Meidong Auto:2017is going to be another good year

Robust momentum in 2H16 carry on into 2017.

We have an update with management recently, which confirmed our view that 2017 would be another good year for Meidong. To recap, Meidong reported 40% yoy EBIT growth in 2H16, versus 11% CAGR during FY13-15 and a flattish performance in 1H16. The Company’s luxury brand portfolio continues to do well YTD. In the PRC market, sales volume of BMW and Lexus increased by 18% and 24% respectively during 4M17, while Porsche reported 10% volume growth in 1Q17. These three luxury brands represented ~80% of Meidong’s new car sales GP in FY16, and Meidong has focused on opening new stores for them in recent years, which put the Company in a favorable position to enjoy their strong model cycle.

For mid to high end brands, Toyota only posted 3% volume growth in the PRC in 4M17, which is partially attributed to a higher purchase tax rate on small-engine vehicles (5% in 2016 versus 7.5% in 2017), management expressed that the Company has a low inventory level for Toyota YTD (and for most of the other brands as well), hence GPM should remain healthy. Hyundai is the only problem with PRC sales volume down by 29% in 4M17 due to geopolitical tensions. However, Meidong only operates 2 Hyundai 4S stores, and both stores are well established and are still profit making under the challenging environment.

Top-class managing system to ensure efficiency .

Among all listed auto dealers, we like Meidong’s effort and capability in monitoring and managing the operation of each store, which make the Company more efficient in terms of profitability and working capital turnover. Management stated that they have recently improved the Company’s ERP system, which could oversee the daily sales, margin and inventory level of each store. Hence management can make more effective decisions on procurement, retail discount and incentive scheme based on latest development.

We revised up our FY17E earnings forecast by 13% to factor in the stronger than expected YTD performance. Meidong is trading at 7.0X FY17E PER, a 30% discount to the average of the four major H share auto dealers. Given Meidong’s highest dividend yield supported by a healthy balance sheet (negligible net gearing as of end Dec 16), as well as the youngest store portfolio which suggest more growth potential ahead, we believe Meidong deserves a re-rating.