Maintain BUY. We are of the view that Tuhu’s 1H25 earnings were solid despite industry headwinds. While the long-term story (larger after-sales market size with higher margins and fewer players as number of vehicles on the road and average age of vehicles rise in China) remains true, Tuhu’s superb management capabilities, which is likely to help it continue gaining market share, could make investors less concerned about short-term industry volatilities.
　　Solid 1H25 earnings with adjusted net profit beat. Tuhu’s 1H25 revenue
　　rose 11% YoY to RMB7.9bn, as the number of stores increased 14% YoY, in line with our prior forecast. Its trailing 12-month number of transacting users rose 24% YoY to 24mn as of 30 Jun 2025, grabbing substantial market share amid industry-wide downturn. 1H25 gross margin rose 0.3ppts HoH to 25.2%, 0.2ppts lower than our forecast, mainly due to a lower-than-expected gross margin for tires and chassis parts. Tuhu’s 1H25 net profit rose 8% YoY to RMB307mn, or 3% lower than our forecast due to higher share-based payments (SBP). Its adjusted net profit (excl. SBP) thus rose 15% YoY to RMB410mn, higher than our forecast by 11%.
　　Steady store expansion, healthy cash flow and superb operational capabilities make Tuhu better positioned than peers. Tuhu’s store
　　number increased by 331 to 7,205 as of 30 Jun 2025, well on track to achieve its full-year expansion of 900 new stores. About 90% of stores were profitable and almost all of them achieved positive cash flow in 1H25. There are key factors to support Tuhu’s franchised store expansion, in our view.
　　Tuhu also achieved positive free cash flow in 1H25, which could be crucial to survive and outrun peers amid industry headwinds. We attribute such healthy key metrics largely to Tuhu’s superb capabilities in managing complex supply chain and franchised stores, which will likely help Tuhu to continue gaining market share even if macro uncertainties linger. n FY25-26E earnings forecasts. We cut our FY25E revenue forecast by 1% and GPM projection by 0.9ppts to factor in continuous macro uncertainties and management priority on store expansion over margin lift in the short term. We project its R&D and selling expense ratios (as % of revenue) to be flat YoY in FY25E, given rising expenditures in AI and advertising.
　　Accordingly, we cut our FY25E adjusted net profit forecasts by 8% to RMB761mn, or 22% YoY growth. We expect revenue to rise 9% YoY in FY26E, supported by continued store expansion and customer acquisitions.
　　We project gross margin to widen YoY slightly to 25.9% in FY26E, and therefore, 15% YoY growth in adjusted net profit (RMB876mn) in FY26E. n Valuation/Risks. We maintain our BUY rating and raise target price from HK$21.50 to HK$23.00, based on 20x adjusted FY26E (prior 20x FY25E) P/E. Key risks include slower network expansion, lower revenue and/or margins than we expect, as well as a sector de-rating.