[MeiDong Auto] CGS-CIMB initiated coverage on MeiDong Auto with an ADD rating and a target price of HK$13.06

CGS-CIMB initiated coverage on MeiDong Auto (1268.HK) with an ADD rating and a target price of HK$13.06 CGS-CIMB initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) on 9^th December at Add, with a target price of HK13.06, representing an upside of 41.9% from the same day closing price of HK$9.20. CGS-CIMB highlights Meidong's "single city, single store" strategy as an edge, as it focuses on tier 3 and below cities where there is limited appetite for luxury cars and limited competition from peers, leading to a natural margin protection. Meidong's brand mix, including Porsche and Lexus, also boosts margins, as these brands often offer higher dealer margins and are traditionally more prudent with channel inventory management, which prevents significant dealer discounting.

CGS-CIMB also likes Meidong's data analytic approach with a strong focus on return on equity and inventory management, and its balance sheet efficiency and above-average returns should justified a premium valuation. With the expectation of a ROE of c.30% over FY19-21, CGS-CIMB believes the current valuation is attractive, and comes up with a target price of HK$13.06 based on 15.5x FY21F P/E, an c.35% discount to the peak historical valuation of its closest peers, Zhongsheng Auto.