Zhongsheng (881.HK)

Research Summary

Rating: Buy

Target Price: HK$101

ZENG Siyang, Michael

Updated on October 30, 2016

Key Investment Theses

• The Dealerships’ Inventory Level has fallen below warning line. New car sale in China keeps climbing against the backdrop of sluggish growth. Outlook of the industry of auto dealership is stable.

• Zhongsheng is the largest Benz dealership in China, taking up over one-tenth share (units sold). Benz is the largest source of car sale revenue, taking up about one fourth. Benz’s units sold has surged in recent years. The coming of new E Class in August will boost the sale of Zhongsheng.

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Key Investment Theses

• The management thinks highly of Toyota and Lexus due to high quality of the former and over-demand of the latter. Zhongsheng will continue cooperation with the automaker on the basis of close relationship.

• Zhongsheng acquired Hainan Joyer to tap into Hainan market successfully. In the restructuring earlier this year, some stores in Northern China were given up. Management emphasizes that quality of M&A actions should be primary goal despite of numerous M&A opportunities.

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Key Investment Theses

• Second-hand car business, one of future directions,

yields higher profit margin than new car, as high as

5% and saw 11.7 thousand transactions in 1H16.

• The considerable drop in finance cost reflects the

impact of decline in interest and inventory level.

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Business Model of Auto Dealership

• Basic Business: New Car Sale– Buy in first and sell out later

– High volume of revenue with low profit margin

– To attract customers

• Value Added Business: Post-sale & Financial services– Repair & maintenance, used car disposal, accessories & modification,

finance & insurance

– Low volume of revenue with high profit margin

– To monetize the portfolio of customers

• Other Business: Related Industry & Business– E.g., forward integration, channel expansion

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Business Model of Auto Dealership

New Car Purchase

Rental / Repair & Maintenance

Used Car Disposal

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Accessories & Modification

Finance & Insurance Agency

4S Store

OEM

Insurance

Company

Bank & Auto

Finance Firm

New Car

Finance Product

Insurance Product

Independent

Supplier Parts & Accessories

Core Lifecycle of Cars

Auto Dealership in China

• Low market concentration

• Business structure gap between Chinese dealers and dealers in mature markets

• Frequent M&A transactions and new business explorations in last few years

• OEMs with stronger market power

• Emerging sectors

– parallel import, O2O sale, new energy car, IOV & smart car

– Much uncertainty

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Competitive Landscape

25%

75%

2015 New Car Sales in China

Top100 Dealerships Others

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Rank Name Revenue(RMB) Sales

1 China Grand Auto 90,700,035,201 678,190

2 Sinomach Auto 64,189,320,000 222,908

3 Zhongsheng 59,142,607,000 260,353

4 Pang Da Auto 56,374,978,176 450,724

5 Lei Shing Hong Auto 52,208,903,075 117,422

6 Yongda Auto 45,118,896,000 134,441

7 HXQC 38,182,904,877 215,998

8 GWQM 30,750,224,679 236,264

9 Zhengtong Auto 29,785,763,000 95,409

10 Baoxin Auto 29,015,725,864 71,046

Source：Top100 Dealerships Ranking 2015 by China Automobile Dealers Association

Business Structure Gap

82.3%

2.2% 8.9%

3.8% 2.8%

China Top100 Revenue StructureNew Car Sale

2nd Car Sale

Parts & Repair

Finance & Insurance

Others

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29.5%

3.9%50.7%

15.5%

0.4%

China Top100 Gross Profit Structure

57.5%22.9%

14.8%

4.2% 0.6%

US Average Revenue Structure

20.6%

10.8%

41.0%

26.6%

1.0%

US Average Gross Profit StructureSource：Top100 Dealerships Ranking 2015 by China Automobile Dealers Association

Recent Major M&A Transactions

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Disclosure Date Target Acquirer Value Status

Aug 20, 2016 Shenzhen Pengfeng China Grand 1,006 mRMB In progress

Acquire stores in Guangdong and access stores in Hunan

Feb 6, 2016 Dalian Prestige China Grand Undetermined In progress

Acquire premium-brand store in Northeast China

Sept 15, 2015 Baoxin China Grand 9,768 mRMB Completed

Enhance brand portfolio with Baoxin’s BMW location network

Mar 31, 2015 Hainan Jiahua Zhongsheng 455 mRMB Completed

Access Hainan auto market and enhance Lexus location network

Source：Announcements and reports of companies

Emerging sectors

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Parallel

Import

- Importing cars without OEM’s

permission to provide more and

cheaper choices

- Risks: regulative barriers, limited

car sources, immature maintenance

systems

- E.g., traditional dealers, general

distributors

New

Energy

Car

O2O

Sale

IOV &

Smart Car

- Exploiting digital technologies and

Internet to enable more convenient

driving experience

- Risks: safety concerns, regulation,

no unified standards

- E.g., internet enterprises, OEMs

- Cars using cleaner energies

(mainly electricity)

- Risks: technology bottleneck,

infrastructure requirements, capital

barriers

- E.g., OEMs(major and minor)

- Buying cars from online stores and

getting car offline

- Risks: capital requirements,

undeveloped habits

- E.g., traditional dealers, OEMs, e-

commerce platforms, start-ups

Company OverviewNAME Zhongsheng Group Holding Limited

CATEGORY Automobile Retailing, Maintenance & Repair

LISTING DATE March 26, 2010

MARKET CAPITALIZATION 15.541 Billion HKD

STOCK PRICE 7.240 HKD

PRICE-EARNING RATIO 29.31 (based on 2015 annual earning)

PRICE-BOOK RATIO 1.17

DIVIDEND YIELD 0.69%

52-WEEK RANGE 3.170 – 8.380

INDEX CONSTITUENT HSCI, Index: Consumer Goods, HSHKMI, HSGCI

12Source：AASTOCKS，as of September 30, 2016

Price Trend

13Source：Bloomberg，Rearranged, as of September 23, 2016

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

HSINDEX 881.HK

Income Statements

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KRMB 1H2016 1H2015 2015 2014

Revenue 31,742,203 100.0% 26,886,947 100.0% 59,142,607 100.0% 54,786,660 100.0%

Car Sale Revenue 27,553,189 86.8% 23,241,798 86.4% 51,842,665 87.7% 47,961,591 87.5%

(Profit Margin) 3.0% 2.7% 2.6% 3.3%

Post-sale Revenue 4,189,014 13.2% 3,645,176 13.6% 7,299,942 12.3% 6,825,069 12.5%

(Profit Margin) 47.8% 45.3% 45.5% 46.9%

Gross Profit 2,824,651 8.9% 2,275,623 8.5% 4,669,193 7.9% 4,774,823 8.7%

Other Incomes 560,972 1.8% 501,397 1.9% 1,104,143 1.9% 944,500 1.7%

SDA Expense (1,938,483) -6.1% (1,709,973) -6.4% (3,763,409) -6.4% (3,354,945) -6.1%

Operating Profit 1,447,140 4.6% 1,067,047 4.0% 2,009,927 3.4% 2,364,378 4.3%

Finance Cost (487,027) -1.5% (610,940) -2.3% (1,295,697) -2.2% (1,272,568) -2.3%

Income Tax (281,905) -0.9% (135,650) -0.5% (234,329) -0.4% (314,727) -0.6%

Net Income 612,981 1.9% 310,405 1.2% 460,964 0.8% 750,905 1.4%

Source：Annual and Interim Reports, Rearranged

Income Forecast

2016E 2017E 2018E

Revenue(kRMB) 73,756,689 80,159,776 83,840,340

YoY Change 24.7% 8.7% 5.0%

Net Income(kRMB) 1,092,641 1,707,162 2,005,418

YoY Change 137.0% 56.2% 17.5%

EPS(RMB) 0.51 0.80 0.93

P/E 19.25 12.32 10.49

P/B 1.54 1.37 1.21

ROE 8.8% 12.1% 12.5%

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Valuation Comparison

Market

CapPrice P/E P/B

6 Months Ended June 30, 2016

Revenue

(kRMB)ROE(%) ROA(%)

881.HK Zhongsheng 15.541B 7.240 29.31 1.17 31,742,203 5.47 1.63

1293.HK Baoxin 6.189B 2.420 22.86 1.07 10,871,401 N/A N/A

3836.HK Harmony 5.940B 3.770 8.22 0.86 4,928,161 5.15 2.76

1828.HK DCH 5.771B 3.150 10.13 0.6420,121,000

(kHKD)2.44 0.81

1728.HK Zhengtong 5.437B 2.460 7.47 0.54 14,596,154 2.94 1.01

3669.HK Yongda 5.284B 3.570 8.67 1.06 18,709,529 8.79 2.11

Category：Automobile Retailing, Maintenance & Repair, Market cap more than 5B

16Source：AASTOCKS，Results Announcements of Companies，as of September 30, 2016

Valuation Comparison

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7

9

11

13

15

17

19

21

23

28-Sep-15 28-Oct-15 28-Nov-15 28-Dec-15 28-Jan-16 28-Feb-16 28-Mar-16 28-Apr-16 28-May-16 28-Jun-16 28-Jul-16 28-Aug-16

881 1728 3836 3669

Source：Bloomberg，Results Announcements of Companies，Rearranged

P/E

Valuation Comparison

• Zhongsheng maintains a higher level of P/E (from 15

to 20 times) than those of its competitors (from 7 to

11 times)

• The high valuation multiple of Zhongsheng probably

benefits from concentrated and stably developing

business, while rivals’ strategies are more diversified.

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Summary

• We can expect a stable auto market and recovered

revenue for Zhongsheng. The net income for 2016FY

will be at least 1,225 million RMB. If we give a P/E

from 15 to 20, then the price should be 9.96 to 13.28

HKD.

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Author Contact

ZENG Siyang, Michael

Research experience in Guotai Junan International and

Guosen H&S

Email zengyoya@gmail.com

LinkedIn https://hk.linkedin.com/in/zengsiyang

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