Transfer coverage with a BUY rating. Tuhu Car's 1H24 earnings slightly beat our prior forecast amid a better-than-expected GPM. We expect its margins to be resilient despite average selling price (ASP) declines, given a higher GPM from the exclusive and private-label products. We believe there is still substantial room for growth for Tuhu's number of stores in China amid rising vehicle ages and Chinese consumers' more rational spending on after-sales services, which could support its fast earnings growth in the next few years. We believe Tuhu is a beneficiary and a defensive player from the consumption downgrade.

1H24 earnings slightly beat. Tuhu's 1H24 revenue grew 9% YoY to about RMB7.1bn with number of stores rising 23% YoY to about 6,300, in line with our prior forecast. Its 1H24 GPM improved 1.7ppts YoY to 25.9%, higher than our forecast by 0.4ppts, mainly due to the better GPM from car wash and detailing businesses and lower costs from self-operated stores. Tuhu's 1H24 adjusted net profit (excluding share-based payments) surged 67% YoY to RMB359mn, higher than our prior forecast by RMB17mn.

Margins to benefit from consumption downgrade. We believe the total demand for independent automotive after-sales service suppliers could rise over the next few years, given growing vehicle ages and more rational spending on after-sales services in China. The number of applications for franchise stores rose 22% YoY in 1H24, according to the company, which could support its network expansion in 2H24 and 2025, in our view. We expect Tuhu's rising store number to more than offset declines in average revenue per store amid the company's penetration into lower-tier cities in the next few years. We also project its OPM to improve driven by greater economies of scale and higher contribution from exclusive and private-label products which provide much higher GPMs than branded products. Both factors combined should lead to high earnings visibility, in our view.

Earnings/Valuation. We expect Tuhu's FY24E revenue to rise 9% YoY with total number of stores of 6,900 at the end of FY24E. We project FY24E adjusted net profit to rise 59% YoY to RMB766mn, with NPM widening to 5.2%. That implies 2H24E adjusted net profit of RMB409mn (+52% YoY and +14% HoH). We forecast FY25E revenue to rise 14% YoY and adjusted net profit to rise 43% YoY to about RMB1.1bn with NPM of 6.5%. We maintain BUY rating with a new target price of HK$23.00, based on 15x adj. FY25E P/E, which could be justified given its high growth potential, in our view. Key risks to our rating and target price include slower network expansion, lower revenue and/or margins than we expect, as well as a sector de-rating.