CITIC International lowered the target price for MEIDONG AUTO to 2.2 yuan, maintaining a "Buy" rating

Zhaoyin International published a report indicating that MEIDONG AUTO (01268.HK) is expected to drive profit growth in the fiscal years 2026 to 2027 due to the recovery of new car gross margins in the second half of last year and the launch of new stores under HarmonyOS. The performance in the second half of last year slightly exceeded expectations, mainly due to the improvement in new car gross margins.

In the second half of last year, revenue decreased by 14% year-on-year, which was 6% lower than the bank's previous forecast, mainly due to new car prices and automotive financial commissions being lower than expected. The gross margin increased by 2.1 percentage points to 6.8% compared to the previous half, which was about 2.3 percentage points higher than the bank's forecast, primarily due to a 9.8 percentage point improvement in new car gross margins compared to the previous half, reaching negative 1%. Selling and administrative expenses and financial costs were basically in line with the bank's expectations, resulting in a net profit of RMB 60 million in the second half of last year, which was about RMB 80 million higher than the bank's previous forecast.

The report stated that despite ongoing uncertainties, the bank expects dealer new car gross margins to improve slightly year-on-year in 2026, as most foreign luxury brands have more pragmatic targets for sales and pricing. The improvement for MEIDONG may be more pronounced, as it has achieved a better-than-industry average improvement in new car gross margins through operational efforts. It is expected that the new car gross margin will expand by 2 percentage points year-on-year to negative 3.8% in 2026, and although revenue is expected to decline by 9% year-on-year, gross profit in 2026 will remain roughly flat. The net profit is expected to reach RMB 146 million in 2026.

The bank expects the new car gross margin to improve slightly year-on-year to negative 2.1% in 2027. The overall gross margin is expected to rise by 1.2 percentage points to 7.5%, the net profit margin is expected to expand by 1 percentage point to 1.8%, and net profit is expected to increase to RMB 328 million. The rating is maintained at "Buy," with the target price adjusted down from HKD 2.8 to HKD 2.2