Profit recovery among Chinese auto dealers is still underway, but it will take longer

Overview

This report focuses on auto dealers in China and the Asia Pacific region. Its core view is that after the 2025 earnings trough, there may still be a recovery in 2026, but the pace of recovery will be slower than the market expects. Supporting factors include dealer network consolidation, lower sales targets, the relative resilience of after-sales maintenance services, and rising profit contribution from Chinese-brand EVs. Drag factors include aging luxury ICE models, high oil prices that weaken willingness to buy gasoline vehicles, limited contribution from BBA next-generation EVs in China, and new-car margins and commission income coming in below expectations.

Core views

The report maintains the trough-to-recovery framework, but emphasizes a lower recovery slope. Improvement in the new-car business will no longer depend mainly on EVs from global brands such as BMW, Mercedes-Benz, and Audi; instead, it will rely more on EVs from Chinese brands such as Huawei Aito and Geely. Yongda benefits from higher exposure to EV-related businesses, but after-sales revenue may slow due to store closures; Meidong still needs more time for new-car margin recovery, Porsche sales may continue to decline, and BMW new-car sales are still expected to remain loss-making; Zhongsheng faces relatively high goodwill and intangible asset impairment risk.

Analysis framework

The report evaluates Yongda, Meidong, and Zhongsheng target prices through scenario analysis and a DCF valuation framework, and combines brand mix, EV penetration, dealer network, after-sales services, inventory turnover, margins, commission income, and asset impairment risk to assess the earnings recovery path.

Methodology notes

• Valuation methodsDCF

  discounted cash flow valuation

  Yongda and Meidong target prices both come from a base-case DCF model; key assumptions include WACC, cost of equity, cost of debt, and perpetual growth rate.

• scenario analysisRisk Reward

  bull / base / bear scenarios

  The report uses bull, base, and bear scenarios to characterize how changes in new-car margins, EV store expansion, after-sales service revenue, brand sales, and price discounts affect valuation.

• earnings forecastEarnings revision

  downward earnings revisions

  The report cuts 2026-2027 earnings forecasts to reflect lower-than-expected new-car margins and commission income, and introduces 2028 estimates.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Yongda Automobiles Services (3669.HK)

  Key covered company; target price cut

  Strengths

  China's largest BMW dealer, and may gain share during industry consolidation; relatively high exposure to EV-related businesses should support long-term growth.

  Weaknesses

  New-car margins are still low in 2026, luxury vehicle recovery remains weak, and store closures may weigh on after-sales revenue growth.

  Comparison

  Compared with Zhongsheng, Yongda has a lower share of goodwill and intangible assets; compared with Meidong, Yongda has a more aggressive EV penetration target.

  Risks

  BMW and Porsche sales may come in below expectations, price competition among luxury dealers may intensify, and EV store expansion may consume capital expenditure without reaching break-even.

• China MeiDong Auto Holdings Ltd (1268.HK)

  Key covered company; target price cut

  Strengths

  Its fast inventory-turnover discipline helps maintain healthy operating cash flow; the single-city, single-store strategy can reduce intra-city competition.

  Weaknesses

  Porsche dealer sales may continue to decline in 2026, BMW new-car sales are still expected to be loss-making, and new-car margin recovery will take longer.

  Comparison

  Meidong's goodwill and intangible assets account for about 3%, below Yongda and Zhongsheng; however, pressure on its luxury-brand new-car business is clearly significant.

  Risks

  Mid-tier brand sales may be weaker than expected, luxury dealer price competition may be more intense than expected, luxury ICE market share may be eroded faster by EVs, and after-sales customer retention may decline.

• Zhongsheng Group Holdings (0881.HK)

  Peer covered company; recent target price cut to HK$10.5

  Strengths

  It plans to lift 2026 EV sales penetration to 16% through Huawei Aito and Geely, and still has a foundation in after-sales services and network scale.

  Weaknesses

  Goodwill and intangible assets together account for a relatively high share of total assets, making impairment risk more pronounced if luxury ICE vehicles weaken.

  Comparison

  Zhongsheng's goodwill and intangible assets account for 14.5%, above Yongda's 6% and Meidong's 3%.

  Risks

  If luxury ICE vehicle sales weaken further, additional impairment costs could arise; although this would not affect cash flow, dividend payouts could be pressured if payout ratios are tied to reported earnings.

Key data

• report date2026-04-08The report body shows a publication time of April 8, 2026 10:25 AM GMT.
• Yongda target priceHK$1.30Derived from the DCF base case, down 32% from the prior HK$1.90.
• Yongda earnings estimate changedown 42%-47% for 2026-2027Mainly reflects lower-than-expected new-car margins and commission income.
• Meidong target priceHK$1.50Derived from the DCF base case, down 12% from the prior HK$1.70.
• Meidong earnings estimate changedown 11%-12% for 2026-2027Mainly reflects lower-than-expected new-car margins and commission income.
• Yongda DCF key assumptions13% WACC; 15.3% cost of equity; 7.7% after-tax cost of debt; -2% perpetual growth rateThe report says the other key assumptions remain unchanged.
• Meidong DCF key assumptions13% WACC; 15.3% cost of equity; 7.7% cost of debt; -2% perpetual growth rateUsed for Meidong's base-case DCF valuation.
• Zhongsheng DCF key assumptions12.1% WACC; 15.3% cost of equity; 4.7% cost of debt; 30% target leverage ratio; 1% perpetual growth rateDisclosed in the report's valuation methodology and risk sections.
• Zhongsheng goodwill and intangible assets14.5% of total assets combinedAs of end-2025, goodwill accounted for 6.8% and intangible assets for 7.6%, higher than Yongda's 6% and Meidong's 3%.
• Yongda EV target50% EV sales penetration target over the next 1-2 yearsThe report says Yongda is actively expanding its Chinese EV brand business.
• Zhongsheng EV target16% EV sales penetration in 2026Sources include Huawei Aito and Geely.
• Meidong EV storeto open its first Aito EV store in 2Q26The report says Meidong will ultimately open its first EV store.

Impact & implications

The investment implication is that the earnings inflection point for Chinese auto dealers has not been ruled out, but the quality of the recovery will depend more on brand structure and EV transition execution. Dealers with Chinese-brand EV exposure, lighter capital expenditure, healthy inventory turnover, and resilient after-sales businesses are more likely to withstand pressure from the decline in luxury ICE vehicles. By contrast, companies with high exposure to luxury ICE vehicles, widening discounts, and higher asset-impairment pressure may face valuation and dividend pressure.

Risks

• Luxury ICE vehicle demand may recover more slowly than expected, especially for key brands such as BMW, Porsche, Lexus, and Mercedes.
• High oil prices weaken consumers' willingness to buy gasoline vehicles and delay the recovery in the new-car business.
• Next-generation BBA EVs may offer limited help to Chinese dealers, for example BMW iX3 deliveries in China are delayed until late 2026, while Mercedes CLA EV post-launch monthly sales are only 352 units.
• Price competition among luxury dealers may intensify, and wider discounts may further erode new-car margins.
• EV store expansion may require substantial capital expenditure but may not reach break-even in the near term.
• After-sales service revenue may come under pressure from store closures, lower customer retention, or changes in auto-finance products.
• If luxury ICE vehicle sales continue to weaken, Zhongsheng may face additional goodwill or intangible-asset impairment.
• There may be potential business relationships between the research firm and the covered companies, so investors should pay attention to conflict-of-interest disclosures.

What to watch

• Whether 2026 luxury ICE vehicle price discounts narrow and whether new-car gross margins can turn positive or improve.
• The delivery pace and sales performance in China of global-brand EVs such as BMW iX3 and Mercedes CLA EV.
• The actual increase in sales penetration and profit contribution from Chinese-brand EVs such as Huawei Aito and Geely.
• The speed at which Yongda advances toward its 50% EV sales penetration target and the intensity of capital expenditure.
• Meidong's Porsche sales, BMW new-car losses, and the operating performance of its first Aito EV store.
• Signs of goodwill and intangible-asset impairment at Zhongsheng, and the impact of reported earnings changes on dividends.
• After-sales traffic, ASP, customer retention, and the effect of store closures on revenue growth.
• Changes in auto-finance commission income, especially the impact after high-interest-rate, high-commission products are discontinued.