Maintain BUY. Meidong Auto's 1H24 adjusted net profit beat our prior forecast on after-sales service GPM and SG&A reduction. We view its cost reduction efforts as impressive. Although we expect industrywide headwinds to continue, we believe investors could turn a bit more positive on Meidong's FY25 outlook given the removal of the convertible bond (CB) burden, traditional luxury brands' sales target cuts and a new NEV model cycle for BMW.
Core earnings beat on cost reduction. Meidong's 1H24 adjusted net profit (excluding impairment without tax effect) of RMB124mn was RMB80mn higher than our prior forecast. Its 1H24 revenue was 11% lower than our forecast, mainly due to the sales volume miss. GPM of 7.6% was largely in line with our projection of 7.4%, as new-car GPM of -5.1% missed our forecast of -3.7% but after-sales service (including auto finance) GPM of 59.8% beat our forecast of 56.5%. SG&A expenses in 1H24 (RMB620mn) were about RMB160mn lower than our prior estimates.
Less financial burden in FY25E. We maintain our views as a month ago: we expect 2H24 and FY25 to be better than 1H24 for Meidong in terms of profitability, despite continued gloomy new-car sales. We maintain our 2H24 new-car sales volume at around 29,500 units. We assume Meidong's new- car GPM to improve slightly to -3.8% in 2H24 and -3.4% in FY24 amid lowered sales targets by Porsche and BMW. We expect after-sales service revenue to fall 3% YoY in FY25 amid weak economic situation. It appears to us that key to Meidong's earnings sustainability now lies in after-sales GPM. We project after-sales GPM to narrow 1.2ppts YoY to 58.5% in FY25. All combined would result in a gross profit lift of RMB100mn YoY in FY25. We also estimate CB interest expense and withholding tax to reduce by RMB120mn YoY in FY25. We assume impairment on goodwill to be both RMB50mn for 2H24 and FY25, respectively, with the previous patterns. Accordingly, we cut our FY24E net profit by 28% to RMB122mn and raise our FY25E net profit by 6% to RMB382mn.
Valuation/Key risks. We maintain our BUY rating but cut target price slightly from HK$3.00 to HK$2.80, based on 9x (prior 10x) our revised FY25E EPS to reflect the current market volatility. Key risks to our rating and target price include lower sales and/or margins than expected, especially for after-sales services, as well as a sector de-rating.
