FY17 earnings to more than double
On 18 January after market closed, Zhengtong issued a positive profit alert that itsunaudited FY17 reported net profit is expected to grow more than 100% YoY. Thecompany attributed the earnings growth to 1） rapid growth of the auto financebusiness and 2） network expansion with good sales/after-sales performance inits brand portfolio.
Deutsche Bank view - auto finance to stay as key earnings driver
Zhengtong's preliminary profit should not bring much surprise to us or toconsensus, as we expect its FY17 earnings to surge by about 140% YoYconsidering the low FY16 earnings base and auto finance business expansion. Going forward, we think Zhengtong's recent share placements for HKD2.1bnfresh capital will further boost its auto financing business growth and make thecompany a proxy for China's auto finance boom. We maintain Buy. Our targetprice is based on DCF, which implies 13.1x FY18E P/E, which seems justified tous given the 15% FY17-19E two-year fully diluted EPS CAGR. Key downside risks:a sharp weakening in new car margin, slow auto financing loan growth and risingnon-performing loan ratios.