FY16E net profit will be up by more than 80% YoYBaoxin announced on 17 January that the company expects to record FY16 netprofit YoY growth of over 80%. In other words, Baoxin expects its FY16reported net profit would be above RMB396m. According to theannouncement, the company attributes the surge in profit to 1） refocusing ongrowth after the completion of acquisition by China Grand Auto （600297.SS），2） synergies with the new parent, and 3） operational improvement.
　　Deutsche Bank view – extra positives still limitedWe estimate that Baoxin would make a profit of RMB331m in FY16 whileBloomberg consensus forecast for the company is at RMB360m. We thereforethink that the company's profitability is ahead of ours and marketexpectations. While we think that positive market reaction is possible, we seelimited upside since some other dealership groups have announced positiveprofit warnings. In other words, dealership stocks in general have ralliedrecently.
　　In our view, the above-than-expected profits can be driven by a cut-back indiscount le el for some BMW models, based on our recent channelchecks. At the moment, while we envision solid new car sales growth goingforward for Baoxin, to be driven by new models for like the BMW 5 series, weonly expect limited positives to the company's outlook. This is because 1） wesee a lack of China Grand's experience with the BMW and Jaguar Land Roverbrand and 2） we see limited extra synergies with the parent, which ispredominantly a mass market brand dealership group vs. Baoxin's premiumpositioning.
　　We ha e a old rating on Baoxin's shares. Key downside risks include: ）slowdown in its new car sales, and 2） inability to further cut cost. Upside riskswould be strong sales from its brand portfolio and stronger than expectedsynergies with parent. In the China auto dealership space, our Buy preferenceis Zhengtong （1728.HK, HKD2.39, Buy） on less demanding valuation andpotentials in the auto financing operation. In addition, we also have Buyrecommendations on Brilliance （1114.HK, HKD11.24, Buy） and BAIC Motor（1958.HK, HKD6.82, Buy） on resilient premium car demand in China.