Investment positives

We are upbeat on Yongda’s new business expansion in auto services amid the industry consolidation, after the companycompletes its back-door listing in the A-share market via Yangtze New Materials. Initiate coverage with a BUY rating.Our TP is Rmb15.6, implying 30x 2016e P/E.

Stronger earnings upside in auto dealership; gross margin of new car sales to bottom out. In the nearterm, the auto dealer sector is most sensitive to interest rate cuts due to its high gearing ratio. Moreover, auto dealers’cautious expectation and a recovering auto market should ensure a low inventory in 3Q16. Auto dealers will likely enjoystrong earnings growth in 2016 thanks to lower financing cost and rebounding demand for PVs since May. In themedium term, the sector consolidation and favorable policies could drive leading dealers’ gross margin of new car salesto bottom out.

Continued optimization of core business mix; aftersales services to start transformation. With continuedefforts in adjusting its sales strategy and product mix, Yongda has proactively deployed in the aftermarket business witha high gross margin; its blended gross margin will likely increase as the GP contribution from new car sales droppedfrom 44% in 2013 to 33% in 2015 and is expected to further decline to <30% in 2016. Moreover, Yongda has alreadystarted its own sales of auto parts and entered businesses with a high gross profit like maintenance products. With anetwork/channel expansion, the earnings of its self-operated business will likely see rapid growth on a large user base.

Full deployment in emerging segments; M&A to drive long-term growth. Yongda centers its focus on autofinance (financial leasing and commission agency services), used cars and independent aftersales businesses. It alsopartners with well-known e-commerce players to improve its deployment in O2O network. The Rmb3.5bn proceedsraised from the share offering will be all used to fund the financial leasing business, which targets to contribute a profitof Rmb400mn and interest-earning assets of Rmb10bn in 2020. We expect Yongda’s used car business to maintainrobust growth driven by its wholesale, retail and online channels as well as favorable policies.

Financials

We expect the company’s 2016/17 net profit to be Rmb801mn/Rmb1bn, implying a YoY growth of 56.9%/25.1%.

Valuation and recommendation

Yongda’s market cap, valuation and operating capabilities would make it a good choice for A-share investors. Weinitiate coverage of the stock with a BUY rating. Our TP is Rmb15.6, implying 30x 2016e P/E.

Risks

Uncertainty in backdoor listing; management risk brought by M&A; new business expansion disappoints.