We expect new car sales volume for Zhongsheng to drop c.4% YoY in 2023, within which 2H23 sales volume for luxury brands recovered better than expected but with wider discounts. Thus, we assume a meager gross profit of c.RMB70m for new car sales in 2H23, landing to full-year new-car margin estimate of 0.63%. We expect after-sales services revenue to resume YoY growth of above 5% in 2H23, against slide of 4.6% YoY in 1H23. For pre-owned vehicle business, we expect sales volume to grow over 15% YoY to c.160k units in 2023, but comprehensive profit per vehicle of per-owned vehicle may slide from c.RMB8k in 1H23 to less than RMB7k in 2H23 due to new-car pricing pressure. All in, we expect net profit may drop 26-28% YoY to RMB4.8-4.9bn in 2023 dragged by slumping new-car margin. Now its valuation (6.1x 2024E P/E and 0.7x 2024 P/B) approached the lowest level since listing, reflecting pessimism among investors over the cloudy outlook for the entire dealer sector. Maintain BUY with lower TP of HK$20.00 (8x 2024E P/E).
Key Factors for Rating
New-car sales business. We expect new car sales for Zhongsheng to drop c.4% YoY to 498K units in 2023, but see constant improvements in sales mix as the volume of luxury brands picked up 3-4% YoY versus the notable volume decline for mid-to high-end brands of over 15% YoY. Given the widening discounts amid the industry-wide price war, we assume a meager gross profit of c.RMB70m for new car sales in 2H23, against RMB866m in 1H23, landing to full-year new-car margin of 0.63% under our estimate.
After-sales services. We expect after-sales services to resume YoY growth in 2H23, against slide of 4.6% YoY in 1H23, as the cross-selling business related to new car sales (i.e. car-detailing and Worry Free Vehicle Maintenance PLUS) recovered HoH along with new-car sales growth. For core after-sales services of maintenance, warranty and collision business, we expect revenue to maintain stable growth of 10% in 2H23. Thus, full-year after-sales revenue is expected to come in largely flattish YoY in 2023 with stable gross margin.
Pre-owned vehicle business. We anticipate pre-owned vehicle sales may grow at above 15% YoY to c.160k units in 2023, shy of the original management guidance of 180k units, but we see recovery trend of pre-owned vehicle sales throughout the year as volume of last December has reached 20k units, against 15k units at mid-year and only 7k units in the year- beginning. In terms of margin, we reckon the weakening new-car sales could drag on the price and gross profit performance of pre-owned vehicle business, lowering the lower comprehensive profit per vehicle of per-owned vehicle from c.RMB8k in 1H23 to less than RMB7k in 2H23.