[ET Net News Agency, 30 October 2019] Jefferies Research initiated coverage on
Zhongsheng Group Holdings (00881) with a "buy" rating and target price of HK$21.7.
The research house said Zhongsheng has achieved significant growth in the past two
years, with the help of its two major franchised brands - Mercedes and Lexus. However,
Jefferies believes the best time for the two brands is over.
It said that Mercedes will see intensified competition for its aging product lines given
new BMW models launched in China market. Margins from selling Mercedes new cars will
decline going forward.
In addition, Lexus new car margin will be under pressure and volume growth is
restricted. Lexus is well-known for its shortage of supply, particularly for its ES model,
due to capacity restrictions. There is no room for remarkable volume growth in medium
term.
The recent movement of Lexus to increase MSRP (manufacturer's suggested retail price)
will hurt dealer margins immediately as it is hard for dealers to pass through the price
hike to consumers. Therefore, Jefferies expects a decelerating earnings growth for the
company in 2020, which may not support its current multiple the stock is traded at. (KL)