20160613-大和证券-和谐汽车-03836.HK-Positive_outlook_intact_15页_1mb_1mb

China Harmony New Energy Auto (3836 HK) Summary

Core Content

China Harmony New Energy Auto (3836 HK) is an auto dealer with a focus on luxury and ultra-luxury vehicles, operating in more than 120 cities in China. The company has been expanding its independent after-sales outlets, with a target of reaching 300, 500, and 1,000 by the end of 2016, 2017, and 2020, respectively. This expansion is seen as a key driver for future growth and profitability.

The company's share price as of 13 June is HKD4.22, with a 37.4% upside to the target price of HKD5.80. The analysts maintain a "Buy" rating, citing positive outlook and potential catalysts such as the 1H16 results and the potential listing of its assets on the A-share market.

Main Points

Growth Outlook

• New-car sales volume: YTD (Jan to end-April) has seen double-digit growth, with management targeting a 15% YoY increase in 2016.
• Revenue growth: Expected to grow at mid-to-low single-digit due to ASP (average selling price) decline.
• After-sales service growth: Expected to grow by 20% YoY for 4S shops and 60% YoY for independent outlets.
• Gross profit contribution: After-sales service is projected to contribute 80% of gross profit by end-2018E.
• EV business: Expected to report minor net losses in 2017-18E due to cautious market reception for its hatchback EV model.

Valuation

• Current PER (2016-17E): 6-8x, lower than its peers (8-10x) but in line with its average PER since listing.
• Target price: Revised to HKD5.80 from HKD5.50, based on SOTP (Sum of the Parts) valuation.
• Core dealership business: Valued at HKD5.20 per share (up from HKD4.50).
• EV business: Valued at HKD0.6 per share (down from HKD1.0).
• Analysts believe: The company deserves a valuation premium due to its after-sales growth and EV development with Hon Hai and Tencent.

Earnings Revisions

• 2016E EPS: Revised down by 4% compared to the Bloomberg consensus, due to dilution from 2015 share issuance.
• 2017E and 2018E EPS: Revised up by 8-17%, driven by the expansion of independent after-sales outlets.
• EPS forecast:
  • 2016E: 0.454 CNY
  • 2017E: 0.585 CNY
  • 2018E: 0.783 CNY

Financial Summary

Key Assumptions

Key Risks

• Lower-than-expected after-sales demand: Could negatively impact growth and profitability.

Share Price Performance

Potential Share-Price Catalysts

• 1H16 results: Expected to boost investor sentiment.
• Potential A-share listing: Seen as a possible catalyst, though management is more cautious following Yongda's backdoor listing.
• FMC (Future Mobility Corporation): Expected to launch its first SUV model by September 2017, and possibly list separately in the US, which could lead to a long-term rerating.

Company Profile

• Focus: Luxury and ultra-luxury vehicles.
• Sales network: Covers more than 120 cities, mainly in Central China and tier-1 cities.
• Independent after-sales network: 120 stores as of end-2015, with plans for expansion.
• Strategic moves: Acquired an 87.57% stake in Green Field Motor and formed a JV with Hon Hai and Tencent to enter the green car manufacturing business.

Management Profile of FMC

Summary of Key Highlights

• Growth drivers: Expansion of independent after-sales outlets, strong BMW sales, and potential FMC product launch.
• Valuation: Analysts have raised the target price to HKD5.80, with a focus on after-sales growth.
• Risks: Potential lower-than-expected demand for after-sales services and uncertainty around Aiche's EV business.
• Strategic moves: Consideration of A-share listing and FMC's potential US listing.
• Financial performance: Expected to improve significantly, with increasing net profit and EPS over the forecast period.