Thanks to China's economic development and consumption upgrades, the luxury car industry has risen against the wind. Under the general trend of declining passenger car sales, luxury car sales have maintained a strong upward trend. The market size of the industry reached a growth rate of 12.2% between 2015-2019, and is expected to exceed 2.4 trillion yuan by 2024. Compared with ordinary cars, the profit margin of luxury bikes is higher (about 30%). It is believed that with the continuous expansion of the luxury car consumer base, the luxury car industry will show superior potential to other market segments.

Harmony Auto 1H2021's operating revenue increased 62.2% year on year to 9.60 billion yuan, net profit increased 65.4% year on year to 400 million yuan. Performance growth was strong, based on 1) strong demand in the luxury car market and 2) increased sales and boutique business revenue. Meanwhile, the company's gross profit during the period increased 65% year-on-year to 859 million yuan, of which gross profit from automobile sales was 345 million yuan (+86%), gross profit from after-sales service was 489 million yuan (+53%), comprehensive gross margin was 9.2%, up 0.2ppt, and profitability strengthened.

It is worth noting that during the heavy rain disaster in Henan in July, the company's overall losses were manageable and operations were not affected. At the same time, 400,000 vehicles were affected by the disaster in Henan Province, of which 100,000 were scrapped. The demand gap is expected to drive the company's future sales volume to rise.

Considering Harmony Auto's strong mid-term performance and excellent luxury car racetrack, it is recommended that prudent long-term investors absorb it on bargain terms. The front high resistance level is 6.39 yuan. We have given a target price of HK$6.4, which is slightly higher than the average market target price of HK$5.8, with room for increase of 42.2%.