Citi initiated coverage on China MeiDong Auto Holdings Limited at Buy; TP of HK$39.00

Citi initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) at Buy; TP of HK$39.00

Citi initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) at Buy with a target price of HK$39.00, representing an upside of 32.6% from the closing price of HK$30.65 on 1st December, after factoring in expected dividend yield.

Citi reckons Meidong's strongest suit is its simple but favorable luxury brand portfolio, which includes six high-performing brands such as Porsche and Lexus, two of the fastest-growing luxury brands in China, as well as BMW, which recorded a solid sales recovery since 2H19. The brand mix is expected to deliver a new car sales growth of 25% CAGR in 21-23E, supported by strong same store sales growth (11% CAGR in 2021-23E) and solid demand in coverage regions (lower-tier cities luxury sales +11% YoY in 10M20).

In addition to the sales growth, Citi highlights MeiDong's precise data-driven management approach and single-city-single-store strategy as the key to deliver best-in-class efficiency (with inventory turnover days at 17 days). This would in turn, reduce pressure to offer discount and yield better new car sales margins. Together with its maturing store network, MeiDong was able to deliver industry-topping absorption rate (2022E 120%) and after-sales margins (2022E 47.1%).

On top of its lucrative growth story, Citi also cited MeiDong's robust dividend policy as a plus, with management guiding that almost all of the free cash flow would be paid out as dividends, roughly translating to a 52% payout in 2020E and 85-88% in 2021-23E.

In view of MeiDong's strong brand portfolio, data-driven management, high operating efficiency and maturing store network, Citi estimates a 47% CAGR in 21-23E net profit, which translates to the target price of HK$39.00 on 30x blended 21E P/E, 0.5x 21-23E PEG, 12x 21E P/B or 19x 21E EV/EBITDA. Near-term order backlog strength and potential M&A could act as catalysts for further valuation inflation.