M M July 24, 2019 09:00 PM GMT China Autos & Shared Mobility Auto Dealers: Time to Upgrade to Luxury Cars It is time to look beyond dealers' cyclical weakness and prepare for a recovery from 2H19, backed by improving new car margins and rising contribution from after-sales services. We upgrade Yongda (our new top pick) on the BMW model upcycle. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. M M Contributors MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY & CO. INTERNATIONAL PLC+ Shelley Wang, CFA Jack Yeung Harald C Hendrikse Equity Analyst Equity Analyst Equity Analyst +852 3963-0047 +852 2239-7843 +44 20 7425-6240 Shelley.Wang@morganstanley.com Jack.Yeung@morganstanley.com Harald.Hendrikse@morganstanley.com MORGAN STANLEY & CO. LLC MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ Armintas Sinkevicius, CFA, CPA Tim Hsiao Frank Wan Equity Analyst Equity Analyst Research Associate +1 212 296-5469 +852 2848-1982 +852 2239-1229 Armintas.Sinkevicius@morganstanley.com Tim.Hsiao@morganstanley.com Frank.Wan@morganstanley.com M M China Autos & Shared Mobility Auto Dealers: Time to Upgrade to Luxury Cars It is time to look beyond dealers' cyclical weakness and prepare for a recovery from 2H19, backed by improving new car margins and rising contribution from after-sales services. We upgrade Yongda (our new top pick) on the BMW model upcycle. Industry View brands (50-80% for China, vs 20-40% for US in 2018), higher profit Still constructive on China's luxury car contribution from after-sales services (50-60% for China, vs 40-50% demand: We look for a +6% CAGR, 2019-20, In-Line for US in 2018), and higher upside potential from auto finance against our expected -4% CAGR for China’s (30-40% penetration in China, vs 70-75% in US in 2018). overall passenger vehicle demand in the same period. Hong Kong-listed auto dealers have 50-80% sales exposure to luxury car Where we differ vs the market: In contrast to market concerns brands, so we think they can withstand and grow beyond the cyclical about dealers' margin pressure amid weak auto demand, we are more weakness. Although auto dealers' 1H19 earnings could be pressured bullish on a 2H19 recovery, which is supported by substantially nar-by the deep discounts for inventory cleanup, we believe much of the rower discounts on new model launches and incremental demand challenge has passed, and that it is time to look beyond the cyclical from the relaxation of the new vehicle license plate quota. weakness. Yongda up to OW; our new top pick: As China's largest BMW dealer We expect dealers' new car margins to recover from 2H19, thanks by sales volume, Yongda should benefit from a BMW-backed margin to a BMW model upcycle and the new vehicle license plate quota recovery from 2H19, and we forecast a 24% earnings CAGR, 2019-21. relaxation. This follows prolonged margin erosion stemming from The stock is currently trading at 6x 2020 P/E, below its 7-year histor-the 2H18 import tariff disruption and the 1H19 China V inventory ical average of 7x. We remain OW on Zhongsheng on its solid opera-clearance ahead of the rollout of China VI emission standards. We tional efficiency. We resume coverage of Zhengtong at OW on its expect BMW dealers to outperform peers in 2019-20, thanks to a highest exposure vs peers to luxury car brands. We remain UW on strong model pipeline, such as BMW's new generation 3-series in June Baoxin because of its subpar balance sheet quality. 2019 and localized X2 in 2H19. In Europe/US, 3-series sales recovered Where we could be wrong: (1)

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