China Meidong Auto’s both top- and bottom-line earnings in FY21 were in line with our prior expectation. We hosted a non-deal roadshow (NDR) after the earnings call. The CEO elaborated the company’s operational efficiency during the call and how such culture has been built in the letter to shareholders, which is consistent with our initiation report published on 8 Mar 2022. We are of the view that Meidong should be the top-pick dealer during tough time given its operational efficiency and cautious approach.
　　In-line FY21 results. Meidong’s FY21 revenue and net profit both were 1.5% below our estimates. Inventory days of 5.8 and dividend payout ratio of 90% are impressive. After-sales gross margin of 52% in 2H21 was the highest since FY14. New-car gross margin of 7.1% in 2H21 was the highest in history.
　　Meidong’s efficiency and conservative approach could make it resilient　in tough environment. CEO puts the macro uncertainty as his top concern this year and is still conservative about potential profit lift from the customer return ratio (CRR) program, which could make investors turn a bit pessimistic about its outlook. We hold a different view: First-mover advantage from product or technological innovation is crucial to automakers, but is of little use for dealers. It is apparent that Meidong has been thinking about or even trying new initiatives in a bid to cope with industry development, e.g. new EV brands with different sales approach and used car business. ‘Think twice before you act’ should be a right approach now given the current extremely complex situation, in our view.
　　Prioritize tasks with lower uncertainty. The company prioritizes efficiency　improvement for stores from the StarChase acquisition and optimizes CRR this year, which sounds unexciting but should be the right thing to do during such environment, in our view. As we noted earlier, our channel checks show that potential M&A opportunities have been rising faster than some investors had thought. Meidong’s mentality to make its balance sheet as healthy as possible would help it ride on the wave of M&As.
　　Valuation/Key risks. We cut our FY22E net profit estimates by 2% mainly to reflect one-month delay of the StarChase consolidation. We maintain our BUY rating and target price of HK$ 48.00, still based on our 20x FY23E P/E. Key risks to our rating and target price include lower sales and/or margins, slower store expansion than our expectation, as well as a sector de-rating.