Premium Auto Demand to Remain Solid in China - Bernstein Raises Target Price of Meidong (1268.HK) and Zhongsheng (881.HK)

Bernstein issued a report update on 27th May on China's auto market, indicating its confidence in premium auto demand which would in turn, support dealer earnings in China. Given the sustainable premium demand and strong operating trends in April and May, Bernstein raised the target price of China MeiDong Auto Holdings Limited (1268.HK) from HK$15.00 to HK$19.00, and Zhongsheng Group Holdings Limited (881.HK) from HK$38.00 to HK$46.00.

Bernstein took note on the rapid rebound in premium demand as well as the return of aftersales post-Covid, as premium has recorded a 13.6% growth in sales in April, and recent feedbacks have all pointed to continued strength in May. Supported by the accelerating credit growth, Bernstein believes a double-digit premium sales growth is likely in the coming quarters, even on a conservative projection.

Specifically in the case of Meidong, Bernstein continued to see it as one of the key beneficiaries due to its combination of rapid store expansion and the maturation of stores opened in recent years. Its favourable brand mix in Lexus and BMW, together with the suspension of volume-mix formulas (specifying minimum purchases of certain models that are tougher to sell), should also contributed to stronger sales growth and higher new car margins, helping its share price to outperform the sector, and go higher over time.

On valuation, Meidong seems to be more expensive than peers on near-term earnings multiples, but Bernstein highlighted that its 2021E PE multiple actually implies a lower "long term PEG" (c. 0.54) when compared with Zhongsheng (0.61), and only modest higher than Yongda (0.42). With its best-in-class operating efficiency, Bernstein found the premium for Meidong as deserved, and advised to "buy every dip".