The mid-term net profit was halved while making a big move to bottom-fish Xinfengtai. Has the fundamental of ZHONGSHENG HLDG (00881) changed?

2024 has passed more than halfway, and the car market's "price war" fierce competition shows no signs of abating. The interim performance of various companies in the automotive industry is a mix of joy and sorrow. According to statistics from the Southern Daily, among the 16 listed car companies in China, 10 companies saw an increase in revenue compared to the same period last year, while 6 saw a decrease in revenue; 5 companies reported losses, and 9 companies saw a decrease in profits. This data shows that while 62.5% of car companies in China achieved revenue growth, 56% of car companies experienced varying degrees of profit decline. On the other hand, the production and sales of new energy vehicles continue to thrive, with production and sales reaching 4.929 million and 4.944 million vehicles respectively in the first half of the year, an increase of 30.1% and 32.0% respectively year-on-year, gradually eroding the market share of traditional fuel vehicle sales dominated by car dealers. As the leader in car dealerships, ZHONGSHENG HLDG (00881) has seen its profit indicators decline since 2021, showing signs of "increased revenue but decreased profits". The latest disclosed interim financial report shows that in the first half of 2024, the company's operating income was approximately RMB 82.421 billion, an increase of 0.63% year-on-year; net profit attributable to shareholders was RMB 1.58 billion, a decrease of 47.5% year-on-year. Gross profit was RMB 4.926 billion, a decrease of 29.3% compared to the same period last year, with a gross profit margin of 6.0%, slightly lower than the same period last year. With multiple challenges ahead, what highlights remain in the fundamentals of ZHONGSHENG HLDG, and when will it have the opportunity to recover? New car business accounts for over 70%, "price wars" drag down performance It is understood that in the first half of the year, ZHONGSHENG HLDG's performance was poor, mainly due to the intensified competition in the domestic new car market and the decline in average selling price of new cars during the period. According to the data from the China Passenger Car Association, retail sales of passenger cars in China are estimated to be 9.828 million vehicles in the first half of the year, an increase of 3% year-on-year, with a slightly narrowed growth rate; according to data from the Automotive Home Research Institute, from the first quarter of 2023 to the second quarter of 2024, the average selling price of approximately 160 best-selling car models in China decreased by 15.9% (based on the average price in the first quarter of 2023), showing a downward trend. Up to now, new car sales remain the main source of revenue for the company. For the six months ended June 30, 2024, the revenue from this business accounted for 73.8% of the total revenue (down from 78.8% in the same period of 2023). It is understood that, unlike the traditional single-car brand dealership service model, Zhongsheng provides services across car brands and different fuel types, seeking a second growth curve. Under the company's strategy of brand upgrading in the automotive service sector, new car sales are no longer the only way to reach customers, as the company has expanded into used car business, repair and spray services, car cleaning and beauty services, car insurance renewal services, etc., thereby potentially covering almost all possible car service scenarios through services such as replacement vehicles, road rescue, and car rental. Currently, Zhongsheng concentrates all customer relationship management and used car business in 32 central cities, with full car wash services available in over 90% of its stores. Nearly ten thousand replacement vehicles have been deployed in core cities, and over a thousand renewal insurance specialist positions have been established across the company. Currently, Zhongsheng operates 26 maintenance service centers in 20 cities, with the remaining 19 under construction or planning. Although the used car business has grown rapidly in the first half of the year, its share of the business is not high. Sales revenue from used cars in the first half of the year was RMB 8.240 billion, a 61.6% increase over the same period last year, accounting for 10.0% of total revenue; revenue from after-sales and boutique services was RMB 13.369 billion, a 9.3% increase over the same period last year, mainly due to the increase in after-sales service visits and the contribution to the average value of each service visit, accounting for 16.2% of total revenue. In the first half of the year, the company's various operating indicators showed positive performance. Taking the four central cities with the widest coverage of the company's footprint, Chengdu, Dalian, Nanjing, and Shenzhen, as examples, the active customer base increased by 9% year-on-year, reaching a total of 900,000; regular maintenance increased by 6%, manufacturer warranty increased by 10%, accident repair increased by 14%, car insurance renewal policy quantity increased by 22%, and used car retail volume increased by 29%. In addition, among customers who performed maintenance, accident repair, or car insurance renewal in the first half of this year, the percentage of customers who did not purchase their vehicles from Zhongsheng were 20%, 35%, and 29% respectively, indicating an improvement in the company's customer acquisition, activation, and conversion capabilities. Furthermore, as of the first half of 2024, Zhongsheng Group's inventory was RMB 18.354 billion, an 18.9% increase from the same period last year, mainly due to the slightly increased turnover days of new cars, increased inventory of used cars, spare parts, and automotive products; inventory turnover days were 36.2 days, an increase from the same period last year, mainly due to the intensified competition in the new car market in the first half of the year. Splurging RMB 510 million to bottom out New Fengtai, will opportunities for development still be hidden in adversity? In the context of the overall downturn in the industry, the signs of declining performance are not only seen in ZHONGSHENG HLDG. According to the report on the survival status of national automobile dealers in the first half of 2024 released by the China Automobile Dealers Association, only close to 30% of dealers exceeded their semi-annual sales targets, while one-third of dealers had a completion rate of less than 70%. To make matters worse, in recent years, as the global automotive industry has transitioned towards electrification and intelligence, the shrinking fossil fuel vehicle market has also put pressure on the development space of traditional luxury car brands. In the first half of the year, the performance data of the three major luxury car brands "BBA" (Mercedes-Benz, BMW, Audi) all showed a downward trend, and all three companies mentioned in their financial reports that the increasingly fierce competitive market environment in China has had a significant impact on their performance. It is understood that Zhongsheng's current brand portfolio includes luxury brands such as Mercedes-Benz, Lexus, BMW, Audi, as well as middle and high-end brands like Toyota, and is the leader in each of the core brand markets. In the first half of the year, based on new car sales revenue, Mercedes-Benz is the car brand with the highest new car sales revenue in the company, accounting for approximately 40.5% of the total new car sales revenue of the Group (compared to the same period in 2023). 43.1% of people participate in it.In the face of many unfavorable factors, Zhongsheng chose to expand against the trend and in July acquired three companies in Jiangsu under Xin Fengtai, the largest 4S dealership in northwest China, for 51 million RMB. It is understood that the three companies acquired by Xin Fengtai recorded losses in their performance in 2023, with Suzhou losing 9.821 million RMB, Wuxi losing 1.479 million RMB, and Yangzhou losing 720,000 RMB. For Xin Fengtai, selling the loss-making 4S dealership was a timely loss-limiting "slimming down" move; while for Zhongsheng, the customer resources behind the old stores will help it maintain competitiveness in the regional market and further expand market share. Looking at the performance in 2023, Zhongsheng Group took the industry lead with a revenue of 179.29 billion RMB, far larger than YONGDA AUTO and MEIDONG AUTO following behind. Although the company's net profit fell by 24.74% in the same year, it still performed above average compared to its peers. As a leading automobile dealer, Zhongsheng still has opportunities. Since 2024, many new energy car companies have adjusted their direct sales model and announced the introduction of authorized dealership models, which is expected to bring opportunities for profit recovery for Zhongsheng. Looking ahead, most investment institutions still hold a negative view on the company's future. Recently, JPMorgan pointed out in a research report that the weak profitability of Chinese automobile dealers was surprising, and Zhongsheng Holdings' mid-term performance was 36% lower than the bank's expectations. Therefore, the bank has downgraded Zhongsheng's rating to "underweight" since the beginning of the year, and lowered the company's target price from 12.5 Hong Kong dollars to 8.5 Hong Kong dollars. Daiwa also mentioned in a research report that, based on the higher-than-expected gross loss from new car sales, the company's net profit forecast for the 2024 fiscal year has been lowered by 45.5%, and its target price has been reduced from 12.5 Hong Kong dollars to 9.8 Hong Kong dollars. The bank estimates that weak demand for traditional luxury cars will continue until the second half of this year to next year, while the after-sales and used car business will contribute most of the gross profit performance for Zhongsheng in 2025 and 2026. With the support of the used car and after-sales businesses, as the scale continues to expand, Zhongsheng Holdings remains a leading target with growth potential. However, the overall negative factors in the automobile dealership industry will continue to suppress the company's performance and stock price. Looking ahead, uncertainties remain in the second half of the automobile dealership market, and the downward trend in company profitability is expected to continue, with the progress of the used car business deserving close attention from the market.