11-04-2018

Chinese President announced plans on lowering tariffs for autos at the Boas Forum for Asia. The plan should be positive to China’s auto dealers, who are still enjoying the earnings upcycle, by spurring demands for import autos as we expect retail prices of import autos would decline by the approximately same amount to reflect the decrease in tariffs. Consumption upgrade in China has driven stronger demands for luxury car in the past few years. While total car sales volume recorded a mild year-over-year growth of just 3% last year, luxury car sales volume growth remained solid and continues to record a double-digit growth. There is still room for China’s auto dealers to register a stronger sales volume and chances for profit margin expansion as we expect the sales volume growth of luxury car will continues to outpace the whole auto market in the next few years. Besides, dealers are undergoing structural reform to shift their business focus from new car sales to more profitable after-sales services and auto finance business. China Zheng Tong Auto Service (ZTA) is a leading 4S auto dealer in China. ZTA is now actively expanding its share in the luxury car dealership market in China and it is the only auto dealer that has been granted the interbank auto-finance license. With this license, ZTA’s auto finance business can generate a higher net interest margin than its peers, and we expect the auto finance business can greatly boost its profitability. Recently, share price of ZTA has dropped significantly as fear of a trade war between China and US has dragged the auto dealership sector lower. While we saw a series of share buyback actions of ZTA in the past few days, we think that the recent sell-off of ZTA is overdone and its valuation is so attractive with the backdrop of solid fundamentals.

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