Action
We reiterate our BUY rating for Grand Baoxin as we believe it isstarting to catch up with its peers.
Reasoning
Share performance underperforms peers; it’s time for Baoxin to catch up. Compared with other HK-listed autodealers, Baoxin’s price performance has largely lagged those of its peers; in particular,its 20-day price change was 3.6%, vs. the 14% of Yongda, and 28.4% of Zhengtong. We believe that sector-wide rallies have driven its peers’ values up; Baoxin, which has a relatively cheap valuation and strong market expectations for 1H17 results, should catch up the others soon.
Biggest exposure to BMW and high profitability elasticity from new 5 series. Baoxin, with the mainland’s largest BMW 4S store number, enjoys the biggest BMW penetration. As the BMW 5 series is officially launched with favorable pricing, the sales volume and GPM of BMW might beat expectations, and we have confidence that Baoxin may enjoy higher-than-expected BMW profitability elasticity from 2H17.
Strong growth momentum in both new car sales and after-sales services; auto finance developing with CGA’s help. Thanks to the booming luxury market, we believe Baoxin’s new car salesand after-sales services will continue to see growth in both volume and ASP in1H17; while its selling expense ratio might be reduced further. With the help of CGA, Baoxin’s auto finance business has developed smoothly, and will see breakthroughs over the medium-/long-term.
Valuation and recommendation
We believe
Baoxin joining hands with CGA has been mutually beneficial, and largely
enhanced Baoxin’s management efficiency. We
reiterate our BUY rating, and lift our target price by 10% to HK$5.50,
implying 14x 2017e P/E.
Risks
Profitability of BMW 5 series misses expectations.
