Investment positives
　　We initiate coverage with a BUY rating and a target price ofHK$4.50, or an 11x 2017e P/E ratio.
　　Why a BUY rating？
　　New car sales business to benefit from BMW’sstrong product cycle. We estimate that the localizedSeries 1 sedan and seventh generation Series 5 will raiseBMW’s new car sales volume 27.0% YoY and gross margin1.6ppt in 2017, contributing around Rmb350.2mn inincremental gross profit to Baoxin. The localization of X3 in2018 should continue this upside trend.
　　Integration with CGA to enhance operationalefficiency. In 2016, Baoxin and China Grand Auto （CGA）saw SG&A/revenue of 5.7% and 4.1%. By introducing arefined management system and advanced IT instrumentsfollowing integration with CGA, we expect Baoxin’soperational efficiency to keep improving in 2017.
　　Still upside in highly profitable after-sales business.
　　In 2016, Baoxin’s after-sales revenue per store wasRmb32.3mn, outperformed by its peers. With high grossmargin of 45+%, we expect the after-sales business toboost earnings once Baoxin makes full deployment afteryears of conservative expansion.
　　How do we differ from the market
We believe changes inBaoxin’s fundamentals, rather than the sector trend, will drivethe company’s growth.
　　Potential catalysts: BMW’s strong product cycle in 2017.
　　Financials and valuation
　　We expect EPS to be Rmb0.37, Rmb0.47 and Rmb0.52 in 2017e,2018e and 2019e, a CAGR of 12%.
　　Risks
　　Integration with CGA misses expectations.