On 1 November, Baoxin announced that they intent to acquire the entireinterest of Sichuan Ganghong Enterprise Management （Ganghong）。 The totalconsideration of this acquisition shall be no more than RMB520m. Toelaborate, 1） Beijing Yan Bao Auto Service （Yan Bao, a wholly-ownedsubsidiary of Baoxin） will acquire 51% stake of Ganghong for no more thanRMB217.28m; and 2） Baoxin will acquire 25% stake of Ganghong from ItochuCorporation （8001.T, JPY1,338.00, Buy） and Yan Bao will acquire 24% stake ofGanghong from Itochu China for no more than RMB302.72m. RegardingGanghong, it currently comprises 13 4S stores of Jaguar Land-Rover （JLR），Cadillac and some other mid-to-high end brands （such as Chevrolet, Nissan,Honda, according to Ganghong's corporate website）， mainly in Chengdu,Sichuan province.
　　Based on the June FY16 and FY15 financials of Ganghong disclosed in theannouncement, the valuation of the target is set at 2.10x June 2016 P/BV and9.85x FY15 P/E. In addition, Ganghong's FY15 earnings are equivalent to 12%of Baoxin's FY17E earnings, on our estimates.
　　Deutsche Bank view – acquisition valuation reasonable but limited synergiesWe think the acquisition valuation for Guanghong can be considered attractivegiven a low target FY15 P/E vs. Baoxin. While the target June 2016 P/BVappears high at 2.1x, we think this is still considered rational given more than20% ROE.
　　On the other hand, although the proposed acquisition would enlarge Baoxin'sgeographical reach to Southwestern China, we see limited synergies fromhaving Ganghong's assets, as most of Ganghong's stores are mid-to-high endbrand 4S stores vs. Baoxin's premium brand focus. What is more, we estimatethat Baoxin's FY17E earnings accretion with Ganghong is likely to be less than10% if taking into consideration the additional financing expenses related toacquisition funding. This is not to mention that Ganghong may be a highlygeared company at the moment given the high ROE, and this could affectBaoxin's debt profile after the deal completion.
　　All in all, we maintain our Hold rating for Baoxin since we think thatexpectations of earnings recovery is already in the price. Key upside risksinclude stronger-than-expected new car sales margin, effective cost cuts andvalue accretive M&As. Key downside risks are an inability to restore salesmomentum and enhance margins.