2023.04.17 20,500 points to be the resistance

China’s new loans in March was CNY 3.89 tn, higher than the expectation of CNY 3.3tn and CNY1.8 tn in Feb. In 1Q23, the new loans in China amounted to CNY10.3 tn, up CNY2.27 tn YoY, reflecting the still abundant liquidity. However, CPI in March was only +0.7% YoY, lower than the expected of 1% and PPI also fell 2.5% YoY. The data may reflect that domestic demand is still weak, and investors cannot be too optimistic about the economic growth and the corporate profitability, which will limit the performance of China and Hong Kong stock markets.

Hong Kong’s catering revenue during the Easter holiday fell by 15% to 20% compared with just after the relaxation of Covid measures, and local retail consumption also recorded a drop of nearly 10%-20%. We attribute to the weak consumption sentiment, locals traveling abroad and tourist from China only recovering to less than 40% of pre-Covid levels. Although the first batch of consumption vouchers will be distributed on the 16^th April and is expected to boost consumer sentiment, the scale of the consumption vouchers has decreased by 50% YoY. As the local economy is still under pressure, we do not expect local catering and retail enterprises to perform well in the near future. Inflationary pressures in the U.S. eased and the market predicts that the probability of a 0.25% interest rate hike in May is about 70%, while Fed will start cutting rates in 2023. Regarding the Hong Kong market, although the Hang Seng Index is above 20,000 points, it lacks upward momentum. We expect the Hang Seng Index to trade between 19,500-20,500 points.

Raw material and Medical and health care sectors outperformed the market. As China will have “5/1” holiday soon, which is expected to support auto sales, the auto related sectors are worth paying attention to.

Meidong(1268) is principally engaged in 4S dealerships in China. In 2022, Meidong achieved revenue of CNY 28,654mn, +22% YoY and net profit of CNY 521mn, -55% YoY, mainly due to weaker auto market in 2022. Moreover, Meidong’s gross margin dropped 3 pct to 8.8%, the lowest since 2013. As of the end of 2022, company operated a total of 76 outlets, in which 16 were Porsches and 27 were BMWs.

Meidong is one of the largest Porsche dealers in China. In 2022, Meidong sold 67,871 vehicles, +10% YoY, incl. 11,790 Porsche, +107% YoY and 23,611 BMW, -5% YoY. Per mgmt, current foot traffic has improved recently and mgmt expects the recovering foot traffic to transfer to revenue soon. In 2M23, Porsche sales in China increased 20% YoY to 13,758 units (+11/14% compared with 2M21/2M19). We expect the ultra-luxury brand to benefit from China’s recovery in 2023. It is recommended to buy at HK$14.4, target at HK$16.2, stop loss at HK$13.5. Risk: More fierce than expected price war.

YONGDA AUTOMOBILES (3669) is principally engaged in the sale of automobiles and provision of after-sales services, provision of automobile operating lease services, provision of proprietary financing services, distribution of automobile insurance products and automobile financial products in China. In 2022, Yongda reported revenue of CNY72,024mn, -8% YoY and net profit of Rmb1,425mn, dropping 43% YoY mainly due to gross margin dropping from 10.8% in 2H21 to 8.1% in 2H22. As of the end of 2022, the company operated a total of 263 outlets, in which 62% were luxury brands, 19% were mid-to-high-end brands, 14% were independent new energy brands, while many of the 4S stores were Porsche, BMW, Audi etc.

In 2022, new car sales revenue dropped 9% to CNY 58,192mn, and vehicle sales gross margin declined 0.9 pct to 2.3%, mainly due to intensifying auto market competition in 2H22. However, mgmt. highlighted the pre-owned car segment and EV growth that could support future results, together with the promotion activities in some cities that might support sales. As the dividend is around 8%, it is recommended to buy at HK$5.0, target at HK$5.6, stop loss at HK$4.7. Risk: The auto sales in China remaining weak compared to 2022.