Robust new car volume; but new car margin and after-sales below expected
Baoxin’s FY16 net profit surged 89.6% YoY as guided in its Januaryannouncement. The profit was 4% above our estimate due to higher new carsales, partly offset by lower new car margin and after-sales revenue growth.
　　New car sales revenue grew 10.1% YoY on 17.1% volume growth, but new carmargin dropped 80bps YoY due to old inventory destocking, according tomanagement. After-sales revenue declined 5.8% YoY, with 80bps YoYenhancement in gross profit margin to 46.0%. With 41.3% YoY increase incommission income and 8.3% drop in SG&A, net profit margin improved70bps YoY in FY16. On a sequential basis, Baoxin recorded RMB352.8m netprofit in 2H16 （+4.5x HoH） on the back of 48.6% HoH growth in new carvolume. However, the blended 2H16 gross profit margin contracted by 1.5pptHoH with 59bp decline in new car margin, with no rebate from BMW sales in2H16 vs. rebate of RMB180m in 1H16, according to management.
　　Deutsche Bank view – Hold with earnings rebound and new M&A in the price
During the post-results conference call, management guided for 20% YoY andat least 10% YoY growth on new car sales and after-sales business in FY17E,respectively, with margin improvement on robust luxury car demand.We raise FY17-18E revenue by 10.5-11.7% on higher new car sales, and raiseFY17-18E net profit by 3.1-4.5% also on lower SG&A ratios, partly offset bylower new car margin. Our DCF-derived target price （9.2% WACC and 1%terminal growth） implies FY17E P/E of 17.1x, which we believe is justified vs.28% FY16-19E three-year EPS CAGR. While we foresee a FY17 earnings jumpup for Baoxin, we think that its current P/E valuation has already factored inthe upbeat expectations. We therefore maintain Hold. Downside risks: Slowingdemand for premium car products and inability to lift margins. Upside risks:strong sales from Baoxin’s brands, and the consequent margin enhancement.