Country’s major dealers of BMW and Jaguar Land Rover set for bumper year
One dealer of the car brands says earnings for 2016 could grow by 80 per cent on coming new models of the German automaker
Every dog has its day, and China Zhengtong auto is realising that better than most.
The company, which is one of the country’s major dealers of BMW and Jaguar Land Rover was struggling with weak earnings during 2014-16, but saw its rating upgraded from “Neutral” to “Overweight” by analysts from JP Morgan last week.
An overweight rating by investment analysts for a stock means the company is likely to outperform its industry over the next 12-18 months
JP Morgan’s Nick Lai and Rebecca Wen put the upgrading down to new models coming on stream during 2017-18, that are set to bring direct benefits and improved profitability for their dealers, as well as a revised rebate policy rolled out by BMW in China that will help with its Chinese dealers’ working capital, as well as balance sheet leverage.
“With BMW and JLR refreshing its key models in China through 2018 and Benz taking a pause on its key model launch, we believe the headwinds facing ZhengTong Auto will turn into tailwinds,” Lai and Wen said in the report.
Benz sales in 2016 reached a record high of 472,844 vehicles in this country, up 26.6 per cent year-on-year, according to an announcement from the firm in early January.
Fundamentally, dealer profitability depends on the original car manufacturers’ model cycles and inventory management.
Jaguar Land Rover, incidentally, has enjoyed a record-breaking year selling more than one car for every minute of 2016. The English West Midlands-based manufacturer sold almost 600,000 vehicles across the world – representing a 20 per cent year-on-year increase.
But BMW and JLR dealers in China have struggled with shaky earnings in recent years, hit by the two automakers’ “weaker model cycle against Benz in 2014-15”, said Lai and Wen in a separate note on another Chinese dealer of BMW and JLR, Baoxin Auto Group Limited.
Baoxin, similar to Zhengtong, was grappling with declining profits in recent years but issued an alert last Thursday, saying its preliminary 2016 earnings could grow by 80 per cent to 400 million yuan on the back of BWM’s new product portfolio that they will be rolling out aggressively over the next two or three years, according to the note by Lai and Wen.
Baoxin was also given an “Overweight” rating by analyst Eddy Wang from Morgan Stanley in a report last Wednesday and was expected to see its share price “rise in absolute terms in the next 15 days” on its positive profit alert, according to Wang.
In addition to upcoming new models of the two car makers, secondary market business, referring to deals concerned with the manufacturing, remanufacturing, distribution, retailing, and installation of all vehicle parts after the sale of the automobile by its original maker, would become the major revenue source for Chinese car dealers in the coming years, rather than new car sales, said Lai and Wen in the reports.
“We like auto dealers’ aftermarket business and believe the profitability of Chinese dealers will gradually move towards the same pattern as that in developed or more mature markets – dealers deriving the majority of their earnings from after service,
financing, leasing and related business, rather than new car sales.”, the report said.
With all the positive elements being considered, the downside risks for the two dealers include worse-than-expected price competition among luxury car dealers, as well as higher-than-expected expenditure on network expansion, according to Eddy from Morgan Stanley.
With the rise of its middle class, China saw car sales grow at its fastest pace in three years in 2016, buoyed by the government’s purchase tax waiver for small-engine vehicles.
Chinese buyers scrambled to order cars towards the end of 2016, after the 5 per cent tax introduced in October 2015 to reinvigorate the automobile market was due to end at midnight on December 31, resulting in the biggest rate of growth in car sales since 2013.