Trans-China Automotive Holdings - UOB Kay Hian 2022-03-16: 2H21 Supply Constraints Impaired Sales

TRANS-CHINA AUTOMOTIVE HOLDINGS LIMITED (SGX:VI2)

Trans-China Automotive Holdings - 2H21 Supply Constraints Impaired Sales

Trans-China Automotive recorded 2H21 net profit of RMB51.8m (-17% y-o-y), taking 2021 net profit to RMB124.0m (+13%), 15% under our estimate due to an automobile inventory supply shortage and a higher proportion of lower-valued service orders.
We expect the inventory shortage issue to persist in 2022 due to the Russia-Ukraine war, and have reduced our earnings expectations by 22%.
Maintain BUY rating on Trans-China Automotive with a lower target price of S$0.31 from S$0.39.

Trans-China Automotive (SGX:VI2) reported 2H21 net profit of RMB51.8m (-16.7% y-o-y), which took 2021 net profit to RMB124.0m (+13% y-o-y), below our estimate. For 2H21, sale of automobiles fell 16.2% y-o-y to RMB1,759.6m as a result of inventory supply shortfall, as global manufacturing of new automobiles was impacted by the semiconductor chip shortage.
While provision of after-sales services inched 1.6% higher y-o-y to RMB293.8m, this was also weaker than expected as a result of more service orders coming from lower-valued repairs.
Nevertheless, management proposed to pay a dividend of RMB0.0257 (S$0.0055), implying a dividend yield of 2.3%.

In Feb 22, Trans-China Automotive and Lotus mutually terminated the arrangement for Trans-China Automotive to sell Lotus automobiles. The termination was amicable and was due to differences both parties had on the direction for the brand. Revenue contribution from Lotus automobiles for Trans-China Automotive is not significant and accounted for RMB2.0m in 2021.
On the flip side, Trans-China Automotive commenced construction for a dealership of Hyundai’s premium brand, Genesis, in Guangzhou. Upon expected completion by Jun 22, Trans-China Automotive will operate the first and only Genesis dealership in Guangzhou. Hyundai is reportedly allocating a significant budget for the Genesis brand in China under an agency model, whereby orders get passed through to Hyundai and dealers do not take on inventory.
Additionally, Hyundai has a capex rebate programme, where Trans-China Automotive is able to earn back its in building costs subsequently.

Being the segment with the largest contribution to gross profit (59% in 2021), after-sales services for BMW automobiles is expected to see demand grow, in line with the increasing BMW automobile population and Trans-China Automotive’s growth in new automobile sales.
Trans-China Automotive’s absorption ratio, which refers to the ratio of the after-sales services gross profit to a dealer’s operating cost, is high, and we believe this provides for high earnings visibility for the segment.

With the ongoing Russia-Ukraine situation, we believe inventory supply for imported BMW automobiles, which accounts for 20% of Trans-China Automotive’s inventory, will be disrupted till at least end-1H22, and any resolution of the disruption is not visible currently.
Furthermore, the semiconductor chip shortage has significantly impacted UK-based McLaren Group. This has resulted in a reduction in new vehicle production and shipments to Trans-China Automotive that was previously scheduled for Apr 22, and the delay is understood to be at least six months.

Trans-China Automotive commenced construction of a new BMW service centre in Pingshan District, located about 40km north-east of Trans-China Automotive’s Shenzhen dealership. The centre is expected to be ready in late-2Q22 and will help expand its Shenzhen store footprint.
We expect a ready pool of customers for the after-sales service centre given that the Shenzhen store historically accounted for 27% of the total new automobile units sold by Trans-China Automotive over the past three years.

We have lowered our 2022 and 2023 revenue forecasts for Trans-China Automotive by 8.3% and 8.7% to RMB4,957m and RMB5,522m respectively, to account for the inventory supply shortage arising from the semiconductor chip shortage and the Russia-Ukraine situation.
2022 gross margin assumption has been reduced from 8.8% to 8.2% due to the shift in new car sales mix towards the relatively lower profitability domestic-manufactured BMWs.
Accordingly, net profit estimates for Trans-China Automotive have reduced 22% and 8.4% from RMB180.3m to RMB140.9m in 2022, and RMB206.5m to RMB189.3m in 2023.
Maintain BUY with a lower target price of S$0.31 (from S$0.39), pegged to 6x 2022F P/E or a 30% discount to regional peers which trade at an average 8.6x. Though smaller in scale, we are of the view that Trans-China Automotive’s growth plans should improve the group’s visibility and narrow the valuation spread with industry peers.
See
Share price catalysts:
- Stronger-than-expected new automobile sales.
- Higher-than-expected absorption ratio.
- Better-than-expected cost management.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-16

SGX Stock Analyst Report BUY MAINTAIN BUY 0.31 DOWN 0.390