Haitong International initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) on the 10^th January with a Buy rating at Target Price of HK$3.50, representing an upside of 30.1% from the closing price of HK$2.69 as at 10^th January 2019.
 
Haitong International sees MeiDong Auto as a rising star with the following highlights:
 
1.   Rapid growth
MeiDong Auto's focus on the Porsche and Lexus dealership businesses along with its outstanding management execution should place MeiDong at good position amid the increasingly challenging auto dealership market in China.
 
2. Expeditious store expansion of Porsche
The number of Porsche dealerships is expected to quadruple during FY2017-2020. Haitong International projects gross profit from Porsche new-car sales to rise by 63% and 41% year-on-year ("YoY) in FY2019 and FY2020, respectively.
 
3. Strong model cycle of Lexus
Given the upcoming model cycle of Lexus, Haitong International projects the respective gross profit to grow 5% and 9% YoY in FY2019 and FY2020, respectively
 
4.  Profit growth from Porsche and Lexus offsets the decline of BMW new-car-sales
Haitong International expects gross profit from BMW new-car-sales to decline in FY2019 due to rising competition and significant reduction/ cancellation of its special subsidies to dealers. Yet, Haitong International foresees that the growth from Porsche and Lexus will be able to offset the decline.
 
5.  Strategies that secure growth
MeiDong's product portfolio, namely Porsche and Lexus, average store age and "Single City Single Store" strategy should secure profit growth in after-sales services.
 
6.  Strong balance sheet with high shareholder returns
MeiDong's strong balance sheet is beneficiary for potential attractive acquisitions and acceleration in industry consolidation. Haitong International expects MeiDong's ROE to rise between 26.7 - 31.5% during FY2018- FY2020 and dividend yield to reach 5.9% for FY2018, based on the current share price and assumption of a 50.2% dividend payout ratio.
 
7.  Attractive earnings projections
Given the aforementioned factors, Haitong International presents the following projections:
- Revenue to rise by 41% and 21% YoY in FY2019 and FY2020, respectively, fueled by new stores and growing after-sales services
- Gross profit to increase by 30% and 28% YoY in FY2019 and FY2020, respectively, supported by rapid revenue growth, particularly from Porsche, and stable after-sales service margins
- Net profit to enhance by 24% YoY and 38% YoY in FY2019 and FY2020, respectively
 
8.  Buy rating with TP at HK$3.50
In light of the attractive earnings forecast, Haitong International issued target price of HK$3.50 based on 9.0x FY2019 EPS forecast, in line with its five-year average and significantly higher than the current peer average of 5.6x. Haitong International believes that MeiDong deserves to trade at its historical average valuation.