Zhongsheng Holdings is a leading company among car dealers in China. According to the company's 2024 mid-year report, Zhongsheng has 419 dealerships nationwide, including 269 luxury brands and 150 high-end brands. Zhongsheng's share of new car sales in the major brands in the Chinese market is: Lexus 32%, Mercedes-Benz 18%, Toyota, Volvo and Jaguar Land Rover 10%, and BMW and Audi 6%. The company achieved 0.233 million new vehicle sales in the first half of 2024, an increase of 3.9% over the previous year.

The new car business is under pressure, and Zhongsheng sought a high market share through key layout in central cities, and obtained stronger resilience to risks. According to the company's interim report, the year-on-year growth rate of Lexus/Audi/Mercedes/BMW/Toyota sold by the company in the first half of 2024 was 20.7%/2.6%/-10%/-5.4%/-13%, respectively, showing that some brands are under pressure under the smart electric wave. However, in the 32 central cities where Zhongsheng focuses, 2.1 million of the 15.1 million luxury cars have become the company's long-term customers. 80% of these customers are repeat customers who independently choose car service providers, which better represents the characteristics of mature markets. Through the acquisition, promotion and transformation of mature customers, Zhongsheng achieved a certain degree of resistance and was established. Revenue for the first half of 2024 was basically the same as compared to the same period last year.

New forces have also begun to use dealer networks, and the dealership group's new car business is not necessarily shrinking. According to the official websites of various car companies, new forces such as Xiaopeng and Zero Run are all recruiting to join dealers. According to the company's announcement, the company signed a preliminary negotiation agreement with Cyrus to further discuss the cooperative distribution of its new energy vehicles. We believe that in the smart electric era, dealer groups have advantages such as existing customer leads, distribution service experience, and after-sales service software and hardware infrastructure, and still have clear opportunities for development. If the dealer group can cooperate with new core car companies and increase sales, it is expected to make up for the profit pressure brought about by the decline in sales and gross profit of traditional brands.

The after-sales business continues to grow, and has strong customer stickiness and poor substitutability. It is an excellent business model that can support long-term profit growth. According to the 2024 annual report of Zhongsheng Holdings, the company broke the traditional service model of a single car brand dealership, built a Zhongsheng Auto service brand, and provided car services across car brands and different fuel types. Through Zhongsheng's diverse service types and full-brand service scenarios, Zhongsheng maximizes coverage of the car customer base in central cities. According to the communication materials of Zhongsheng's 2024 mid-year report, the company's after-sales business entered the factory 3.94 million units in the first half of the year, +5.6% year-on-year, and service revenue was 10.964 billion yuan, +13.8% over the same period last year. The company's gross margin for boutique products, maintenance packages and after-sales service in the first half of the year was 47.1%, which was basically the same as the previous year. Zhongsheng's absorption rate of zero doses reached 118% in the first half of the year, bucking the year-on-year trend and increasing by 10 pcts.

In summary, we believe that by covering more new brands, Zhongsheng Holdings can hedge against the decline in traditional brand volume and profit. At the same time, the after-sales business with a better business model is expected to continue to contribute to performance.

Profit forecast and investment advice: We expect the company's revenue for 2024/25/26 to be 169.9/191.7/218.5 billion yuan, respectively, net profit to mother of 3.5/5.1/6.7 billion yuan, and EPS of 1.45/2.13/2.79 yuan respectively. We used the PE method to value the company. The closing market value on November 25, 2024 corresponds to 2024/25/26 PE 10/7/5 times, respectively. Referring to comparable companies, we gave the company 14-16 times PE in 2024, with a corresponding reasonable value range of HK$22.34-25.54 (converted at the exchange rate of HK$1 = RMB 0.91). The first coverage gave it an “superior to the market” rating.

Risk warning: Automobile consumption falls short of expectations; raw material prices have risen sharply.