Morgan Stanley has released a research report indicating that capacity reductions in mainland China's automotive industry are driving sector consolidation, with luxury car dealers expected to be the primary beneficiaries.
The investment bank anticipates accelerated dealership closures in 2025-26, as comprehensive profit margins for new vehicles have already fallen below 1% in the first half of this year, making the business unattractive for smaller dealers. Automakers are also planning to reduce their mainland dealer networks by 10% to 30% by the end of 2026, a consolidation that will favor financially robust dealers.
Morgan Stanley believes that authorized dealers like ZHONGSHENG HLDG (00881) will continue to dominate the automotive accident repair business, while independent repair shops such as TUHU-W (09690) can capture market share in maintenance and minor repair segments.
Excluding the pandemic-affected period of 2020-21, ZHONGSHENG HLDG's repair services gross profit achieved a compound annual growth rate of 14% from 2017 to 2024, and is expected to continue supporting core profitability in the future.
The firm believes ZHONGSHENG HLDG has finally reached a turning point after experiencing a four-year downturn cycle. Despite market concerns about continued profit decline, Morgan Stanley expects the group's 2026 earnings to rebound 67% year-over-year to RMB 4 billion, driven by new car profit margin recovery, the upward cycle of Mercedes-Benz and AITO models, and increased market share in accident repairs.
Meanwhile, declining capital expenditure requirements suggest that the expected 2026 dividend yield of 5% still has upward potential. The target price has been raised from HK$15 to HK$21, with an "Overweight" rating.
The bank also assigns TUHU-W an "Overweight" rating, expecting the company's earnings to achieve a compound annual growth rate of 25% from 2025 to 2027, based on mobile application user growth and franchise store expansion. The target price has been increased from HK$20 to HK$23.
For MEIDONG AUTO (01268), the target price has been lowered from HK$2.2 to HK$2.1, with an "Equal-weight" rating.
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