When we last wrote about Lentuo International (NYSE: LAS), the stock had just pulled back to support in the mid-$4 range after breaking its post-IPO downtrend. Over the past two weeks the stock has broken above $6 and we believe this is the beginning of a major trend shift in the stock that will lead to much higher prices in the months ahead.
Over the past several months LAS has been using the capital it raised in its December 2010 IPO, led by Cowen & Co. and HSBC, to expand its dealership network in both Beijing and other major cities in China. The Company has already opened a newly-constructed, or greenfield, FAW-Volkswagen dealership in eastern Beijing and acquired a controlling interest in a high-sales Honda dealership in Tianjin just a few weeks later in late June.
As part of its aggressive expansion plan, the Company now has LOIs in place to acquire a top-performing Audi dealership in Zhejiang Province and an FAW-VW dealership in Guangdong Province. The Company also signed an equity transfer agreement to acquire a Mazda dealership in Beijing. Additionally, construction is already underway on another greenfield FAW-Volkswagen dealership in Beijing. All four of these dealerships are anticipated to contribute sales in the fourth quarter this year.
With the continued successful execution of its growth strategy, including the Company’s recent entrance into the lucrative vehicle leasing market, LAS is well-positioned to capitalize on China’s surging demand for mid-line and luxury vehicles. Although the astounding growth experienced by China’s car market in 2010 has moderated somewhat, demand for mid-line and luxury vehicles remained robust during the first half of 2011, with sales growth outpacing China’s total vehicle market. J.D. Power and Associates projects that luxury car sales in China will nearly double over the next four years, from 900,000 vehicles in 2011 to more than 1.6 million vehicles in 2015. To meet this increased demand, LAS is expanding its luxury dealership mix to include other luxury brands, including BMW and Mercedes.
Currently, China’s passenger vehicle penetration remains low, at 70 vehicles per 1,000 people as compared to 256 in Korea, 325 in Japan, and 450 per 1,000 people in the United States. At a long-term macro level, there is plenty of room for China’s vehicle market to expand exponentially, particularly in the nation’s fast-growing second- and third-tier cities.
Bottom line, LAS is well on track for another record year of revenues and earnings. The Company expects to generate total revenues of RMB 3.5 billion to 4.0 billion, or $541 million to $618 million USD, for fiscal 2011. At today’s market cap the Company is trading for less than a third of sales and with a single digit P/E that is a fraction of the earnings multiple of its peers.
LAS is positioned to enter fiscal 2012 with a total of at least 6 new dealerships generating sales for the Company. In comparison the expected record revenue and earnings performance for fiscal 2011 is being generated mostly by the Company’s original dealership network, with modest contributions from a handful of the new locations. With the full-year revenue contributions from the full slate of new acquisitions factored in, 2012 should be a massive growth year for LAS in both revenues and earnings. To discover more about why RedChip analysts like the Company at current levels, download RedChip’s recently published initial report on LAS.
Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visithttp://www.redchip.com/disclosures.asp?src=rcv.