2015 results in line with core NP up 12% YoY
2016E after-sales services to grow rapidly while diversificationfuels mid/long-term development
After-sales services robust with solid GPM at 4S outlets
Harmony Auto's 2015 NP was up 3.5% YoY to RMB560 mn, in line withour estimate. Excluding the impact from government's listing subsidy in2014 (RMB52 mn), its core NP was up 12% YoY. In terms of business:(1) sales of new cars were up 14.2% with revenue flat YoY while GPMwas down 1.7 ppt to 4.1%, in line with sector; (2) after-sales servicesincome was up 34.5% YoY, of which income from 4S outlets was up35.5% YoY thanks to the lower age of outlets, and that fromcomprehensive maintenance was up 74.6% YoY as a result of networkexpansion; and (3) GPM of after-sales services slid 0.7 ppt to 45.1% in2015, of which the GPM of 4S outlets still edged up 0.1 ppt to 46%, whilethat of comprehensive maintenance fell 2.5 ppt to 42.9%.
Diversified development with mid/long-term momentum
In the future, Harmony Auto will focus on comprehensive maintenanceand intelligent EV businesses: (1) it will increase coverage oncomprehensive maintenance in 2016E with an aim to improve marketshare. We estimate its income from 4S outlet after-salesservices/comprehensive maintenance to increase 21%/43%. GPM of 4Soutlets should drop to 44-45% due to lower accessories prices, whilethat of comprehensive maintenance should fall to 40-41% as a result ofthe higher proportion of relatively new outlets; (2) we estimate its salesof new cars to increase 10% in 2016E as its network mainly locates inmid-west China where penetration of luxury cars could still increase; and(3) it will start selling economy as well as intelligent and internet EVs in2017-18E.
Maintain BUY with TP lowered to HK$6.20
We cut our 2016-17E NP estimates by 5%/7% to reflect our conservativeview on comprehensive maintenance, which are 11%/15% belowconsensus. We maintain BUY with TP lowered to HK$6.20, implying12.3x FY16E P/E, above its historical average of 10.5x and the sector?scurrent average of 9.0x. We estimate its 2015-18E NP CAGR to reach20%. With successful transformation and clear long-term strategy, webelieve Harmony Auto can justify a fair premium.