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A Premium Drive Gearing Up For The Fast Lane

TCA is a premium automobile dealership group mainly operating in China’s affluent Greater Bay Area. TCA carries well-established automobile brands such as BMW and McLaren, riding on the strong demand for premium automobiles and the line-up of electric vehicles slated for launch. Initiate coverage with BUY and a target price of S$0.39.

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Among the best-in-class premium automobile dealerships in GBA. Trans-China Automotive Holdings (TCA) operates four BMW dealerships, four McLaren showrooms and one Lotus showroom. Three of its BMW dealerships are in the Greater Bay Area (GBA). TCA is ranked third by number of BMW dealerships in the GBA. The group’s dealership network punches above its weight, with an average BMW automobile sales volume of 2,516 per dealership in 2020, well above the average of 1,342 per BMW dealership in China. TCA’s Foshan dealership is also the top-ranked dealership in Foshan, occupying a 38% market share in 2020 with a large area of over 20,000sqm. In general, TCA’s large dealerships, accommodated in the affluent and growing GBA market, enjoy a higher automobile sales volume per store, as well as higher after-sales service capacity with above-average absorption ratios.

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Dealer of well-established automobile brands. BMW is the main automobile brand under TCA and one of the leading automobile brands in China. In 2016 and 2020, BMW was ranked second in China’s premium automobile market in terms of sales volume. The number of BMWs in operation in China grew at a CAGR of 16.9% from 2016 to 2020. BMW also has a steady pipeline of electric vehicles poised for launch in the coming years, and plans to launch 12 all-electric BMW and Mini models by 2023.

Riding on burgeoning growth of luxury car ownership in China. China has been experiencing rapid economic growth. The number of high-net-worth individuals (HNWI) grew at a CAGR of 54.4% from 2016 to 2020. Consumer demand for premium and ultra-premium automobiles is expected to grow with the rising number of HNWIs, given their spending power and higher propensity to spend on aspirational products, often regarded as status symbols. According to Frost & Sullivan, premium automobile ownership in China is expected to hit 46.3m in 2025, growing at a CAGR of 9.8% from 2021 to 2025.

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Valuation of S$230m; growing dealership network. We initiate coverage on TCA with BUY and a target price of S$0.39. We value the stock based on forward PE range of 6x 2022F earnings of Rmb180.2m (S$38.3m). This is at a 25% discount to peers’ multiple, given TCA’s smaller dealership network. The group could add to its dealership network and, coupled with better operating efficiency, could see its discount to peers narrow.

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