Maintain HOLD. We project Meidong's 1H23E net profit to fall 23% YoY to RMB 266mn, consistent with our prior estimates of RMB 250-300mn made in Apr 2023. We see gradual improvement in new-car margins in 2H23 but could be weaker than we had hoped earlier. Therefore, we cut FY23E net profit by 29% to RMB 723mn. We still see valuation cap as industry headwinds persist.

We project net profit to be RMB 266mn in 1H23E, as BMW may beat expectation. We project Meidong's sales volume to rise 8% YoY, driven by Porsche and BMW. Although discounts widened for all the brands in 1H23, model mix improved for brands including Porsche, BMW and Toyota. We expect a mild HoH decline for the average selling prices of most brands in 1H23. We expect new-car GPM to widen by 0.2 ppt HoH to 2.2% in 1H23E, with GPMs for both Porsche and Lexus hitting all-time low. We expect new- car GPM for BMW to be 1.8% in 1H23E, as the additional rebates announced on 1Jun 2023 could lift its GPM by almost 3 ppts, based on our estimates. We project after-sales service revenue to rise 26% YoY to RMB 1.9bn, with a GPM of around 49%, which implies an absorption ratio (excluding finance costs) of about 117%, on our estimates. Accordingly, we project Meidong's 1H23E net profit to fall 23% YoY to RMB 266mn.

We cut FY23E net profit by 29% to RMB 723mn. It appears to us that the new-car GPM for Porsche in 1H23 could be a trough for dealers, as the German marque aims to cut its 2023 China sales volume target by 10+%. Its discounts at dealers have started to narrow, based on our channel checks. We are of the view that Lexus could face more challenges in new-car sales than BMW and Porsche, but its new-car GPM could be stabilized, as the Japanese OEM had already subsidized its dealers in 1H23. We also expect BMW to provide similar incentives to dealers in 2H23 as it did on 1 Jun 2023. Accordingly, we expect Meidong's sales volume to fall 2% YoY in 2H23E and new-car GPM to widen to 2.6% in 2H23E. We also project its after-sales services and cost reduction efforts to contribute more to its profits. We estimate its net profit to rise 157% YoY to RMB 458mn in 2H23E. Meidong's current FY23E is 17x on our estimates.

Valuation/Key risks. We also cut our FY24E net profit by 31% to RMB 1.07bn, although the visibility is still low. Therefore, we maintain our HOLD rating and cut target price from HK$ 17.00 to HK$ 11.00, which is based on 13x our revised FY24E EPS (previous 20x FY23E), as uncertainties for FY24E are still high. Key risks to our rating and target price include higher/lower sales and/or margins, as well as a sector re-rating or de-rating.