Boosting luxury/ultra luxury brand exposure in Zhejiang
On 27 March, Baoxin announced that they intend to acquire the entire interestof six target dealers that operate luxury and ultra-luxury 4S stores. The totalconsideration of this acquisition shall be no more than RMB900m. To elaborateon the deal: 1） the target companies are Wenzhou Jieshun, Shaoxing Jieshun,Wenzhou Jiejun Automotive, Taizhou Jieshun, Wenzhou Haodebao andWenzhou Haoda; and 2） Baoxin will settle the total consideration in cash in fivepayments. The target companies currently own and operate six 4S stores （2Porsche, 2 BMW, 1 Maserati, 1 Maserati and Alfa-Romeo）， three maintenancestations and one showroom for luxury and ultra-luxury auto brands in Zhejiangprovince.
　　Based on FY16 and FY15 financials of the six target companies disclosed in theannouncement, the valuation of the target is set at 3.2x FY16 P/BV and 11.7xFY16 P/E. In addition, the six target companies’ FY16 earnings are equivalentto 13% of Baoxin’s FY17E earnings, on our estimates.
　　Deutsche Bank view – acquisition valuation reasonable and possible synergies
We believe the acquisition valuation for six target companies is reasonablegiven a low target FY16 P/E vs. Baoxin’s. While the target FY16 P/BV appearshigh at 3.2x, we think this is still considered rational given more than 25%FY16 ROE.
　　The proposed acquisition is expected to enhance Baoxin’s brand coverage,geographic layout and operational efficiency. We see higher likelihood ofsynergies from the six target companies than Ganghong that Baoxin acquiredat yearend FY16 given the formers’ premium brand focus. However, we notethat these six target companies may be highly geared considering the highROE, and this might affect Baoxin’s debt profile after the deal completion.
　　We currently have a Hold recommendation on Baoxin, and will seek moreclarity on this proposed acquisition from their annual results conference call on31 March.
　　Key upside risks include stronger-than-expected new car sales margin,effective cost cuts and value accretive M&As. Key downside risks are aninability to restore sales momentum and enhance margins.