Source of opportunity
After the Nov. 2 market close, Harmony announced a strategic cooperationframework agreement with Alibaba (covered by Piyush Mubayi) to build a“Harmony-Alibaba Automobile Car Port” physical network (~300 outlets) in80 cities in 2 years, integrating vehicle sales support, delivery, insuranceagency, auto finance, used cars and after-sales services (see pg 3 fordetails). We believe this new car service business model could not onlybring >Rmb500mn extra revenue to Harmony in 2018E, but also reshape thecurrent 4S (sales, service, spare parts, and surveys) store business modelfor the entire car service industry value chain over the longer term.Catalyst
1) Rapid expansion of Harmony independent maintenance outlets, from 40in 2014 to 220 in 2016E; 2) rapid revenue growth (51% CAGR from 14-18E) ofindependent maintenance business on store expansion, increasing traffic; 3)stabilizing new car sales GPM on improving dealer-OEM dynamics; and 4)higher visibility on new electric vehicle business as execution progresses.Valuation
We raise our 2016-2018E EPS by 1.6%/8.0%/16.1%, factoring in storeexpansion and improving margin after full ramp-up in 2018. As the networkbuilds out, we expect stronger revenue/margin contribution fromindependent maintenance stores on both new car and after-sale servicingon multiple brands in areas with less competition. We raise our 12-m SOTPbasedTP to HK$5.87 (from HK$5.39) on a higher value for its independentmaintenance stores and smart EV business; we still value its traditionalluxury dealer business on EV/GCI vs. CROCI/WACC, as with other dealers(see Exh. 7). Our new target implies 13% upside and we reiterate Buy.Key risks
Execution risk on new business model; delay in electric vehicle project;lower volume growth/GPM of independent maintenance stores; lowerprice/GPM of luxury new car sales on weak demand/intensified competition.INVESTMENT LIST MEMBERSHIPAsia Pacific Buy List
Coverage View: Neutral