CICC: Raise target price of ZHONGSHENG HLDG(00881) to 25.3 Hong Kong dollars, optimistic about growth prospects after cooperation with Chongqing Sokon Industry Group Stock.

CICC releases research report stating it will temporarily maintain unchanged profit forecast for ZHONGSHENG HLDG (00881). The company's current stock price corresponds to a 12.7x/10.4x 2024e/2025e P/E ratio. Switching to a 2025 valuation, due to the potential cooperation with Chongqing Sokon Industry Group Stock bringing strong stock price catalysis and potential business reversal logic to the company, the target price for the company was raised to HK$25.3. The company announced that it has signed a preliminary agreement with Chongqing Sokon Industry Group Stock, agreeing to further negotiate on distributing its new energy vehicles. The bank is optimistic about the growth space opened up for the company after cooperating with Chongqing Sokon Industry Group Stock, as well as the potential boost to future profits. CICC's main points of view are as follows: Combining location advantages with leading operational capabilities, the company plans to accelerate cooperation with domestic high-end luxury new energy brands such as Wanjie. As of 1H24, Zhongsheng operates 419 dealerships in 32 central cities in China. Due to the company's continued focus on central cities and high-end customers, the number of dealerships and market share of luxury brands are leading in the industry. In central cities, Lexus, Mercedes-Benz, BMW, and Audi brands have market shares of 52%, 29%, 18%, and 18% respectively. The bank believes that Zhongsheng plans to access Wanjie's distribution channels to promote the company's faster integration of luxury brand matrix and actively enter the domestic luxury new energy business, which is expected to further leverage existing user assets and traditional luxury brand dealership assets. New car sales profits are expected to increase, and post-sales empowerment will achieve greater performance flexibility. Affected by pressure on sales of traditional luxury brands, the company's new car business revenue fell by 3.6% in 1H24, with new car gross profit losses. The bank believes that the cooperation between the company and Chongqing Sokon Industry Group Stock is expected to boost financial performance in terms of quantity, price, and profit: 1) the average selling price of Huawei Wanjie brands currently exceeds 30,000 yuan, with M9's selling price exceeding 45,000 yuan, higher than Zhongsheng's average selling price in 1H24; 2) Wanjie has a rich product lineup, planning products such as M8 and M7 facelifts, with sales growth outpacing traditional luxury brands; 3) the bank expects Wanjie brand new car gross profit margin to reach 4%-5%, which is at a good level historically for traditional luxury brands. Looking ahead, with the company entering Huawei Wanjie's aftersales business such as maintenance, repair of accident vehicles, the bank expects the company's operational advantages in the post-sales sector to further enhance, realizing a continuous expansion of post-sales service scale. New energy brands actively embrace distribution channels, and a win-win model may be initiated. Recently, BYD Company Limited, Tesla, Farasis, NIO, and Ji Ke, among other high-end new energy brands, have successively opened dealer joining channels, adopting a "direct+ dealer partner" channel model to build a diversified channel system. The bank believes that the dealer channel can enhance brand management leverage, alleviate financial pressure on car manufacturers, and achieve faster channel expansion. For luxury brand dealers, they have strong advantages in grasping brand tone, operating capabilities of high-end customers, and holding core property in key city locations. The bank is optimistic about the strategic transformation of leading dealers to new energy brands, achieving steady growth in performance. Risks include the cooperation with Chongqing Sokon Industry Group Stock not meeting expectations, greater-than-expected impact on existing business, greater-than-expected decline in new car gross profit margin, and greater-than-expected decline in post-sales business.