales volume was -2.1% YoY to 131,000 units, causing a drag; after-sales business grew steadily, with revenue +4.4% YoY to 10.543 billion yuan, of which maintenance revenue was +11.5% YoY to 9.51 billion yuan; used car business model transformation accelerated, with annual used car revenue +18.0% YoY to 7.902 billion yuan, of which sales revenue was +56.6% YoY to 5.277 billion yuan. We believe that the company's after-sales and used car business is improving steadily, and with the optimization of the brand network, the revenue side is expected to recover marginally.
Profitability is under pressure in the short term, and lean management is strengthened. On the profit side, gross margin in 2023 was -1.99ppt to 6.88% year over year. Specifically, new car sales were affected by increased competition, gross margin was -2.16ppt to 0.31% year over year; gross margin of after-sales business was -3.3ppt to 41.53% year over year, which was mainly dragged down by after-sales business derived from new cars; and gross margin of used car sales was 2.21ppt to 6.51% year over year due to the new car price war. On the cost side, annual sales and management expenses were +0.3ppt to 8.12% year-on-year, mainly due to depreciation and amortization and rental expenses. On the operating side, the number of new car inventory turnover days was 23 days, and the overall performance was stable. The number of used car sales turnover days dropped further by 4.4 days to 14.9 days. We believe that the company actively carries out refined management, which is expected to promote continuous high-quality business development.
The new energy business drives growth, and digitalization enhances customer stickiness. In 2023, the company's total NEV sales volume was +33.8% YoY to 32,919 units, with independent NEV sales +91.6% YoY to 18,376 units, unlocking performance potential. In addition, new energy after-sales developed rapidly, with independent new energy maintenance revenue +255.3% year-on-year to 159 million yuan. At the same time, the company actively enhances customer stickiness through new media and apps. We believe that by promoting comprehensive cooperation with leading new forces and other manufacturers, and cooperating with the improvement of digital capabilities, the company will further cultivate the used car business, accurately develop new energy brands, and help transform the business.
Profit forecasting and valuation
Due to a significant decline in profits from the new car sales business, we reduced 2024E net profit by 55.0% to RMB 8.2 billion, and introduced 2025E net profit of RMB 1.10 billion for the first time. The current stock price corresponds to the 2024/2025 price-earnings ratio of 4.3 times/3.4 times. Maintaining an outperforming industry rating. Due to increased competition in the industry, the company's position as a leading domestic dealer is stable. We lowered our target price by 30.0% to HK$2.80, which corresponds to 5.8 times the 2024 price-earnings ratio and 4.6 times the 2025 price-earnings ratio. There is 35.9% upside compared to the current stock price.
risks
Competition for new cars has intensified, and the restoration of profitability has fallen short of expectations.