We project Meidong’s 2H22E net profit to fall 23% YoY amid new-car margin weakness in 4Q22. On the other hand, we expect StarChase and after-sales services to aid its profitability with FY23E net profit to surge 76% YoY on our estimates. We believe Meidong is still best positioned among Chinese dealers with its strongest management execution and better brand mix than its peers.
We project 2H22E net profit to fall on 4Q22 weakness. We expect Meidong’s 2H22E revenue to rise 47% YoY driven by new-car sales. We project Porsche’s new-car sales volume in FY22E at Meidong to be in line with our prior forecast of 13,000 units, or 164% YoY growth for 2H22E. We forecast BMW and Lexus new-car sales volume to rise 13% and 3% YoY in 2H22E, both outpacing the nationwide growth. On the other hand, we project new-car gross margins for both Porsche and Lexus in 2H22E at Meidong to drop to 5.9%, a multi-year low level amid weak 4Q22. We also expect new-car gross margin for BMW to be 0.9% in 2H22E. Accordingly, we project Meidong’s 2H22E net profit to decline 23% YoY to RMB 485mn by taking amortization and interest expense for zero-coupon convertible bonds into consideration.
StarChase, after-sales services to drive FY23E earnings. We expect the margin weakness in 4Q22E to be short-lived as China reopens and project Meidong’s overall new-car gross margin to be 5.6% in FY23E, a similar level as FY20 despite a much higher sales portion from Porsche, in order to account for heightened competition from NEVs. We project StarChase stores to contribute additional RMB 300mn in net profit level in FY23E than FY22E. We also expect after-sales services to drive earnings after reopening, especially with Meidong’s continuous efforts on the “customer return ratio” program.
Therefore, we forecast Meidong’s net profit to rise 76% YoY to RMB 1.46bn in FY23E.
Valuation/Key risks. We maintain our BUY rating and raise our target price slightly from HK$ 23.00 to HK$ 25.00, which is based on 20x (prior 15x) of our revised FY23E EPS estimates. We are of the view that investors have been turning more positive on dealers’ valuation, especially as Meidong’s management has turned more optimistic when facing competition from NEV luxury brands. Key risks to our rating and target price include lower sales and/or margins, slower store acquisitions than our expectation, as well as a sector de-rating.