FY25 to regain traction after 2H24 slowdown

途虎-W(09690)\r

Maintain BUY.We project Tuhu’s2H24E adjusted net profit to fall9%YoY and32%HoH to about RMB243mn,as sales in3Q24could be weaker than marketexpectation.That has probably delayed some new store openings.On the otherhand,we expect Tuhu’s FY25E revenue to grow faster than FY24E,aided bynew stores opened in4Q24and more support to stores to lure consumers andnew franchised stores.The price cut in2H24has made Tuhu more cautious inprocurement negotiation for2025,which could help it lift GPM in FY25,in ourview.We believe Tuhu is still more resilient than most auto after-market serviceproviders amid economic uncertainties.\r

2H24E net profit to fall amid lower GPM.We expect Tuhu’s2H24Erevenue to rise8%YoY and7%HoH to about RMB7.6bn,as total storenumber may rise more than900in FY24to almost6,900at the end of2024.We project2H24E gross margin to fall1.5ppts HoH and0.7ppts YoY to24.4%due to tire products’price cuts to withstand weak consumption in3Q24.Meanwhile,we estimate selling expense ratio(as%of revenue)torise1.1ppts HoH to13.8%in2H24E to increase customer flow.Yet,we stillexpect total operating expense ratio in FY24E to narrow by0.4ppts YoY.Accordingly,we expect Tuhu’s2H24adjusted net profit(excluding share-based payment)to fall9%YoY to about RMB243mn,or FY24E adjusted netprofit of RMB601mn(+25%YoY).\r

Margins to recover in FY25E.We expect Tuhu’s revenue growth toaccelerate again at13%YoY in FY25E,especially with new stores opened4Q24and more support to stores.We project gross margin to improve from25.1%in FY24E to25.7%in FY25E,given lower procurement costs andhigher sales portions from the high-margin exclusive and private-labelproducts.We are of the view that Tuhu may still need to maintain a highselling expense ratio in FY25E,as the company may need to invest more innew media advertising to attract customers in lower-tier cities.Therefore,weproject Tuhu’s adjusted net profit to rise27%YoY to RMB763mn in FY25E,with a net margin of4.6%(+0.5ppts YoY).\r

Valuation.We maintain our BUY rating but cut target price from HK$26.00to HK$20.00,based on20x(prior17x)our revised adjusted FY25E EPS.Webelieve a higher P/E multiple could be justified given its proven capabilitiesto achieve more resilient earnings than peers amid consumption downgrade.There is still a discount against the valuation multiples for its US peersO’Reilly(ORLY US,NR)and Advance Auto Parts(AAP US,NR)of about30x.Key risks include slower network expansion,lower revenue and/ormargins than we expect,as well as a sector de-rating.