Merrill Lynch Lifts PO of MeiDong Auto (1268.HK) as Luxury Margins Drive 2H20 Beat; Maintain Buy at HK$42.00

Merrill Lynch Lifts PO of MeiDong Auto (1268.HK) as Luxury Margins Drive 2H20 Beat; Maintain Buy at HK$42.00

Merrill Lynch (BofA) further lifts its price objective for China MeiDong Auto Holdings Limited (1268.HK) to HK$42.00 at Buy, as luxury margins led to 2H20 outperformance. The latest price objective represents an upside of 11.9% from the closing price of HK$37.55 on 7th April.

On 2H20 results, BofA acknowledges MeiDong's net income was 6% ahead of its estimates, up 43% YoY to RMB450mn, despite a deeper than expected non-cash FX loss of RMB95mn. Car sales rose 25% YoY, while strong post-COVID demand helped lift 2H gross margin to 10.3% (+1.1ppts YoY) driven by the luxury car segment, plus growth in high margin after-sales service (+29% YoY).

BofA also appreciates MeiDong's industry-best Inventory levels, which were cut to just 9 days (2019: 17). Combining with MeiDong plans to lift store count to 72 in 2021 (+10), and sales per store is expected to grow at 15% per year as new stores mature, BofA expects a positive outlook for 2021.

Addressing market concerns over auto chip supply, BofA noted that it is not having an impact on MeiDong, but strong luxury demand means this would likely cause margins to rise on lower discounts. The concern over EV also looks misplaced, as MeiDong reported rising adoption of hybrids across its brands and is open to future NEV brand tie-ups.

From BofA's viewpoint, the demand outlook for luxury cars in lower-tier cities remains strong, and MeiDong, with its strong presence in large, fast-growing and under-penetrated tier 3-5 cities, is set to benefit. As a result, BofA lifts MeiDong's earning forecasts by an average of 2%, with net income now seen posting growth of 35%/44%/35% over the next 3 years, while M&A offers potential additional growth. The price objective of HK$42 is set at 28x 2022E P/E. Although being valued at a premium to peers, BofA sees this justified given MeiDong's faster earnings growth, industry leading return on equity and a rising net cash position.