Story
Morgan Stanley Downgrades Chinese Luxury Auto Dealers on Weak Demand, Margin Pressure
Summary
The investment bank cut its ratings for several major dealers, including Zhongsheng Group and Meidong Auto, citing a sharp decline in vehicle sales and growing pressure on profitability from new cars and after-sales services.
Morgan Stanley downgraded its ratings on several major Chinese luxury auto dealers on Friday, citing persistent pressure from weak consumer demand and ongoing industry consolidation. The bank warned that fundamental demand is unlikely to improve in the near term, even after a significant sell-off in dealer stocks this year.
The Rating Changes
In a note to clients, Morgan Stanley analysts detailed the specific ratings actions, reflecting a more cautious outlook on the sector's profitability:
- Yongda Automobile Services (SEHK:3669): Downgraded to Underweight.
- Meidong Auto (SEHK:1268): Downgraded to Underweight.
- Zhongsheng Group Holdings (SEHK:0881): Downgraded to Equal-weight.
The bank noted that dealer share prices have already fallen by 50% to 60% year-to-date but sees further headwinds for the group.
Falling Sales and Margin Compression
AdThe downgrades are rooted in a sharp contraction in the market for internal combustion engine (ICE) vehicles, which fell 26% year-over-year in the first half of 2026, according to the report. The decline was attributed to cuts in government subsidies and high oil prices.
Sales volumes for major luxury brands saw significant year-over-year declines during the period: Mercedes-Benz volume fell 28%, BMW's joint venture dropped 18%, Audi's joint venture declined 16%, and Porsche sales were down 32%. This has squeezed new car margins, a problem compounded by falling auto finance commissions, despite manufacturers lowering suggested retail prices.
After-Sales Business Now a Concern
Morgan Stanley expressed new concerns that accelerated store closures could threaten the after-sales service segment, which has historically been a stable and high-margin source of revenue for dealers. The bank highlighted that Zhongsheng’s repair service revenue grew at a 10% compound annual growth rate (CAGR) from 2022 to 2025, with gross profit growing at a 13% CAGR over the same period.
Analysts worry that store closures could push customers toward independent repair shops, while weak consumer sentiment and lower new car sales may further reduce demand for after-sales services. While an earnings recovery is possible in 2027 following industry consolidation, Morgan Stanley sees Zhongsheng as better positioned than its peers due to its ability to expand after-sales services through independent repair centers.