【Company Research】Meidong Auto (1268 HK) – Deserve a valuation premium

MeiDong released its FY20 results. Top-line was RMB20.2bn, up 25%YoY. Among that, revenue from new car sales was RMB18bn, up 25% YoY while revenue from after-sales service was RMB2.3bn, up 23% YoY. NP increased 36% YoY to RMB751mn (vs CMBI forecast RMB736mn). Thanks to the recovery of China's overall auto market after COVID-19, the Company's NP rose 43%YoY to RMB450mn in 2H20. The Company declared a full-year dividend of RMB0.39 per share (including interim dividend), representing a 64% payout ratio, higher than its historical level.

  

  1. Keep expanding while maintaining high efficiency. The number of stores increased to 63 in 2020 from 58 in 2019. The Company continues to expand its presence in luxury brands, adding 1 Porsche/2 BMW/2 Lexus in 2020. The proportion of luxury brands in terms of revenue from new car sales/after-sale new increased to 84.0%/83.8% respectively in 2020. MeiDong's operating efficiency continues to improve together with store expansion. Inventory turnover days dropped to a historical low of 9 days in 2020 from 17 days in 2019. Operating cash flow increased significantly to RMB1.45bn while the Company continues to maintain a net cash position.

  

  1. MeiDong set up a new M&A team in 2020 to normalize small/medium-sized M&A business. MeiDong will focus on its M&A on 1) familiar mainstream luxury brands; 2) familiar locations; 3) reasonable valuation - expected payback period to be less than six years. We expect the setup of the M&A dept will 1) significantly expand the M&A target pool; 2) improve the quality of the pipeline project; 3) and enhance the predictability for M&A. The Company has completed 100% equity acquisition of one Lexus in Nanjing and one BMW in Guangan (single store single city) in 2021.

  

  1. MeiDong launched the CRR pilot project in Aug 2020 and expanded to 60 stores by Mar 2021. Preliminary data show that 1) the return rate of customers' second visit increased by 5%-15%; 2) customer active contact rate increased to 30% from 10%; and 3) service reservation rate increased to 60% from 45%. We expect that the CRR project will increase customer stickiness by improving customer satisfaction, therefore reducing the losing rate of after-sales service.

  

  1. We barely adjust our 2021E forecast. We believe MeiDong will have 1) higher GPM forecast assumption and 2) higher operating efficiency as new store gradually matured. We believe the rapid growth rate and high efficiency deserve a higher valuation premium for MeiDong. We take 45x 2021E P/E and raise our TP to HK$46.2 with an upside of 22.1% from initial TP HK$33.7 (based on initial 34x 2021E P/E). Reiterate BUY.
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