机构：花旗银行

　　评级：买入

　　目标价：27.43 港元

　　2017 results beat; TP lift to HK$27.43 (25% 18-20E EPS CAGR): ZSG’s 2017 netprofit came in with 80% YoY growth, beating our and consensus estimates by 4%and 11%, thanks mainly to better-than-expected gross margin (GPM +0.9ppt YoY to10.1%) and strong commission income (ZSG’s pre-tax margin +1.6ppt YoY to5.6%). Overall ZSG 2017 ROIC +3ppts YoY to 10.9%. We raise 18/19E NPestimate by 10%/15% and TP to HK$27.43 (from HK$25) mainly on higher GPMand commission income, and now expect ZSG to deliver 25% NP CAGR in 18-20E(vs. 18% previously), a. We foresee sequential ROIC improvement to 14% by2020E. Our forecasts are now 21%/26% ahead of consensus in 18/19E. MaintainBuy.

　　Sales-mix & GPM improvements intact: 2017 revenue up 21% YoY, in-line withexpectation, boosting up asset-turn by 0.15x YoY to 1.98x. ZSG’s 2017 new carsales revenue up 20% YoY on 13% YoY volume growth, and aftersales revenue up27% YoY. Gross margin expanded 0.9ppts YoY, and was 0.2ppt higher than ourand consensus forecast, with that for new car sales +0.7ppts YoY to 4.0% and thatfor aftersales +0.1ppts YoY to 48.9%. Other income up 39% YoY, ahead ofconsensus expectation at 35% YoY, likely thanks to higher-than-expectedcommission income. SG&A-to-revenue ratio slightly edged down 0.2ppts to 5.4%.

　　FCF likely bottomed, expect multi-year ROIC rerating: ZSG added 35 newstores and increased its total dealership to 286 by end-2017; with 31 additionsduring the year, ZSG now has 151 luxury dealership stores, exceeding that for itsmid-to-high-end brands for the first time. Even though this is at the cost of asignificant capex at RMB5.3bn in 2017, due to which ZSG recorded a negative FCF(RMB-71m) and lowered its dividend payout ratio back to 20% (from 30% in 2016),we believe this could further improve sales & profit mix going forward with 18-20EROIC up 1.1/1.0/1.0ppts YoY.

　　Catalyst: ZSG’s 2017 effective tax rate lowered 1.3ppts YoY as a result of lessloss-making stores (53% of stores were luxury in ‘17, +6ppt YoY). We expect betterluxury car sales can improve PBT margin and potentially lower the effective tax rate.