August 3, 2012 Auto Sector Cautious Buy · Sector Research | China Auto THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14,

Sector Research | China Auto

THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14, 2012

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only.

August 3, 2012

Auto Sector Cautious Buy

Be selective when picking auto stocks

Investment highlights

The passenger vehicle market is at the initial stage of a new growth cycle.

We believe the sales volume of passenger vehicles still enjoys considerable

growth potential, boosted by initial purchase demand, repeat purchase demand

and upgrade demand. However, the y-o-y growth rate of China’s passenger

vehicle sales volume will be regional-specific, and the median of the fluctuation

range of the y-o-y sales growth is poised to fall from 25% to 10%-15%. JV

brands, premium brands and the SUV segment are well-placed to outperform

due to the ongoing consumption upgrade.

The bus market experienced steady growth despite the industry-wide

weakness. The robust growth in demand for school buses has led to an

expansion of the bus segment’s growth potential in 2012. Coupled with stable

demand for public buses and considerable demand from overseas markets, we

believe there is still a good chance bus stocks will outperform in 2H12. It’s worth

noting that the unprecedented urbanisation process in China will drive up

medium and long-term demand for buses.

The heavy truck market is still dipping and waiting for demand to pick up.

Growth in the sales of heavy trucks has been decelerating since 2Q 2011.

Based on our estimate, 2012 full-year sales growth of heavy trucks is set to be

negative, especially as the sales condition during the peak season was

lacklustre. We are cautious about the heavy truck sub-sector in the short term,

as we expect full-year sales volume to slump by 10% to around 800,000 units in

2012. However, demand for heavy trucks may pick up in 3Q if the government

adjusts policies and increase investment in infrastructure construction.

We raised our rating on the auto sector and the passenger vehicle market

to “Cautious Buy”, and upgraded the heavy truck sub-sector to “Neutral”.

There is a good chance that sales of passenger vehicles will gradually recover in 2H

2012. Demand for buses will keep growing at a steady pace, and the prospect of the

heavy truck market will depend on the government’s infrastructure investment and

monetary policies. Divergence among these sub-sectors will continue, and we suggest

to closely watch companies set to benefit from the rapid growth of mid and high-end

brands and the SUV market. Our top picks include: Beijing WKW, SAIC Moto,

Changchun FAWAY, Great Wall Motor, Changan Automobile and Yutong Bus.

Exhibit 1: Valuations & forecasts

Ticker Company Rating Price (RMB)

EPS (RMB) PE (x)

2011 2012E 2013E 2011 2012E 2013E

002662 CH Beijing WKW Buy 21.20 1.02 1.34 1.76 20.7 15.8 12.0

600066 CH Yutong Bus Buy 23.33 1.75 2.17 2.59 13.3 10.7 9.0

600104 CH SAIC Moto Buy 15.51 1.83 2.07 2.36 8.5 7.5 6.6

600742 CH Changchun FAWAY Buy 21.92 2.02 2.37 2.89 10.8 9.2 7.6

601633 CH Great Wall Motor Buy 16.70 1.13 1.48 1.94 14.8 11.3 8.6

000625 CH Changan Automobile Buy 5.29 0.21 0.27 0.48 25.5 19.6 11.1

Source: Wind, Guosen Securities Economic Research Institute

Analyst

Zuo Tao +021-60933164 [email protected] S0980510120011

Sales Contact

Dan Weil Global Head of Institutional Sales and Trading Managing Director +852 2248 3588 [email protected]

Chris Berney Managing Director +852 2248 3568 [email protected]

Roger Chiman Managing Director +852 2248 3598 [email protected] Andrew Collier Director +852 2248 3528 [email protected]

Joe Chan Director +852 2248 3578 [email protected]

Cancy Kong Vice President +852 2248 3538 [email protected] Gary Wong Associate +852 2248 3548 [email protected] Ma Ning Associate +852 2248 3536 [email protected]

mailto:[email protected]

Auto Sector August 3, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14, 2012

Guosen Securities (HK) Bespoke translation by Guosen Securities (HK) strictly for use by its clients only

2

1 The passenger vehicle1 market is at the

initial stage of a new growth cycle

1.1 The sales volume of passenger vehicles still enjoys considerable

growth potential

The number of passenger vehicles per 1,000 people is still low in China. Generally

speaking, core forces driving up a country’s passenger vehicle sales include income

growth, the urbanisation process, infrastructure construction, etc. Boosted by these

factors, China has witnessed rapid popularisation of passenger vehicles since 2001, and

the sales volume of passenger vehicles enjoyed a CAGR of 28.2% since then. As of 2011,

there were 43 vehicles per 1,000 people in China, while in developed countries where the

rapid popularisation period of passenger vehicles has ended, the number of passenger

vehicles per 1,000 people reached about 400 units. This implies the sales volume of

passenger vehicles in China still has room for growth, even after considering various

unfavourable conditions China faces, including large population, unbalanced economic

development, limited resource supply, etc. Brand-new cars account for over 85% of

China’s passenger vehicle sales, and first-time buyers account for most of the new

passenger vehicle sales. In our view, the sales volume of passenger vehicles still enjoys

growth potential in China.

Exhibit 2: No. of vehicles per 1,000 people in 2011 by country Exhibit 3: Per capita disposable income in China’s urban areas

(1995-2011)

Source: Roland Berger, Guosen Securities Economic Research

Institute Source: NBSC, Guosen Securities Economic Research Institute

The median of the fluctuation range of the y-o-y growth rate of China’s passenger

vehicle sales volume is poised to fall, in our view. Following more than 10 years of

rapid popularisation, the penetration rate of passenger vehicles has risen significantly.

Given the already strong vehicle sales and production data, as well as restrictions

imposed by limited energy supply and infrastructure construction, the central

government’s focus in drafting auto policies might transfer from “ensuring steady sales

and production growth” to “adjusting the consumption structure”. Under such a scenario,

we are unlikely to see the government release aggressive auto-purchase stimulus

policies going forward. Moreover, as the number of vehicles surged in more developed

1 The passenger vehicle market includes the sedan, SUV and MPV segments in this report

2 I.S. Engine is a Chinese consulting and research company focusing on the auto market.

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coastal areas and tier-one cities, the construction of roads and parking lots is gradually

lagging. Coupled with rising oil prices, higher ownership costs and deteriorating traffic

conditions, demand for passenger vehicles is subdued to some extent. In our opinion, the

y-o-y growth rate of China’s passenger vehicle sales volume will be regional-specific, but

the median of the fluctuation range of the y-o-y sales growth is poised to fall from 25% to

10%-15%.

2 Initial-purchase demand, upgrade demand,

and repeat-purchase demand to drive

growth in China’s vehicle sales

The passenger-vehicle market in middle and western China is still at the initial

phase of rapid growth, where initial-purchase demand accounts for most of the

vehicle sales. As Western China lags far behind Eastern China in terms of economic

development, the passenger vehicle population in the middle and western regions,

especially in tier-three and tier-four cities is relatively small. In recent years, these regions

outperformed the national average in terms of both GDP and income growth, while at the

same time, the negative impact from various restraining factors, e.g. traffic and

environmental factors, is relatively limited. Under such circumstances, we expect

passenger vehicle sales in the middle and western regions to grow at a high rate going

forward. All the top seven provinces that witnessed the highest passenger vehicle sales

growth in 2011 are located in Middle and Western China. In our view, initial-purchase

demand will continue to account for most of the passenger vehicles sales in middle and

western China.

Upgrade demand and repeat-purchase demand is expected to grow in more

developed regions. Normally, repeat-purchase demand will grow after passenger

vehicle sales surge, as the average age of vehicles gradually increases. Although

first-time purchases still dominate China’s passenger vehicle sales (over 80%), the ratio

has been trending downward. With a growing number of households in tier-one cities and

other economically developed regions beginning to purchase their second family car,

upgrade demand and repeat-purchase demand will stimulate the growth in auto sales,

especially the sales of SUVs, MPVs and other mid to high-end passenger vehicles.

As such, initial-purchase demand, repeat-purchase demand and upgrade demand

will fuel China’s PV sales growth simultaneously. We expect newly added demand

dominated by first-time purchases will continue to grow at a rapid pace in middle China,

western China and other tier-four and five cities, while passenger vehicle sales growth

should ease in coastal areas and tier-one and two cities, as the penetration rate of

vehicles is already relatively high. Generally speaking, the continuous increase in

initial-purchase demand, repeat-purchase demand and upgrade demand will lead to a

shift of passenger vehicle sales mix towards higher-end segments, with the share of

SUVs, MPVs and other mid to high-end passenger vehicles in overall passenger vehicle

sales gradually expanding.



4

Exhibit 4: Per capital GDP and the y-o-y growth of passenger vehicle sales by province in 2011

Source: NBSC, CAAM, Guosen Securities Economic Research Institute

Exhibit 5: China’s passenger vehicle population by age (2006-2011)

Source: Roland Berger, Guosen Securities Economic Research Institute

2.1 The passenger vehicle market is at the initial stage of a new

growth cycle

China’s annual auto sales surged from 1.21 million units to 14.47 million units over

2001-2011, on the back of rising income levels and the unprecedented urbanisation

process. During this period, the domestic auto market actually experienced three growth

cycles in our view, under the combined impact of a number of factors, e.g.

macroeconomic conditions, consumption policies, credit policies and growing

environmental awareness. The first cycle began in 2001, when passenger vehicle sales

enjoyed blowout growth as family car purchases peaked for the first time, boosted by

favourable policies, and ended in 2004, as the industry faced hurdles due to overcapacity

problems and amid a fierce price war.

The second cycle extended from 2005 to 2008, during which period the growth of wealth

amid rapid economic development, booming property and stock markets stimulated

robust demand for vehicles, but demand was subdued due to the outbreak of the global

financial crisis in 2H 2008.

During the period from 2009 to 1Q 2012, the Chinese government launched the RMB4

trillion stimulus package and took a series of measures to support the auto market in

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5

hopes of stimulating domestic demand. Under such circumstances, minibus and

cost-effective passenger vehicle markets experienced explosive growth, although

industry sentiment weakened later as the government withdrew some stimulus measures

and tightened monetary policies in a bid to ease inflation pressure.

In our opinion, China’s passenger vehicle market hit an interim low, but has so far

entered the initial stage of a new growth cycle with considerable upside potential. We

believe new demand from middle and western China as well as tier-three and four cities,

and upgrade demand from coastal areas and tier-one cities will shore up auto sales. As

sales growth gradually moderates, mid and high-end models, especially the SUV

segment will outpace other passenger vehicle segments due to the structural change in

demand. We estimate China’s passenger vehicle sales to increase by 8.9% y-o-y to15.76

million units this year.

Exhibit 6: The passenger vehicle market is at the initial stage of a new growth cycle

Source: CAAM, Guosen Securities Economic Research Institute

Exhibit 7: The y-o-y sales growth of passenger vehicle models

Sales volume (‘000 unit) 2006 2007 2008 2009 2010 2011 2012E

Passenger vehicle 5,150 6,300 6,750 10,320 13,750 14,470 15,760

Sedan 3,810 4,730 5,040 7,460 9,490 10,120 11,080

SUV 230 360 450 660 1,320 1,590 1,920

MPV 190 230 200 250 450 500 560

Crossover PV 920 990 1,060 1,950 2,490 2,260 2,190

Y-o-y sales growth 2006 2007 2008 2009 2010 2011 2012E

Passenger vehicle 29.6% 22.3% 7.1% 52.9% 33.3% 5.3% 8.9%

Sedan 36.7% 24.0% 6.6% 48.0% 27.3% 6.6% 9.5%

SUV 16.8% 56.3% 24.8% 47.4% 100.4% 21.0% 20.5%

MPV 20.3% 18.5% -12.5% 26.1% 78.9% 11.7% 12.4%

Crossover PV 10.5% 7.6% 7.7% 83.2% 27.9% -9.4% -3.0%


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First growth cycle: the first cycle began in 2001, when passenger vehicle sales enjoyed blowout growth as family car purchases peaked for the first time, boosted by favourable policies, and ended in 2004, as the industry faced hurdles due to overcapacity problems and amid a fierce price war.

Second growth cycle: the second cycle extended from 2005 to 2008, during which period the growth of wealth amid rapid economic development, booming property and stock markets stimulated robust demand for vehicles, but demand was subdued due to the outbreak of the global financial crisis in 2H 2008.

Third growth cycle: During the period from 2009 to 1Q minibus and cost-effective passenger vehicle markets experienced explosive growth due to the government's new economic stimulus package, although industry sentiment weakened later as the government withdrew some stimulus measures and tightened monetary policies in a bid to ease inflation pressure.

We've entered a new growth cycle: new demand from middle and western China as well as tier-three and four cities, and upgrade demand from coastal areas and tier one cities will shore up auto sales. As sales growth gradually moderates, mid and high-end models, especially the SUV segment will outpace other passenger vehicle segments due to structural change in demand.



6

The passenger vehicle industry showed signs of recovery. The entire passenger

vehicle industry lacked momentum in 1Q 2012, with total passenger vehicle sales down

by 1.3% y-o-y. However, passenger vehicle sales enjoyed a y-o-y increase of 12.5% in

April and cumulative y-o-y growth of 1.9% over Jan-Apr. The main reasons why

passenger vehicle sales growth turned to positive over Jan-April compared to that over

Jan-Mar are because automakers launched more new models during the Beijing Auto

Show, and both automakers and dealers launched aggressive promotions. The industry

sentiment rebounded even if we exclude the low-base impact due to the Japan

earthquake last year, with the SUV and sedan segments leading the way.

Sales performances of different models, segments and companies continued to

diverge. SUV segments significantly outperformed other models in recently years, with

sales growth continuously outpacing that of other segments. On one hand, the ongoing

consumption upgrade and growing demand for a second family car will continue to boost

the SUV segment, but on the other hand, it’s also worth noting that competition will

intensify, as automakers will launch more models to grab a share of this booming market,

in our view.

Domestic brands and compact models lacked growth momentum. According to

relevant data, the sales volume of domestic passenger vehicle brands, domestic sedan

brands, and vehicles fitted with 1.6L and below engines fell by 3.2%, 3.7% and 1.2%

respectively over Jan-Apr. In contrast, the market shares of JV brands and premium foreign

brands, especially Germany and South Korean brands, expanded significantly. According

to our analysis, part of the reason behind this phenomenon is the withdrawal of some

subsidies and oil price spikes. Concurrently, the decline in the selling prices of mid-and-high

end models, as well as JV auto makers’ efforts to launch more entry level models in a bid to

diversify their product mix also exerted negative impact on domestic passenger vehicle

brands.

Exhibit 8: Monthly sales volume of passenger vehicles and

the y-o-y growth

Exhibit 9: Annual sales volume of passenger vehicles and the

y-o-y growth

Source: CAAM, Guosen Securities Economic Research Institute Source: CAAM, Guosen Securities Economic Research Institute

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Exhibit 10: Monthly sales volume of sedan vehicles and the

y-o-y growth

Exhibit 11: Monthly sales volume of MPVs and the y-o-y growth


Exhibit 12: Monthly sales volume of SUVs and the y-o-y

growth

Exhibit 13: Monthly sales volume of mini buses and the y-o-y

growth


Government policies will focus on the adjustment in the consumption structure.

Sentiment in the auto market is highly sensitive to government policies. For example, the

blowout growth of auto sales in 2009 and 2010, as well as the lacklustre auto sales data

in 2011 were all related to government policies. As the auto industry can usually exert

huge impact on related upstream and downstream sectors, with tightening property

policies already in place, encouraging auto purchases can help the government to

stimulate domestic demand and stabilise economic growth.

However, given the relatively high base so far, and restrictions from energy and

infrastructure factors gradually increasing, the focus of the government’s auto policies is

shifting from “securing growth” to “adjusting the consumption structure”. At present,

subsidies for buyers of energy saving vehicles are core policies Beijing implements to

support the passenger vehicle industry. The state council announced on 16 May that it

will continue to invest RMB6 billion in subsidising energy saving models. So far, only 49

vehicle models included in the seventh batch of energy saving models list released by

the government last October can enjoy subsidies. More models and related auto makers

will benefit from subsidy policies in our view, as the government plans to release a new

subsidy list soon.

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2.2 The auto market is under certain pressure due to previous

capacity expansion

Auto makers expanded production capacity aggressively in 2009 and 2010, as the rapid

growth in passenger vehicle sales aided by favourable policies created a severe

bottleneck in terms of production capacity. After two years of construction, most of the

new production lines are on schedule to go into operation in 2H12 and 2013. According

to expansion plans released by leading domestic passenger vehicle makers, their

production capacity will reach 14.58 million and 17.43 million units in 2012E and 2013E,

representing a y-o-y growth of 21.6% and 19.5% respectively.

Passenger vehicle production capacity of leading passenger vehicle companies is

expected to increase by 2.59 million and 2.75 million units respectively in 2012E and

2013E. The production capacity of JV brands will grow by 1.74 million units and 1.18

million units in 2012E and 2013E, while that of domestic brands will increase by 850,000

units and 1.57 million units respectively, indicating JV brands will contribute most of the

capacity growth. One reason why JV brands are expected see relatively rapid capacity

expansion is foreign JVs began to face capacity shortfalls since 2009 and 2010 as they

held a relatively cautious attitude towards capacity expansion in earlier years. These

companies moved to expand capacity in 2011, given stable growth in demand and sales

volume, and steady improvement in profitability.

Exhibit 14: Main passenger vehicle makers’ production

capacity and the y-o-y growth

Exhibit 15: Foreign JVs’ passenger vehicle production capacity

and the y-o-y growth

Source: CAAM, Company websites, Guosen Securities Economic

Research Institute


Research Institute

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Exhibit 16: Domestic brands’ passenger vehicle production

capacity and the y-o-y growth

Exhibit 17: Comparison of passenger vehicle production

capacity of JV brands, domestic brands and the industrial

average


Research Institute


Research Institute

Industry-wide capacity ultilisation will trend down. As a large number of fixed assets are

involved in the production process of the auto industry, leading to huge amounts of

depreciation expenses every year, capacity ultilisation usually has significant impact on

auto makers’ profitability. As mentioned, PV production capacity is expected to increase

by about 2.59 million units in 2012. Considering new production lines usually can’t run

smoothly in the initial phase and some of the production lines will only operate for several

months this year, we expect the actual increase in auto production to be only about 1.4

million units in 2012. This means the capacity ultilisation of the auto industry will fall as

capacity growth exceeds production growth. According to experiences, a fall in capacity

ultilisation is usually accompanied with an increase in car dealers’ inventory levels, more

aggressive price cuts, and a decline in profitability.

Exhibit 18: Major Chinese passenger vehicle companies’ production capacity and the y-o-y growth (2004-2013E)

(‘000 unit) 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Total 3,330 4,720 5,720 6,820 8,240 9,580 11,120 11,990 14,580 17,430 19,660 21,620

Y-o-y growth 34.4% 41.6% 21.3% 19.2% 20.8% 16.3% 16.0% 7.9% 21.6% 19.5% 12.8% 10.0%

JV brands 2,210 3,280 4,000 4,580 5,250 5,990 6,720 7,010 8,750 10,030 11,660 13,110

Y-o-y growth 38.3% 48.2% 22.1% 14.5% 14.6% 14.1% 12.1% 4.4% 24.8% 14.6% 16.3% 12.4%

Domestic brands 1,120 1,440 1,720 2,240 2,990 3,590 4,400 4,980 5,830 7,400 8,000 8,510

Y-o-y growth 27.3% 28.6% 19.4% 30.2% 33.5% 20.1% 22.6% 13.2% 17.1% 26.9% 8.1% 6.4%


0%

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Domestic PV brands production capacity (mn units,LHS)


0%

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Overall y-o-y capacity growth Y-o-y capacity growth of JV brands Y-o-y capacity growth of domestic brands



10

Exhibit 19: China’s overall passenger vehicle production

capacity utilisation rate

Exhibit 20: Passenger vehicle production capacity utilisation

rate of JV brands


Research Institute


Research Institute

Exhibit 21: Passenger vehicle production capacity utilisation

rate of domestic brands

Exhibit 22: Comparison of capacity ultilisation rates of JV

brands, domestic brands and the industrial average


Research Institute


Research Institute

The impact of capacity expansion varies from brand to brand. As for JV brands,

given foreign JVs held a cautious view towards capacity expansion before 2009, they

have taken some measures, e.g. lengthening work hours to increase their auto

production amid rising demand in recent years. Foreign JVs’ capacity ultilisation has long

exceeded the industrial average, with that of some JVs approaching 150%, which we

believe is highly unsustainable. Under such circumstances, capacity expansion and the

construction of new production lines are actually good solutions to eliminate current

capacity bottlenecks in a more sustainable way. Although depreciation and amortisation

expenses will grow due to capacity expansion efforts, labour costs, e.g. overtime pay, will

decline, so the profitability actually won’t be severely affected. In contrast, some domestic

auto makers that actually don’t face capacity bottlenecks and have suffered a decrease

in market share will see their profitability decline significantly. Their capacity expansion

efforts will lead to severe overcapacity problem, in our view.

Car dealers’ inventory level also rose to an historic high. Although the performance

of China’s passenger vehicle industry was lacklustre in 1Q, auto makers still launched a

20%

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mn

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its

PV production (mn units,LHS)

Production capacity (mn units,LHS) Capacity utilisation rate（RHS）

20%

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mn

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PV production (mn units,LHS)

Production capacity (mn units,LHS) Capacity utilisation rate（RHS）

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mn

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its

PV production (mn units,LHS) Production capacity (mn units,LHS) Capacity utilisation rate（RHS）

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

Overall capacity utilisation rate

Capacity utilisation rate of JV brands

Capacity utilisation rate of domestic brands



11

large number of new models after the Beijing Motor Show opened in 2Q. As a result,

inventory level continued to surge since February and has even reached a record high,

imposing huge pressure on car dealers.

4S stores have announced more aggressive price cuts. According to I.S. Engine2, the

extent of price reduction in the passenger vehicle market generally remained stable in 1Q,

but customers began to enjoy more discounts and preferential treatments starting from

April, with SUV models leading the way. All segments, expect for C-Class luxury

segments, announced more aggressive discounts then. According to our estimates, both

automakers and car dealers will continue to launch aggressive and comprehensive

promotion activities in 2H 2012 due to a growth in vehicle production as more production

lines are put into operation. Under such a scenario, the y-o-y growth of auto sales will

gradually rebound, but growth in profits will lag, and performances of different auto

makers will diverge, in our view.

Automakers reported varied results. The y-o-y revenue and profit growth of key auto

companies reversed the decline trend and reached 0.4% and 28.1% respectively in 1Q

2012. Despite the overall rebound in key companies’ revenue and profit growth, the

performance of different companies diverged significantly. Among the 17 key auto

companies, four companies reported y-o-y profit growth, 11 booked y-o-y profit decline,

and the rest two suffered losses.

Exhibit 23: The extent of price cuts in 4S stores Exhibit 24: Exhibit 24: Passenger vehicle price index by

segment

Source: I.S. Engine, Guosen Securities Economic Research

Institute

Source: I.S. Engine, Guosen Securities Economic Research

Institute

2 I.S. Engine is a Chinese consulting and research company focusing on the auto market.

-2

-1.5

-1

-0.5

0

0.5

1

1.5

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0

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6,000

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se

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n

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b

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r

Apr

Ma

y

Ju

n

Ju

l

Au

g

Se

p

Oct

No

v

De

c

RM

B

The extent of price cut in 4S stores for 2011 (RMB, LHS) The extent of price cut in 4S stores for 2012 (RMB, LHS) 2011 terminal price cut index (RHS) 2012 terminal price cut index (RHS)

50

60

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100

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Passenger vehicles Mini cars Small cars Mid-level cars High-end cars Luxury cars



12

Exhibit 25: Cumulative newly added inventory of sedan makers Exhibit 26: Key auto makers’ total profit and the y-o-y growth

Source: I.S. Engine, Guosen Securities Economic Research Institute Source: I.S. Engine, Guosen Securities Economic Research Institute

3 Consumption upgrade is taking place

3.1 JV brands, premium brands and the SUV segment outperform

JV brands continued to post strong performance. During 2009 and 2010, when the

entire passenger vehicle market experienced exceptional growth, the market share of

mini buses and low displacement vehicles expanded to 45.4%, as they were major

beneficiaries of favourable government policies. However, the market share of domestic

brands declined by 3.4% in 2011, and has continued to trend down since the beginning of

this year. In our view, JV brands still enjoy several competitive edges in the Chinese

market and will continue to enjoy robust growth momentum in the medium and long term.

Comprehensive product mix expansion: Given the gradual decline in passenger

vehicle sales growth, JV brands have accelerated the pace of new model launches.

On one hand, foreign JVs try to tap into the low-end passenger vehicle market by

launching more small-sized models, and models aimed at the domestic market and

priced below RMB100,000. On the other hand, these companies keep introducing

high-end and luxury models, sell these models at lowest possible prices, and ensure

profitability by increasing the adoption of domestically made parts and components.

Comprehensive sales channel expansion: Foreign JVs accelerated their expansion in

middle and western regions as well as tier-three and four cities, extending their sales

channels to small cities and even counties. Confronted with fierce competition from

JVs brands, domestic brands are gradually losing competitive advantages in these

regions.

Obvious advantages in terms of technology and quality standard. Although domestic

brands made huge progress in recent years in terms of R&D, JV brands still enjoy

advantages in terms of technology, quality and brand awareness, as foreign JVs kept

introducing most advanced technologies and latest models into China in the hope of

boosting sales growth.

The sales growth of the SUV segment continued to outpace other PV segments:

SUV models have enjoyed continuous sales growth since 2009. Even when the entire

-150

-100

-50

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0

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RM

B b

n

Total profit of key auto companies (RMB bn, LHS)

Y-o-y growth of the total profit of key companies(RHS)



13

industry lacked momentum, the SUV segment still outperformed. China’s SUV sales

jumped ten-fold over 2005-2011, outperforming that of all other passenger vehicle

segments. SUV models’ share in total passenger vehicle sales materially expanded from

7% to about 14% over the same period. According to our analysis, reasons behind the

explosive growth of the SUV segment in recent years include:

SUV models feature more storage space, more practicality and more driving pleasure.

SUV models can satisfy upgrade demand and repeat-purchase demand as they can

not only play the role as a commuting tool, but also a good choice for family travel.

China has witnessed the rise of the urban SUV and small-sized SUV markets since

2005, as urban and small-sized SUV models can alleviate the problems of high ASP,

high oil consumption and high maintenance costs the traditional SUV market faces.

As a result, more first-time buyers tend to buy small-sized urban SUVs.

We expect the SUV segment to maintain strong growth momentum, as it’s not only

benefiting from the growth in initial-purchase demand in less developed areas, but also a

major beneficiary of the increase in upgrade demand and repeat-purchase demand in

more developed areas.

Exhibit 27: Various brands’ share in China’s passenger vehicle

market by country

Exhibit 28: New vehicle quality of domestic brands and JV

brands


Note: PP100 refers to no. of problems per 100 vehicles, and the

lower the PP100 is, the higher a vehicle model’s quality is.

Source: J.D. Power, Guosen Securities Economic Research

Institute

Exhibit 29: Fluctuation of SUV sales by month Exhibit 30: Annual SUV sales and the y-o-y growth


0%

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Ja

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Self-owned brands Japanese brands German brands US brands

0

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JV brands (LHS) Domestic brands(LHS) Gap between the (RHS)

0

50,000

100,000

150,000

200,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Un

it

2007 2008 2009

2010 2011 2012

0%

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0

0.5

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2.5

2005 2006 2007 2008 2009 2010 2011 2012E

mn

un

its

Annual SUV sales volume (mn units,LHS)

Y-o-y growth (RHS)



14

Exhibit 31: The y-o-y sales growth of the SUV segment and

the entire PV industry

Exhibit 32: The share SUV takes up as % of total PV sales


3.2 Premium brands have entered a golden era of growth

The mid and high-end segment, luxury segment and ultra-luxury segment

witnessed exceptional sales growth in recent years. Mid- and high-end passenger

vehicle models usually refer to those priced between RMB120,000 and RMB300,000

under mainstream foreign brands, including Volkswagen, Toyota, Honda, Ford, Buick, etc;

Luxury models refer to those priced at between RMB300,000 and RMB1 million under

brands like Audi, BMW, Mercedes Benz, etc; ultra-luxury models mean those priced

above RMB1 million, such as Porsche, Bentley, etc. Based on the aforementioned

definitions, the sales of mid and high-end, luxury and ultra-luxury models enjoyed CAGR

of 22.1%, 41.3% and 50.5% respectively over 2006-2011.

Exhibit 33: The no. of high net worth individuals in China and

the y-o-y growth

Exhibit 34: Mid and high-end auto sales and the y-o-y growth

Note: High net worth individuals refer to individuals who hold at least

RMB10 million in financial assets or properties.


Institute


Institute

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010 2011 Jan-Apr/ 12

SUV Passenger car

0%

4%

8%

12%

16%

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0

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6

2006 2007 2008 2009 2010

,000 p

eo

ple

The no. of China's high net worth individuals (000 people, LHS)

Y-o-y growth (RHS)

0%

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50%

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12

2006 2007 2008 2009 2010 2011 2012E

mn

un

its

Sales volume of mid and high-end PV models (mn units, LHS)

Y-o-y growth (RHS)



15

Exhibit 35: Luxury vehicle sales and the y-o-y growth Exhibit 36: Ultra-luxury vehicle sales and the y-o-y growth


Institute


Institute

We see substantial long-term demand growth potential for the premium brands.

According to our estimates, premium brands will continue to enjoy rapid sales growth,

and are set to outperform at the initial stage of a new growth cycle. First of all, the

number of China’s high net worth individuals grew at a CAGR of 29.1% over 2006-2012

due to income growth. Second, upgrade demand will trend up as the total number of

passenger vehicles in China surged, and most of second-time buyers will choose to buy

premium brands. Third, the ASPs of premium brands foreign JVs introduce are gradually

trending down as foreign JVs introduce more entry-level luxury models and increase the

adoption of domestically made parts and components. Fourth, premium brands have

expanded their sales channel aggressively to improve after-sale services, which used to

be a major obstacle hindering the development of the high-end vehicle market.

4 The bus market experienced steady growth

4.1 We suggest to buy bus names as the sub-sector remained stable

despite industry-wide weakness

The bus sub-sector remained stable despite industry-wide weakness. The y-o-y

sales growth of commercial vehicles kept declining since 2Q 2011, but the bus segment

outshined all other commercial vehicle segments. China’s auto sales slightly increased by

2.5% y-o-y in 2011, while commercial vehicle sales even recorded a y-o-y decline of 6.3%.

In contrast, bus sales enjoyed a y-o-y jump of 10.1%. Such divergence continued since the

beginning of 2012. During the first four months of this year, China’s auto and commercial

vehicle sales suffered y-o-y fall of 1.3% and 11.6% respectively, but bus sales still booked a

y-o-y increase of 1.2%, with the sales of large and mid-sized buses growing by 5.5%, while

that of light buses declining by 2.7% compared with a year earlier. In general, the bus

market maintained steady sales growth despite the weakness in the overall auto industry,

with school buses and public buses leading the way.

Investors should still hold positions in bus names during the initial phase of an industry-wide

recovery, we believe. Generally speaking, the bus segment features lower volatility compared

with other segments. The bus segment usually enjoys relatively small upside potential when

the entire auto industry enjoys blowout growth, but at the same time, it can be a relatively safe

choice amid an industry-wide slowdown. The robust growth in demand for school buses has

led to an expansion of the bus segment’s growth potential in 2012. Coupled with stable

0%

20%

40%

60%

80%

100%

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2006 2007 2008 2009 2010 2011 2012E

mn

un

its

Sales volume of luxury models (mn units, LHS) Y-o-y growth (RHS)

-40%

-20%

0%

20%

40%

60%

80%

100%

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011 2012E

'000 u

nit

s

Sales volume pf ultra-luxury models(mn units, LHS) Y-o-y growth (RHS)



16

demand for public buses and considerable demand from overseas markets, we believe there

is still a good chance bus stocks will outperform in 2H12.

4.2 The urbanisation process will drive up medium and long-term

demand for buses

The bus market will be a long-term beneficiary of China’s unprecedented

urbanisation process. According to purposes of use, buses can be categorised into bus

with seats (school bus, tourist bus, etc), public bus, sleeper bus, private bus and some

other specialised bus, e.g. school bus. The urbanisation process can directly drive up

demand for public buses, school buses and light buses used for logistics service, and

indirectly stimulate demand for long-distance buses and tourist buses. Generally

speaking, the development of almost all bus segments are closely correlated with China’s

urbanisation process, and are set to be medium and long-term beneficiaries of this

process.

Exhibit 37: The y-o-y sales growth of large and mid-sized

buses and the auto industry

Exhibit 38: The y-o-y sales growth of buses and CVs

Source: Company data, Guosen Securities Economic Research

Institute

Source: Company data, Guosen Securities Economic Research

Institute

Exhibit 39: The urbanisation process drives up medium and long-term demand for buses

China’s

urbanisati

on

process

continues

The population and area of large and

medium-sized cities expand, while

infrastructure construction improves

Small towns gradually become

economic and educational centers in

rural areas

Intra-city travel demand increases, leading to

traffic jams

Satellite town takes shape as industrial enterprises

move out of town

Demand for short-distance and high-density

logistics increases

Demand for ordinary urban and rural passenger

transport and that for student transport increase

Public buses

Private buses

Passenger coaches

School buses

Logistics vehicles and light buses

Source: Guosen Securities Economic Research Institute

-10%

0%

10%

20%

30%

40%

50%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

The y-o-y sales growth of large and medium-sized buses

-60%

-40%

-20%

0%

20%

40%

60%

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100%

120% Ja

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2

The y-o-y sales growth of Large and medium-sized buses The y-o-y sales growth of light buses The y-o-y sales growth of commercial vehicles



17

Exhibit 40: The rise in China’s rate of urbanisation

accelerated

Exhibit 41: Share of various segments in China’s total large

and mid-sized bus sales

Note: The rate of urbanisation refers to the level of urban relative to

overall population

Source: NBSC, Guosen Securities Economic Research Institute

Source: www.chinabus.info, Guosen Securities Economic Research

Institute

The seater bus segment still enjoys considerable growth momentum. The sales

volume of seater buses accounts for 55%-60% of total large and mid-sized bus sales so

far. Seater buses can be divided into three main categories, namely buses for road

passenger transport, tourist buses and private buses. Although the sales volume of

sleeper buses could gradually trend down, as the rapid development of high-speed rail

networks threatens demand for mid to long-distance buses for road passenger transport,

that of short distance buses won’t come under pressure, and expensive high-speed rail

fares could even lead to an increase in demand for short-distance buses from

non-time-sensitive passengers. The private bus market is expected to enjoy rapid growth

as more industrial enterprises move outside of urban areas and a growing number of

satellite towns are developed near metropolitan areas. Meanwhile, tourist buses will

receive a boost from continuous income growth and surging demand for travel. As a

result, we believe the seater bus market has not reached a saturation point, and still

enjoys upside potential.

Demand for public buses is on the rise. The share public buses make up as a

percentage of total bus sales increased steadily in the last decade, and has reached

about 30% so far. Rising demand for public buses is mainly driven by the increase in

demand for public transportation vehicles in the urbanisation process and the

government’s vigorous support to public transportation in hopes of reducing greenhouse

gas emission and easing traffic congestion. Going forward, we believe the public bus

market will continue to expand, as the ongoing urbanisation process, launch of traffic

congestion measures, and government policies designed to encourage the use of public

transportation vehicles will stimulate repeat-purchase demand for public buses in tier-one

and two cities, as well as initial purchase demand from middle and western regions.

According to the 12th Five-Year Plan for public transportation in urban areas, China

targets to increase the total public bus population to 200,000 units by 2015. Including

considerable repeat-purchase demand, we expect the demand for public buses will reach

about 400,000 units over 2011-15. Considering both public bus purchasers and operators

can enjoy government subsidies, the demand will be relatively stable, in our view.

China’s bus industry has witnessed an upgrade in export structure. China’s bus

exports reached 7,080 units in 1Q 2012, corresponding to a y-o-y growth of 45%. This

means the increase in bus exports is significantly higher than that of the number of buses

sold in the domestic market. Meanwhile, the export structure also substantially improved,

0%

10%

20%

30%

40%

50%

60%

19

49

19

52

19

55

19

58

19

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20

12

0%

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100%

2005 2006 2007 2008 2009 2010 2011 Jan-Apr12

Bus with seats Public bus

Sleeper bus and others School bus

http://www.chinabus.info/



18

with the total export value and ASP per unit rising by 88.1% and 29.8% respectively. We

believe Chinese bus makers will be able to maintain competitive edges in the foreseeable

future, as the bus industry is labour-intensified and key related technologies are widely

shared. Growing economies of scale, continuous technological development and

diversification of sales channels will lead to an expansion in export destinations and an

upgrade in the export structure, we believe. Under such a scenario, both the export

volume and price will trend up, in our view.

Exhibit 42: The y-o-y growth of large and mid-sized bus sales

by segment

Exhibit 43: China’s large-sized bus exports and the y-o-y

growth

Source: www.chinabus.info, Guosen Securities Economic Research

Institute Source: CAAM, Guosen Securities Economic Research Institute

Exhibit 44: Fluctuation in large and mid-sized bus sales by

month

Exhibit 45: Fluctuation in light bus sales by month


Exhibit 46: China’s bus exports and the y-o-y growth

1Q11 1Q12 Y-o-y export growth

Export volume (Unit)

Export value (RMB ‘000)

ASP (RMB ‘000)

Export volume (Unit)

Export value (RMB ‘000)

ASP (RMB ‘000)

Y-o-y growth of export volume

Y-o-y growth of export volume

Y-o-y growth of ASP

Large-sized bus 1568 833,597 532 3066 1942,534 634 95.5% 133.0% 19.2%

Medium-sized bus 799 258,638 324 1080 324,329 300 35.2% 25.4% -7.2%

Light bus 2517 216,087 86 2934 194,152 66 16.6% -10.2% -22.9%

Total 4884 1308,322 268 7080 2461,016 348 45.0% 88.1% 29.8%

Source: Commercial Bus Market, Guosen Securities Economic Research Institute

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2006

2007

2008

2009

2010

2011

Ja

n-A

pr1

2

Bus with seats Public bus Sleeper bus and others

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

0

500

1000

1500

2000

2500

3000

Ja

n/0

8

Ma

y/0

8

Se

p/0

8

Ja

n/0

9

Ma

y/0

9

Se

p/0

9

Ja

n/1

0

Ma

y/1

0

Se

p/1

0

Ja

n/1

1

Ma

y/1

1

Se

p/1

1

Ja

n/1

2

un

it

Monthly exports of large-sized buses (unit, LHS) Y-o-y growth

0

5,000

10,000

15,000

20,000

25,000

Jan Feb Mar Ari May Jue Jul Aug Sep Oct Nov Dec

unit

2007 2008 2009

2010 2011 2012

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


unit

2007 2008 2009

2010 2011 2012







19

4.3 Growing demand for school buses brings significant upside

potential

Since the beginning of 2012, China has launched a series of policies and regulations on

the bus sector such as the Regulation on School Bus Safety and the Technical

Specifications for Safe Special School Buses. Besides, the country is also seeking public

consultation on the Administrative Rules on the Market Entry of Special School Bus

Manufacturers and Products. Although details like the subsidising method and the

amount of subsidies to the industry are yet to be clarified, the potential demand for school

buses is still large, and sales are also increasing. From January to April 2012, a total of

8,497 units of specialised school buses were sold in China, accounting for 11.9% of the

total sales volume of passenger vehicles during the same period. Full-year sales volume

is expected to exceed 30,000 units, almost 9 times the level in 2010 (3,000 units). The

surge in the demand for school buses has led to an expansion of the bus market’s upside

potential, in our view.

Exhibit 47: School bus sales of related A-shr listed companies Exhibit 48: School bus sales of Yutong and the entire industry

Source: www.chinabus.info, Guosen Securities Economic

Research Institute


Research Institute

Exhibit 49: China’s school bus sales mix Exhibit 50: School bus sales mix by ASP for 1Q 2012


Research Institute

Source: The Ministry of Industry and Information Technology,

Guosen Securities Economic Research Institute

Mid-level school buses dominate the product mix. As the Regulation on School Bus

Safety has clarified China’s efforts to ensure the availability of school buses in rural areas

where students have to travel a long way to school and public transportation are

unavailable, school bus manufacturers have focused on the medium-sized and light bus

market. Of all school buses sold from January to April 2012, light and medium-sized

2734

810

194 135 32

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Yutong Bus

Zhongtong Bus

King Long Motor

Ankai Automobile

SG Automotive

unit

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

500

1000

1500

2000

2500

3000

3500

Jan/12 Feb/12 Mar/12 Apr/12

un

it

Total bus sales Yutong Bus's bus sales(unit, LHS) Yutong's share (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan/12 Feb/12 Mar/12 Apr/12

Large buses Medium-sized buses Light buses

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

0

500

1000

1500

2000

2500

3000

RM

B 4

00,0

00-5

00,0

00

RM

B 3

00,0

00-4

00,0

00

RM

B 2

00,0

00-3

00,0

00

RM

B 1

50,0

00-2

00,0

00

<R

MB

150,0

00

un

it

Sales volume (unit, LHS) Share (RHS)







20

buses accounted for 48.5% and 48.1% respectively. Of all school buses sold in 1Q 2012,

vehicles priced at RMB150,000 to RMB200,000 and those priced at RMB200,000 to

RMB300,000 took up 41.2% and 33.9% respectively, while school buses with a price of

over RMB400,000 took up only 3.2%. The demand for mid-level school buses has

dominated the school bus market.

Leading companies enjoy obvious competitive advantages. Leading school bus

manufacturers enjoy obvious competitive advantages over peers in terms of technology,

model diversification, market expansion and after-sale service. Yutong Bus sold a total of

2,734 school buses from January to April 2012, representing 32.2% of the total volume of

school buses sold in China during the period. The company was the largest beneficiary of

the increase in demand for school buses.

5 Heavy trucks: still dipping and waiting for

demand to pick up

5.1 Demand for heavy trucks is still slumping

Sales growth of heavy trucks continued to slow down since 2Q 2011: Sales tumbled

13.4% y-o-y in 2011 to 881,000 units, and remained sluggish in the traditional peak

season of March and April 2012. Sales volume plummeted by 41.3% y-o-y in April, and

declined a cumulative 33% from January to April, as demand continued to be depressed.

We estimate the sub-sector continued to dip in 2Q 2012. Leading indicators of

demand for heavy trucks such as fixed-asset investment (FAI) and property investment

were still on the decline, which could dampen engineering vehicle sales that account for

nearly 40% of the total sales of heavy trucks. Besides, the concentration rate of the road

transportation sector is low and the sector experienced significant increases in capacity

of heavy trucks in 2009 and 2010. As it is difficult for logistics companies to pass on the

increase in costs to customers amid high oil prices and a sluggish real economy, they will

restrain demand for heavy trucks due to the decline in profitability. We expect sales of

heavy trucks to fall to the lowest level year to date in June and July, with monthly sales

reaching around 50,000 units.

Exhibit 51: Fluctuation in heavy truck sales by month Exhibit 52: Monthly heavy truck sales and the y-o-y growth


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


unit

2007 2008 2009

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Ja

n/0

9

Ap

r/0

9

Ju

l/0

9

Oct/

09

Ja

n/1

0

Ap

r/1

0

Ju

l/1

0

Oct/

10

Ja

n/1

1

Ap

r/1

1

Ju

l/1

1

Oct/

11

Ja

n/1

2

Ap

r/1

2

un

it

Monthly sales volume of heavy trucks (unit, LHS)

Y-o-y growth (RHS)





21

Exhibit 53: Heavy truck sales volume and China’s heavy truck population (Unit: ‘000 units)

Year Heavy truck population

Y-o-y growth of heavy truck population

Newly added heavy truck population

Heavy truck sales volume

No. of vehicles sold to non-first time buyers

Export New

demand

2004 1,539 12.5% 171 372 199 2 171

2005 1,681 9.2% 142 236 87 8 142

2006 1,740 3.5% 59 305 233 13 59

2007 1,867 7.3% 127 485 315 43 127

2008 2,008 7.6% 141 542 343 58 141

2009 3,151 56.9% 1,142 636 230 40 346

2010 3,948 25.3% 797 1,015 172 46 797

1-3Q11 4,517 19.0% 569 712 98 46 569

Source: Ministry of Public Security, CAAM, Guosen Securities Economic Research Institute

Exhibit 54: Monthly highway freight transport volume and the

y-o-y growth

Exhibit 55: Investment in newly started FAI projects and the

y-o-y growth

Source: NBSC, Guosen Securities Economic Research Institute Source: NBSC, Guosen Securities Economic Research Institute

Exhibit 56: Cumulative inventory increase of heavy truck

makers

Exhibit 57: Monthly container throughput at ports and the y-o-y

growth

Source: NBSC, Guosen Securities Economic Research Institute

Source: The Ministry of transport, Guosen Securities Economic

Research Institute

5.2 We suggest investors to be cautious in the short term and wait for

demand to pick up in 2H 2012

We estimate the sales growth of heavy trucks is set to be negative for the whole year,

especially as the sales during the peak season were frustrating. We are cautious about

the heavy truck sub-sector in the short term, as we expect full-year sales volume to

0%

5%

10%

15%

20%

25%

30%

35%

0

100

200

300

400

500

600

Se

p/0

9

No

v/0

9

Ja

n/1

0

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r/1

0

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y/1

0

Ju

l/1

0

Se

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v/1

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n/1

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Ju

l/1

1

Se

p/1

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No

v/1

1

Ja

n/1

2

bn

to

n k

ilo

mete

rs

Monthly freight transport volume (bn tonne kilometers, LHS)

Y-o-y growth (RHS)

-20%

0%

20%

40%

60%

80%

100%

120%

0

5

10

15

20

25

30

Fe

b/0

8

Ma

y/0

8

Au

g/0

8

No

v/0

8

Fe

b/0

9

Ma

y/0

9

Au

g/0

9

No

v/0

9

Fe

b/1

0

Ma

y/1

0

Au

g/1

0

No

v/1

0

Fe

b/1

1

Ma

y/1

1

Au

g/1

1

No

v/1

1

Fe

b/1

2

RM

B t

n

Cumulative investment in newly started FAI projects (RMB tn, LHS)

Y-o-y growth (RHS)

-80000

-60000

-40000

-20000

0

20000

40000

60000

Ja

n-0

5

Ju

n-0

5

No

v-0

5

Apr-

06

Sep-0

6

Fe

b-0

7

Ju

l-07

De

c-0

7

Ma

y-0

8

Oct-

08

Ma

r-09

Aug-0

9

Ja

n-1

0

Ju

n-1

0

No

v-1

0

Apr-

11

Sep-1

1

Fe

b-1

2

Unit

Cumulative inventory increase (unit)

Monthly inventory increase (unit)

-20%

-10%

0%

10%

20%

30%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Ja

n/0

8

Ma

y/0

8

Se

p/0

8

Ja

n/0

9

Ma

y/0

9

Se

p/0

9

Ja

n/1

0

Ma

y/1

0

Se

p/1

0

Ja

n/1

1

Ma

y/1

1

Se

p/1

1

Ja

n/1

2

'000

TE

Us

Monthly container throughput ('000 TEUs, LHS)

Y-o-y growth (RHS)



22

slump 10% to around 800,000 units in 2012. Demand for heavy trucks may pick up in 3Q

2012 as the government adjusts monetary and credit policies, and enhance investment in

infrastructure construction. In such a case, investors can add positions of companies

which are more resilient to economic changes, such as Foton Motor (600166 CH) and

CNHTC (000951 CH).

6 Investment suggestions

6.1 Ratings & recommendations

We raised our rating on the auto sector, the large & medium-sized bus market and

the passenger vehicle market to “Cautious Buy”, and upgraded our rating on the

heavy truck sub-sector to “Neutral”. There is a decent chance that sales of passenger

vehicles will gradually recover in 2H 2012, as currently the passenger vehicle sub-sector

is at the starting point of a new growth cycle, driven by both new and existing demand.

Demand for buses will keep growing at a steady pace, and whether demand for heavy

trucks could pick up will depend on the government’s infrastructure investment and

monetary policies.

Divergence among these sub-sectors will continue at the initial phase of the recovery

cycle. The passenger vehicle sector is bracing for a capacity surge in 2H 2012, and the

profit growth will lag the rebound in sales. Divergence among companies will continue

due to the difference in vehicle population composition and location. Middle to high-end

passenger vehicles produced by joint ventures will outperform the broad market, and

investors should pick individual stocks based on profit growth rankings. Demand for

buses will grow at a steady pace, and the surge in the sales of school buses has

improved the resilience of the sub-sector. We suggest investors to add positions of

leading companies. The heavy truck sub-sector still faces pressure, and whether it can

recover will depend on the government’s policies to boost demand.

Our top picks include:

Beijing WKW (002662 CH): The company focuses on the production of interior and

exterior accessories for high-end passenger vehicles produced by European and US

manufacturers, which is a fast-growing market segment with hefty profits. The company

will benefit from the rapid growth in the demand for middle to high-end and luxury

passenger vehicles and output expansion of downstream clients. Currently, the company

almost dominates the market of aluminum alloy-made accessories, which is also its core

business with the strongest profitability. Besides, the threshold to enter the market is high,

which means the company’s profitability has been ensured. The company also enjoys

advantages and large potential in acquiring premium Germany-based small and

medium-sized parts makers, and has taken a step forward by acquiring BIA Auto Parts.

SAIC Motor (600104 CH): As one of the leading passenger vehicle manufacturers, it

enjoys steady growth and strong overall profitability. Its domestic brands, which target

middle to high-end markets, have seen production and demand recovering.

Shanghai-Volkswagen has seen significant improvement in product mix and single-vehicle

profitability, and will far outperform the sector in sales and profits. Shanghai General Motors

keeps posting solid growth. Both companies have expanded their capacity, which will help

them get through the production bottleneck. SGMW has outperformed the industry average,

and its new passenger cars are well received by the market.



23

Great Wall Motors (601633 CH): The company has benefited from the rapid growth of

the SUV market in China. It enjoys deep-rooted competitive edges in the market of SUVs

and pick-up trucks with a price range of RMB100,000 to RMB150,000, due to its strong

costs controls and the vertically-integrated production model. Its sedan and SUV

businesses are still advancing rapidly. The launch of Haval H6, Voleex C50 and follow-up

models has further improved the company’s product mix, and the surge in the sales of

new models will partly offset the depreciation and amortization pressure of its plant in

Tianjin due to capacity expansion.

Yutong Bus (600066 CH): As a leading bus manufacturer, Yutong Group enjoys obvious

competitive edges in several market segments except the light bus market. It enjoys

stable demand growth and robust profitability. As a forerunner and leader in the school

bus field, it will benefit the most from the rise in the demand for school buses in China.

FAWAY Automobile (600742 CH): With the strong backing from the First Auto Work, the

company enjoys great growth potential. Its major return on investment is generated from

Faway-Johnson Controls, TianJin YingTai and Faway Tong Yang Plastics, which benefit

from the capacity expansion and sales surge of downstream clients like

FAW-Volkswagen and FAW-Toyota. Its new businesses will gradually generate profits.

Therefore, It enjoys a large room for improvement and relatively great resilience.

Changan Automobile (000625 CH): The demand for minibuses and mini trucks is likely

to bottom out. The company’s minibuses and new domestic passenger car brands are well

received, and are likely to post less losses in 2012. Changan Ford Mazda has stepped up

efforts to launch new products and expand capacity. New products like the New Focus

have posted shining performance. It is likely to book rapid growth in return of investment.

7 Risks

7.1 Local governments may launch more policies to curb auto

consumption

We believe the central government is unlikely to launch policies to curb auto consumption

amid the economic slowdown and property regulation. However, local governments may

launch relevant policies to combat traffic congestion. The impact of

tougher-than-expected policies on the sector may be large.

7.2 Infrastructure and property investment continues to be sluggish

If infrastructure and property investment growth continues to decline, it will dampen the

demand for engineering trucks, whose sales account for 40% of the total sales of heavy

trucks, and the heavy truck sub-sector will recover at a slower pace and to a lower

degree than our expectations.



24

Exhibit 58: Key companies and valuations

Ticker Company Rating Closing price (RMB) EPS (RMB) PE (x) PB (x)

As of June 1, 2012 2011 2012E 2013E 2011 2012E 2013E 2011

002662 Beijing WKW Buy 21.20 1.02 1.34 1.76 20.7 15.8 12.0 5.8

600066 Yutong Bus Buy 23.33 1.75 2.17 2.59 13.3 10.7 9.0 3.6

600741 HUAYU Automotive Buy 10.08 1.16 1.29 1.44 8.7 7.8 7.0 1.6

000550 Jiangling Motors Buy 24.46 2.17 2.22 2.54 11.3 11.0 9.6 2.9

600742 Changchun FAWAY Buy 21.92 2.02 2.37 2.89 10.8 9.2 7.6 1.8

600104 SAIC Motor Buy 15.51 1.83 2.07 2.36 8.5 7.5 6.6 1.7

601633 Great Wall Motor Buy 16.70 1.13 1.48 1.94 14.8 11.3 8.6 3.0

000800 Faw Car Cautious Buy 11.86 0.14 0.29 0.43 85.9 40.6 27.3 2.3

000927 Tianjin FAW Xiali Cautious Buy 7.73 0.07 0.10 0.17 112.7 77.1 44.5 3.4

000338 Weichai Power Cautious Buy 33.39 3.36 2.85 3.78 9.9 11.7 8.8 2.4

002126 Yinlun Machinery Cautious Buy 13.58 0.66 0.74 0.91 20.6 18.3 15.0 1.8

600166 Foton Motor Cautious Buy 8.37 0.55 0.61 0.70 15.3 13.8 12.0 2.0

000951 Jinan Truck Cautious Buy 13.75 0.86 0.68 0.98 15.9 20.2 14.1 1.5

000581 Weifu High-Technology Cautious Buy 33.22 1.77 1.86 2.65 18.8 17.9 12.5 3.7

600686 Xiamen King Long Cautious Buy 7.02 0.59 0.71 0.84 12.0 9.9 8.4 1.6

002607 Yaxia Automobile Cautious Buy 12.20 0.51 0.67 0.94 23.7 18.2 13.0 1.3

000625 Changan Automobile Cautious Buy 5.29 0.21 0.27 0.48 25.5 19.6 11.1 1.7

Source: Wind, Guosen Securities Economic Research Institute



25

Information Disclosures

Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months.

Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the

next six months.

Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the

next six months.

Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months.

Sector Ratings:

Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months.

Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the

next six months.

Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next

six months.

Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months

Disclaimers

This report is based on public data. Guosen does not warrant the accuracy and completeness of the information contained herein. This

report is published solely for reference purposes and shall in no way be construed as a solicitation or an offer to buy or sell securities or

related financial instruments stated herein. Guosen and its employees do not accept responsibility for any direct or indirect losses arising

from the use of this report. Guosen or its affiliates may hold or trade securities issued by the companies mentioned in this report, and

provide or seek to provide investment banking services for these companies. All rights of this report are reserved by Guosen. Without the

prior written consent of Guosen, no one may copy, reproduce or publish part or whole of this report.

Documents

August 3, 2012 Auto Sector Cautious Buy · Sector Research | China Auto THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14,