2H21: Supply Constraints Impaired Sales
TCA recorded 2H21 net profit of Rmb51.8m (-17% yoy), 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 with a lower target price of
S$0.31 from S$0.39.
RESULTS
• 2H21 impacted by inventory shortage. Trans-China Automotive (TCA) reported 2H21 net
profit of Rmb51.8m (-16.7% yoy), which took 2021 net profit to Rmb124.0m (+13% yoy),
below our estimate. For 2H21, sale of automobiles fell 16.2% yoy 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 yoy 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 DPS of Rmb0.0257 (0.55 S cent), implying a dividend yield of 2.3%.
• Lotus distributorship terminated; new Genesis dealership. In Feb 22, TCA and Lotus
mutually terminated the arrangement for TCA 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 TCA is not significant and accounted for
Rmb2.0m in 2021. On the flip side, TCA commenced construction for a dealership of
Hyundai’s premium brand, Genesis, in Guangzhou. Upon expected completion by Jun 22,
TCA 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 TCA is able to earn back its
capex spent in building costs subsequently
STOCK IMPACT
• After-sales to buffer impact of… 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 TCA’s growth in new
automobile sales. TCA’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.
• …slower growth for BMW and McLaren new automobiles. With the ongoing Russia Ukraine situation, we believe inventory supply for imported BMW automobiles, which
accounts for 20% of TCA’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 TCA that was previously scheduled for
Apr 22, and the delay is understood to be at least six months.
• New BMW service centre to be ready in late-2Q22. TCA commenced construction of a
new BMW service centre in Pingshan District, located about 40km north-east of TCA’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 TCA over the past three years.
EARNINGS REVISION/RISK
• We have lowered our 2022 and 2023 revenue forecasts 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 have reduced 22% and 8.4% from Rmb180.3m to
Rmb140.9m in 2022, and Rmb206.5m to Rmb189.3m in 2023.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of S$0.31 (from S$0.39), pegged to 6x 2022F PE
or a 30% discount to regional peers which trade at an average 8.6x. Though smaller in
scale, we are of the view that TCA’s growth plans should improve the group’s visibility and
narrow the valuation spread with industry peers.
SHARE PRICE CATALYST
• Stronger-than-expected new automobile sales.
• Higher-than-expected absorption ratio.
• Better-than-expected cost management.