CICC released a research report stating that due to pressure on new vehicle profitability, the firm has lowered ZHONGSHENG HLDG's (00881) net profit forecasts for 2025/2026 by 35.1%/38.1% to RMB 24.64 billion/RMB 30.80 billion respectively. The current stock price corresponds to 14.3x/11.2x P/E ratios for 2025/2026. Considering the company's proactive brand portfolio adjustments, CICC maintains its outperform industry rating and HK$18.00 target price, representing 16.0x 2025 P/E and 12.6x 2026 P/E, with 12.0% upside potential from the current stock price.
The company announced its 1H25 results with revenue of RMB 77.322 billion, down 6.2% year-over-year, and net profit attributable to shareholders of RMB 10.11 billion, down 36.0% year-over-year. Affected by increased terminal discounts in the new vehicle business, 1H25 performance fell short of expectations.
**Revenue Structure Continues to Optimize with Steady After-sales Growth**
1H25 operating revenue reached RMB 77.322 billion, down 6.2% year-over-year. By business segment, new vehicle sales volume decreased 1.7% year-over-year to 229,000 units, with revenue declining 4.7% year-over-year to RMB 57.931 billion. The new vehicle business faced pressure on growth rates and per-unit revenue due to increased terminal discounts. Structurally, new vehicle brand portfolio adjustments saw AITO contributing 11,000 incremental units, with luxury brand sales accounting for 62.3% of total volume.
Used car sales volume increased 9.6% year-over-year to 111,000 units, while revenue declined 27.0% year-over-year to RMB 6.02 billion, primarily impacted by government trade-in policies where a large number of older vehicles lowered per-unit revenue. After-sales service revenue grew 4.4% year-over-year to RMB 11.445 billion, benefiting from increased service bay visits and higher average output per vehicle.
During this period of deep industry adjustment, the stable after-sales business effectively offset pressure from the new vehicle market.
**Profitability Under Pressure but Cash Flow Improved, Operational Efficiency Steadily Enhanced**
1H25 gross margin was 5.4%, down 0.5 percentage points year-over-year, mainly due to intensified market competition and worsening gross losses in the new vehicle business. By segment, new vehicle sales gross loss increased 20.0% year-over-year to RMB 2.388 billion, used car sales gross profit declined 58.4% year-over-year to RMB 257 million, while after-sales service gross profit grew 8.1% year-over-year to RMB 5.441 billion.
The company maintained stable period expense ratios, with selling/administrative expense ratios increasing 0.3ppt/0.1ppt year-over-year to 4.4%/1.4% respectively. 1H25 net cash flow from operating activities reached RMB 5.948 billion, up significantly by 103.3% year-over-year, reflecting improved operational efficiency.
With optimization of new vehicle sales structure and major OEM partners entering new product cycles, CICC believes the company's profitability is poised for recovery.
**Clear Medium to Long-term Growth Momentum with Deepening Strategic Layout**
The luxury vehicle customer base continues to expand with active customers reaching 4.54 million, up 15.2% year-over-year. The dealer network underwent deep optimization with 57 new dealerships and 20 new service centers added in the first half, of which 48 were luxury brands.
Looking ahead, as industry requirements for regulating irrational competition increase, CICC expects vehicle terminal prices to stabilize. Combined with the upcoming launch of new-generation German luxury brand products such as the Audi A5L and Mercedes CLA, the business is expected to see recovery.
**Risk Factors:** Continued intensification of new vehicle business competition, used car business progress falling short of expectations.