1Q16 results in line with expectations
1Q16 rental revenue +36% and adjusted profit +20%,in line with our estimates.
Short-term rental revenue +19% YoY. RevPACremained flat at Rmb174. Long-term rental revenue+119% YoY, driven by fast UCAR development. Endingfleet size +22% YoY, -3% QoQ.
5,404 vehicles were disposed of in 1Q16 vs. 1,581 in1Q15. Cost of vehicle disposal was 98% of disposal sales,showing solid residual risk management capability.
Adjusted net margin -2.6ppt to 20%, due to higherdepreciation expenses.
Trends to watch
We believe the robust growth in short-term rentalswill continue, as the short-term rental market still hasmuch potential in China, new growth initiatives areimplemented, including incentive program redesign,customer experience upgrading and marketing reimaging,and more vehicles will be added in 2Q16.
CAR Inc. starting to generate positive cash flow. Freecash flow improved significantly to Rmb590mn in 1Q16 from-Rmb1,876mn in 1Q15, having benefited from strongEBITDA growth and fast vehicle disposal.
Valuation and recommendation
Valuation is attractive. The stock currently trades at 14x2016e P/E and 0.7x PEG.
Maintain earnings forecasts unchanged. Adjusted profit isexpected to grow by 25% for 2016 to Rmb1,178 and 15% toRmb1,359mn for 2017. Maintain Conviction BUY rating andTP at HK$13.1, based on 20x 2017e P/E.
Risks
Used car price fluctuation, weak performance of RevPAC.