DCH has high hopes for 2H14 in terms of earnings

Its primary businesses are on track.

Dah Chong Hong (DCH) has a sunny outlook for the second half of 2014, as it sees solid and stable earnings on the way, generally speaking.

According to a research note from Nomura, DCH noted that its auto and food businesses are both on track.

For instance, for its food business - DCH expects very stable growth of c.20% this year, although sales of high-end food products have slowed due to the central government’s initiative to clampdown official waste and extravagance.

The company also looks to set up a new regional office in major cities to expand its geographic coverage for direct distribution and develop new sales channels.

The company is one of the HK's leading business conglomerates, with a strong focus on auto dealership, food, and other consumer products businesses.

The company's operations span across HK, Macau, China, Taiwan, and other major countries in Asia such as Japan and Singapore. Established in 1949, DCH is now listed on the HKEX Main Board.

Here's more from Nomura:

Occupy central campaign - DCH has seen slower traffic over the past two months to its HK auto dealership outlets located along Gloucester Road, where protesters mainly gathered. This is despite its stable food business which is less impacted by the event.

Overall, DCH does not expect the campaign to have a significant impact on its earnings outlook. According to the company, revenues derived from HK contributed c.20% to 1H14 total revenues.

Auto business:

Passenger vehicles (PV) –The auto dealership business remained a major revenue driver for the company and accounted for c.78% of total revenue in 1H14. Despite

slow traffic in Jul and Aug, DCH saw sales recover in Sep, with blended new car sales margins remaining stable at low single-digits.

While inventory days was high at two months in June, DCH expects inventory pressure to gradually ease to normal levels of 1.5 months within 2H14 when demand picks up.

DCH continued to see strong growth in its after-sales service revenue of c.35%, with stable gross margins of 35-40%. In terms of its network expansion strategy, DCH looks to expand its dealership network through M&As, especially in Tier-1 cities where small dealers are barely profitable.

– Commercial vehicles (CV) – DCH sees softening CV demand in China owing to decelerating FAI growth. On the other hand, management believes replacement demand in HK should remain intact, thanks to the HK government’s HKD11.4bn exgratia payment scheme to replace obsolete CVs to improve air quality.

Overseas expansion - The company also aims to expand both its PV and CV businesses in the overseas market. So far, significant progress has been made in Taiwan with good margins and volume growth.

Going forward, DCH looks to explore new business opportunities in Myanmar and other countries in the Indo-China region.

On the other hand, in Canada, the company divested its dealership business in Vancouver last year. By selling the remaining property earlier this year, DCH recorded a one-off disposal gain of HKD85mn.