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Issuer Flash: Zhongsheng Group Holdings Limited

Issuer: Zhongsheng Group Holdings | Document: Issuer Flash | Date: 2026-09-04 | Event: H1 2026 Results

Report date: 2026-09-04 Event date: 2026-08-31 Event title: H1 2026 Interim Results

1. Flash Conclusion

Zhongsheng’s H1 2026 interim results provide evidence that the acute new-car margin problem seen in 2025 has eased, but they do not yet demonstrate a restored earnings model or resolve the liquidity read-through for unsecured offshore creditors. Revenue fell 18.5% year on year to RMB63.0bn as vehicle volumes contracted, while total gross profit rose 20.0% to RMB5.05bn. The key improvement was a narrowing of the new-car gross loss to RMB631m from RMB2.39bn in H1 2025. After-sales gross profit also rose 2.7% to RMB5.59bn and again exceeded group gross profit, underlining its role as the operating support.

The offset is that finance and insurance-related commission income fell 78.7% to RMB392m. That decline, together with lower revenue, reduced operating profit by 57.8% to RMB804m and profit attributable to owners by 89.1% to RMB111m. Operating cash flow fell to RMB618m from RMB6.57bn a year earlier, and the company-defined free-cash-flow measure was a RMB735m outflow after capital expenditure and lease payments. Thus, the result shows a better front-end vehicle gross margin but a materially weaker aggregate earnings and cash-conversion outcome.

The balance-sheet movement is cautiously constructive at the consolidated level: inventory, total borrowings and gearing all declined. However, total cash also fell to RMB17.0bn, RMB13.4bn of assets remained pledged, and the filing does not provide parent-level cash, foreign-currency liquidity, committed-undrawn offshore facilities, or an upstreaming plan. The 2028 offering circular identifies Zhongsheng Group Holdings Limited, a Cayman Islands company, as issuer of the notes; lower consolidated debt and bond repurchases do not establish debt-service resources at that obligor. The prior cautious lower-end investment-grade view therefore remains appropriate.

2. Earnings Recovery Is Partial

The operating picture is mixed. New-vehicle volume declined 17.6% to 188,463 units and pre-owned volume fell 35.9% to 71,302 units. New-car revenue declined 20.3% to RMB46.2bn and pre-owned revenue declined 28.4% to RMB4.31bn. Yet the new-car gross loss narrowed by RMB1.76bn to RMB631m. Management attributes this to less adverse purchase-versus-sale pricing and a restructured new-car portfolio. That is an important improvement relative to the FY2025 gross loss, but a gross loss remains a constraint on the customer-acquisition and network-utilisation channel.

After-sales services were more resilient. Revenue from maintenance, warranty and collision repair rose 0.8% to RMB11.54bn, and gross profit increased to RMB5.59bn from RMB5.44bn. The filing attributes this to a higher value per visit and lower cost structure. This supports the established view that service and collision-repair economics are Zhongsheng’s principal earnings buffer. It does not, however, disclose service absorption, profitability by brand, the mix of paid versus warranty repair, or the economics of external-customer and insurer traffic. Those gaps matter because the after-sales franchise must carry more of the earnings burden while commission income is impaired.

The decline in commission income is the main reason to avoid interpreting the gross-margin improvement as a full recovery. Commission income from auto insurance, financing and registration services fell by RMB1.45bn year on year after industry-policy changes reduced auto-financing commission rebates. The company states that per-vehicle cross-selling profit has stabilised sequentially since the second half of 2025, but the H1 disclosure does not quantify that sequential change. Operating margin consequently fell to 1.3% from 2.5%, despite an 8.0% group gross margin versus 5.4% a year earlier.

H1 metric 2026 H1 2025 Credit reading
Revenue RMB63.0bn RMB77.3bn Lower volumes and selling prices remain a drag.
New-car gross loss RMB631m RMB2.39bn Material improvement, but the front-end business is still loss-making.
After-sales gross profit RMB5.59bn RMB5.44bn Continues to support the operating floor.
Commission income RMB392m RMB1.85bn The finance-fee reset remains a major earnings constraint.
Operating profit RMB804m RMB1.91bn Gross-margin recovery has not offset lower commission income.
Parent-attributable profit RMB111m RMB1.01bn Earnings headroom remains thin.

3. Cash Flow, Debt and Offshore-Creditor Read-Through

Total cash was RMB17.0bn at 30 June 2026, down from RMB20.4bn at year-end 2025. Net cash generated from operating activities was RMB618m, compared with RMB6.57bn in H1 2025. The filing explains that lower profit and reduced trade and bills payables caused working-capital use. The company-defined free-cash-flow measure was negative RMB735m after RMB812m of capital expenditure and RMB540m of lease payments. Lower inventories, at RMB14.6bn versus RMB17.9bn at year-end, assisted the balance-sheet adjustment, but average inventory turnover days increased to 40.9 from 38.3 in H1 2025. This is not evidence that cash flow is yet self-funding through a normalised profit base.

Bank loans and other borrowings declined to RMB27.35bn from RMB29.54bn, including RMB14.02bn classified as current liabilities; gearing decreased to 42.3% from 44.3%. The filing links the lower borrowings to reduced inventory-financing needs. Pledged assets were RMB13.4bn. These movements reduce consolidated leverage and inventory-financing reliance, but secured funding, pledged assets and the absence of entity-level liquidity detail remain relevant to structural subordination for the offshore notes.

The filing also reports that US$117.91m principal amount of the original US$600m 5.98% bonds due January 2028 had been repurchased by 31 July and cancelled on 6 August, leaving US$482.09m outstanding. The same filing says the RMB1bn first Panda-bond tranche, issued on 1 August 2024, has a three-year maturity. The lower principal outstanding is supportive, but the source of repurchase funding, remaining offshore liquidity and legal availability of mainland cash to the Cayman issuer are not disclosed.

4. Network Transition: Progress, but Capital and Execution Need Confirmation

The group closed, suspended, merged or transferred 66 underperforming traditional-brand stores in H1 and reported 461 brand dealerships at end-June, including 102 NEV-brand stores. It aims to operate 300 NEV-brand stores by year-end and targets a 35% NEV run-rate share in December. Management states that NEV brands contributed positive gross margin and represented 10.3% of H1 new-vehicle volume.

The targets are not proven to be cash-neutral. Brand-level store profitability, test-vehicle investment, lease commitments, closure cash costs and post-occupancy service attachment were not disclosed. The absence of an interim dividend is consistent with retaining capital, but not a binding capital-allocation hierarchy or refinancing plan. The directly related SSC discussion is only partly answered: interim earnings and working-capital data are now official, while GP3, absorption, OEM and refinancing tests remain unconfirmed.

5. What To Watch Next

6. Unverified / Pending

7. Sources