China Meidong Auto Holdings Limited

Morgan Stanley initiated coverage on MeiDong Auto (1268.HK) with an Overweight rating and a target price of HK$20.00

Morgan Stanley initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) on 21st April at Overweight, with a target price of HK20.00, representing an upside of 62.9% from the same day closing price of HK$12.28.

Morgan Stanley branded MeiDong as a high-efficiency, high-return auto dealer in lower-tier cities. Supported by its "single city, single store" strategy, Morgan Stanley expects MeiDong to maximize the first-mover advantage from consumption upgrade, and avoid direct competition with larger dealer peers. Its much simpler yet favorable brand mix, which focuses on premium brands such as BMW, Lexus and Porsche, are also expected to outperforming the overall sector in sales.

Morgan Stanley also pointed out that, through its industry-low inventory level of 17 days (vs. 34-43 for peers) and lower-than-peers CAPEX, MeiDong was able to deliver a strong investment return, with a 32% ROE in 2019 (vs. 5-21% for peers) and a 3% dividend yield, while enjoying better cash flows and net cash position (vs.net gearing for peers). In view of its rapid store expansion, favorable brand mix, and fast inventory turnover, Morgan Stanley expects its earnings to grow at a 45% CAGR between 2020-22E, higher than peers' 15-20% CAGRs. Valued at 17x 2021E P/E, Morgan Stanley believes MeiDong's valuation premium is justified by its high growth visibility and strong investment return.