1H16 results in line
CAR announced 1H16 results: rental revenue was Rmb2,452mn,up 23.7% YoY; recurrent net profit was Rmb472mn, up 11.6%YoY, or Rmb0.20/sh. Second quarter rental revenue rose13.2% YoY, recurrent profit +3.5%, as we estimated.
Short-term rental revenue +16% YoY in 1H16. Averagefleet size +17% as RevPAC dropped 2% to Rmb172. Long-termrental revenue +57%, driven by fast UCAR development.Recurrent margin -2.1ppt to 19%, due to higherdepreciation expenses.
Trends to watch
Benefiting from strong EBITDA growth and faster vehicledisposal, 1H free cash flow was Rmb784mn. We expect freecash flow yield could reach 11% in FY16.
The used-car B2C program has been sold to UCAR, with an EV ofRmb138mn. Operating expenses will decline in 2H16 asthe costs related to this program reached Rmb48mn in 1H.
Didi recently launched an online car rental program. It plans toapply an asset-light model and cooperate with small car rentalcompanies. The industry may face tougher competition.
However, a P2P model was tried in the rental industry severalyears ago without success. Operation risk is difficult to overcomeand platforms have limited standard supply.
Earnings forecast
We maintain our earnings forecasts for 2016 & 2017.
Valuation and recommendation
The stock is trading at 14x 2016e P/E. We maintain our BUYrating and HK$9.91 target price, implying 33.56% upside roomfrom the current price.
Risks
Weak performance of RevPAC, tougher competition.