On Monday (NASDAQ:MNDY), JPMorgan revised its stance on shares of Zhongsheng Group Holdings (881:HK) (OTC: ZSHGY), upgrading the company's stock rating from Underweight to Neutral and increasing the price target to HK$15.00 from the previous HK$8.50.
The adjustment reflects the firm's recognition of Zhongsheng's improved prospects, particularly in its new car sales business, which is expected to benefit from the robust sales momentum of AITO NEV products.
The financial institution anticipates a recovery in Zhongsheng's new car sales margins by 2025, driven by higher margins provided by Seres AITO. Management has indicated that the gross profit margin (GPM) on AITO NEV products is approximately 4.5%, a significant improvement compared to the zero or slightly negative margin for existing foreign brands.
JPMorgan also sees a long-term aftermarket opportunity for Zhongsheng with AITO products. As a result of these positive developments, the firm has increased its 2025-26 earnings estimates for Zhongsheng by roughly 13%-16%. The new price target of HK$15 is based on a 7.5 times 2025 estimated P/E ratio, up from the previous 5 times.
Despite the conservative nature of this valuation—still one standard deviation below Zhongsheng's historical average—the higher multiple now reflects a more optimistic view on China's auto sector and Zhongsheng's partnership with Seres AITO.
The analyst notes that the recent rally in Zhongsheng's stock price likely already reflects the discussed positive factors. While JPMorgan has upgraded Zhongsheng's rating, it maintains a preference for other companies in the China auto sector, including XPeng (NYSE:XPEV), BYD (SZ:002594), Geely, and Nio (NYSE:NIO), and remains cautious about joint venture original equipment manufacturers (OEMs) such as Dongfeng Motor, Guangzhou Auto, SAIC, and BAIC.
InvestingPro Insights
Zhongsheng Group Holdings' recent upgrade by JPMorgan aligns with several key metrics and insights from InvestingPro. The company's P/E ratio of 11.67, and an even lower adjusted P/E of 9.31 for the last twelve months as of Q2 2024, supports JPMorgan's view of a conservative valuation. This low earnings multiple, highlighted as an InvestingPro Tip, suggests potential upside if the company's prospects continue to improve as JPMorgan predicts.
The company's significant dividend yield of 5.87% and its history of raising dividends for 7 consecutive years, as noted in InvestingPro Tips, could attract income-focused investors. This consistent dividend policy aligns with the company's profitability over the last twelve months and analysts' expectations of continued profitability this year.
Zhongsheng's recent stock performance has been strong, with InvestingPro data showing a 17.61% price total return over the last three months. This aligns with JPMorgan's observation of a recent rally in the stock price. However, the InvestingPro Tip indicating that the RSI suggests the stock is in overbought territory might warrant caution for short-term investors.
For readers interested in a more comprehensive analysis, InvestingPro offers 13 additional tips for Zhongsheng Group Holdings, providing a deeper understanding of the company's financial health and market position.
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