Morgan Stanley downgrades Chinese luxury auto dealers on weak demand

Investing.com -- Morgan Stanley downgraded several Chinese luxury auto dealers on Friday, citing continued pressure from weak demand and ongoing industry consolidation.

The firm downgraded Yongda Automobile Services (SEHK:3669) and Meidong Auto (SEHK:1268) to underweight, while Zhongsheng Group Holdings (SEHK:0881) was cut to equal-weight.

China's retail sales of internal combustion engine vehicles fell 26% year-over-year in the first half of 2026, driven by cuts to government subsidies and high oil prices. Mercedes-Benz volume dropped 28%, BMW's joint venture fell 18%, Audi's joint venture declined 16%, and Porsche was down 32% year-over-year during the period.

New car margins at luxury auto dealers remained under pressure despite manufacturers cutting suggested retail prices since the beginning of the year. The margin compression stems from falling auto finance commissions.

Morgan Stanley said dealer share prices have fallen 50% to 60% year-to-date, but fundamental demand is unlikely to improve in the near term.

The firm expressed concern that accelerated store closures this year could hurt after-sales services, which had previously been a stable revenue source. Zhongsheng's repair service revenue grew at a 10% compound annual growth rate from 2022 to 2025, with gross profit growing at a 13% rate during the same period.

Store closures may push some customers toward independent repair shops, Morgan Stanley said. Weak consumption sentiment and declining new car volumes could further reduce after-sales demand.

The firm expects a potential earnings recovery in 2027 following industry consolidation. Zhongsheng appears better positioned than competitors due to its ability to expand after-sales services through independent repair centers.

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