MEIDONG AUTO(1268.HK)2H24 EARNINGS PREVIEW：STABLE OPERATING PROFIT WITH RISING IMPAIRMENT RISK-格隆汇

机构：招银国际
研究员：Ji SHI/Wenjing DOU/Austin Liang

　　Maintain BUY. We project Meidong’s 2H24E core earnings to be largely stable HoH, as profit improvement from BMW and Lexus may be offset by Porsche. We believe the impairment risks have been rising more significantly in 2H24E given Porsche’s worsening profit. On the other hand, lower amortization burden could lift its earnings in the future, should the company book a large impairment loss on intangible assets in 2H24E. That, along with Meidong’s convertible bond redemption in Jan 2025 and our slightly more positive views on Porsche in FY25E, has made us raise Meidong’s FY25E net profit by 7%.
　　Profits from BMW and Lexus stores are likely to improve HoH in 2H24E. We project Meidong’s BMW new-car gross margin to improve by 1 ppt HoH in 2H24E amid lower sales volume (-3% HoH on our estimates) and higher rebates from the OEM in 4Q24. We also estimate Meidong’s Lexus new-car gross margin to improve by 2.1ppts HoH in 2H24E, which could make Lexus stores the largest profit contributor at Meidong in FY24E, based on our estimates.
　　Porsche’s worsening profit in 2H24E may increase impairment risks. We project Meidong’s Porsche sales volume to rise 9% HoH to about 4,500 units in 2H24E with new-car gross margin narrowing by 2ppts. We estimate that profit improvement from BMW and Lexus in 2H24E could be offset by Porsche at Meidong. Moreover, we are of the view that Porsche stores’ deteriorating profits in the past four reporting periods could increase the impairment risks of goodwill and intangible assets from the StarChase acquisition, especially as small but increasing amounts of impairment losses were already booked in FY23 and 1H24. We project an impairment loss of RMB1.3bn in FY24E (or RMB1.15bn in 2H24E) for Meidong.
　　We expect 2H24E net profit excluding impairment to be still in positive territory and FY24E free cash flow to be stable YoY. We project Meidong’s new-car revenue to rise 6% HoH in 2H24E, driven by sales volume growth of 12% HoH. We expect its 2H24E overall gross margin to narrow by 0.5ppts to 7.1%, which would result in a gross profit of RMB792mn (-2% HoH) in 2H24E. We project Meidong’s 2H24E net loss of RMB1.1bn and a net profit excluding impairment of RMB70mn. On the other hand, we estimate Meidong’s free cash flow to be RMB458mn in FY24E, a similar level as FY23, aided by its operational efficiency. Therefore, we project a net cash of about RMB586mn at Meidong as of the end of FY24E.
　　FY25E outlook: Lower non-operating burden with Porsche likely bottoming out. With recent management changes, we expect Porsche to adjust its volume and pricing strategies in 2025 to cope with its challenges in China. That could benefit its dealers’ profitability, in our view, which could be more crucial for Meidong than other dealers. Meidong also redeemed its previous convertible bonds in Jan 2025, which could cut its interest expense by about RMB100mn YoY in FY25E, based on our estimates. These, along with the possible significant impairment of intangible assets to make future amortization lower, could lift Meidong’s earnings in FY25E.
　　We revise up Meidong’s FY25E net profit by 7% to RMB408mn, mainly due to our larger impairment projection in FY24E and slightly more positive views on Porsche dealers’ profitability in China.
　　Valuation/Risks. We maintain our BUY rating and target price of HK$2.80, still based on 9x (unchanged) our revised FY25E EPS. As noted in our 2025 auto sector outlook report, we believe that the challenges that Chinese dealers face now are unlikely to be significantly larger in the foreseeable future, although such headwinds may linger. Key risks to our rating and target price include lower sales and/or new- car margins than we expect and a sector de-rating.