Despite the slowdown of the overall auto market, the luxury/ultra-luxury car sale maintained a 7.2% YoY growth rate in 1H19. We believe that the luxury car market will continue to grow at a moderate rate. In the meanwhile, after-sales service with high GPM has gradually become the main contributor to the bottom-line for auto dealers. Therefore, we recommend investors to focus on the companies with a good brand mix and strong operational capabilities to reap the fruit in both the new car market and after-sales market. Our top picks are Zhongsheng (881 HK) and Meidong (1268 HK).
- As of the end of 2018, there were 29,664 4S stores nationwide, an increase of 3.9% YoY. In terms of the operating environment, the GPM of new car sales dropped from 5.5% in 2017 to 0.4% in 2018. The proportion of loss-making enterprises increased from 11.4% in 2017 to 39.3% in 2018. In the meanwhile, 27% of 4S dealerships were breakeven with only 33.7% of dealerships were making a profit. According to the latest survey from CADA, most of the new car sales have negative GPM except for a few brands in 2019. Under hard budget constraints, we believe the dealer sector is moving into the consolidation phase.
- In the future, China's replacement demand is expected to rise from 29.5% in 2018 to 46% in 2022E. The demand for used-car trade will enable 4S-dealerships to obtain the corresponding opportunities in both the replacement new car sale and the used car transaction.
- In 1H19, the sales volume of luxury brands exceeded 1.4 mn units, an increase of 7.2% YoY. The sales of BMW and MINI brands reached 350,000 units, an increase of 16.8% YoY. Mercedes-Benz and smart brands delivered 350,004 units in China, an increase of 1% YoY. Audi's cumulative sales was 311,871 units, up by 1.9% YoY. However, Jaguar Land Rover's cumulative sales in China was 48,933 units, down by 31.7% YoY. The market share of luxury brands continued to rise to 11% in 1H19 which was higher than the world average level and the same as the US level. We believe the future growth rate will be an inverse U shape and finally get back to the world average.
- Pangda announced that it had confirmed the intended investors were involved in the restructuring of the group. By analyzing its past performance, we will try to avoid black swan through three aspects, namely financial risk management, authorization from OEMs and business model risk.
- Valuation/Key risks. 1) Continued slowdown in the Chinese economy. 2) The development of the used car market was slower than expected.
