Morgan Stanley: Expects mainland luxury car dealers to benefit from industry consolidation, optimistic about ZHONGSHENG HLDG and TUHU-W
Morgan Stanley released a research report stating that mainland luxury car dealers will benefit from industry consolidation, with ZHONGSHENG HLDG and TUHU-W expected to dominate the market. ZHONGSHENG HLDG's maintenance service gross profit has a compound annual growth rate of 14%, and profits are expected to rebound by 67% year-on-year in 2026. The target price has been raised from HKD 15 to HKD 21, with a rating of "Overweight." TUHU's target price has been raised from HKD 20 to HKD 23, with an expected compound annual growth rate of 25% in profits. The target price for Meidong Automotive has been lowered to HKD 2.1, with a rating in line with the market
According to the Zhitong Finance APP, Morgan Stanley released a research report stating that capacity reductions in the mainland automotive industry are driving industry consolidation, and luxury car dealers are expected to benefit first; it is anticipated that from 2025 to 2026, dealer store closures will accelerate, as the comprehensive profit margin for new cars has fallen below 1% in the first half of this year, making it unattractive for small dealers. Additionally, car manufacturers plan to reduce their mainland dealer networks by 10% to 30% before the end of 2026, and this consolidation will benefit financially stable dealers.
The firm believes that authorized dealers such as ZHONGSHENG HLDG (00881) will continue to dominate the automotive accident repair business, while independent repair shops like TUHU-W (09690) can gain market share in maintenance and minor repairs. Excluding the impact of the pandemic in 2020 to 2021, ZHONGSHENG HLDG's gross profit from repair services has achieved a compound annual growth rate of 14% from 2017 to 2024, and it is expected to continue supporting core profitability in the future.
The firm believes that ZHONGSHENG HLDG has finally reached a turning point after experiencing four years of a downturn. Although the market is concerned about its continued profit decline, the firm expects the group's profit in 2026 to rebound by 67% year-on-year to RMB 4 billion, driven by the recovery of new car profit margins, the upward cycle of Mercedes-Benz and Aito models, and an increase in market share in the accident repair sector. At the same time, the decline in capital expenditure demand means that the expected dividend yield of 5% in 2026 still has room for upside; the target price has been raised from HKD 15 to HKD 21, with a rating of "Overweight."
The firm also gives TUHU an "Overweight" rating, expecting the company's profit compound annual growth rate to reach 25% from 2025 to 2027, based on user growth of its application and expansion of franchise stores; the target price has been raised from HKD 20 to HKD 23. As for Meidong Automotive (01268), the target price has been lowered from HKD 2.2 to HKD 2.1, with a rating of "In Line with the Market."
