1. Zhongsheng (881.HK)
Research Summary
Rating: Buy
Target Price: HK$10
1
ZENG Siyang, Michael
Updated on October 30, 2016

2. Key Investment Theses
• The Dealerships’ Inventory Level has fallen below
warning line. New car sale in China keeps climbing
against the backdrop of sluggish growth. Outlook of the
industry of auto dealership is stable.
• Zhongsheng is the largest Benz dealership in China,
taking up over one-tenth share (units sold). Benz is the
largest source of car sale revenue, taking up about one
fourth. Benz’s units sold has surged in recent years. The
coming of new E Class in August will boost the sale of
Zhongsheng.
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3. Key Investment Theses
• The management thinks highly of Toyota and Lexus due
to high quality of the former and over-demand of the
latter. Zhongsheng will continue cooperation with the
automaker on the basis of close relationship.
• Zhongsheng acquired Hainan Joyer to tap into Hainan
market successfully. In the restructuring earlier this year,
some stores in Northern China were given up.
Management emphasizes that quality of M&A actions
should be primary goal despite of numerous M&A
opportunities.
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4. Key Investment Theses
• Second-hand car business, one of future directions,
yields higher profit margin than new car, as high as
5% and saw 11.7 thousand transactions in 1H16.
• The considerable drop in finance cost reflects the
impact of decline in interest and inventory level.
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5. Business Model of Auto Dealership
• Basic Business: New Car Sale
– Buy in first and sell out later
– High volume of revenue with low profit margin
– To attract customers
• Value Added Business: Post-sale & Financial services
– Repair & maintenance, used car disposal, accessories & modification,
finance & insurance
– Low volume of revenue with high profit margin
– To monetize the portfolio of customers
• Other Business: Related Industry & Business
– E.g., forward integration, channel expansion
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6. Business Model of Auto Dealership
New Car
Purchase
Rental / Repair
& Maintenance
Used Car
Disposal
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Accessories & Modification
Finance & Insurance Agency
4S Store
OEM
Insurance
Company
Bank & Auto
Finance Firm
New Car
Finance Product
Insurance Product
Independent
Supplier Parts & Accessories
Core Lifecycle of Cars

7. Auto Dealership in China
• Low market concentration
• Business structure gap between Chinese dealers and
dealers in mature markets
• Frequent M&A transactions and new business
explorations in last few years
• OEMs with stronger market power
• Emerging sectors
– parallel import, O2O sale, new energy car, IOV & smart car
– Much uncertainty
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8. Competitive Landscape
25%
75%
2015 New Car Sales in China
Top100 Dealerships Others
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Rank Name Revenue(RMB) Sales
1 China Grand Auto 90,700,035,201 678,190
2 Sinomach Auto 64,189,320,000 222,908
3 Zhongsheng 59,142,607,000 260,353
4 Pang Da Auto 56,374,978,176 450,724
5 Lei Shing Hong Auto 52,208,903,075 117,422
6 Yongda Auto 45,118,896,000 134,441
7 HXQC 38,182,904,877 215,998
8 GWQM 30,750,224,679 236,264
9 Zhengtong Auto 29,785,763,000 95,409
10 Baoxin Auto 29,015,725,864 71,046
Source：Top100 Dealerships Ranking 2015 by China Automobile Dealers Association

9. Business Structure Gap
82.3%
2.2% 8.9%
3.8% 2.8%
China Top100 Revenue Structure
New Car Sale
2nd Car Sale
Parts & Repair
Finance & Insurance
Others
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29.5%
3.9%50.7%
15.5%
0.4%
China Top100 Gross Profit Structure
57.5%22.9%
14.8%
4.2% 0.6%
US Average Revenue Structure
20.6%
10.8%
41.0%
26.6%
1.0%
US Average Gross Profit Structure
Source：Top100 Dealerships Ranking 2015
by China Automobile Dealers Association

10. Recent Major M&A Transactions
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Disclosure Date Target Acquirer Value Status
Aug 20, 2016 Shenzhen Pengfeng China Grand 1,006 mRMB In progress
Acquire stores in Guangdong and access stores in Hunan
Feb 6, 2016 Dalian Prestige China Grand Undetermined In progress
Acquire premium-brand store in Northeast China
Sept 15, 2015 Baoxin China Grand 9,768 mRMB Completed
Enhance brand portfolio with Baoxin’s BMW location network
Mar 31, 2015 Hainan Jiahua Zhongsheng 455 mRMB Completed
Access Hainan auto market and enhance Lexus location network
Source：Announcements and reports of companies

11. Emerging sectors
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Parallel
Import
- Importing cars without OEM’s
permission to provide more and
cheaper choices
- Risks: regulative barriers, limited
car sources, immature maintenance
systems
- E.g., traditional dealers, general
distributors
New
Energy
Car
O2O
Sale
IOV &
Smart Car
- Exploiting digital technologies and
Internet to enable more convenient
driving experience
- Risks: safety concerns, regulation,
no unified standards
- E.g., internet enterprises, OEMs
- Cars using cleaner energies
(mainly electricity)
- Risks: technology bottleneck,
infrastructure requirements, capital
barriers
- E.g., OEMs(major and minor)
- Buying cars from online stores and
getting car offline
- Risks: capital requirements,
undeveloped habits
- E.g., traditional dealers, OEMs, e-
commerce platforms, start-ups

12. Company Overview
NAME Zhongsheng Group Holding Limited
CATEGORY Automobile Retailing, Maintenance & Repair
LISTING DATE March 26, 2010
MARKET CAPITALIZATION 15.541 Billion HKD
STOCK PRICE 7.240 HKD
PRICE-EARNING RATIO 29.31 (based on 2015 annual earning)
PRICE-BOOK RATIO 1.17
DIVIDEND YIELD 0.69%
52-WEEK RANGE 3.170 – 8.380
INDEX CONSTITUENT HSCI, Index: Consumer Goods, HSHKMI, HSGCI
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Source：AASTOCKS，as of September 30, 2016

13. Price Trend
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Source：Bloomberg，Rearranged, as of September 23, 2016
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16
HSINDEX 881.HK

14. Income Statements
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KRMB 1H2016 1H2015 2015 2014
Revenue 31,742,203 100.0% 26,886,947 100.0% 59,142,607 100.0% 54,786,660 100.0%
Car Sale Revenue 27,553,189 86.8% 23,241,798 86.4% 51,842,665 87.7% 47,961,591 87.5%
(Profit Margin) 3.0% 2.7% 2.6% 3.3%
Post-sale Revenue 4,189,014 13.2% 3,645,176 13.6% 7,299,942 12.3% 6,825,069 12.5%
(Profit Margin) 47.8% 45.3% 45.5% 46.9%
Gross Profit 2,824,651 8.9% 2,275,623 8.5% 4,669,193 7.9% 4,774,823 8.7%
Other Incomes 560,972 1.8% 501,397 1.9% 1,104,143 1.9% 944,500 1.7%
SDA Expense (1,938,483) -6.1% (1,709,973) -6.4% (3,763,409) -6.4% (3,354,945) -6.1%
Operating Profit 1,447,140 4.6% 1,067,047 4.0% 2,009,927 3.4% 2,364,378 4.3%
Finance Cost (487,027) -1.5% (610,940) -2.3% (1,295,697) -2.2% (1,272,568) -2.3%
Income Tax (281,905) -0.9% (135,650) -0.5% (234,329) -0.4% (314,727) -0.6%
Net Income 612,981 1.9% 310,405 1.2% 460,964 0.8% 750,905 1.4%
Source：Annual and Interim Reports, Rearranged

15. Income Forecast
2016E 2017E 2018E
Revenue(kRMB) 73,756,689 80,159,776 83,840,340
YoY Change 24.7% 8.7% 5.0%
Net Income(kRMB) 1,092,641 1,707,162 2,005,418
YoY Change 137.0% 56.2% 17.5%
EPS(RMB) 0.51 0.80 0.93
P/E 19.25 12.32 10.49
P/B 1.54 1.37 1.21
ROE 8.8% 12.1% 12.5%
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16. Valuation Comparison
Market
Cap
Price P/E P/B
6 Months Ended June 30, 2016
Revenue
(kRMB)
ROE(%) ROA(%)
881.HK Zhongsheng 15.541B 7.240 29.31 1.17 31,742,203 5.47 1.63
1293.HK Baoxin 6.189B 2.420 22.86 1.07 10,871,401 N/A N/A
3836.HK Harmony 5.940B 3.770 8.22 0.86 4,928,161 5.15 2.76
1828.HK DCH 5.771B 3.150 10.13 0.64
20,121,000
(kHKD)
2.44 0.81
1728.HK Zhengtong 5.437B 2.460 7.47 0.54 14,596,154 2.94 1.01
3669.HK Yongda 5.284B 3.570 8.67 1.06 18,709,529 8.79 2.11
Category：Automobile Retailing, Maintenance & Repair, Market cap more than 5B
16Source：AASTOCKS，Results Announcements of Companies，as of September 30, 2016

17. Valuation Comparison
17
7
9
11
13
15
17
19
21
23
28-Sep-15 28-Oct-15 28-Nov-15 28-Dec-15 28-Jan-16 28-Feb-16 28-Mar-16 28-Apr-16 28-May-16 28-Jun-16 28-Jul-16 28-Aug-16
881 1728 3836 3669
Source：Bloomberg，Results Announcements of Companies，Rearranged
P/E

18. Valuation Comparison
• Zhongsheng maintains a higher level of P/E (from 15
to 20 times) than those of its competitors (from 7 to
11 times)
• The high valuation multiple of Zhongsheng probably
benefits from concentrated and stably developing
business, while rivals’ strategies are more diversified.
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19. Summary
• We can expect a stable auto market and recovered
revenue for Zhongsheng. The net income for 2016FY
will be at least 1,225 million RMB. If we give a P/E
from 15 to 20, then the price should be 9.96 to 13.28
HKD.
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20. Author Contact
ZENG Siyang, Michael
Research experience in Guotai Junan International and
Guosen H&S
Email zengyoya@gmail.com
LinkedIn https://hk.linkedin.com/in/zengsiyang
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