1H17earnings expected to rise ≥500% YoY
On July 18, Grand Baoxin pre-announced its 1H17attributable net profit would grow no less than 500% YoY, up ≥Rmb384mn, a rise of ≥8.8% HoH.
Trends to watch
1H17 to see five-fold YoY growth, keeps rising HoH.
The company attributes 1H17’s huge YoY rise to: 1) the stabilization and steady growth of both its new car sales and after-sales services after its integration with CGA; 2) the realization of synergies with CGA; and, 3) its acquisition of six 4S stores in 1H17, contributing to the Group’s profits.
Brand mix still favorable; BMW 5 series contributing strong momentum.
Baoxin’s major brands saw rapid growth in 1H17, particularly BMW (+30% YoY) and JLR, which maintained positive MoM growth. Baoxin’s brand mix has been strengthened, and we expect its luxury exposure will be lifted. The BMW 5 series achieved favorable initial monthly sales; we believe it will provide strong momentum, helping the company to raise its new car sales ASP and GPM.
Dealership expansion to deliver incremental boost after the company acquired six luxury 4S stores in 1H17.
Synergy with CGA may continue to enhance economies of scale, as more efficient management should spur a reduction in expense ratios, while centralized purchasing saves costs.
Valuation and recommendation
As we were previously overly optimistic on Baoxin’s cost ratios, we now lower our 2017/18 earnings forecasts by 6.2%/15.4% to Rmb919mn/1,103mn.
We maintain our BUY rating and target price of HK$5.5, implying 12.3x 2018e P/E.
Risks
Rising financing costs; disappointing integration of M&A targets.
