Initiate with BUY. We initiate coverage of Yongda with a BUY rating and a target price of HK$ 8.50, based on 7x FY23E P/E. Despite direct-sales attempts by some new-energy-vehicle （NEV） makers, we believe dealership business model is still justified. We believe the majority of short-term negatives has been priced in given its low valuation now. Some investors may underestimate the contribution of after-sales service recovery to Yongda’s net profit growth this year.
　　Industry margin dent has been largely priced in. Auto dealers’ new-car　sales business may face challenges amid price war in 1Q23, following phase- out of both NEV subsidy and purchase-tax benefit from this year. We expect sales volume and margins to recover from 2H23 after possible inventory reduction in 2Q23. Yongda’s core brands, BMW and Porsche, could be better positioned than other traditional brands in the NEV world.
　　NEV brands and pre-owned vehicles may grow fast. Yongda is a pioneer　in partnering with NEV makers. We expect Yongda’s new-car sales volume of NEV brands to surge over 90% YoY to 15,000 units （dealership model and agency model combined） in FY23E amid network expansion. We project Yongda’s pre-owned vehicle sales volume to rise 10% YoY to 88,000 units in FY23E, amounting to more than 50% of its new-car sales volume.
　　After-sales services as a key earnings driver this year. We project　Yongda’s after-sales service revenue to rise 15% YoY in FY23E and to account for 16.5% of its total revenue amid pent-up demand and commute resumption. That could lift Yongda’s overall gross margin to 10.0% in FY23E from 8.9% in FY22E, based on our estimates. Accordingly, we forecast its net profit to rise 39% YoY to RMB 2.0bn in FY23E. We believe such profit and margin contribution from after-sales services could be underestimated by some investors.
　　Valuation/Key risks. Our target price of HK$ 8.50 is based on 7x our FY23E P/E, the same as its average forward 12-month P/E in the past nine years. We think the valuation gap between Yongda and its peers could narrow, because the rising importance of after-sales services and Yongda’s NEV exposure. We also project Yongda’s dividend yield to exceed 8% this year. Key risks to our rating and target price include lower sales and/or margins, slower after-sales service recovery than our expectation, as well as a sector de-rating.