Net profit fell 20% in 2020 compared with the same period last year.
Harmonious Automobile released its financial results for 2020: revenue rose 17% year-on-year to 14.7 billion yuan, while net profit fell 20% year-on-year to 411 million yuan, lower than our expected 540 million yuan. This is mainly due to changes in the fair value of investments in associated companies. On the whole, we think the company is on the right track. We estimate that the EPS of Harmony car 2021 / 2022 / 2023 is RMB 0.34 / 0.39 *. Maintain a "buy" rating.
Luxury car sales lay the foundation for revenue growth
Sales of Harmony cars rose 12 per cent year-on-year to 37000 in 2020. BMW and Lexus are the two main brands of harmonious automobile management. Sales of Harmony's BMW brand rose 8 per cent year-on-year to 28000 vehicles in 2020, accounting for 76 per cent of total sales. Sales of Lexus-branded cars rose 18 per cent year-on-year to 45000, accounting for 12 per cent of total sales. On the revenue side, new car sales increased 18% year-on-year, accounting for 87% of total revenue in 2020. Overall, we believe that luxury car sales lay the foundation for revenue growth.
Business has improved; non-operating projects are a drag on profits
The gross profit margin of Harmony Motor is 8.8% in 2020 (8.6% in 2019). The sales expense rate is 4.7% (2019: 5.0%) and the administrative expense rate is 1.3% (2019: 1.4%). Operating cash flow increased by 239% compared with the same period last year, and inventory turnover days decreased by 5 to 32 days. We believe that the operation of Harmony will improve in 2020. We believe that the change in the fair value of the investment in the associated company FMC resulted in a loss of RMB 120 million, which dragged down Harmony Automobile's net profit. Looking ahead to 2021, we believe that Harmony Automobile will refocus on the distribution business of specific brands, such as BMW, Lexus and Porsche. We believe that Harmony Automobile will strive to improve operational efficiency, reduce inventory turnover days and improve customer loyalty. We believe that through these measures, the distribution business of Harmony Automobile will continue to grow.
Maintain a "buy" rating
Taking into account the possible fair value changes of the associated company, we reduce the net profit forecast for 2021 to 2022 by 1310% to RMB 539 million / 622 million, and expect the net profit to reach RMB 704 million in 2023. Based on 13 times the 2021 forecast PE, we have a target price of HK $5.30 (previous target price: HK $5.00). Mainly considering the uncertainty of investment return, our target price multiple is lower than the average (20 times) of peer Bloomberg's consensus forecast for PE in 2021.
Risk tips: 1) weaker-than-expected demand for luxury cars; 2) changes in the fair value of investments in associates.