Incident: In 2023, macroeconomic challenges compounded industry price competition, and new car sales in the US East continued to be under pressure. However, the company still showed strong business resilience, and the absorption rate of zero service reached 116.7%. The beta downturn is both a challenge and an opportunity. With its leading alpha advantage, the company is expected to survive the crisis and even achieve better growth.

Adjust profit forecasts and maintain an “gain” rating. In 2023, demand for new car sales declined as macroeconomic challenges led to a decrease in passenger traffic and a longer customer buying cycle. Second, frequent price cuts and rapid iteration of new energy vehicles have had an impact on traditional fuel vehicle brands, and the gross sales margin of new vehicles in the US East has declined markedly. We still believe that the future of the dealer industry exists in a market dominated by new energy vehicles, but it is difficult to predict how long this round of changes will last. We adjusted Meidong Auto's net profit forecast for 2024-2026 to 2.95/9.83/16.72 billion yuan (the previous forecast was 1,026/1,354 million yuan for 2024-2025). Meidong is the company with the fastest inventory turnover in the auto dealer industry. Efficient and steady operation is expected to turn the crisis into an opportunity and maintain a “gain” rating.

Price competition continues, and full-year performance continues to be under pressure. MeiDong Auto achieved net profit of 156 million yuan in 2023, a year-on-year decrease of 72%. The gross margin of new cars continued to decline. In 2023, the gross profit margin for new cars in the US East was -0.6%, down 4 percentage points from the previous year. It changed from positive to negative, lower than our expectations. Judging from the trend, the gross margin of new car sales is still deteriorating. In the first half of 2023, the gross profit margin for new car sales in the US East was 0.2%, and the gross margin fell 1.5 percentage points month-on-month to -1.3% in the second half of the year. Strong after-sales business performance hedged the decline in gross profit from some new car sales. The company's annual after-sales service gross profit margin was 53.7%, an increase of 4.7 percentage points over the previous year.

Accelerate turnaround and reduce costs. The company continues to be the company with the fastest turnover in the industry. The number of inventory days in the Eastern US was 12 days in 2023, the same as in 2022. Faster turnover can guarantee the company's stable cash flow, and fuller cash reserves can help the company overcome the crisis. As of the end of 2023, the company's cash reserves were 2.4 billion yuan, and the net operating cash flow for the full year of 2023 was 800 million yuan. On the cost side, the company's main expenses as a share of revenue fell 0.1 percentage points year-on-year to 6 in 2023.

7% The increase in after-sales gross profit fully covered the company's main expenses, and the company's zero service absorption rate increased from 84.6% in 2022 to 116.7% in 2023. This means that even if the company doesn't sell a single car, it can still guarantee survival and operation.

Survive the night and wait for the dawn. The core value of car dealers is for automakers to bear inventory risks. In a market environment where supply exceeds demand, the shift of automakers from direct management to a distribution model is a probable event, but it is difficult for us to determine when the industry will recover. Meidong is the company with the fastest inventory turnover in the industry. Extreme operating efficiency can help the company maintain a healthier cash flow and balance sheet. Auto dealers are a highly cyclical industry. In the downturn cycle, dealers face great operational risks, but companies that survive the crisis are expected to show strong performance flexibility in the upward cycle of the industry.

Risk warning events: Industry price wars increase risk, risk of proxy brand weakening, and risk of untimely update of research report usage information.