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Baoxin Auto Group Ltd Summary

Core Content

Baoxin Auto Group Ltd (1293:HK) is a Chinese automotive retail company that has focused on luxury and mid-to-high-end vehicle sales. It was established in 1999 as one of the first authorized dealers for Audi in China and successfully listed on the Hong Kong Stock Exchange in 2011. The company has since expanded its dealership network and brand portfolio, becoming a significant player in the luxury car market.

Main Points

• Company Background:

  • Founded in 1999, Baoxin Auto Group Ltd became one of the first authorized Audi dealers in China.
  • Listed on the Hong Kong Stock Exchange in December 2011.
  • By 2015, operated 91 dealerships, focusing on luxury and ultra-luxury brands such as BMW and Jaguar Land Rover.
  • Ranked among China's top 10 dealers in terms of total revenue in 2015.

• Market Position:

  • Largest BMW and Jaguar Land Rover dealer in China, holding 8.1% and 8.3% market shares, respectively.
  • Dominates the luxury car segment, with 45 BMW and 19 Jaguar Land Rover dealerships.
  • Operates in the Consumer Discretionary sector, under the Specialty Retail sub-sector.

• Financial Performance (2012–2015):

  • Revenue fluctuated significantly, peaking in 2013 and declining in 2015.
  • Net income dropped sharply, with a 68.9% decline in 2015.
  • Earnings per share (EPS) declined from 0.28 in 2012 to 0.09 in 2015.
  • Return on Equity (ROE) fell from 20.6% in 2012 to 4.4% in 2015, reflecting a decline in profitability.

• Business Structure:

  • Heavy reliance on new car sales, which accounted for 87.6% of total revenue in 1H16.
  • After-sales and value-added services (insurance, auto finance, second-hand car sales) contributed only 12.4% of revenue, below the industry average of 15%.
  • Gross margin for new car sales declined from 3.9% in 1H15 to 3.5% in 1H16, while after-sales gross margin slightly dropped to 46.0%.

• Industry Challenges:

  • Auto sales growth slowed, leading to increased inventory and price-cutting pressure.
  • The top 100 dealers in China saw their gross margin fall from 6.1% in 2014 to 4.5% in 2015.
  • Inventory turnover days increased from 40 in 2014 to 51 in 1H16, indicating poor inventory management.

• Acquisition and Integration:

  • In 2016, Baoxin Auto accepted a cash tender offer from China Grand Auto (CGA), which acquired 75% of Baoxin's shares.
  • Integration was completed by September 2016, with CGA providing sales leads, shared procurement systems, and support in developing value-added services.
  • Management expects recovery in 2017 with improved new car sales and cost savings from centralized procurement, which could save 10–20% in after-sales costs.

• Valuation:

  • Trading at 8.7x 17E PE and 0.9x 17E PB, with a slight 5% premium over the sector average.
  • Historical average 1-year leading PE is 8.4x.
  • The company's valuation is compared with peers, including China Grand Auto, Yongda Auto, ZhengTong Auto, and Zhongsheng Group.

Key Information

• Key Financial Metrics (as of 2016):

  • Price (HK$): 2.36
  • 52-week High (HK$): 5
  • 52-week Low (HK$): 2.77
  • Market Cap (HK$m): 6,035
  • Market Cap (US$m): 778
  • Shares Outstanding (m): 2,557
  • Free Float (%): 11.7
  • 1M Relative Return: 5.2
  • 6M Relative Return: -63.3
  • YTD Relative Return: -49.6
  • HSCEI: 9,492
  • Dividend Yield (FY15): 0.0%
  • US:$:HK$: 7.7559

• Top Institutional Owners (as of 2016):

  • China Grand Auto: 75%
  • Baoxin Investment Management: 9.88%
  • Schroders PLC: 5%
  • Hansong Yang: 1.47%
  • Zehua Yang: 1.47%

• Integration Benefits:

  • Sales leads increased through CGA's digital marketing platform.
  • Cost savings from shared procurement systems.
  • Development of value-added services, such as auto finance and insurance, with higher contribution expected in 2016.

Investment Highlights

• Growth:

  • Revenue growth slowed significantly after 2014, with a 22.6% decline in 2015.
  • Net income growth also slowed, with a 68.9% decline in 2015.

• Profitability:

  • Gross margins for new car sales decreased due to weak demand and fierce competition.
  • After-sales and value-added services, although high-margin, contributed less to revenue.

• Market Trends:

  • The automotive retail sector in China faced challenges with declining sales and increasing competition.
  • A consolidation wave was observed, with the number of dealers with over Rmb10bn revenue decreasing from 38 in 2014 to 37 in 2015.

Valuation Table

Investment Rating

• Security Investment Rating:

  • BUY: Expected more than 20% upside over 6 months.
  • BUY (12-month): Expected more than 20% upside over 12 months.
  • Outperform: Expected 10–20% upside over 12 months.
  • Hold: Expected 10% downside to 10% upside over 12 months.
  • Underperform: Expected 10–20% downside over 12 months.
  • SELL: Expected more than 20% downside over 12 months.

• Industry Investment Rating:

  • Overweight: Industry outperforms the market.
  • Equal weight: Industry performs about the same as the market.
  • Underweight: Industry underperforms the market.

Disclaimer

• This report is for the exclusive use of SWS Research clients.
• The information is based on public data, and the Company does not guarantee its accuracy or completeness.
• The views expressed are the personal opinions of the analyst.
• The report does not constitute investment advice, and the client is encouraged to make independent investment decisions.
• The Company reserves all rights to this report and does not permit unauthorized use or distribution.