Citi further raised MeiDong Auto (1268.HK) target price to HK$40.0; maintain Buy

Citi raised China MeiDong Auto Holdings Limited (1268.HK) 12-month target price from HK$39.0 to HK$40.0 at Buy, representing an upside of 27.2% from the closing price of HK$32.35 as at 4th January 2021 (incl. expected dividend yield).

The upward revision was supported by the positive takeaways from a recent management call on (i) Meidong's low inventory level with abundant backlog, (ii) steady expansion plan with potential M&A, together with (iii) strong improvement in store efficiency and (iv) continuous outperformance from the luxury car market.

Citi indicated that Meidong's order backlog remains abundant, and the Company expects inventory to continue to decline with strong market demand in China. In the case of Porsche, Meidong's order backlog is currently at 2-3 months, with selling prices significantly above suggested retail prices, potentially due to the pricing in of uncertain production amid the European pandemic. Meanwhile, for BMW, Meidong's order backlog is within 1 month and retail prices remain stable. However, management believes that approaching Chinese New Year in February 2021, sales volumes of BMW will remain at a high level and the inventory level could decline largely before then.

On network expansion, Citi pointed out that while currently there is no update on M&A pipeline, the Company is expected to open 7 greenfield stores in 2021, which is in-line with the previous target of 10% new organic stores each year. Meidong also saw success in its CRR (Customer Return Ratio) pilot project, which has successfully boosted after-sales service engagement of the 5 stores from 5-12% in Aug-20 to 20-30% in Dec-20. The CRR program is now being applied to 50 stores, which suggests further improvement in operational efficiency.

From a macro viewpoint, management expects luxury cars will continue to outperform the sector into 2021, guiding a 12-15ppt higher YoY sales volume growth. To reflect the accelerating Chinese luxury auto market and the aforementioned positive management guidance, Citi hence raised its 2021/22 EPS estimates by 42.2%/1.7%,  with the latest target price of HK$40.0 pointing to a 30x blended 21E P/E.