Zhongsheng announced its 1H20 results. 1H20 top-line increased by 1% YoY to RMB58.2bn, among which revenue from new car sales increased by 0.6% YoY to RMB49.8bn while revenue from after-sales and accessories increased by 6% YoY to RMB8.4bn. 1H20 bottom-line increased by 10% YoY to RMB2.3bn.
- 1H20 top-line missed CMBI estimate due to the slower-than-expected store expansion. The number of stores only increased from 360 at the end of 2019 to 365 in 1H20 (newly added 3 luxury/2 mid-/high-end). In the mean-while, sales volume per store fell 13% YoY to 540 units in 1H20 vehicles given the economy lockdown in 1Q20. As a result, new car sales volume decreased by 7.8% YoY to 197K units in 1H20.
- However, both aggregate unit price and GPM from new car sales improved in 1H20. Given 1) mismatch between the supply side and the demand side in 1H20 and 2) the rising proportion of luxury brands sales volume (56% in 1H20 vs 47% in 1H19), the aggregate unit price increased by 9% YoY in 1H20. Moreover, GPM from new car sales increased by 0.3ppt to 3.0% in 1H20, which partially offset the top-line growth slowdown.
- 2Q20 performance has resumed to the high growth trajectory. Both new car sales and after-sales service have rebounded strongly in 2Q20 (new car sales volume +7.4% in 2Q20 vs -25.7% in 1Q20/after-sales revenue +22.2% in 2Q20 vs -8.3% in 1Q20). The resilience of luxury brands (+23.7% in 2Q20) has contributed to the rapid recovery of the Company's new car sales. We expect the luxury brands will keep their growth momentum in 2H20E given 1) consumption upgrade and 2) the rising proportion of replacement purchase.
- 2H20E performance will be supported by excellent operation and recent M&A deals. Inventory turnover days in 1H20 reduced to 29.7 days, reflecting its excellent operating efficiency. The Company disclosed that it acquired 3 stores at the beginning of 2020 with a total price of RMB1.5bn. We estimate that the P/E ratio was in the range of 3.5x to 4.0x, which is much lower than the Company's current P/E ratio of 20x. In Jul, the Company also announced the acquisition of 8 luxury brand 4S stores (6 Mercedes-Benz/2 JLR), which will further expand its luxury brand presence. A number of M&A expansion at low cost reflects the Company's strong bargaining power in deal negotiations. We believe the optimization in its geographic presence (East/South China, Tier-1/2 cities) and its product mix (BBA+Lexus+Toyota) will support the performance in 2H20E.
