Share Price HK$4.64
Target Price HK$5.00
Earnings Could Have Bottomed Out in 2013
DCH will post its 2013 results on 20 February. We expect 2013 net profit to drop by 25% yoy to HK$783m vs consensus estimate of HK$933m. The reporting of 2013 results may trigger a downgrade of 2014 consensus earnings. But we believe the 33% stock price drop over the last quarter should have factored in weak 2013 results. For 2014, we expect DCH’s profit to recover in line with sales recovery of Japanese cars and Bentley. Maintain HOLD but cut target price to HK$5.00. Entry price: HK$4.00.
• 2013 profit to drop 25% yoy. We expect DCH’s net profit to drop by 25% yoy to HK$783m in 2013 vs consensus estimate of HK$933m. Our earnings estimate for 2013 implies that 2H13 net profit would remain flat hoh and yoy at HK$395m, with recovery of Japanese car sales offset by hoh margin contraction. While prices of Japanese cars have rebounded from the trough in 2H12 to 1H13, OEMs also rolled back additional rebates they gave to dealers gradually from 1H13. According to our channel check, DCH’s dealerships of Japanese cars gave more discount in 4Q13 to clear inventories, resulting in a hoh decline in car sales margin.
• Earnings recovery in 2014. We believe DCH’s earnings should have bottomed out in 2013, and are set to recover in 2014, because: a) the impact of the termination of Bentley’s China sole distributorship will fade from this year, b) Bentley sales in China will likely recover in 2014 with the launch of new model Continental Flying Spur in Aug 13, and c) Japanese car sales should continue to recover given strong product pipelines.
• The worst of Bentley business is behind us. DCH’s Bentley business was hit hard by the termination of its China sole distributorship, sales decline of Bentley in China and rapid dealership expansion by Bentley, which cannibalised sales of DCH. But these effects will likely fade in 2014. First, the termination of Bentley’s China distributorship will no longer dampen DCH’s earnings in 2014, as it already took the hit in 2013. Second, Bentley sales in China are set to recover in 2014, following the launch of the new Continental Flying Spur in Aug 13. According to Bentley dealers, given strong demand, some orders for the new model they received in 4Q13 will only be delivered in 1H14. This would spur Bentley sales in 2014.
Finally, Bentley China has slowed down the pace of dealership expansion, which eases pressure on DCH’s dealerships. After doubling its store count in China to 36 in 2012, Bentley China did not add stores in 2013. Bentley now targets to have 45 dealerships in China by 2015, up from 36 now, implying a growth of 12% p.a. DCH will also get new Bentley dealerships. Before 2012, DCH only had four Bentley dealerships in China (Guangzhou, Shanghai, Nanjing and Hangzhou), and it added three (Dalian, Hefei and Ningbo) in 2012. In 2014, DCH will add two more Bentley dealerships (Fuzhou and Nanning).
• Japanese car sales are recovering. With over 50% of its sales volume of China auto business coming from Japanese cars, DCH will benefit from the continuous recovery of Japanese car sales in the country. Major Japanese brands, including Toyota, Nissan and Honda, are entering robust product cycles in 2013-15, which we believe will spur their sales growth in China to above industry average levels (10-15%). As for profitability, we believe DCH’s margin of Japanese car sales has bottomed in 2012-13, though the room for improvement will be limited.
• Poor 2013 results factored in. We expect DCH’s 2013 results to miss consensus expectations, which would trigger a further downgrade of consensus earnings. However, we do not think this would hit stock price much, as the poor 2013 results should have been factored in by a 33% stock price drop over the last three months and the undemanding valuation of 9.5x 2014F PE (based on our lower-than-consensus 2014F EPS estimate) vs 10x of historical mean one-year forward PE.
• No change. We keep our net profit forecasts for 2013/14/15 unchanged at HK$783m/HK$885m/HK$979m respectively, implying a 25% decline in 2013 and a growth of 13% and 11% in 2014 and 2015. Our net profit forecasts for 2013/14/15 are 9%/20%/26% below consensus expectations based on our more conservative margin assumption.
• Anti-Japanese riots and car licence limit are the main risks. Risks to our estimates include outbreak of anti-Japanese riots in China, and possible imposition of car licence quota by Shenzhen, which would hit DCH’s car sales in China.
• Cut target price to HK$5.00. Based on our EPS estimates, DCH now trades at 9.5x 2014F PE, lower than its historical mean one-year forward PE of 10x. Previously, we targeted DCH at 12x 2014F PE, 1 SD above its historical mean, based on the assumption that the stock’s valuation will get closer to global peers’ 15x in the next few years. Now, we believe it is unlikely for the stock’s PE multiple to be re-rated to above the historical mean level in the next 12 months, given unfavourable sentiment toward auto dealers. Based on the same 2014F EPS and lower target PE multiple of 10x (on a par to historical mean), we cut target price from HK$6.00 to HK$5.00. Maintain HOLD. Entry price: HK$4.00.
SHARE PRICE CATALYST
• 2014 earnings guidance. The guidance on 2014 outlook to be given by management during results briefing on 20 February will drive analysts’ earnings forecasts and rating.
Publish date: 17/02/14