1H22 results in line with our forecast
　　Yongda Automobiles Services (Yongda) announced 1H22 results: Revenue fell 22.5% YoY to Rmb31.39bn, and attributable net profit declined 42.5% YoY to Rmb673mn or Rmb0.34/sh. Due to COVID-19 conditions and a high base, the firm’s attributable net profit declined 67% YoY (down 53% QoQ) to Rmb214mn in 2Q22, in line with expectation.
　　Trends to watch
　　1H22 results under pressure due to impacts from COVID-19 pandemic; upbeat on recovery of car sales in 2H22. The pandemic’s impacts around Shanghai pressured Yongda’s earnings in the near term. New-car sales volume in 2Q22 fell 40.6% YoY (down 20.0% QoQ) to 34,100 units, and that of luxury cars declined 35.0% YoY (down 19.5% QoQ) to 25,800 units. Due to smaller end-market discounts, per-car revenue of new-car sales rose 11.7% YoY to Rmb339,000/unit, and that of luxury cars increased 6.2% YoY to Rmb398,000/unit. Yongda’s blended gross margin rose 1.52ppt YoY (down 0.44ppt QoQ) to 11.44%, with GM of new cars up 0.46ppt YoY to 3.58%. We believe COVID-19 conditions will work to postpone the car sales cycle. Despite short-term disruption, we think overall demand will improve due to recovering supply and government subsidies for purchasing new cars. Along with increased investment in marketing and accelerating orders, we expect rapid sales for Yongda’s inventory of high-quality cars and foresee large potential for earnings improvement in 2H22.
　　Accelerating development of AFV business to foster new growth engines. In addition to consolidating its advantages in luxury brands, Yongda also accelerated the development of alternative-fuel vehicle (AFV) brands. It obtained 47 independent AFV network authorizations in 1H22, taking the total number of authorized outlets to about 70. The firm plans to increase the number to 100 by end-2022. The firm’s authorization covers 13 mainstream brands such as XPeng, Smart and AITO. Its AFV sales volume rose 143.7% YoY to 2,849 units, and after-sales service revenue grew 67% YoY, reflecting Yongda’s improved capabilities for operating AFV brands. We think the firm has built a considerable AFV service network and the business is rapidly growing. We think that AFV business will likely become a new growth driver, along with the firm’s rapid network expansion and uptrend in the AFV market.
　　Improving supply chain for used cars; policy positives supporting dealership business for used cars. The firm has comprehensive supply-chain capabilities for used cars. COVID-19 conditions weighed on sales of used cars in 1H22, with sales volume down 5.0% YoY to 31,500 units. Due to policy positives and prudent strategy, the GM of the used-car business expanded 0.09ppt YoY to 6.05%. In 1H22, per-car sales revenue of used cars grew 6.7% YoY to Rmb217,400/unit. We think policy positives for the used-car market in 2H22 will help address long-term pain points in the sector. We expect the used-car dealership business to keep trending upward, conducive to boosting earnings.
　　Financials and valuation
　　Considering the pandemic affected the consumption of cars purchased in stores, this year's fuel vehicle policy overdraws next year's demand, and sales of traditional luxury cars are squeezed by high-end new energy vehicles, we trim our net profit forecast for 2022 by 21.2% to Rmb2.26bn, and for 2023 by 23.6% to Rmb2.59bn. The stock is trading at 4.4x 2022e and 3.8x 2023e P/E. We maintain OUTPERFORM, and cut our TP 24.5% to HK$7.70 (5.8x 2022e and 5.0x 2023e P/E with 31.6% upside).
　　Risks
　　Expanding end-market discount; disappointing sales volume of new cars; disappointing development of used car business.