Transform into after-sales and new energy vehicle businesses
Rapid development of comprehensive after-sales business andkick-off of new energy vehicle business in 2016
Upgrade to BUY, TP raised to HK$6.91 on new business model
Comprehensive after-sales business to grow rapidly
We expect comprehensive after-sales outlets to hit 161 by the end of2015, and 115 new outlets to be added in 2016.We estimate after-salesbusiness revenue of Harmony will grow 50% and 43% respectively in2015-2016E, with 16% and 19% contribution to gross profit. Given thataverage vehicle age reaches 3.5 years in China, we believecomprehensive after-sales business has huge growth potential.
New energy vehicle business to kick off
On Dec. 7, Harmony Futeng (JV of Harmony, Tencent and Hon Hai)invested in Green Field Motor, Harmony?s new energy vehicle platform.Green Field plans to launch economy EV with range of 150 km/250 km in2016/2017E. High-end EV project will start in 2016 and its first model willbe launched in 2018. We expect the new energy vehicle business to startto generate profit in 2017, with 5% net profit contribution.
Robust growth in new car sales
The company's sales network is mainly in Central China, where luxury carmarkets enjoy less competition. We expect 10-11% growth in Harmony?snew car sales in 2015 v.s. 3% growth in BWM sales in China. We expectGPM of 4S store after-sales to improve in 2015-17 as its news storesbecome mature. We expect GPM of comprehensive after-sales businessto drop slightly due to higher revenue contribution from new outlets.
TP raised to HK$6.91, upgrade to BUY
We raise our 2015-17E new car sales forecasts and 4S store after-salesGPM and lower the comprehensive after-sales GPM. We lower 2016/17net profit forecasts by 3.9%/4.3%, 3%/15% below the consensus. Webelieve Harmony deserves premium to its peers, given its businesstransformation and the bright outlook of aftermarket and new energyvehicle businesses. Our SOTP-based TP of HK$6.91 is equivalent to13.2x 2016E P/E, higher than sector average of 8.6x.