Earnings expected to up 100%
On January 18, Zhengtong preannounced its net profit wouldgrow >100% YoY to >Rmb986mn in 2017.
Trends to watch
Explored new business models in 2017, great breakthroughs
expected in 2018. Zhengtong attributes its >100% growth to: 1） therapid growth of the auto finance business; 2） the ideal brand portfolioand dealer network expansion; and, 3） increases in new car sales andcontinuous improvements in its after-sales service business. In 2017,the company explored several new business models, such asoperating its strategic operation management cooperation scheme（SOMCS） of BMW dealerships, establishing a JV with XFinTech（Zhengyuan Technology）， increasing Dongzheng AFC’s registeredcapital from Rmb0.5bn to Rmb1.6bn, and joining hands with PICC. Allthese big moves and new business models might help Zhengtongreach a great breakthrough in 2018.
Multiple supports towards auto finance, rising core assets to leverage larger loan scale. Zhengtong announced two new sharesplacements in a month, with net proceeds of possibly >HK$2bn,which is all slated to develop its auto finance business. The coreassets of Dongzheng AFC are now >Rmb2bn, and with the placementproceeds, its auto finance segment could leverage higher loan scaleand expand its business further. Zhengtong’s finance penetration rateis >50%, of which Dongzheng’s share is rising to 30-40%, which showsstrong demand for Zhengtong’s own financing products. DongzhengAFC also developed its own external finance business, and may seea leap in growth. The business model, as well as Zhengtong’s internetfinance ecosystem and closed platform, were all established in 2017,and the segment will keep boosting robust momentum in 2018.
Valuation and recommendation
We temporarily maintain our 2017/18 earnings forecasts. Wemaintain our BUY rating and target price of HK$13 （14x 2018e P/E）。
Risks
Financing costs are higher than expected.