Morgan Stanley has downgraded the stock ratings of multiple Chinese luxury auto dealers, attributing the moves to continued weak retail demand, shrinking dealer margins and an ongoing consolidation in the sector. The brokerage cut Yongda Automobile Services (SEHK:3669) and Meidong Auto (SEHK:1268) to underweight and lowered Zhongsheng Group Holdings (SEHK:0881) to equal-weight.
The firm highlighted a sharp pullback in China’s retail market for internal combustion engine vehicles, which declined 26% year-over-year in the first half of 2026. The drop has been driven in part by reductions in government subsidies and elevated oil prices, Morgan Stanley said. The bank noted brand-level volume falls over the period: Mercedes-Benz down 28%, BMW’s joint venture off 18%, Audi’s joint venture down 16% and Porsche lower by 32% year-over-year.
Despite manufacturers trimming suggested retail prices since the start of the year, new-car margins at luxury dealers remain under pressure. Morgan Stanley attributed the compression primarily to falling auto finance commissions rather than sticker price adjustments.
Investor reaction has already been severe: dealer share prices have fallen between 50% and 60% year-to-date, according to the bank. Still, Morgan Stanley warned that fundamental demand is unlikely to improve in the near term.
The research note also raised concerns about an accelerated pace of store closures in 2026 and the implications for after-sales services. Historically, after-sales work has been a relatively stable revenue stream for dealers. The bank pointed to Zhongsheng’s after-sales performance as an example: repair service revenue grew at a 10% compound annual growth rate from 2022 to 2025, with gross profit rising at a 13% compound annual rate over the same period.
Morgan Stanley cautioned that further closures could push customers toward independent repair shops, eroding a previously dependable source of margin and revenue. The firm added that weak consumption sentiment combined with falling new-car volumes could further reduce demand for after-sales services.
Looking ahead, Morgan Stanley flagged the potential for an earnings recovery in 2027, contingent on industry consolidation. Within the dealer group, Zhongsheng was identified as relatively better positioned to expand after-sales services through independent repair centers, a capability the bank sees as a competitive advantage as the market restructures.