Company News - China MeiDong Auto Holdings Limited (1268.HK)

Huatai Hong Kong initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) on the 5^th December with a Buy rating at Target Price of HK$4.00, representing an upside of 71.7% from the closing price of HK$2.33 as at 5^th December 2017.

Huatai Hong Kong sees MeiDong Auto as a hidden gem with the following highlights:

1. An undiscovered company with great potential

MeiDong Auto is a medium-size auto dealer group focusing on premium brands in lower-tier cities in southern China. Its three luxury brands namely, BMW, Lexus and Porsche have contributed 33%, 22% and 15% respectively towards the total new car sales in 1H2017; while its mid-end brands, namely Toyota and Hyundai contributed a total of 30%. MeiDong Auto is one of the beneficiaries of the consumption upgrade and the rapid growing demand for luxury cars in China.

2. Expeditious growth in net earnings in 2017 and 2018

Huatai Hong Kong estimates MeiDong Auto's net earnings will grow 55% year-on-year ("yoy") to RMB235 mn in 2017E and 38% yoy to RMB324 mn in 2018E, driven by the network expansion (addition of BMW, Lexus and Porsche stores), strong product cycles of the three luxury brands and solid growth in aftersales services.
 

3. Differences between MeiDong Auto and other dealers

- Focus on three core luxury brands (BMW, Lexus and Porsche stores) which are all in strong product cycles.
- Most of MeiDong Auto's networks are located in mid-to-small size cities in Southern China where demand is strong with limited competition, allowing MeiDong Auto to enjoy high margin.
- Low liability ratio (FY2016 net-debt-to-equity ratio: 1%) with high dividend payout ratio (40-50%).

4. Buy Rating with TP at HK$4.00

Huatai Hong Kong holds strong confidence towards the stock price of the dealership sector in 2018 and expects MeiDong Auto's earnings in 2018 will double those in 2016, driven by volume growth and margin improvement. Together with its solid balance sheet and high dividend payout ratio, Huatai Hong Kong initiates coverage on MeiDong Auto and issues a target price of HK$4.00 based on 12x 2018E PE.