On 8 February, Zhengtong hosted a conference call on its January operatingresults and outlook for 2018. Our key takeaways are as follows:
In January, Zhengtong's new car sales increased c.60% YoY on low base.Management remains positive on the premium car market, and expectits new car sales to grow more than 30% YoY this year, partly supportedby network expansion. Zhengtong does not envision fierce competitionsamongst various premium brands, as premium auto OEMs auto seem tocare about profitability as well other than purely striving for volume.
The company is confident about the BMW brands' outlook, with therolling out of new products such as domestically-made X3 with localizedfeatures and X2. For the 5 series, the management expects sales of 530Lito stay steady, and the February launch of 525Li with attractive pricing/features to further strengthen the market position of this model vs. peers'. All in all, Zhengtong hopes to maintain about 5-6% new car sales marginfor 5 series.
Regarding the auto finance business, Zhengtong grew the loan sizeby about RMB2bn in January, and still targets to achieve loan size ofRMB30bn by end 2018, with increasing amount of new loan from outsideZhengtong's dealership network and with earnings to multiply YoY.Management estimates that overall market auto financing penetrationrate was around 35% in 2017, and can probably grow another 5ppt thisyear.
Regarding the increasing interest rate environment, management statesthat it will only slightly affect the auto finance business's return on asset.To recap, Zhengtong has completed share placements in December 2017and January 2018 to raise cash, which will effectively contain the overallfinance cost.
Deutsche Bank view - auto finance to stay as key earnings driver
Zhengtong's operation update implies still healthy premium car demand growthand auto financing penetration growth. Going forward, we think the company'srecent share placements will support its auto financing business growth and makethe company 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.