Stocks I love: China Yongda Automobiles Services
China Yongda Automobiles Services sells new and used cars, and an increasing proportion of its revenue comes from service and parts
The company’s profit rose 110 percent in the first half of this year
Mike Kerley, manager of funds including Henderson Far East Income (HFEL) and Janus Henderson Asian dividend income (GB00B6193536) explains why he invests in car dealerships China Yongda Automobile Services (HK: 3669)
“With per capita incomes rising, the demand for cars in China is very strong, sales rose in the first five months of 2021 by 36 percent compared to the previous year. The euphoria surrounding electric vehicle manufacturers has also caused their stock prices to soar, driving valuations above their long-term averages.
However, this is a very competitive industry, and as the jury has yet to determine who the long-term winners will be, we prefer to bring these demand dynamics through dealers rather than manufacturers.
China Yongda Automobiles Services, for example, is a nationwide dealer that focuses on the luxury segment of the auto market with key brands such as BMW, Porsche, Audi, Benz and Lexus. Revenue is generated from the sale of new and used cars, with an increasing share coming from services and higher margin parts of a recurring nature that shield the revenue stream from cyclical downturns.
China Yongda Automobiles Services’ positive earnings announcement on July 7th indicated that earnings will increase at least 110 percent year over year in the first six months of 2021. This proves the positive industry dynamics – especially in the luxury segment.
At a significant valuation discount compared to the automakers, we like China Yongda Automobiles Services because it allows us to get involved in the fast-growing automotive market without the risk of betting on the success of a single brand. And its strong cash flow generation offers a generous dividend – the icing on the cake. “
China Yongda Automobiles Services accounted for 1.85 percent of Henderson Far East Income’s assets at the end of the last six months on February 28, 2021.