Haitong sec released a research report stating that it has initiated coverage of Zhongsheng hldg (00881) with an "outperform" rating, anticipating that the company's revenue for 2024/25/26 will be 169.9/191.7/218.5 billion yuan, with net income attributable to the parent company of 3.5/5.1/6.7 billion yuan, and EPS of 1.45/2.13/2.79 yuan respectively. The reasonable value range is 22.34-25.54 HKD.

The main points of Haitong Securities are as follows:

Zhongsheng HLDG is a leading company among car dealers in China.

According to the company's mid-year report for 2024, zhongsheng has 419 dealerships nationwide, including 269 luxury brands and 150 mid-to-high-end brands. The market share of zhongsheng in the new car sales of major brands in china is as follows: Lexus 32%, Mercedes-Benz 18%, Toyota, Volvo and Jaguar Land Rover 10%, BMW and Audi 6%. In the first half of 2024, the company achieved new car sales of 0.233 million, a year-on-year increase of 3.9%.

Faced with pressure in the new car business, zhongsheng has focused on key urban layouts to strive for a high market share, thereby gaining a stronger risk resistance capability.

According to the company's mid-year report, in the first half of 2024, the year-on-year growth rate of insurance volume for Lexus/Audi/Mercedes-Benz/BMW/Toyota that zhongsheng deals with is 20.7%/2.6%/-10%/-5.4%/-13%, showing that some brands are under pressure amid the wave of intelligent electric vehicles. However, among the 32 key cities where zhongsheng is focusing its layout, 2.1 million out of 15.1 million luxury cars have become long-term customers of the company, with 80% of these customers being repeat customers who independently selected a car service provider, which illustrates characteristics of a mature market. Through acquiring, activating, and converting mature customers, zhongsheng has achieved a certain degree of pressure resistance, with revenue in the first half of 2024 remaining basically flat year-on-year.

New forces are also beginning to use the dealer network, and the new car business of dealer groups may not necessarily shrink.

According to the official websites of various automakers, companies like Xiaopeng and Leap Motor are recruiting franchise dealers. According to the company's announcement, a preliminary consultation agreement was signed with Chongqing Sokon Industry Group Stock, agreeing to further discuss the cooperative distribution of its new energy vehicles. The firm believes that in the era of intelligent electric vehicles, dealer groups possess advantages such as existing customer leads, distribution service experience, and after-sales service hardware and software foundation, which still offer clear development opportunities. If dealer groups can cooperate with core new energy vehicle companies and achieve large sales, they are expected to mitigate the profit pressure caused by the decline in sales and gross margin of traditional brands.

After-sales business continues to grow, with strong customer loyalty and poor substitutability, making it an excellent business model that can support long-term profit growth.

According to Zhongsheng Hldg's 2024 mid-year report, the company has broken the traditional single automotive brand dealership service model by creating the Zhongsheng Auto Service brand, offering services across automotive brands and different fuel types. Through Zhongsheng's diverse service types and full-brand service scenarios, it aims to maximize coverage of urban vehicle customer groups. According to Zhongsheng's 2024 mid-year report communication materials, in the first half of the year, the company's after-sales business handled 3.94 million units, a year-on-year increase of 5.6%, with service revenue of 10.964 billion yuan, up 13.8% year-on-year. The gross margin for the company's boutique, maintenance packages, and after-sales services in the first half of the year was 47.1%, basically unchanged year-on-year. Zhongsheng's zero service absorption rate reached 118%, an increase of 10 percentage points year-on-year against the trend.

In summary, the firm believes Zhongsheng Hldg is expected to hedge against the decline in quantity and profit of traditional brands by covering more new brands. At the same time, the after-sales business, which has a relatively superior business model, is expected to continue to contribute to performance.

Risk warning: Auto consumer demand may not meet expectations; significant increases in raw material prices.