中国汽车经销商：吸收率-一种看待倍数的新方法

1、ChinaEquitiesAutomobilesAbsorption rates a new way to look at multiplesChina Auto DealersWe examine how steady after-sales business can reduce earnings volatility, which in turn implies more upside potentialWe think dealers with a higher absorption rate deserve higher multiples, as this offsets larg

2、e fluctuations in new car salesTPs raised to HKD36 from HKD21 for Zhongsheng (Buy from Hold), HKD10.70 from HKD7.00 for Yongda (Buy from Hold) and TP lowered to HKD2.40 from HKD2.70 for Zhengtong (Hold)We now think we were too early in downgrading our coverage stocks last year. This report explains

3、why we think the powerful rally has further to run and also introduces a new way of looking at valuation multiples.Rethinking multiples. Despite strong growth in luxury car sales, earnings have been volatile and too dependent on sales margins. Can this change? We think the steadier and recurring aft

4、er-sales business is being overlooked. Our proprietary analysis of the absorption rate after-sales gross profits divided by total company costs shows how this can reduce earnings volatility. For example, Zhongshengs absorption rate was an impressive 107% in 1H19, which means after-sales profits not

5、only covered all company costs but also left a surplus to offset fluctuations in new car sales.A new re-rating driver. The absorption rate also provides a way to value dealers more systematically. Our analysis finds that the higher the absorption rate, the lower the earnings volatility and the highe

6、r the trading multiple. We forecast that the absorption rate for all three companies Zhongsheng, Yongda and Zhengtong will improve over 2018-21, creating re-rating opportunities.Upgrade Zhongsheng and Yongda. We upgrade Zhongsheng and Yongda both to Buy ratings from Hold as we anticipate lower earni

7、ngs volatility. In deriving our TPs we apply a 0.25 standard deviation (SD) premium, 0.25 SD discount and 0.5 SD discount to our target PEs of Zhongsheng, Yongda and Zhengtong based on their absorption rate. Although we significantly increase our TPs for Zhongsheng and Yongda (see table), we still t

8、hink our new target multiples of 14.4x and 9.9x are reasonable, based on their growth profile, ROE and improving earnings quality. We also discuss the potential threats from Tesla and assess the impact from the coronavirus outbreak. Within our coverage, we think Zhengtong should see the most negativ

9、e impact from this outbreak as it has the highest exposure to Hubei province.Key changes to ratings and estimates7 February 2020Tracy Li*, CFA AnalystThe Hongkong and Shanghai Banking Corporation Limited HYPERLINK mailto:tracy.s.w.li.hk tracy.s.w.li.hk+852 2996 6751Employed by a non-US affiliate of

10、HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations13-15 May 2020 | ShenzhenHSBC 7th Annual China ConferenceRegister nowCompanyCurrent Ticker Currencyprice TP Rating _Upside/ Market cap OldNewOldNew downside(USDm)3m ADTV (USDm)2020e PE2020e PB2020e ROEYongda3669

11、 HKHKD8.197.0010.70HoldBuy31%2,1324.847.60.917.1%Zhengtong1728 HKHKD2.122.702.40HoldHold13%8022.8%Zhongsheng881 HKHKD29.3021.0036.00HoldBuy23%9,0078.9811.72.422.3%Source: HSBC estimates. Priced as of close at 4 Feb 2020Disclosures & DisclaimerThis report must be read with the disclosures a

12、nd the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.Issuer of report: The Hongkong and Shanghai Banking Corporation LimitedView HSBC Global Research at:https:/ HYPERLINK / Quantifying trading multiples based on absorption ratesWe assess how the a

13、fter-sales absorption rate can reduce fluctuations in dealers earningsWe then use this rate to quantify trading multiples the higher the absorption rate, the higher the multipleUpgrade Yongda and Zhongsheng to Buy, maintain Hold on Zhengtong, with new TPs of HKD10.70, HKD36.00 and HKD2.40How the aft

14、er-sales business is starting to stabilise earnings2018 was a bad year, despite the luxury segment delivering 9% growthNet profits are highly correlated to margins of new car salesWhen asked back in 2017, which was a really good year for dealers, “of the companies you cover, which could double their

15、 share price in three years?”, the logical response was that if the trading multiple remained unchanged, as long as earnings doubled within three years (a CAGR of 28%) the share price should double.Back then, this didnt look hard to achieve as most dealers had recorded y-o-y earnings growth of more

16、than 50% in 2017. Driven by strong luxury sales, dealers should have had little difficulty in doubling their earnings in three years. At that time, Zhongshengs share price was HKD17 and Yongdas was HKD11.However, things didnt quite work out that way. 2018 turned out to be a very bad year for dealers

17、. Share prices tumbled due to a combination of widening discounts on the BMW 5 series, the impact of the import tariff rate, and China-US trade tensions. This sharp correction took place despite the luxury segment delivering 9% growth at a time when overall industry retail sales fell 8%, according t

18、o insurance data. Earnings growth has since slowed and some dealers even experienced a y-o-y decline in earnings in 2018.There is no secret to what drives dealers earnings. As explained in our report China Auto Dealers: In pole position (2 May 2018), net profits are highly correlated to the margins

19、of new car sales. Our analysis showed that a 50bp increase in new car sales margin boosts net profit by more than 10%, all else being equal.Fig 1: Zhongsheng new car sales margin vs net profit growthFig 2: Yongda new car sales margin vs net profit growth5.0%4.0%3.0%2.0%1.0%0.0%350%2.6%2.7%80%35%9%13

20、%(39% )(26% )3.1%3.3%3.3%4.0%4.2%304%300%250%200%150%100%50%0%(50%)(100%)5.0%4.0%3.0%2.0%1.0%0.0%4.2%5%3.3%25%3.1%3.5%62%77%3.7%100%80%60%40%2.4%2.4%20%1% 0%(17% )-20%-40%(15% )2013 2014 2015 2016 2017 2018 1H19ZS new car sales margin ZS net profits growth (RHS)2013 2014 2015 2016 2017 2018 1H19YD n

21、ew car sales marginYD net profits growth (RHS)Source: Company data, HSBC calculationsSource: Company data, HSBC calculationsIn this report, we dig a little deeper to see what can lead to different valuation multiples for dealers. Their revenue can be split into two categories: 1) variable revenue: n

22、ew car sales and finance and insurance commissions, which is led by the number of new cars sold; and 2)non-variable revenue (after-sales service), which is based on the accumulation of cars sold in the past.Here, we focus on the absorption rate defined as gross profits from after-sales divided by to

23、tal company costs, mainly selling, general and administrative (SG&A) expenses plus finance costs. Among dealers under our coverage, Zhongsheng has the highest absorption rate (107%), which means almost every fluctuation in net profit comes from changes in new car sales gross profits that are determi

24、ned by both new car sales volume and margin. In a situation where volume delivers positive growth, the margin becomes the biggest swing factor that will impact the earnings growth rate.Fig 3: Absorption rate of Zhongsheng, Yongda and Zhengtong99%107%97%82%87%66%65%67%56%80%75%89%75%74%75%120%100%80%

25、60%40%20%0%20152016201720181H19Zhongsheng absorption rateYongda absorption rateZhengtong absorption rateSource: Company data, HSBC calculationsAbsorption rates were much lower for Yongda (87%) and Zhengtong (67%) in 1H19. This means fluctuations in earnings were higher as variable gross profits also

26、 need to cover certain parts of SG&A and finance costs. Looking ahead, we forecast that dealers will continue to see their absorption rate improve and the impact from fluctuations in new car sales margins will have less of an impact on earnings growth.Volatile new car margins lead to volatile earnin

27、gs. Volatile earnings lead to volatile share prices. Volatile share prices lead to low valuationThis leads us to the next question at what multiples should dealers trade? Investors often ask why dealers such obvious beneficiaries of the luxury boom in China trade at such low multiples. The answer, i

28、n our view, is simple higher multiples require higher earnings growth. However, as explained above, net profits are fragile and highly dependent on new car sales margins, which face many uncertainties such as discounts and rebates. As a result, volatile new car margins lead to volatile earnings. Vol

29、atile earnings lead to volatile share prices, and volatile share prices lead to low valuations.That has certainly been the pattern in the past. Looking ahead, as after-sales and the absorption rate continue to grow, we think fluctuations in new car margins should play a less significant role in dete

30、rmining the rate of net profit growth. To us, this means dealers deserve a re-rating.Fig 4: Absorption rate forecasts120%110%100%90%80%70%60%50%20182019e2020e2021eZhongshengYongdaZhengtongSource: Company data, HSBC estimatesBased on the analysis above, in Fig 5 we assign different SD premium/discoun

31、t levels to Zhongsheng, Yongda and Zhengtongs target multiple according their after-sales absorption rate. We forecast that their absorption rates will increase to 113%, 94% and 67% in 2021e, respectively, from 97%, 80% and 56% in 2018.Fig 5: Target trading multiple (PE) vs after-sales absorption ra

32、teTarget Multiple16.014.0Zhongsheng14.412.010.08.06.04.0Zhengtong4.8Yongda9.950%60%70%80%90%100%110%120%Aftersales absorption rateSource: Company data, SHBC, HSBC estimatesNew car sales margin to stay low in 2020eLuxury volumes show no signs of slowing downThe luxury segment achieved growth of 8% in

33、 2019, outperforming the market by 11.6ppt. The penetration rate of the luxury segment reached 14%. We expect the luxury segment to keep delivering strong growth in the coming years, driven by the spending power of an increasing affluent population and replacement demand after 10 years of rapid grow

34、th in Chinas auto market.Fig 6: Retail growth rate of luxury and market70%60%50%40%30%20%10%0%10%71%36%30%20% 20%11% 16% 17%9% 8%2010 2011 2012 2013 2014 2015 2016 2017 2018 201980%Fig 7: Penetration rate of luxury segment-20%Luxury growth rateMarket growth rate2010 2011 2012 2013 2014 2015 2016 201

35、7 2018 201916%14%12%10%8%6%4%2%0%14%13%11%8% 9% 9% 10%9% 9%6%Penetration rateSource: Thinkercar, HSBC calculationsSource: Thinkercar, HSBC calculationsMercedes-Benz was the luxury brand with the largest sales volume in 2019 (Fig 8), closely followed by BMW, which recorded a 14% y-o-y increase in sal

36、es. The top three luxury brands accounted for c70% of the luxury market in 2019.Fig 8: Growth rate by brand in 2019, units49%21%25%9%13%5%6%(2%)(25%)(30%)(12%)14%800,000700,000600,000500,000400,000300,000200,000100,000-BenzBMWAudi Cadillac Lexus VolvoJLR Porsche Lincoln Infiniti Acura Maserati2019 r

37、etail salesy-o-y (RHS)60%50%40%30%20%10%0%(10%)(20%)(30%)(40%)Source: Thinkercar, HSBC calculationsTier-two luxury brands such as Lexus, Volvo and Porsche also recorded solid growth in 2019. Pricing for both Lexus and Porsche remained robust, while most luxury brands faced large discounts in 2019.Fi

38、g 9: Market share of major luxury brands in China (volume)3%5%7%3%2%11%1%1%24%BenzBMWJLR7%PorscheLincoln23%Infiniti22%OthersAudi Cadillac Lexus VolvoMiniAcuraSource: Thinkercar, HSBC calculationsIn the Appendix to this report, to get a sense of what the market can expect, we detail the new model lau

39、nches for major luxury brands.Margin likely to stay at 2019 low levelWe believe new car sales margins are likely to stay at 2019 levels as both positive and negative factors exist. Overall sales pressure and competition mean the discount rate remains high.However, in order to achieve sales targets,

40、OEMs will likely support dealers by providing them with more rebates.Fig 10: Discounts for luxury brands and market21.0%19.0%17.0%15.0%13.0%11.0%9.0%7.0%5.0%Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19Market discountLuxury discountSource: Thinkercar, HSB

41、C calculationsAt the same time, OEMs are more cautious about inventory build-up. The current inventory level is not high, which is favourable for dealers. The inventory level in December 2019 was 1.33, much healthier than that at the end of 2018.Fig 11: Inventory level of the market, number of month

42、s2.502.302.101.901.701.501.301.100.900.700.50JanFebMarAprMayJunJulAugSepOctNovDec 2019201820172016 2015Source: CADA, HSBC calculationsFig 12: Inventory level by brand, number of months1.601.601.401.201.000.800.600.400.20-Domestic brandsJVsLuxury brand & ImportsSource: CPCA, HSBC calculat

43、ionsDec inventory level by brands Dec market levelPotential threat from TeslaThe arrival of the localised Tesla model 3 could impact the entire China auto market. It is still hard to tell whether Tesla will repeat its success in the US, where all major luxury brands are starting to launch EVs this y

44、ear. However, what has happened in the US does highlight the potential threat from Tesla on luxury sales in China.Fig 13: Growth rate of US luxury and mass market sales volume and penetration rate14%13%12%12%12%12%12%11%11%16%14%12%10%8%6%4%2%0%-2%-4%201120122013201420152016201720182019US luxury pen

45、etrationUS market y-o-yUS Luxury y-o-y14%14%13%13%12%12%11%11%10%Source: IHS, HSBC calculationsThe US luxury market has slightly outperformed the global market since 2011. The overall penetration rate of the luxury segment rose from 11% in 2011 to 14% in 2019. Prior to 2018, the top-selling luxury b

46、rands were Mercedes-Benz, BMW, Lexus, Audi and Cadillac. However, the situation has started to change since Tesla ramped up sales of the Model 3. In just two years, Teslas market share among luxury brands rose to 9% in 2019 from 2% in 2017. If we exclude Tesla sales, the growth of other luxury brand

47、s was flat.Fig 14: Growth of Tesla and other luxury brands sales volume in the US1%0%1%0%8%7%10%14%5190%240%140%90%40%-10%201120122013201420152016201720182019Other luxury segment y-o-yTesla y-o-y (RHS)190%140%90%40%-10%Source: IHS, HSBC calculationsHas Tesla created extra demand, or did it just take

48、 market share from other brands? In our view, its the latter as the overall market size did not increase between 2017 and 2019.Fig 15: Market share of US luxury market in 2017 by volumeFig 16: Market share of US luxury market in 2018 by volumeBMWBMWLexusLexusAudi9%4 4%18%Audi5%11%15%Cadillac Acura I

49、nfinitiLincoln5%7%7%7%11%14%14%TeslaCadillac Acura Infiniti5%5%7%7%9%14%13%9%VolvoLand RoverLincolnVolvoOthersOthersSource: IHS, HSBC calculationsSource: IHS, HSBC calculationsMercedes-BenzMercedes-BenzImpact from Tesla will directly hit comparable modelsComparable models listed by Autohome for the

50、Tesla Model 3 include the GAC-Toyota Camry, FAW-Audi A4L, GAC-Honda Accord and BMW 3 series. The impact from Tesla will directly hit comparable models and may lead to pricing pressure on traditional internal combustion engine (ICE) models. In the long run, it will also disrupt the after-sales servic

51、e segment. We think the threat could be imminent, as launches of EV models by traditional OEMs still focus on the larger SUV segment, which makes it less affordable.Impact from the coronavirus outbreakOnly Zhengtong has sizeable exposure to Hubei province, while Yongda and Zhongsheng have minimal sa

52、les exposure to Hubei in terms of store countIn response to the coronavirus outbreak, dealers have taken various measures to continue the original business including online showrooms and valet aftersales service. Except for Hubei and Wenzhou (Zhejiang), dealers in other regions should resume normal

53、operations after 10 February. Given the fact that people may go outside as little as possible, the negative impact may continue.Luxury sales are the first to be hurtHubei accounted for 3% of national luxury sales in 2019. Within our coverage, only Zhengtong has sizeable exposure to Hubei province wh

54、ile Yongda and Zhongsheng have minimal sales exposure to Hubei in terms of number of stores.Fig 17: Retail sales by province in 2019450,000400,000350,000300,000250,000200,000150,000100,00050,000-Source: Thinkercar, HSBC calculationsFig 18: Percentage of stores located in Hubei as of 1H1914%1%1%16%14

55、%12%10%8%6%4%2%0%YongdaZhengtongZhongshengSource: Company data, HSBC calculationsUsually the first quarter of the year is the weakest quarter for luxury sales. As there will be close to zero sales for 2.5 weeks during this extended Chinese New Year, we think Q1 luxury sales could well have weakened

56、further.Fig 19: Seasonality of CN luxury sales16%12%4%6% 8% 9%7% 7%-1%-6%-14%-15%-7%-11%-7%-10%20%15%10%5%0%-5%-10%-15%-20%1Q2Q3Q4Q2016201720182019Source: Thinkercar, HSBC calculationsIf the overall situation does not recover soon, it is likely that in order to get rid of inventory and pay back loan

57、s, dealers will offer bigger discounts to drive salesPressure on cash flow may lead to margin compressionIf sales continue to be weak, we see pressure on cash flow and margin emerging. Running a dealership is actually running a cash flow management business. Dealers borrow from banks to buy cars (in

58、ventory) from OEMs. Once the car is sold to an end buyer, after deducting the staff costs and SG&A costs, the profits will go to pay back the debt and enter into the next cycle of buy-and-sell. Most dealers have high gearing. All three names we cover have net gearing over 50%. Cash conversion cycles

59、 for dealers are over a month. Whats worse, if the overall situation does not recover soon, it is likely that in order to get rid of inventory and pay back loans, dealers will offer bigger discounts to drive sales. Margin will then be hurt again, as happened between May and June 2018 when a new impo

60、rt tariff rate was announced and customers held back their purchases, inventory levels soon built up and margins slumped.Fig 20: Net gearing as of 1H19130%85%86%140%120%100%80%60%40%20%0%YongdaZhengtongZhongshengSource: Company data, HSBC calculationsMost OEMs cancelled sales targets in February, an