Investment Summary

Profits in Q1 down 83% but the Result in Q2/Q3 Saw Rebound up to 20%/41%

Yongda reported 2020M9 revenue of RMB48.236 billion, up 8% yoy; net profit attributable to the parent company at RMB 1010 million, down 6% yoy. Its comprehensive revenue recorded RMB10.48 billion for Q1 and RMB17.95 billion for Q2, down 25% yoy and up 14.4% yoy, with the net profit at RMB59 million and RMB471 million, down 83% and up 21.3% yoy.

In Q3, demand in the premium car market remained strong. The company's revenue and net profit rose 31.5% and 41.2% yoy to 19.8 billion and 480 million, respectively.

Gross Margin of the Premium Brands Saw a Surge in a Downward Trend

In H1 the revenue from the new car sales went down 3.7% to RMB23.581 billion because the sales volume of new models was down 13.5% yoy, while partially offset by the rise of the proportion of sales volume and revenue from the premium brands by 6.5 ppts/3.7 ppts to 70.9%/86.1%.

The significant volatility in H1 caused by COVID-19 outbreak and the rebound in Q2 reflects the vigorous purchase demands for premium brands provided by Yongda. The sales volume of the new models was down 30.6% in Q1 and up 0.4% in Q2 yoy, among which Q1 and Q2 saw the decrease by 21% and increase by 8% of the sales volume of the premium brands, and the decrease by 46% and 15% of the sales volume of the mid-end and high-end brands. The strong supportive policies from the manufactures contribute to the rise of the gross margin of the premium brands in the downward trend. Along with the driving force of the leading brands such as Porsche and BMW, the gross margin of the sales of new models in premium brands in H1 saw a slight increase by about 0.2 ppts yoy.

In Q3, new car sales increased by 30.8% yoy. Unlike the first half of the year, sales of mid-to-high-end brands improved significantly from the previous quarter (+34%qoq), although the yoy growth rate saw the rebound of premium brands (+32.3%yoy) is still stronger than mid-to-high-end brands (+28% yoy), driving new car sales revenue to increase significantly by 35% yoy in Q3.

Pressure from the Pandemic for the After-sales Business in Q1

The revenue from the after-sales business was down 6.6% yoy due to the strike of the pandemic in H1 and Q1 saw the severest strike, of which the revenue and gross margin were down over 30% yoy. The after-sales business has a significant effect on the result for it accounts for nearly 70% of the comprehensive gross margin. The after-sales business in Q2 reported a swift rebound. The revenue and gross margin were up over 15% yoy. The revenue from the after-sales business in H1 was down 6.7% with gross margin remaining basically unchanged at 46.05%. After-sales business continued to rebound in 2020Q3, with revenue increasing by 20.8% yoy.

In our view, given the favourable factors such as the acquisition of new stores, the increase of the number of the license plates issued and the supportive policies from the OEMs, the accelerated recovery are expected in 2020Q4 for the after-sales business.The value-added service was stable. Revenue of the division for the leasing business and finance proprietary business stood at about RMB460 million and showed flat growth, but the gross profit of the division was slightly down by 1.9% to RMB212 million and the gross margin was 45.9% with a decrease of 0.6%. We expect that the status quo of the division will remain unchanged.

Unceasing Optimization and Upgrading of the Network

The Company continues to optimize the network layout and develop the wide network centred on the Yangtze River Delta and expanding towards the other areas in China such as the northern, central, southwest, and southern China and further focuses on the key premium brands and key regional markets. 8 outlets for the sales and service for the passenger cars featured in premium and super-premium brands were established in H1, including a 4S store for Porsche, 3 4S stores for BMW (one from acquisition), a 4S store for Lexus, a 4S store for Aston Martin, a 4S store for WM Motor and an exhibition hall for Volvo. On 30 June, the aggregated number of outlets opened (230) and authorized to open (7) is 237. Yongda reveals the ongoing scheme for merger and acquisition, which is expected to obtain achievements before the end of this year.

Investment Thesis

We expect the company's EPS for 2020/2021 to reach 0.90/1.08 yuan and the target price of HK$12.5, corresponding to 2020/2021 11.7/10x P/E. We maintain our Buy rating. (Closing price as at 19 October)

Financials

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