Dah Chong Hong Holdings Initiation： Audi to drive ROI

See important disclosures, including any required research certifications, beginning on page 23 ■ Investment case Dah Chong Hong Holdings (DCH) has a range of businesses, including motor-vehicle distribution, trading of food and consumer products, and a logistics operation. The primary focus of this report is the auto sector, which accounts for 84% of our SOTP valuation and will contribute 78% of revenue in 2013, on our forecasts. We recommend taking advantage of any share-price weakness if, as we expect, DCH’s 1H13 earnings (due on 14 August) fall short of market expectations. Our Buy call reflects the following factors: 1) Positive auto-industry outlook. Against the backdrop of our positive outlook for the China auto dealers sector, we believe DCH shares will outperform those of its peers in 2H13, backed by a low sales volume base for YoY comparison. 2) Enhanced product mix. We see DCH as the best-placed stock to ride a sector re-rating, backed by: 1) its gradual shift to relatively high-ROI brands (eg, Audi) for new dealerships, and 2) expansion in DCH’s working capital following its loss of distribution rights for the Bentley brand in China in 2013. ■ Catalysts Seasonal pick-up. In the run-up to the September high season for car sales in China, we expect the dealer sector to be re-rated to above 12x PER for 2013E (as in past years). Earnings upside from cash investment. DCH has the strongest balance sheet among its peers, which we think will give it the upper hand in its ongoing negotiations to acquire high-ROI-brand dealerships. Relative to our existing forecasts, we estimate these prospective acquisitions could lift DCH’s earnings for 2014E and 2015E by 35% and 42%, respectively. ■ Valuation DCH offers 26% potential upside to our six-month SOTP-based target price of HKD7.55. Our target price is equivalent to a 2013E PER of 12.1x, slightly higher than DCH’s seven-year average + 0.5SD level. ■ Risks DCH’s earnings quality could deteriorate if it were to implement overly aggressive expansion plans which resulted in unrealistic sales targets and led to equity placements. Consumer Discretionary/ Hong Kong1828 HK12 August 2013Dah Chong Hong Holdings Initiation: Audi to drive ROI • We expect DCH to outperform the dealers segment in 2H13 as its mix skews toward domestically produced, high-ROI cars • Seasonal pick-up in sales and potential earnings upside from new acquisitions underpin attractive risk-reward outlook • Stronger balance sheet and dividend payout relative to peers; initiating coverage with a Buy rating (1) Source: FactSet, Daiwa forecasts Consumer Discretionary / Hong KongDah Chong Hong Holdings1828 HKTarget (HKD): 7.55Upside: 25.8%9 Aug price (HKD): 6.00Buy(initiation)OutperformHoldUnderperformSell123457585951051155. 56. 57. 58. 59. 5Aug-12Nov-12Feb-13May-13Aug-13Share price performance DCH (LHS)Relative to HSI (RHS)(HKD)(%)12-month range5.58-9.19Market cap (USDbn)1.413m avg daily turnover (USDm)1.63Shares outstanding (m)1,826Major shareholderColton Pacific Ltd (20.7%)Financial summary (HKD)Year to 31 Dec13E14E15ERevenue (m)45,95254,27265,875Operating profit (m)1,9372,4563,068Net profit (m)1,1401,4311,769Core EPS (fully-diluted)0.6230.7810.966EPS change (%)9.125.523.7Daiwa vs Cons. EPS (%)4.64.67.7PER (x)9.67.76.2Dividend yield (%)3.94.86.0DPS0.2310.2900.359PBR (x)1.21.11.0EV/EBITDA (x)5.54.53.9ROE (%)12.914.816.6Jeff Chung(852) 2773 8783jeff.chung@hk.daiwacm.comLi Xiong(852) 2773 8829li.xiong@hk.daiwacm.comHow do we justify our view?How do we justify our view? Consumer Discretionary / Hong Kong 1828 HK - 2 - Auto-driven earnings recovery for 2H13E ..................................................................................... 6 Auto segment: three business drivers ......................................................................................... 6 New product mix has the best asset turnover to capture the industry upcycle ............................ 9 Shift from Bentley to Audi should lift DCH’s ROI...................................................................... 9 Losing the Bentley dealership is not the end of world .............................................................. 11 Food and consumer segment ..................................................................................................... 12 Strong balance sheet, FCF, and catalysts from new acquisitions ................................................. 13 Cash flow should improve due to change in product mix ......................................................... 13 Catalyst: potential upside from asset acquisitions .................................................................... 13 Debt-structure optimisation ...................................................................................................... 14 Valuation .................................................................................................................................... 15 Downside ri