2021 and 1Q22 results miss our expectations

China Grand Auto (CGA) announced its 2021 and 1Q22 results. In 2021, revenue was flat YoY at Rmb158.44bn, and net profit attributable to shareholders rose 6.12% YoY to Rmb1.61bn. In 1Q22, revenue fell 16.78% YoY or 5.50% QoQ to Rmb35.14bn, while net profit attributable to shareholders rose 2.38% YoY or 75.39% QoQ to Rmb667mn. The results missed expectations as vehicle sales revenue declined due to disruption from the COVID-19 pandemic and industry-wide chip shortage since 2H21.

Trends to watch

Supply issues and weak demand both weighed on revenue. Recognition of heavy impairment provisions affected earnings. CGA sold around 696,700 new vehicles in 2021, down 7.24% YoY, and new-vehicle sales revenue fell 29.12% YoY in 4Q21 and 18.05% YoY in 1Q22. The firm’s revenue from all of the four main business sectors declined YoY in 1Q22. In addition, a contraction in investment gains weighed on earnings. CGA recognized Rmb377mn of impairment provisions for subsidiary Shanghai Xcar, which contributed to its net loss in 4Q21. CGA’s net profit attributable to shareholders surged 75.4% QoQ in 1Q22 to the normal level seen in 1H21. We believe short-term disruptions from the pandemic could put pressure on CGA’s business in 2Q22. Nevertheless, we think the firm’s new vehicle sales may regain growth momentum amid easing impact of the pandemic and supply chain issues.

Store optimization enhanced average earnings per store. Expense control and capital structure improved. In 2021, CGA closed 23 stores and focused on improving store efficiency. The firm’s average revenue per store rose 2.0% to about Rmb210mn, and average gross profit per store increased 10.8% to Rmb19.04mn in 2021. The number of stores for luxury and super-luxury auto brands increased to 250. Gross margin (GM) expanded 0.92ppt YoY to 3.1% in 2021 for new-vehicle business, and rose 0.86ppt YoY to 35.9% for maintenance service business. Selling, G&A and financial expenses as a percentage of revenue remained largely stable at 6.6% in 2021 (+0.11ppt YoY), with financial expense ratio falling to a multi-year low of 1.7%. CGA continued improving its capital structure. As of end-2021, the firm’s liabilities contracted Rmb4.62bn, and liability to asset ratio fell to 66.8%.

CGA pushed ahead with the transformation towards digitalization and new energy vehicles (NEV) to strengthen its leadership in the auto dealership market. In 2021, the company entered into a partnership with Ping An Insurance (Group). Before the end of 2021, CGA has won dealership authorization by NEV brands such as Great Wall Motor, XPeng and Arcfox. CGA ranked No.1 in 2021 among auto dealers, in terms of both revenue and sales volume of passenger vehicles (PV). In addition, we are upbeat on the firm’s financial leasing business targeting second hand PVs, and confident about the future of CGA’s financial leasing services targeting new-energy commercial vehicles.

Financials and valuation

Given the disruption from the pandemic to auto dealership services, we lower our 2022 earnings forecast 30.7% to Rmb1.97bn and introduce our 2023 earnings forecast of Rmb2.21bn. CGA is trading at 8.7x 2022e and 7.7x 2023e P/E. We maintain our OUTPERFORM rating. However, given rising supply chain cost, we cut our TP 23.6% to Rmb2.52 (10.4x 2022e and 9.2x 2023e P/E with 20.0% upside).

Risks

Weak auto sales due to the pandemic.