Merrill Lynch initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) at Buy; TP of HK$40.50

Merrill Lynch initiated coverage on China MeiDong Auto Holdings Limited (1268.HK) at Buy with a target price of HK$40.50, representing an upside of 56.0% from the closing price of HK$25.90 on 29th January.

Merrill Lynch appreciates Meidong's differentiated strategy, which focuses on luxury brand car dealerships in fast-growing yet under-penetrated tier 3-5 cities, making it a key beneficiary from consumption upgrade as regional income rises. Merrill Lynch also likes Meidong's laser focus on high operating efficiency and inventory turnover, which sees the company generates significantly higher returns and faster growth than peers. Supported by its strong operating cash flow and net cash position, Merrill Lynch believes it has a growing capacity to pursue acquisitions, which could pose further upside to the stock's valuation.

Driven by new store additions (12% CAGR), increase in sales per store (14% CAGR) and higher margins, Merrill Lynch predicts a revenue CAGR of 28% and net income CAGR of 41% through 2023E. As the median age of MeiDong's stores is only 3 years, Merrill Lynch believes its operating margin will be lifted by 120bps to 6.2% by 2023E, as after-sales services revenue will grow as stores mature.

Merrill Lynch's target price of HK$40.50 is set at 28x 2022E P/E - based on a PEG of 0.8x on its 2023E EPS growth of 35%. While this is a premium to peers and its average, Merrill Lynch sees it as justified due to the faster growth, higher ROE and net cash balance sheet that offers potential of faster growth via M&As.