Key takeaways
On January 22, we visited one of Zhengtong’s Mercedes-Benz 4Sstores, and a BMW 4S store under its SOMCS （strategic operationmanagement cooperation scheme） in Shenzhen.
SOMCS: good offer to inspire further sector consolidation;professional dealers to amplify profitability & synergy. SinceZhengtong took over its operations on January 1, the BMW storewe visited has received operational and managementimprovements, including increasing after-sales workstations,enhancing its organizational structure, and optimizing its HRmanagement. As a leading dealer, Zhengtong has a professionalmanagement team, and maintains closer cooperation withOEMs than small dealers – these attributes will help its SOMCSpartners lift their overall profitability and spur stronger synergyin new car sales and other value-added businesses. We believeSOMCS is a reformed business model that could furtheraccelerate sector consolidation, as leading dealers’ finemanagement model could be popularized, and OEMs anddealers could better communicate.
Dongzheng products to expand scale of external finance.SOMCS is especially beneficial to Zhengtong’s finance segment.Dongzheng’s finance products could have equal penetration tothose of BMW Finance in BMW stores and its finance revenuecould hit Rmb20mn p.a. Its 2018 target is sales split 50%/50%between external/internal networks, greatly expanding its loanscale as it is no longer limited to its own new car sales.
BMW and MB still enjoy favorable cycles; stores’ revenuetargets both exceed 10%. According to feedback from these twostores: BMW 5 series now are sold with no discount, and the530 has a 1.5-2 month wait with compulsory Rmb15,000-20,000of accessories; while, MB GLC and E class are still sold withoutdiscounts, and there is around 30,000 discount for the C class.
Both stores are expected to enjoy >10% growth in both new carsales and after-sales services revenue.
Recommendation
Maintain BUY rating and HK$13 target price （14x 2018e P/E）。
Risks
Financing costs are higher than expected.