Auto WIN - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2012/8/31/353a8c27-ca07-4e94-a205... · Asia Pacific Equity Research 31 August 2012 Auto WIN Regional auto industry highlights

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Asia Pacific Equity Research31 August 2012

Auto WINRegional auto industry highlights

Auto Parts

Nick Lai AC

(886-2) 2725-9864

[email protected]

J.P. Morgan Securities (Taiwan) Limited.

Jin Luo

J.P. Morgan Securities (Asia Pacific) Limited

Prateek Sharma

(91-22) 6157-3353

[email protected]

J.P. Morgan India Private Limited

Aditya Makharia AC

(91-22) 6157-3596

[email protected]


Aditya Srinath, CFA AC

(62-21) 5291-8573

[email protected]

PT J.P. Morgan Securities Indonesia

Wan Sun Park AC

(82-2) 758-5722

[email protected]

J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Kohei Takahashi AC

(81-3) 6736-8621

[email protected]

JPMorgan Securities Japan Co., Ltd.

See page 85 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Key items this month

What is changing? We analyze: (1) the impact of newly introduced loan down

payment system on short- and medium-term auto demand in Indonesia and its implications for the automakers in Japan; (2) our more bullish stance onHyundai Wia following its 2Q12 results owing to expected rapid margin as well as ROE expansion in Korea; (3) the implications of early resolution of strike at Maruti’s Manesar plant and our Neutral stance on it owing to the combined effect of its market share stabilization coupled with sedate industry demand outlook in India; (4) the unjustifiable relative outperformance of Taiwan’s auto sector to the market index and our underweight stance on auto sector driven by increasing oil price and flattish auto growth outlook for 2012/13E in Taiwan; (5) the implications of Denso’s new component facility and Central bank’s move to possibly issue downpayment rules for Shariah Financing in Indonesia.

Information: We discuss: (1) 1H12 results review of auto companies in

China; (2) the approaching end of eco car subsidies leading to current high production levels to negatively impact the earning prospects from 2H onwards for automakers in Japan; (3) the implications of the launch of Kia’s K3 model in Korea; (4) two wheeler OEMs’ decision for production cut given slowing demand, the resumption of partial production at Maruti's Manesar plant and the fall in rubber prices to positively impact Tyre manufacturer’s margins in India; (5) the continued flattish growth momentum in the auto sector amid slumping economic data around the globe and our expectation of Hotai Motor to be the only winner in Taiwan; (6) Honda’s aim to challenge Nissan’s leadership in "city cars" with the launch of new Brio in Indonesia.

Non-consensus calls: We highlight: (1) our assumption of China autos

coverage with 5 OWs, 3 structural trends, 3 non-consensus and 2 pair trades. By segment, structurally we prefer luxury PV over mid to low-end PV and would avoid commercial vehicle (CV) such as trucks. By stock, we rate ZhengTong, Baoxin and Brilliance China OW for their luxury exposure. We believe Geely (OW) has the potential to become China's Hyundai Motor and like Great Wall's (OW)’s SUV business for now.

New vehicle sales volume (SAAR)Million units

Market CY12E Y/Y (%) Jul-12 Y/Y (%) CYTD12 Y/Y (%)

Japan 5.16 22.5 5.30 26.8 5.49 37.6 China 19.39 4.8 16.65 4.7 16.89 0.3 Korea 1.52 -1.9 1.82 17.4 1.68 10.1 India 4.35 12.0 4.02 15.5 3.91 9.7 Taiwan 0.40 5.8 0.36 0.0 0.39 1.5 Indonesia 0.93 4.5 0.96 9.1 0.98 22.2 US 14.00 10.2 14.09 15.2 14.30 14.0 W. Europe 12.10 -5.5 11.00 -8.3 11.95 -7.5

Total 57.84 5.3 54.20 7.2 55.58 5.8

Source: JAMA, KAMA, CAAM, SIAM, China Motor, Hotai Motor, Taiwan Economic Journal, Astra International,

J.P. Morgan estimates; .US, W. Europe contains Light Vehicle SAAR.

Aggregate SAAR sales volume in AsiaMillion units

Source: JAMA, KAMA, CAAM, SIAM, China Motor, Hotai Motor, Taiwan Economic Journal, Astra International, J.P. Morgan estimates; .US, W. Europe contains Light Vehicle SAAR.

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Nick Lai(886-2) [email protected]

J.P. Morgan automotive coverage in Asia

Ticker Price Rating AnalystJapan (¥)

Nissan Motor 7201 JP 730 Neutral Kohei Takahashi Toyota Motor 7203 JP 3,095 Overweight Kohei Takahashi Mazda Motor 7261 JP 94 Overweight Kohei Takahashi Honda Motor 7267 JP 2,472 Overweight Kohei Takahashi Suzuki Motor 7269 JP 1,428 Neutral Kohei Takahashi Fuji Heavy Industries 7270 JP 626 Overweight Kohei Takahashi Yamaha Motor 7272 JP 678 Neutral Kohei Takahashi

China (HK$)DongFeng Motors 489 HK 10.0 Underweight Nick LaiGuangzhou Auto 2238 HK 5.4 Neutral Nick LaiBrilliance China 1114 HK 7.6 . Overweight Nick LaiGreat Wall Motor 2333 HK 17.5 Overweight Nick LaiGeely Auto 175 HK 2.5 Overweight Nick LaiSinotruk 3808 HK 4.0 Underweight Nick LaiWeichai Power 2338 HK 20.5 Underweight Nick LaiMinth 425 HK 8.6 Neutral Nick LaiChina ZhengTong Auto 1728 HK 4.6 Overweight Nick LaiBaoxin Auto 1293 HK 3.9 Overweight Nick Lai

Korea (Won)Hyundai Motor 005380 KS 240,500 Overweight Wansun ParkKia Motors 000270 KS 74,100 Overweight Wansun ParkHyundai Mobis 012330 KS 307,500 Overweight Wansun ParkNexen Tire 002350 KS 19,500 Neutral Wansun ParkHyundai Wia 011210 KS 180,000 Overweight Wansun Park

India (Rs)Maruti Suzuki India MM IN 1,138 Neutral Aditya MakhariaMahindra & Mahindra MM IN 768 Neutral Aditya MakhariaTata Motors TTMT IN 234 Overweight Aditya MakhariaHero Motocorp Ltd. HMCL IN 1,753 Underweight Aditya MakhariaBajaj Auto BJAUT IN 1,615 Neutral Aditya MakhariaBosch Limited BOS IN 8,501 Overweight Aditya Makharia

Taiwan (NT$)China Motor 2204 TT 27.4 Underweight Nick LaiYulon Motor 2201 TT 54.4 Neutral Nick Lai

Indonesia (Rp)Astra International ASII IJ 6,750 Underweight Aditya Srinath

Source: Bloomberg, J.P. Morgan. Note: Share prices are as of the closing of Aug 31, 2012.

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Summary

Table 1: New vehicle sales volume (SAAR)

Million units

Market CY12E Y/Y (%) Jul-12 Y/Y (%) CYTD12 Y/Y (%)Japan 5.16 22.5 5.30 26.8 5.49 37.6 China 19.39 4.8 16.65 4.7 16.89 0.3 Korea 1.52 -1.9 1.82 17.4 1.68 10.1 India 4.35 12.0 4.02 15.5 3.91 9.7 Taiwan 0.40 5.8 0.36 0.0 0.39 1.5 Indonesia 0.93 4.5 0.96 9.1 0.98 22.2 US 14.00 10.2 14.09 15.2 14.30 14.0 W. Europe 12.10 -5.5 11.00 -8.3 11.95 -7.5 Total 57.84 5.3 54.20 7.2 55.58 5.8

Source: JAMA, KAMA, CAAM, SIAM, China Motor, Hotai Motor, Taiwan Economic Journal, Astra International,

J.P. Morgan estimates; .US, W. Europe contains Light Vehicle SAAR.

Figure 1: Aggregate SAAR sales volume in Asia

Million units

Source: JAMA, KAMA, CAAM, SIAM, China Motor, Hotai Motor, Taiwan Economic Journal, Astra International, J.P. Morgan estimates;

.US, W. Europe contains Light Vehicle SAAR.

Figure 2: SAAR sales volume change (%)Jul 2012 versus Jul 2011

CYTD 2012 VS CYTD 2011

Source: JAMA, KAMA, CAAM, SIAM, China Motor, Hotai Motor, Taiwan Economic Journal, Astra International, J.P. Morgan estimates;

.US, W. Europe contains Light Vehicle SAAR.

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Japan China Korea India Taiwan Indonesia US W.Europe Total

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W: What is changing?

In this section, analysts summarize the changing trends in the industry or regulatory changes in the various markets in the region.

Japan

(Extracted from the Note, “Automobile and Motorcycle Sector: Indonesia Motorcycle and Automobile Market Update: Excessive Pessimism Receding"published on 25 July 2012; please see the original note for pricing dates.)

Our impression based on information gathered from finance companies, Japanese automakers, suppliers, and dealers is that Indonesia’s newly introduced loan down payment system will likely negatively impact short-term demand but that excessive pessimism is not necessary regarding 2012 demand; rather, the demand bottom may be approaching. The data represents a small sample size, as it covers just the one-month period since the new loan system was introduced, so we should bear in mind that any discussion is based on low reliability, preliminary data.

Loan down payment system strongly impacts motorcycles: Based on our interviews, we estimate that the number of vehicle loan contracts has fallen from 10–20% for automobiles and 30–50% for motorcycles since the new loan system was introduced. Based on the unit shipment figures that we have been able to verify, shipment volumes have not fallen as much as loan contracts, because also in play is an increase in Islamic banking, growing inventories of car models that had supply shortages, and increasing non-loan sales promotions. With the Ramadan holy month underway, actual demand conditions will be hard to read from the August-September data. The next substantive demand data will likely be for September, for which data will be released in October.

Excessive pessimism receding for 2012 motorcycle demand: Two months ago, the loan system was cited as cause to expect a sharp drop in vehicle demand in 2012, but the forecasts are now being revised upward. Based on our interviews, automobile sales are now expected to exceed 0.9–1.0 million units and motorcycle sales are expected to be in the 6.2–7.0 million-unit range. Many of the people we talked to had expectations for the new Honda motorcycle model due out in 2H and for medium-and long-term demand growth for automobiles. Many also mentioned the risk factor of declining incomes from falling prices for coal, palm oil, and other commodities.

Investment implications: We think the development is a positive for motorcycle parts suppliers with high Indonesia exposure since it means the greatest concern in the motorcycle market is receding and paves the way for a potential 2H recovery fueled by strong Honda business. With one earnings risk factor now out of the way, conditions are aligning for investment with a medium- and long-term view in anticipation of an expanding global motorcycle market. Among the motorcycle parts suppliers, our recommendation is Musashi Seimitsu (7220, Overweight).

Kohei TakahashiAC

(81-3) 6736-8621

[email protected]


5



Keys to Near-Term Demand

Changes Wrought By New Regulations on Lending

Indonesian vehicle dealers evidently scaled down their aggressive sales promotion efforts in the early part of 2012 ahead of the introduction of new regulations on down payments, and it seems that in the nearly one month since the introduction of the new regulations on lending, sales of both autos and motorcycles were down sharply compared to immediately before (the effect is particularly acute on sales of motorcycles, buyers of which have low incomes on average). However, based on our interviews (and this is at best only a sample of opinion), the scale of the decline may be exaggerated because of a spike in demand in advance of the new regulations. Moreover, one must bear in mind that when examining the trend in demand in 2H, doing so hinges on information of somewhat dubious reliability.

Autos

We have confirmed that new loan contracts are down 10-20% compared with before the introduction of the new regulations. Since auto buyers have always had to place down payment of some size, and since their average income is relatively high, the impact of increasing the size of the down payment is having less of an impact on auto sales than on motorcycle sales. Another factor blunting the negative impact of the new regulations on auto sales is that the supply of autos decreased sharply in 2011 owing to the Tohoku earthquake and the Thai floods, and a number of models have been in short supply (all according to monthly data on shipment volume released by the Association of Indonesia Automotive Industries, better known as Gaikindo).

Motorcycles

We have confirmed that new loan contracts are down 30-50% compared with before the introduction of the new regulations. Although sales of popular products such as Honda Motor’s scooters and Kawasaki’s motorcycles are down only a little, sales of other products are off significantly. We attribute this decline mainly to there being a number of potential motorcycle buyers who have low incomes and no ability to make a down payment, and to a significant increase in the average monthly payment now that dealers have ended various sales promotions.

Growth of Islamic banking

One reason why sales of Honda’s motorcycles have not fallen that much in relative terms is the foray by Astra Group member Federal International Finance (FIF), which extends loans only for Honda motorcycles, into Islamic banking, a type of lending that adheres to Sharia law. Because the structure of Islamic banking differs from other types of lending, it is exempt from the new loan regulations. We understand that the ratio of Islamic banking at local financing companies that provide lending services for various brands of motorcycles is increasing rapidly as well. We think other financing companies (such as Japanese trading companies) have the possibility of receiving licenses to conduct Islamic banking.

We believe the fund procurement costs for Islamic lending are higher than for other kinds of fund procurement, and will probably become even higher if Sharia-compliant fund procurement increases sharply as other companies enter the Islamic

6



banking business. The level of comprehension about Islamic banking will have to increase on both the dealer and customer sides. A key issue to watch, we believe, will be the degree to which the various finance companies expand their Islamic banking.

New Lending Regulations, Summary and Background

Indonesia introduced new regulations governing down payment on consumer loans for motorcycles and autos on June 15. Minimum down payments are now as follows: for motorcycle loans, 25% when borrowing from a bank and 20% when borrowing from a finance company; household-use autos, 30% (bank) and 25% (finance company); and commercial vehicles, 20% (bank) and 20% (finance company).

Figure 2: Motorcycle and Automobile Minimum Down Payment in Indonesia

Banks Finance Co’sMotorcycle 25% 20%Automobiles for commercial use & other vehicles 20% 20%Automobiles for household use 30% 25%

Source: J.P. Morgan

Since the size of the monthly payment is lower when the down payment is higher, we think the impact of the new regulations will be neutral over the medium term. Also, we think those motorcycle customers that cannot afford an increase in the down payment from 15% to 25% are the kind of customers that have barely enough income to make monthly payments and are highly likely to default. If a customer has sufficient income to buy a motorcycle, he or she should be able to save up for the down payment over several months and then buy. Over the long term, we think the new regulations on down payments will increase the quality of receivables, and that share of sales should come to reflect fundamentals such as product competitiveness and sales capabilities.

Impact of Ramadan

Since the timing of Ramadan is based on the Islamic calendar, it does not occur at the same time each year on the Western calendar. This means that it will be hard to get an accurate read on the actual strength of demand YoY in July and some time thereafter. Manufacturing and sales tend to decline sharply during Ramadan, and demand tends to surge both before and after Ramadan. In 2012, demand will probably decline YoY in July since Ramadan begins in July this year, but did not in July 2011, and increase YoY in August since the end of Ramadan (Lebaran) comes earlier in August this year than it did in August 2011. We thus think it will be October before we can gauge actual YoY growth in demand (because sales data for September will not be released until then).

Figure 3: Ramadan

Source: J.P. Morgan

CY July August September October

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2010

2011

2012

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Gas Price Hikes Unlikely

The consensus view among those we interviewed is that it will be hard to raise gas prices. We see a lack of increase in gas prices as a positive, as we think such a rise could reduce the structural level of demand. That said, gas prices depend in part on political decisions, so higher gas prices remain a possibility. Moreover, for reasons related to fiscal policy, there is strong upward pressure on gas prices (see pages 14-15). We therefore think one ought to continue viewing higher gas prices as a risk factor.

Figure 4: Regular Gasoline Price

City per Liter (US$)Kuala Lumpur 0.60 Jakarta 0.71 Hanoi 0.99 Karachi 0.99 Rangoon 1.04 Taipei 1.05 Dakha 1.08 Guangzhou 1.12 Beijing 1.20 Shanghai 1.20 New Delhi 1.20 Bangkok 1.22 Manila 1.25 Phnom Penh 1.26 Chennai 1.29 Mumbai 1.30 Bangalore 1.40 Sydney 1.42 Singapore 1.62 Seoul 1.87

Source: Comparison of major cities in Asia and Oceania

Note: As of January 2012

8



Demand Outlook for 2012

Autos: Consensus Is For Continued Strength

According to our interviews, the majority view is that auto demand in Indonesia will remain strong in 2012, exceeding 0.9–1.0 million vehicles. Although most believe auto demand will remain at roughly January-June pace (535,000 units), there are some sources of concern, including at least some degree of negative impact from the new regulations on down payments and an erosion of demand in rural areas and for small commercial vehicles as a result of falling commodities prices.

Figure 5: Indonesia Auto Sales:

Source: Astra International

Market share trend: Strong demand for new models from Nissan, Suzuki

Nissan Motor introduced the new Evalia multi-purpose vehicle (MPV) in June, and targets a 78% YoY increase in sales in 2012, to 100,000 vehicles. The company has outlined an aggressive strategy, involving launching Datsun-brand vehicles, increasing manufacturing capacity from 100,000 vehicles in 2011 to 250,000 vehicles in 2015, and introducing 10 new models over the next three years. We view Nissan as a brand that has substantial medium- to long-term growth potential. The company already has the third-largest share in the greater Jakarta region.

Suzuki Motor has launched the Ertiga MPV, and although commercial vehicles are its main business, it aims to retain a certain share of the passenger vehicle market as well. The Ertiga MPV is a competitor to the Toyota Avanza and the Daihatsu Xenia, respectively no. 1 and 2 in sales.

Toyota’s sales, including those of the Avanza, are generally solid. Despite new competitors in the market, its share rose to 38% in January-June from 35% in 2011. The company is maintaining a high degree of competitiveness in a wide range of areas, including product appeal, brand power, financing support, and used-vehicle prices. Somewhat contrary to our expectations, many are of the view that despite new entrants, Toyota will retain its top share of sales in the Indonesian market.

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Figure 6: Indonesia Auto: Share


Motorcycles: Pessimism Waning

Prior to the introduction of the new loan-related regulations, the pessimistic view was that motorcycle demand in 2012 would amount to 5 million vehicles. However, our interviews suggest that pessimism is waning, and that the expectation is now for demand to total 6.2-7.0 million vehicles. Since demand in January-June amounted to 3.702 million vehicles, this means the expected range for July-December is 2.5-3.3million vehicles (down 37-17% YoY). Considering that the Thai floods severely suppressed demand in November-December 2011, we interpret this projection as a 20-40% estimated decline in actual demand. Our Japan-based autos team currently forecasts that Indonesian motorcycle sales will amount to 6.5 million vehicles in 2012.

Figure 7: Indonesia Motorcycle Sales

Source: Astra International, J.P. Morgan estimates

Demand remains firm for Honda scooters

In January-June, only Honda’s scooters and Kawasaki’s motorcycles achievedpositive YoY growth in sales. We believe that in the high-end segment, the impact of the down payment regulations will be relatively minor, and that sales will remain

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strong in relative terms in 2H. Honda has a full model change planned for its mainstay scooter model, the Beat, in 2012, so its market share could increase still further in 2H.

Our Japan-based autos team forecasts that Honda’s motorcycle sales for 2012 willamount to 3.683 million vehicles, but our interviews suggest that they will range from 3.6 million to over 4.0 million vehicles.

Figure 8: Indonesia Motorcycle Share


The Beat will undergo a full model change in 2012, with fuel injection systems replacing carburetors over the entire lineup. However, we believe the new models will be priced essentially the same as existing models. Both Yamaha Motor’s recently launched Mio J model and Suzuki’s mainstay Nex model are sold in both fuel injector and carburetor versions, with the fuel injector versions priced IDR250,000-300,000 (roughly $26-32) higher. We believe that in taking advantage of its low-cost fuel injection system to accelerate its transition from carburetors to fuel injection, Honda’s goal is to further increase its market share, which is already causing its competitors distress.

Yamaha MotorAlthough Yamaha slowed the growth of non-performing receivables considerably by halting aggressive sales promotion, sales volume in January-June was down 20% YoY, to 1.311 million vehicles, owing to the new regulations on loans and anemic sales of the new Mio J, and its market share fell sharply, to 35% from 39% in 2011. The Mio J, launched in February, is starting to show up in the used vehicle market, and we think there is a risk of the price of used Mios falling further going forward. Other risk factors for Yamaha include lower share of sales and downward pressure on prices as a result of the launch of new Honda models. Although the company is taking steps to spark a recovery in sales, we expect the difficulties to continue in the near term.

Our Japan-based autos team forecasts that Yamaha’s motorcycle sales for 2012 willamount to 2.589 million vehicles, but demand projections among those we interviewed ranges from 2.3-2.8 million.

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Strikes on the Rise

There were strikes going on at the industrial parks we visited. Labor costs in Indonesia are still low, even compared with other developing countries, and the labor force is going to grow for some time. Thus, we think swiftly rising costs and labor shortages are unlikely to become major problems. That said, we think worker management in Indonesia needs to be done in a way that increases employee satisfaction and does not adversely affect output.

Figure 9: Monthly Wages in US$

CityWorker

(General Engineer)

Engineer

Middle Management(Managerial

level)

Non-manufacturing(General level)

Non-manufacturing

(Managerial level)

Minimum Wage

Phnom Penh 82 204 663 266 1,019 55 Hanoi 111 297 713 369 947 95 Ho Chi Minh 130 286 704 320 1,020 95 Colombo 141 508 885 296 1,016 60 Karachi 193 596 1,243 227 1,343 78

Jakarta 209 414 995 409 1,448 167

Chingdao 251 437 766 601 1,421 162 New Delhi 264 607 1,510 648 1,568 98 Bangkok 286 641 1,565 617 1,597 136 Shenyang 299 531 916 520 1,011 158 Dalian 316 540 1,012 586 1,569 166 Shenzhen 317 619 1,208 635 1,342 237 Bangalore 320 634 1,465 620 1,649 84 Manila 325 403 1,069 455 1,197 153 Wuhan 333 577 973 652 1,585 158 Kuala Lumpur 344 973 1,926 920 2,163 -Guangzhou 352 650 1,301 739 1,883 206 Mumbai 403 594 1,319 727 1,928 103 Shanghai 439 745 1,372 836 1,806 203 Beijing 538 815 1,460 854 2,001 199

Source: Cost Comparison of major cities in Asia and Oceania

Note: As of August-September 2011

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Medium-Term Demand Outlook

Size of Auto Market Headed to 1.5 Million Vehicles

Many we spoke with are optimistic about the auto market, and project that market demand will expand to 1.5 million vehicles by 2015 and over 2.0 million vehicles by 2020. If infrastructure construction is stepped up, we think an expansion of the market to well over 2 million vehicles is possible. We think drivers upgrading to autos from motorcycles as their incomes rise, an expansion of the low end of the market, and the aggressive introduction of new models will all help to drive demand. The auto penetration rate and per-capita GDP are both lower in Indonesia than in China, where both have increased rapidly, and the relationship between incomes and the auto penetration rate suggests that Indonesia is probably on the verge of a major increase in auto demand, driven by rising incomes.

Figure 10: GDP per Capita and Penetration Rate

Source: Global Statistic Yearbook, Gaikindo, World Bank

Production capacity approaching 1.5 million vehicles

Based on publicly announced data, aggregate vehicle production capacity should exceed 1.5 million vehicles in 2014. We think automakers could announce further capacity increases once details of the Low-Cost Green Car (LCGC) initiative are officially announced.

Brunei

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Figure 11: Indonesia: Auto Production Capacity

Production Capacity (unit/year)Company Plant 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Toyota Motor Sunter 10,000 --> --> --> --> --> 10,000 --> --> -->Toyota Motor Karawang No.1 100,000 --> --> --> --> --> 110,000 --> --> -->Toyota Motor Karawang No.2 - - - - - - - - 70,000 120,000 Toyota Motor Total 110,000 110,000 110,000 110,000 110,000 110,000 120,000 120,000 190,000 240,000Daihatsu Motor Jakarta 114,000 140,000 150,000 --> --> 230,000 400,000 --> --> -->Daihatsu Motor Karawang - - - - - - - 100,000 --> --> Daihatsu Motor Total 114,000 140,000 150,000 150,000 150,000 230,000 400,000 500,000 500,000 500,000Hino Motor Purwakarta - - - - 35,000 --> 35,000 50,000 --> -->Honda Motor Karawang 50,000 --> --> --> --> --> 50,000 60,000 --> 180,000Nissan Motor Purwakarta 50,000 --> --> --> --> --> 100,000 --> 180,000 250,000Suzuki MotorMitsubishi Motor

Tambun (Bekasi) 120,000 --> --> --> --> --> 200,000 --> --> -->

Mitsubishi/Fuso Jakarta 48,000 --> --> --> --> --> 70,000 --> --> -->Isuzu Motor Jakarta - - - - - - 75,000 --> --> -->Mazda/VW Bekasi 18,000 --> --> 30,000 --> --> 30,000 --> --> -->VW/Audi Jakarta - - - - - 3,000 --> --> --> -->Daimler Bogor - 4,400 --> --> --> --> 20,000 --> --> -->BMW Jakarta - - - - - 1,464 4,800 --> --> -->GM Bekasi - - - - - - - - 40,000 -->Hyundai Motor Tangerang - - 4,500 --> --> --> 4,500 --> --> -->Hyundai Motor Bekasi - - - - 12,000 --> 12,000 --> --> --> Hyundai Motor Total 4,500 4,500 16,500 16,500 16,500 16,500 16,500 16,500Kia Jakarta - - 5,000 --> --> --> 5,000 --> --> -->Indonesia Total 510,000 540,400 559,900 571,900 618,900 700,364 1,126,300 1,251,300 1,441,300 1,681,300

Source: Company data, Marklines

Some details about LCGC still unsettled

We expect Indonesia to initiate an eco-car program similar to Thailand’s. However, certain details, such as the conditions for receiving tax breaks and the details of such tax breaks, remain undecided. We believe basically all of the Japanese passenger car manufacturers will participate in the LCGC program, but as they are unable to determine the scale of their investments until the aforementioned details have been decided, the only one thus far to start building new factory facilities is Daihatsu.

Growth among non-Japanese automakers as well

Japan’s automakers continue to command a greater-than 95% share of the Indonesian market. However, we think that given the potential of the Indonesia market, non-Japanese automakers will increase their production and sales in the country. Such manufacturers include PSA Peugeot Citroen (mainly in LCGCs), Hyundai Motor, Kia Motors, Chinese manufacturers like Geely and Chery (who are starting to increase knockdown production in Indonesia with a view to expanding their overseas markets), and European luxury-car manufacturers. Japanese manufacturers have more years of experience in the Indonesian market than in other emerging markets like China and India, and having established brand strength are in a dominant position. However, Indonesia is one of the world’s few growth markets for autos, and with the market on the path toward exceeding 2 million vehicles in size, we think a decline in market share among Japanese automakers is essentially inevitable.

14



Motorcycles: Single-Digit Growth for Now-Mature Market

The motorcycle penetration rate in Indonesia is high, even compared with other ASEAN countries, and the majority opinion is that motorcycle demand is approaching a peak, with estimates of that peak ranging from 10-12 million vehicles. In some areas other than Jakarta, however, the penetration rate is still low, and there is significant potential for growth in motorcycle demand.

Honda could retain high market share

We think Honda will aggressively introduce new models and new technologies, as well as lower prices (the keys to its high volume throughout the ASEAN region), and as a result we think it will retain its dominant position in Indonesia. Yamaha’s market share was on a par with Honda’s in 2009-2010, but the company’s aggressive sales promotions in that period are the root cause of its current slump in sales, and we think a 30-35% market share represents the company’s true strength.

15



Indonesian Market Fundamentals

The ratio of finance utilization in Indonesia is relatively high, at 70-80% for both motorcycles and cars, and the array of finance products is an important factor in determining sales. As a result, Toyota, which has an overwhelming share in the car market, and Honda, which has an overwhelming share in the motorcycle market, have comparatively strong competitive positions in captive finance, and we believe this provides significant support for sales.

Figure 12: Captive Finance Company

Brand Company Manufacturer’s Investment ratio

4W Toyota Toyota Astra Financial Services 50% Toyota Astra Sedaya Finance 0% Daihatsu Astra Sedaya Finance 0% Nissan Indomobile Finance 0% Suzuki Indomobile Finance 0% Honda None2W Honda Federal International Finance 0% Yamaha Motor Bussan Auto Finance 10% Suzuki Suzuki Finance 14%

Source: J.P. Morgan based on company data

Non captive finance companies like other Japanese corporates and local banks also offer financing for car and motorcycle purchases. We list the main companies below.

Figure 13: Auto / Motorcycle Finance Company

4W 2WNew Car Used Car New Car Used Car

CaptiveAstra Credit Companies(ACC) x xFederal International Finance(Astra) x xToyota Astra Financial Services xIndomobile Finance x xBussan Auto Finance x xSuzuki Finance x x

JapaneseSummit Oto Finance (Sumitomo Corp.) x xOto Multiartha (Sumitomo Corp.) xDipo Star Finance (Mitsubishi Corp) x xArtha Asia Finance(Hitachi Capital) x

LocalClipan Finance x xBCA Finance (Bank Central Asia) x xKencana Internusa Artha Finance (Bank CIMB Niaga) x xAdira Finance (Bank Danamon) x x x xBFI Finance x x xWom Finance (Bank International Indonesia) x x

Source: J.P. Morgan based on company data

Note: ACC is Astra group auto finance companies including Astra Sedaya Finance and Astra Auto companies

Motorcycle finance is a high-turnover business

The level of income for motorcycle buyers tend to be low, and the financing period is one to three years, with relatively high interest rates at around 30%. The keys to motorcycle financing are keeping a close eye on non-performing loans, rapid

16



collection and rapid disposal in the second-hand market at an appropriate price following collection. Since there are no really reliable data covering the country as a whole, a human wave strategy for account management and credit checks is extremely important. In the past, when sales have trended downwards, a deterioration in receivables at the finance companies has been an early leading indicator, and management of the financial business has a major impact on sales.

Honda’s dominance in used motorcycle prices

Not only does Honda keep tight control over its financing business, but since it has a relatively high pace of model replacement, Honda motorcycles (particularly scooters) are popular in the used vehicle market, and a number of comments have focused on the relatively high second-hand price commanded by Honda products. Until around 2009, Yamaha Motors’ scooters were also extremely popular, but as a result of expansion in sales and aggressive sales activity, the second-hand price dropped back to the industry average at the end of 2011. Although the price deterioration ended at the beginning of 2012, there are still no signs of recovery.

Toyota has clear advantage in auto financing

Under a narrow definition, Toyota Astra Financial Services (TAFS), in which Toyota maintains a stake, is a captive finance company, but in real terms Astra Sedaya Finance (ASF), which provides services for joint-venture partner Astra, can also be characterized as a captive finance company.

TAFS appears to have a lower procurement cost than its competitors. Its low procurement costs appear to allow it to offer loans at low interest levels, and as a result we believe TAFS has been able to acquire relatively creditworthy customers. Loan interest rates at ASF are average for the industry, but we believe it is able to offer services to a wider range of customers. Not only are the dealers already able to offer a high-quality product in terms of financial services, but since TAFS and ASF both offer priority financial services, they appear to cover most of the needs in this area

For competing finance companies, Toyota’s new car business, in which the captive finance company offers an extremely low interest rate program, appears to offer only low margins, despite the high level of second-hand prices and the creditworthiness of the client base. Since the captive business has an overwhelming market share, the company can undertake sales promotion business while keeping control of financing, and we believe this feeds through to overall strength in sales.

Gasoline Prices and the Financial Situation

Indonesia continues to sell gasoline at a fixed price, with the difference from the market price made up in subsidies. The company has been a net importer of crude oil since 2003, and the subsidy is borne by the government.

17



Figure 14: Indonesia: Oil Production and Consumption

Source: World Bank

As a result of the increase in the number of motorcycles and cars on the road and the rise in crude oil prices, the weighting of overall expenditure represented by this subsidy has been increasing. In FY2012 the subsidy will account for around 17% of expenditure, and while this burden is still not as great as in 2005, when the government raised the gasoline price, considering the expected increase in demand over the medium to long term, reducing the fuel subsidy remains an important issue for car makers.

Figure 15: Indonesia Subsidy Amount

Source: Indonesia Finance Ministry

Will it be difficult to raise prices in 2012?

If the 6mma for the Indonesian crude oil price (ICP) rises more than 15% above the $105/bbl level established in the supplementary budget for FY2012, then there is a possibility the government could raise the gasoline price from 4,500 rupiahs per liter to 6,000 rupiahs per liter (i.e. reducing the subsidy). However, as of the end of June, the ICP had fallen to $117.28/bbl. Since the spot price had fallen to $99.08/bbl, at the current level of the ICP it appears unlikely there will be any increase in gasoline prices in FY2012.

1304

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0200400600800

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Trillion IDR %

Subsidy as a percentageof the Budget

18



Figure 16: ICP: Spot and 6-month Average

Source: Ministry of energy and mineral resources republic Indonesia

FY2013 budget key to short-term developments

Since there will be an Indonesian presidential election in 2014, it will prove difficult to push through any major increase in gasoline prices in 2H 2013 unless there is a reason such as a major increase in crude oil prices. If the government cuts the fuel supplement before 2014, then we believe the most likely timing will be at the time of the FY2013 budget announcement.

Figure 17: Budget Schedule

Source: International Institute for Sustainable Development

0

20

40

60

80

100

120

140

160

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

ICP Price 6 month average

Assumption price (2012 revised budget) Assumption price (+/- 15%)

$/Barrel

7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Budget Schedule

↓ ↓ ↓ ↓

Reform Schedule

↓

Election Schedule

2012 2013 2014

Opportunity for

Reform

Elec

tion

Budget 2013

Proposed

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Approved

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Revision

Budget 2014

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Opportunity for

Reform

Campaign-mode for Presidential Election

Reforms are unlikely

19



Major Models in Indonesia

Figure 18: Auto: Major Models

Source: Company data

Note: Toyota (T), Daihatsu (D), Honda (H), Nissan (N)

Figure 19: Indonesia 2011 Sales Top 10

Rank Brand Model Sales units

1 Toyota Avanza 162,3672 Daihatsu Xenia 66,8353 Toyota Kijang 54,7634 Nissan Livina 27,5635 Toyota Rush 25,0126 Daihatsu Terios 22,4167 Honda Fit 19,4408 Suzuki APV 18,3499 Toyota Vitz 16,44810 Toyota Fortuner 13,111

Source: Marklines

Alphard 2.4 G (T)

New Avanza 1.3 E (T)

Camry 2.4 G (T)

Fortuner 2.5 G (T)

Yaris 1.5 E (T)

All New Xenia 1.0 (D) Terios (D)

Grand Livina (N)

Serena (N)

Civic (H)

CR-V (H)

All New Jazz (H)

Odyssey (H)

0

100

200

300

400

500

600

700

800

900

500 1000 1500 2000 2500 3000

Sales price (Rp. mln)

Displacement (cc)

20



Figure 20: Motorcycle: Major Models

Source: Company data

Note: Honda (H), Yamaha (Y), Kawasaki (K), Suzuki (S)

Figure 21: High Exposure to Indonesia

Indonesia Composition ratio (FY12E)Code Company Rating Sales Net ProfitAutomobile7203 Toyota Motor Overweight 5% 4%

Motorcycle7267 Honda Motor Overweight 1% 7%7272 Yamaha Motor Neutral 20% 49%

Motorcycle Supplier7220 Musashi Seimitsu Overweight 10% 20%7230 Nissin Kogyo Neutral 12% 21%7296 F.C.C. Neutral 14% 23%

Source: Company data, J.P. Morgan estimates

Beat CW (H)

New Blade (H)

Revo Fit (H)

Scoopy (H)

Mio (Y)

Jupiter (Y) Scorpio (Y)

Mio J (Y)Nex (S)

Nex Fi (S)

Athlete (K)

Skywave CW (S)

Hayate (S)

0

10

20

30

40

50

60

80 100 120 140 160 180 200 220 240 260

Sales price (Rp. mln)

Displacement (cc)

21



Korea

Hyundai Wia – We are turning more bullish

(Extracted from the Note, “Hyundai Wia: 2Q12 results - differentiated margin and top-line growth to pick up from 2H12” published on 29 July 2012; please see the original note for pricing dates.)

Highest automotive parts margin in the industry. Wia delivered industry’s highest automotive OP margin of 7.5%, further improving from 7.3% in 1Q12. Automotive utilization rose by 3%P Y/Y during 1H12. Combined with utilization and UPH improvement, Wia increased outsourcing of low value added automotive business (tire module or aged parts production), which further boosted profitability. However, outsourcing caused 2Q12 top-line growth falling short of OEMs' production growth and consensus estimates.

M/T profitability further narrowing the gap with market leader. Developing large size overseas customer relationship (IT and automotive) and FA (power train) orders continued to keep monthly new order and utilization higher. Average monthly new order amounted to 5000 units, 20% above normal monthly average. ASP in 1H12 was 30% higher vs. 2011 ASP. Overseas customer developments drove SG&A costs higher (4.5% of sales from 3.8% in 1Q12), which will stabilize into 2H with revenue rising faster.

Continuous growth plan. We raised FY12~13 NP by 8%, reflecting enhanced margin trend which looks sustainable. We also raised FY13~14 top-line partially reflecting upcoming capacity expansion. Apart from well known China engine production increase from September, we think India CVJ capacity will at least double from 2H13. Casting plant will also raise production capacity by 35,000 ton to have annual production capacity of 115,000 ton from 2H13, on our estimates.

Hyundai Wia is our preferred parts pick on growth, margin and RoE expansion. In the next 2-3 years, we expect Hyundai Wia to show the biggest RoE expansion in Korea auto space driven by profitability increase and high asset turnover. Management focus for FY12 has leaned toward profitability vs. growth with top line growth kept at 10%. However, growth momentum will pick up again from FY13 with a few new capex projects under progress.

Maintain OW and raise PER [Jun-13] PT of W230,000. Key risks include production volatilities of HMC/KIA; increasing R&D expense; global capex decline on macro outlook deterioration.

Wan Sun ParkAC

(82-2) 758-5722

[email protected]

J.P. Morgan Securities (Far East) Limited, Seoul Branch

22



Table 1: Hyundai Wia - 2Q12 earnings review

Won in billions, %

2Q122Q11A YoY (%) 1Q12A QoQ (%)

Actual JPMe Diff. (%) Cons.*Sales 1,685 1,735 -2.9% 1,816 1,615 4.4% 1,652 2.0%OP 132 121 9.2% 137 85 55.5% 123 7.4% OP margin % 7.8% 7.0% 7.6% 5.3% 7.4%NP 95 88 7.5% 102 61 55.1% 91 3.9% NP margin % 5.6% 5.1% 5.6% 3.8% 5.5%

Source: Company data, Bloomberg, J.P. Morgan estimates. *28-days consensus.

Table 2: Hyundai Wia - 2Q12 earnings revisions

Won in billions

2012E 2013E 2014EOld New Chg % Old New Chg % Old New Chg %

Sales 7,189 7,141 -0.7% 8,084 8,132 0.6% 8,741 9,007 3.0%OP 501 542 8.3% 583 626 7.4% 651 703 7.9% OPM (%) 7.0% 7.6% 7.2% 7.7% 7.5% 7.8%NP 376 408 8.6% 440 474 7.8% 496 537 8.2% NPM (%) 5.2% 5.7% 5.4% 5.8% 5.7% 6.0%

Source: J.P. Morgan estimates.

Table 3: Hyundai Wia – Quarterly earnings trend

Won in billions

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12Total revenue 1,003 1,266 1,256 1,600 1,497 1,615 1,531 1,750 1,652 1,685 Auto parts 696 927 925 1,213 1,152 1,194 1,134 1,323 1,255 1,237 Y/Y (%) 66% 29% 23% 9% 9% 4% Machinery 308 339 332 387 345 421 398 426 397 448 Y/Y (%) 12% 24% 20% 10% 15% 6%OP 37 60 49 73 73 85 84 96 123 132 Auto parts 42 39 33 81 62 58 59 69 92 95 Machinery -5 22 17 -8 11 26 25 27 31 37OP margin % 3.7% 4.8% 3.9% 4.6% 4.9% 5.2% 5.5% 5.5% 7.4% 7.8% Auto parts 6.1% 4.2% 3.5% 6.6% 5.4% 4.9% 5.2% 5.2% 7.3% 7.7% Machinery -1.5% 6.4% 5.0% -1.9% 3.2% 6.2% 6.3% 6.3% 7.8% 8.3%

Source: Company data.

Table 4: Hyundai Wia – Revenue and OP trend by division

Won in billions

2010A 2011A 2012E 2013E 2014EOld New Chg % Old New Chg % Old New Chg %

Total revenue 5,125 6,393 7,189 7,141 -0.7% 8,084 8,132 0.6% 8,741 9,007 3.0% Auto parts 3,760 4,803 5,360 5,360 0.0% 5,889 6,084 3.3% 6,218 6,692 7.6% growth (%) 28% 11.6% 11.6% - 9.9% 13.5% - 5.6% 10.0% - Machinery 1,365 1,590 1,829 1,781 -2.6% 2,194 2,048 -6.7% 2,523 2,314 -8.3% growth (%) 16.5% 15.0% 12.0% - 20.0% 15.0% - 15.0% 13.0% -Operating profit 220 337 507 544 7.4% 584 627 7.4% 656 705 7.6% Auto parts 194 248 375 402 7.1% 424 459 8.3% 466 509 9.1% Machinery 26 89 132 142 8.2% 160 168 4.8% 189 197 3.9%OP margin % 4.3% 5.3% 7.1% 7.6% 7.2% 7.7% 7.5% 7.8% Auto parts 5.2% 5.2% 7.0% 7.5% 7.2% 7.6% 7.5% 7.6% Machinery 1.9% 5.6% 7.2% 8.0% 7.3% 8.2% 7.5% 8.5%

Source: Company data, J.P. Morgan estimates.

23



India

Maruti Suzuki: While market share is likely to stabilize, macro headwinds continue

As supplies ramp up at Manesar (post the early resolution of the strike) and with product refreshes ahead, we believe Maruti’s market share will now stabilize at levels of ~40% over the near term (after coming off from ~48% over the past two years). However, the industry demand outlook is muted, given elevated interest rates and fuel prices. We re-iterate our Neutral stance given that while the market share will likely stabilize, industry demand outlook remains sedate.

Manesar strike has been resolved earlier than anticipated: Maruti has resumed limited operations at its Manesar plant (after the lock out was lifted within 21 days) and has started a few of the production shops (including the weld shop). The plant is initially producing 150 cars per day (vs capacity of 1,700 cars) - production is expected to ramp up significantly from hereon.

Market share stabilizing at current levels? Maruti Suzuki has steadily lost market share over the past two years to ~40% now. We believe that as supplies ramp up for the Swift and Dzire (which enjoy waiting periods) and with product refreshes ahead, including the upcoming launch of the refreshed Alto, market share is likely to stabilize at current levels.

However, industry demand outlook remains sedate: The industry growth outlook remains muted over the near term given i) elevated interest rates and higher fuel prices. ii.) weak GDP growth rate and uncertain outlook. A weakening bias of INR given a challenging BoP (Balance of Payment) situation. iii.) Limited scope of any fiscal sops for the sector.

Price Target: We are lowering our earnings to factor in the strike as well as the weak sales environment. We are consequently lowering our Mar’13 PT to Rs. 1,265 -we continue to value the company at 14.5x forward earnings. Key downside risks: Any tax on diesel vehicles, sedate response to the new Alto as well as adverse currency movements. Key upside risk: a sooner than expected pick up in industry growth.

Aditya MakhariaAC

(91-22) 6157-3596

[email protected]

Ritesh Gupta(91-22) 6157-3585

[email protected]


24



As supplies ramp up at Manesar (post the early resolution of the strike) and with product refreshes ahead, including the soon to be launched Alto 800cc, we believe that Maruti’s market share will likely stabilize at current levels of ~40% over the near term (after coming off from ~48% over the past two years). However, the industry demand outlook is sedate, given elevated interest rates and fuel prices. We re-iterate our Neutral stance on MSIL given that while market share will likely stabilize at current levels, industry demand remains muted.

The Manesar plant strike has been resolved earlier than anticipated: Maruti has resumed limited operations at its Manesar plant, after the lockout was lifted (within21days) - it has started a few of the production shops (including the weld shop). The plant is initially producing 150 cars per day (vs capacity of 1,700 cars) - production is expected to ramp up from hereon. Contract workers to be regularized:Currently MSIL employs about ~1,870 contract workers and ~1,530 regular workers at the Manesar facility. The management has highlighted that they will discontinue the system of contract labor at both the plants and the workmen will be employed by MSIL directly. Going forward, ~20% of the workforce will comprise temporary workers. The OEM would start fresh recruitment from September 2 (existing contract workers both at Gurgaon and Manesar will be considered).

Please see our note dated 21 Aug 2012: Maruti resumes partial production at Manesar

Figure 3: Maruti Monthly Unit Sales Trend (in unit nos)

Source: Company

50,000

70,000

90,000

110,000

130,000

AP

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MA

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FY11 FY12 FY13

Unit sales came off in July given

the lock out at Manesar

https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-926009-0.pdf

https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-926009-0.pdf

25



Market share stabilizing at current levels? Maruti Suzuki has steadily lost marketshare over the past two years to ~40% currently as competition launched new models in the hatchback segment.

Figure 4: Maruti Overall Passenger Car Market share (Including Exports)

Source: SIAM, J.P. Morgan

While global OEMs launched several new products across product segments, Maruti continues to enjoy waiting periods for models such as the Swift and Dzire. Further, with the launch of the refreshed Alto, market share is likely to stabilize at current levels.

Figure 5: Maruti Monthly Market share - Passenger Cars Domestic (%)

Source: SIAM

Table 22: Maruti - Monthly Volumes

Jul-12 Jul-11 %YoY Jun-12 %MoM FY13YTD FY12YTD % YTDMini 28,998 38,028 -24 34,198 -15 123,811 160,080 (23)Compact 15,759 9,099 73 22,624 -30 88,745 64,750 37 Super Compact 11,413 3,021 278 13,741 -17 58,371 28,116 108 Mid-Size 679 2,303 -71 408 66 2,126 7,820 (73)Executive 2 32 -94 6 -67 23 149 (85)Utility vehicles 7,294 642 1,036 5,638 29 26,259 2,144 1,125 Vans 6,879 13,379 -49 6,916 -1 34,953 54,128 (35)Domestic 71,024 66,504 7 83,531 -15 334,288 317,187 5 Export 11,210 8,796 27 13,066 -14 43,842 39,639 11 Total Sales 82,234 75,300 9 96,597 -15 378,130 356,826 6

Source: Company Data.

50% 50% 47% 48% 48% 41% 40%

23% 24% 30% 28% 22%23% 25%

14% 13% 12% 12%12%

12% 11%

13% 13% 11% 12% 18% 24% 25%

0%

25%

50%

75%

100%

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 YTDFY2013

Maruti Hyundai Tata Motors Others

30%

35%

40%

45%

50%

55%

60%

Feb

-09

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-10

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-11

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-11

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-11

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-11

Feb

-12

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-12

Maruti has lost ~800bps in

market share over the past two

years

Market share is likely to stabilize

at current levels, given new product refreshes ahead and

steady demand for its diesel

vehicles

26



Maruti has ceded market share in the entry level segment to the Hyundai Eon over the past year. However, MSIL is launching the revamped Alto 800 in 3QFY13, which will likely stem market share losses from hereon.

Figure 6: Maruti Domestic Mini Car Segment Monthly market share (%)

Source: SIAM

Sales of the minivan (Omni, Eeco) segment have halved to current levels of ~7,000 units and market share has come off sharply as these products lack a diesel variant.

Figure 7: Maruti’s Domestic Mini Van Market share (%)

Source: SIAM

85%82%

71%69%

74%76%

80%

73% 73%

69%71%

76%77%

60%

65%

70%

75%

80%

85%

90%

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

62%61%

59%

62%

55%

49%

59% 58%56%

60%

55%

46%

41%

40%

45%

50%

55%

60%

65%

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

Maruti has ceded market share in Mini Car segment, primarily to

the Hyundai Eon

Maruti has also lost share in the

mini vans segment due to non

availability of diesel variants

27



However, the OEM has sustained market share in the competitive Compact (Swift, Ritz) and the Super Compact (Dzire) segments.

Figure 8: Maruti’s Domestic Compact Passenger Car Market share

Source: SIAM

Figure 9: Maruti’s Domestic Super Compact Passenger Car Market share

Source: SIAM

Diesel capacity expansion: Maruti is aggressively expanding diesel capacity, which is likely to more than double to 700,000 units by FY14E. The sustained demand for the Swift and Dzire, launch of the Ertiga as well as the dieselization of the market has led to the capacity expansion.

Table 23: Maruti: Diesel Production Capacity

FY12 FY13 FY14Suzuki Power train 300,000 300,000 300,000 Fiat 100,000 100,000 100,000 Gurgaon Plant 150,000 300,000 Total 400,000 550,000 700,000Gurgaon Phase 1 Phase 1 to be commissioned in early 2013 with a capacity of 150,000 unitsGurgaon Phase 2 Capacity will be raised to 300,000 in 2014.

Source: Company

We estimate diesel cars will likely account for ~37% of sales at Maruti in FY13E (up from just 15% in FY09).

Figure 10: MSIL’s Diesel Car Sales

Source: Company, J.P. Morgan Estimates

33%

36%

30%

32%

34%

36%

38%

May'11 Jun'12

65%

74%

60%

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68%

72%

76%

May'11 Jun'12

110,000

163,000

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15%19% 18%

24%

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FY09 FY10 FY11 FY12 FY13E

Diesel Sales (in units) - LHS % of Sales - RHS

Maruti is aggressively expanding

diesel capacity, which is likely to

more than double to 700,000 units by FY14E.

28



Figure 11: Maruti’s SUV Sales (in unit nos)

Source: Company, J.P. Morgan.

The shift towards the higher priced diesel cars is leading to a sharp increase in realizations.

Figure 12: Maruti Quarterly Realizations Trend (in Rs)

Source: Company.

However, industry demand outlook remains challenging: The industry growth outlook remains muted over the near term given i) elevated interest rates and higher fuel prices. 2.) Weak GDP growth rate and uncertain outlook 3.) Weakening bias of INR given a challenging BoP (Balance of Payment) situation. 4.) Limited scope of any fiscal sops for the sector.

1526

5,592

7,733

5635

7290

0

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Mar Apr May Jun Jul

280,719

318,770

355,844

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1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

The Ertiga has received an encouraging consumer

response

Realizations have improved sharply, driven by rising sales of

diesel variants

29



Figure 13: India Passenger Car Industry Growth Rate (%)

Source: SIAM.

With crude prices remaining elevated, further gasoline fuel price hikes cannot be ruled out.

Figure 14: Brent Crude Price Trend

Source: Bloomberg

News flow around the proposed diesel vehicle tax continues as persistently high crude / weak INR keep subsidy losses elevated, given that the government has not yet raised retail prices of diesel fuel.

Figure 15: India Diesel and Petrol Price Trend

Source: Bloomberg.

19%

7%

21%

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28%24%

4% 4%

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10%

15%

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30%

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1,000,000

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FY

2005

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2012

YT

DF

Y13E

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Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

30.0

40.0

50.0

60.0

70.0

80.0

Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12

Diesel Petrol

We expect passenger car growth

rates to remain sedate over FY13

Crude has risen again to ~$115 levels

Price differential between diesel

and petrol has been widening –raising uncertainties about a tax

on diesel vehicles

30



Figure 16: INR JPY Trend

Source: SIAM

Figure 17: USD INR Trend

Source: SIAM

Further, as the INR continues to weaken against international currencies, it will weigh on profitability. Maruti is localizing components, which will drive cost savings over the medium term.

Figure 18: MSIL Quarterly EBITDA Margin Trend

Source: Company

Valuation and Price Target: We are lowering our earnings estimates to factor in the strike as well as the weak sales environment.

Table 24: Earnings revisions

FY13E FY14E

Revised EstimatesPAT (Rs. M) 18,731 25,211 EPS (Rs) 64.8 87.2

Earlier EstimatesPAT (Rs. M) 22,706 27,990 EPS (Rs) 78.6 96.9

Source: J.P. Morgan estimates

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

43

47

51

55

59

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

10.4%11.7%

13.6%

11.7%

8.9% 8.8%7.9% 8.3%

7.4%

3.1% 3.3%

5.4% 5.1%

0%

4%

8%

12%

16%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Margins have dipped due to

lower operating leverage and

unfavorable currency movements

31



Figure 19: Maruti Annual Volumes (in unit nos)FY10 FY11 FY12 FY13E FY14E

Export Sales (in Unit Nos) 147,575 138,266 127,379 133,748 147,123% Growth 111% -6% -8% 5% 10%Domestic Sales(in Unit Nos) 870,790 1,132,739 1,006,316 1,064,682 1,208,414% Growth 21% 30% -11% 6% 14%Total Sales (in Unit Nos) 1,018,365 1,271,005 1,133,695 1,198,430 1,355,537% Growth 29% 25% -11% 6% 13%

Source: Company, J.P. Morgan estimates.

Figure 20: MSIL Annual EBITDA Margin Trend (%)

Source: Company, J.P. Morgan estimates.

We are consequently lowering our Mar’13 PT to Rs. 1,265 - we continue to value the company at 14.5x forward earnings, which is in line with the avg historical P/E.

Figure 21: MSIL Rolling Forward PE Chart (x)

Source: Company, Bloomberg, J.P. Morgan.

7.9

11.8

8.2

5.2 5.36.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY09 FY10 FY11 FY12 FY13E FY14E

6

9

12

15

18

21

24

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

PE Mean +1 std dev -1 std dev

32



Taiwan

Outperformance not justifiable

YTD the Taiwan auto sector has outperformed the market index by 30%. Outperformance was mainly driven by 1) the decline of oil price in 2Q12, therefore better-than-expected sales momentum and 2) the slumping export outlook hitting technology sector and therefore the auto sector which had good sales momentum in 2Q12 outperformed relatively.

However, we maintain our underweight stance on Taiwan auto sector because 1) oil price is on the rise again since the beginning of 3Q12, and 2) the outperformance of 30% does not seem to be justifiable under a flattish growth outlook for 2012E/13E.

As global economy is entering an era of low interest rate, we believe inflation risk will be inevitable. Rising oil price will discourage purchasing of a motor vehicle. For Taiwan, an export-driven economy, the slumping export outlook will likely lead to low interest in discretionary goods. 7M12 auto unit sales dropped 1%YoY (domestic -2%YoY, imports +2%), which has been a good enough result under such economic environment. We expect full year sales to be 8% lower than 2011.

Figure 22: YTD Taiwan auto sector performance vs. TWSE Index

Source: Bloomberg, and J.P. Morgan

Figure 23: Oil price YTD (US$/bbl)

Source: Bloomberg and J.P. Morgan

Figure 24: Taiwan auto sales and growth analysis

Source: China Motor, J.P. Morgan estimates.

Figure 25: Taiwan auto ownership analysis

Source: China Motor, J.P. Morgan estimates

0

5

10

15

20

25

30

35

95

105

115

125

135

145

155

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

Outperformance (%) (RHS) Auto TWSE75

80

85

90

95

100

105

110

115

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

-2%

1%

-5%

-13%

1%

-1%

-11%

0%

-17%

15%

4%

17%

6%

-27%

-11%

-30%

28%

11%15%

-8%

2%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

100,000

200,000

300,000

400,000

500,000

600,000

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

20

12

E

20

13

E

YoY growth (%) - RHS Total sales volume - LHS

2725

22 2221 19 19

15

17 18

2122

1614

10

1314

1615

-

5

10

15

20

25

30

0%

2%

4%

6%

8%

10%

12%

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

20

11

20

12

E

New vehicle ownership per 1,000 people- RHS

Consumer loan interest rate (%)- LHS

Nick LaiAC

(886-2) 2725-9864

[email protected]

J.P. Morgan Securities (Taiwan) Limited

33



Indonesia

Denso to set up $200m component facility in Indonesia

Third factory in the country expected to come online in 2014

PT Denso Indonesia, a joint venture between Denso and Astra Otoparts (AUTO IJ) announced that it would set up its third facility in Indonesia with an investment of $200m. The company is 64% owned by Denso and 26% by Astra Otoparts.

The new unit, in Bekasi (near Jakarta) will supplement the current factories (in Sunter and Bekasi respectively), which produce a range of automobile components including air conditioners, radiators, spark plugs and filters both for domestic use and exports. The new unit is expected to come on stream in 2014, with a focus on components for local auto makers.

Central bank to plug auto financing loopholes this quarter

Downpayment rules for Shariah Financing expected in 3Q

The Indonesian central bank Governor Darmin Nasution said that the Central Bank may issue Sharia regulation on minimum down-payment for mortgages and vehicle loans this quarter.

As a recap, Indonesian introduced minimum down-payment limits for financing of 2 wheelers and 4 wheelers (and mortgages) on June 15th. Sharia financiers were excluded from these curbs. Anecdotal evidence since then suggests a surge in Sharia financing of vehicles as well as cases where financiers offer unsecured installment loans to partially cover the higher down-payment requirements on vehicles.

The current move by the Central bank would appear to be intent on plugging these loopholes in their move to cool consumer credit.

Aditya Srinath, CFAAC

(62-21) 5291-8573

[email protected]


34



I: Information

In this section, analysts give their take on the news and the developments in each region that may be pertinent to auto companies.

China

Information 1: 1H12 results review for Chinese auto companies

Among our coverage, there are ten Chinese auto listed companies and all of them have released 1H12 results from August 20 to August 30.

There are six companies, which reported 1H12 earnings better than our forecasts, one company’s earnings were in line with our expectations and three reported lower-than-expected results.

(1) Auto companies with better-than-expected 1H12 results:

Brilliance China (OW)

Brilliance China’s 1H12 results were 11% above our expectation and consensus. We believe the performance was mainly driven by the profit contribution from its 50%-owned BMW JV. We continue to see Brilliance China as a proxy to the rapid growth in China's luxury car segment, where risingpenetration and a powerful consumption upgrade trend are two main long-term structural drivers.

Key takeaways from analyst meeting: 1) BMW JV’s net profit rose 58% YoY to Rmb2.62bn, implying a profit contribution of Rmb1.31bn to Brilliance China. In addition to 47% YoY revenue growth, BMW JV's operating margin increased from 9.7% in 1H11 to 13.6% in 1H12 mainly due to higher proportion of BMW 5series sedan in sales mix as 5-series carries a higher margin. 2) 2012E sales targets for BMW cars and minivans are 153,000 units and 82,500 units, respectively. Excluding ~13k units of imported BMW in 1H12, sales of BMW JV were around 67,800 units. This implies BMW JV is expected to sell 85,200 units in 2H12, or up 26% HoH. 2) Management guided for higher expenses in 2H12, because most of R&D expenses (~Rmb500mn) related to its local brand new energy car business will be booked in 2H12.

1H12 result and key operating highlights: 1) Brilliance’s BMW JV sales volume rose 47% YoY to 80,792 units, with 3 series, 5 series sedan and X1 SUVs accounting for 25%, 61% and 14% of total volume, respectively. By July, BMW sales volume has continued to grow by 46%. 2) Minivan (own brand) sales volume dropped 9% YoY to 39,704 units.

Nick LaiAC

(886-2) 2725-9864

[email protected]

Jin Luo


Prateek Sharma

(91-22) 6157-3353

[email protected]


35



Geely Auto (OW)

Geely’s 1H12 results were 7% above our expectation and 12% ahead of consensus. We believe the performance is driven by both its export business and own-brands (mainly Emgrand). We believe Geely will further advance its cooperation with Volvo Car through technology transfer agreement in the coming quarters. In our China auto coverage, we believe Geely has the potential to become China's Hyundai Motor in 4-5 years and hence our OW recommendation.

Three near-term catalysts in 2H12-1H13: 1) Our current 2012/13E earnings are 6%/12% above market consensus, due to our higher sales volume expectation for Geely's export, mainly to emerging markets (which grew by 199% YoY in 1H12) and to a lesser extent due to own-brands especially Emgrand (which saw 38% YoY volume growth in 1H12). We expect ~8% potential upside to management guidance of 460,000 units of sales target this year. 2) Further technology transfer agreement with Volvo is expected in 4Q12-1Q13. This, if it materializes, will follow both companies’ recent MOU signed in March. 3) Totally around 3-4 new or redesigned model launches expected in 2H12-1H13 among Geely’s three own brands in domestic China market.

1H12 result and key operating highlights: 1H12 PAT was Rmb1.02bn vs. our forecast of Rmb956mn and consensus’ Rmb908mn. Sustained gross margin (17.4% in 1H12 vs. 17.4% in 1H11) along with 6% top line growth contributed tothe performance.

Guangzhou Auto (N)

GAC’s 1H12 results were 24% ahead of our expectation but 28% below consensus. We believe the better-than-expected performance was driven by narrowing loss of GAC’s own-brand (Trumpchi) as well as tax credits and government subsidies. Going forward, we believe GAC's margin improvement and two upcoming SUV models around 4Q12-1H13 will help boost its sales momentum and share price performance.

Share price catalyst and risk in 2H12-1H13: (1) We believe consensus earnings are potentially lagging underlying development. Stripping out unexpected tax credit and subsidy in 1H12, our estimate is 14% below actual results in 1H12. Nonetheless, management indicates that GAC's own-brand business might incur higher loss in 2H12 than 1H12, resulting in maintaining our current full-year forecast. At the moment, our current 2012E/13E earnings are 40%/24% below market consensus. (2) GAC’s own brand (Trumpchi) and the Fiat JV are expected to be loss-making this year but such loss should narrow substantially in 2013E on increased sales volume and government subsidies, helping boost GAC’s earnings growth of 57% in 2013E. (3) We are positive on GAC’s two upcoming new SUV models in 4Q12-1H13E (one under its own brand and another likely Mitsubishi Motors model) given the current popularity of SUVs in China.

1H12 result and key operating highlights: (1) Overall vehicle sales volume surged by 17% and revenue up 6% to Rmb5.5bn. (2) Its investment income, which mostly comes from its two major Sino-foreign JVs, i.e., GZT, and GZH, slipped by 5% Y/Y to Rmb1.7bn in 1H12.

36



China ZhengTong (OW)

ZhengTong’s 1H12 results were 3% ahead of our expectation but ~10% shy of consensus. We believe the performance is driven by solid revenue growth in both its new car sales (up 130% YoY) and aftermarket (up 148%) businesses. In 2H12, inventory and pricing pressure is the main challenge facing the auto industry in China; however, we believe such pressure should gradually ease into 2013 and ZhengTong should continue to ride on China’s multi-year luxury consumption trend.

Share price catalyst and fundamental driver in 2H12-2013E: (1) Aftermarketbusiness should be a powerful driver to ZhengTong's profitability as the company expands sales scale and customer base: We estimate AM business will account for 11% of ZhengTong's revenue and ~50% of gross profit by 2014E vs. 8%/40% respectively in 1H12. AM business is not only much more profitable (average GM >40% vs. dealership ~6-8%) but also generates recurring and relatively stable revenue even in an economic downturn. (2) In addition to new auto sales and AM business, ZhengTong is extending its business to auto related business such as logistics service, warehousing and auto/parts distribution for leading OEM automakers. This will help enhance the company's profit in the longer term in our view.

1H12 result and key operating highlights: (1) New car sales surged 106% to 34,111 units while revenue is up 130% to Rmb12.4bn, thanks to acquisitions in 2H11. Also, 88% of revenue is from luxury car sales. (2) Aftermarket accounted for 8% of revenue and 40% of gross profit. (3) Blended gross margin slipped from 10.5% in 1H11 to 8.7% in 1H12 while inventory days increased from 34 to 55 days in the same period.

Sinotruk (UW)

Sinotruk’s 1H12 earnings of Rmb182mn were 20% above our expectationsyet 46% below consensus. We believe the difference between its 1H12 results and our estimate is mainly due to higher-than-expected government subsidy (Rmb102mn). Meanwhile, its 82% YoY earnings drop is a result of weak heavy truck demand along with slowing FAI growth. With decelerating FAI growth putting a structural pressure on truck demand, we retain our UW rating on the stock.

Share price catalyst and risk in 2H12-1H13: (1) On the positive side, China is scheduled to apply China four (equivalent to Euro four) emission standards to the heavy truck sector from July 1, 2013. This will likely bring forward potential demand as customers rush to purchase heavy trucks with old emission standards before end-1H13 deadline in order to save costs. Truck sales may hence stand above seasonality especially in 2Q13 in our view. (2) On the cautious side, we find a high correlation historically between heavy truck demand and FAI growth. Our chief China economist, Haibin Zhou, forecasts a continued decelerating FAI growth to 18% in 2013 from 22% this year and 24% in 2011.

1H12 result and key operating highlights: (1) Sinotruk booked a Rmb102mn government subsidy in 1H12, vs. Rmb22mn in 1H11. (2) The company’s heavy

37



truck sales volume slipped 38% YoY to 47,923 units. Sales of medium and light trucks rose 41% YoY to 17,331 units from a low base last year. (3) Blended gross margin slipped from 16.2% in 1H11 to 14.9% in 1H12.

Minth (N)

Minth’s 1H12 results at Rmb436MM, were 9% ahead of our estimate of Rmb400MM (and no consensus available). We believe the performance is driven by both the domestic sales and overseas businesses. While we like Minth for its leading position in the niche OEM auto parts segment in China, solid balance sheet (consistent net cash since listing in 2005) and long business visibility (about two years), it is unlikely to be completely immune to intense competition in China and oversupply pressure; hence our Neutral rating is maintained.

Potential near-term catalysts and risks in 2H12-1H13: (1) Export business should provide upside surprise, with the export ratio surging from 9% in 2005 to 27% in 2011 and 28% in 1H12. We expect it to top 40% by 2015. Minth also indicated that around half of its new order wins in 1H12 are from overseas customers, which carry higher margins. This should translate into revenue/earnings in 1-2 years given the long lead time. (2) Margins have been on a slow downward trend with GM slipping to 34.8% in 1H12 from 35.8% in 1H11 due to higher labor costs and price cuts from OEM automakers. Similarly, the tax rate rose to 14.7% from 13.5% in the same period. Management indicated that its tax rate could top ~15% this year and move toward 16-17% in 2013 as the previous tax credit expires.

1H12 result highlight: PAT after minority was up 12% on revenue of Rmb2.1B, up 17%. Of this, growth in the export business (18% YoY) should be Minth’s LT driver given its higher margin.

(2) Auto companies with weaker-than-expected 1H12 results:

DongFeng Motor (UW)

DongFeng’s 1H12 results were 2% shy of our expectation and 9% below consensus. We believe the slight disappointment is potentially a result of margin contraction of its three Sino-foreign JVs, i.e., DongFeng Nissan, DongFeng Honda and DongFeng Peugeot Citroen. Longer term, we believe structural challenges facing the company include severe competition in the upper-mid end passenger vehicles (PV) segment and decelerating truck demand.

Key drivers or challenges in 2H12-1H13: 1) SG&A expense will likely remain high in 2H12 as the company may need to continue supporting its dealers in order to boost sales volume and control inventory. We notice DFM’s marketing expense-to-sales ratio has increased from 4.1% in 1H11 to 4.5% in 1H12. This, together with gross margin contraction (from 19.9% to 19.6% in the same period), is the main reason for the 8% earnings decline despite top-line growth of 7% in 1H12 in our view. 2) DFM’s most profitable Nissan Teana sedan model is under pressure due to competition from entry level luxury cars. Also, its closet

38



peer—Honda—is scheduled to introduce a whole new Accord in 2013 while Toyota has recently launched a whole new Camry earlier this year.

1H12 result and key operating highlights: (1) Sales volume increased 11% YoY to 1,176,300 units, with sales of PV and CV rising 22% and 19%, respectively. (2) Revenue rose 7% YoY to Rmb68bn. Of which PV and CV sales accounted for 77% and 22%, respectively. (3) The company booked a government subsidy of Rmb174mn (2% of PBT) for its R&D investment.

Weichai Power (UW)

Weichai’s 1H12 results were 12% shy of our expectation and 18% below consensus. The disappointment coincides with its closet peer in truck sector, Sinotruk whose 1H12 earnings also fell short of anticipation. We believe such weakness is a result of broader slowing FAI in China as majority ~60% of heavy-duty trucks are used to transport commodity or infrastructure related products. We are cautious on China’s FAI momentum in 2H12-1H13 and UW on both Weichai and Sinotruk.

Key catalyst and risk in 2H12-1H13: (1) On the positive side, China is scheduled to apply China four (equivalent to Euro four) emission standards to the heavy truck sector from July 1, 2013. This will likely bring forward potential demand as customers rush to purchase heavy trucks with old emission standards before end-1H13 deadline in order to save costs. Truck sales may hence stand above seasonality especially in 2Q13 in our view. (2) On the cautious side, we find a high correlation historically between heavy truck demand and FAI growth. Our chief China economist, Haibin Zhou, forecasts a continued decelerating FAI growth to 18% in 2013 from 22% this year and 24% in 2011.

1H12 result and key operating highlights: Along with slowing FAI- 1) Sales volume of diesel engines for heavy trucks and construction machinery declined by 40% YoY and 48% YoY to 126,300 units and 39,600 units respectively. 2) Sales volume of heavy trucks and gearboxes slipped 22% YoY and 41% YoY to 49,200 units and 260,200 units respectively. 3) Blended gross margin contractedto 19% in 1H12 from 22% in 1H11.

Baoxin Auto (OW)

Baoxin’s 1H12 results were 5% shy of our expectation and 17% below consensus. Strong bottom line growth (63%YoY) is a result of solid top-line growth of 71%/98% for new car sales/aftermarket (AM) business but margin contraction is the main reason for the disappointment. Separately, we are cautiously positive on Baoxin's M&A announcement of NCGA today, given extension of the company's brand and geographic coverage but execution to turn NCGA profitable will be the main task or challenge facing Baoxin in 2013E we believe.

Our initial assessment of NCGA M&A: Baoxin plans to pay a total of US$305mn to acquire NCGA, which translates into 1.3x NAV. The deal will be funded by cash (US$200mn which will be financed by internal cash reserves and bank borrowings), bonds (US$58mn) and share issuance at HK$3.97/shr (1%

39



dilution). NCGA is currently in a loss in 1H12 due to restructuring of the workforce and potentially poor efficiency. Based on our initial back-of-the-envelope calculation using average revenue/profitability of new car sales and AM businesses of other dealers, we believe NCGA could contribute Rmb300-400mn profit to Baoxin in 2013E if Baoxin can successfully turn around NCGA. Execution is the main task facing Baoxin. NCGA will be consolidated to Baxin's P&L in Oct or Nov-12.

Catalysts, risks and 1H12 result highlights: 1) After-market business is, indeed, the main driver of profit, accounting for 40% of Baoxin's GP despite only 7% of revenue in 1H12. We expect AM will top ~45% of GP by 2014E. 2) Margin of new car sales slipped to 5.4% from 7.5% in 1H11 due to inventory and pricing pressure, an industry-wide phenomenon but this should improve toward end-12. 3) Dealership number increases from 36 in end-12 to 46 by 1H12.

Recommendation and risks: We maintain our OW on Baoxin and our PT at HK$6.0/shr (Jun-13). We believe a better entry point would be toward 4Q12, when consensus earnings downgrades are behind us and inventory pressure eases. Risks: worse-than-anticipated auto sales and price competition due to overcapacity in the Chinese auto market.

(3) Auto companies with 1H12 results in line with our expectation:

Great Wall Motor (OW)

Great Wall Motor announced its earnings results which surged by 30% Y/Y to Rmb2.35bn in 1H12. This was no surprise as the company had reported preliminary results on July 24. We believe the performance was driven by the strong sales growth in its Halva SUVs and improvement in margins. We maintain OW given our positive view on the SUV segment in China where the company should benefit from four new/ redesigned SUV model launches in 2013E.

Three near term catalysts in 2H12-1H13: (1) Our 2012/13E earnings forecasts are 5%/3% above market consensus respectively, potentially due to our higher gross margin assumption. (2) Riding on SUV trend. We forecast SUV volume will grow at a 36% CAGR in 2008-2013 vs. overall passenger vehicle growth of 19% in the same period. The company’s top and bottom lines are expected to be driven mainly by its SUV models in 2013E. (3) New model launches: (a)redesigned models of Halva H3 and H5 SUVs in 2H12; (b) whole new sedan model (C071), in mid-13 with estimated price of ~Rmb80k, (b) whole new Halva H7 SUV in 4Q13 with estimated price of ~Rmb200k, (c) two redesigned sedan models (C30 and C50) in 2013.

1H12 result and key operating highlights: (1) Total sales volume is up 20% Y/Y to 262,018 units, with exports rising 46% Y/Y. Among these, sales of pick-up trucks, SUVs and sedan rose 20%, 46% and 2%, respectively. (2) An improvement in blended gross margin from 26.1% in 1H11 to 26.3% in 2H12 due to the rising proportion of the higher-margined Halva SUVs in its sales mix.

40



Japan

(Extracted from the Note, “Japan Production Flash (June): Focus on Trends after End of Eco-Car Subsidies" published on 30 July 2012; please see the original note for pricing dates.)

Currently production is running at high levels as a result of the subsidies on eco cars, but the end of these subsidies is now approaching, and we believe share prices are starting to discount earnings prospects from 2H onwards. We think the key point in choosing between suppliers will now be the extent to which companies can maximize the benefits of expansion in overseas markets, such as recovery following the Thai floods and the expansion of US market share, to offset the impact of the reduction in domestic production.

Japanese production remains at a high level: In June, total Japanese production was 893,000 units, up 20% YoY and up 14% MoM. At the major makers, production at Nissan was 100,000 units (down 3% YoY and up 19% MoM), at Toyota it was 312,000 (up 25% YoY and 13% MoM), at Honda 92,000 (up 110% YoY and 24% MoM), at Suzuki 98,000 (up 29% YoY and 4% MoM) and at Fuji Heavy 50,000 (up 68% YoY and 25% MoM). Production in the April-June quarter was 270,000 at Nissan (up 19% YoY), 862,000 at Toyota (up 110% YoY), 253,000 at Honda (up 170% YoY), 285,000 at Suzuki (up 43% YoY) and 137,000 at Fuji Heavy (up 76% YoY).

Growth in overseas production continues: In June, overseas production by thenine Japanese brands was 1.332mn units (up 31% YoY), as the uptrend continued. By individual brand, production was 465,000 at Toyota (up 35% YoY), 339,000 at Nissan (up 7% YoY), 278,000 at Honda (up 120% YoY), 138,000 at Suzuki (up 13% YoY) and 15,000 at Fuji Heavy (up 18% YoY). In April-June, production was 1.372mn at Toyota (up 76% MoM), 973,000 at Nissan (up 20%), 826,000 at Honda (up 130%), 466,000 at Suzuki (up 5%) and 45,000 at Fuji Heavy (up 36%). Honda production hit a new high on a quarterly basis, while production at Toyota and Nissan was also close to its previous highs. The key now for April-June earnings will be the differences in the extent to which the high levels of overseas production impacted earnings at the suppliers.

Toyota production plans: According to an article in the Chubu Keizai Shimbun on July 27, Toyota’s production plan in October will fall sharply to 12,272 units per day, or 270,000 units for the month. Also an article on June 23 indicated thecompany had reduced its forecasts for August and September by 100,000 and200,000 units, respectively. It expects the capacity utilization rate for Japaneseproduction to fall by more than 20ppt from the recent peak in July as the result of the ending of eco-car subsidies and the reduction in exports to Europe. However, it expects overseas production to continue to increase, to 440,000 units in August, 440,000 in September, and 520,000 in October. We expect a particularly large increase in production in developing countries.

Kohei TakahashiAC

(81-3) 6736-8621

[email protected]


41



Figure 1: Toyota Motor's Daily Output in Japan

Source:Chubu Keizai Shinbun

Figure 2: Outlook of vehicle production in Japan

Source:JAMA, JADA, and J.P. Morgan estimates

Figure 3: Outlook of Sales, Exports, and Production

Source:JAMA, JADA, and J.P. Morgan estimates

2,000

7,000

12,000

17,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

monthly production units 12 per. Mov. Avg. (monthly production units)(CY)

unit/day

YoY

(Fiscal year base,'000 units) 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2011 2012E 2013E 2014E

Toyota 3,863 4,185 4,265 3,393 3,207 3,004 3,120 3,382 3,119 3,041 3.9% 8.4% -7.8% -2.5%

Nissan 1,365 1,192 1,263 1,050 1,025 1,073 1,199 1,168 1,095 1,017 11.8% -2.6% -6.2% -7.2%

Honda 1,243 1,348 1,297 1,148 902 912 870 933 830 750 -4.6% 7.2% -11.0% -9.7%

Mazda 904 967 1,047 899 828 867 847 918 928 853 -2.4% 8.4% 1.1% -8.1%

Suzuki 1,133 1,212 1,219 1,139 959 994 1,020 1,047 998 1,014 2.6% 2.6% -4.8% 1.7%

Fuji Heavy 467 484 490 474 453 459 468 553 544 547 2.0% 18.1% -1.6% 0.5%

Others 1,918 2,112 2,209 1,901 1,492 1,685 1,743 1,692 1,588 1,592 3.4% -2.9% -6.1% 0.3%

Production in Japan ('000) 10,894 11,501 11,790 10,006 8,865 8,994 9,267 9,692 9,102 8,813 3.0% 4.6% -6.1% -3.2%

(Fiscal year base, '000 units) 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Domestic market sales ('000)Registered vehicle 4,167 3,832 3,660 3,036 3,182 2,972 3,064 2,958 2,766 2,711YoY% -0.7% -8.0% -4.5% -17.0% 4.8% -6.6% 3.1% -3.5% -6.5% -2.0%Mini-vehicles 1,948 2,031 1,893 1,809 1,698 1,629 1,689 1,829 1,724 1,742YoY% 3.6% 4.2% -6.8% -4.4% -6.1% -4.1% 3.7% 8.3% -5.7% 1.0%Total sales in Japan 5,862 5,619 5,320 4,701 4,880 4,601 4,753 4,787 4,490 4,452YoY% 0.7% -4.1% -5.3% -11.6% 3.8% -5.7% 3.3% 0.7% -6.2% -0.8%

Production in Japan ('000) 10,894 11,501 11,790 10,006 8,865 8,994 9,267 9,692 9,102 8,813YoY% 2.6% 5.6% 2.5% -15.1% -11.4% 1.5% 3.0% 4.6% -6.1% -3.2%

42



Figure 4: Industry domestic production unit Figure 5: Toyota's domestic production unit

Source: JAMA, J.P. Morgan estimates Source: JAMA, J.P. Morgan estimates

Figure 6: Nissan's domestic production unit Figure 7: Honda's domestic production unit


Figure 8: Mazda's domestic production unit Figure 9: Fuji Heavy Industries' domestic production unit


Figure 10: Suzuki's domestic production unit Figure 11: Daihatsu's domestic production unit


2,986

2,7272,754

3,1293,180

2,8792,921

2,596

1,6101,712

2,144

2,4692,541

2,3032,484

2,3011,906

1,524

2,3782,591

2,774

2,4742,460

2,313

-60

-40

-20

0

20

40

60

80

1,000

1,500

2,000

2,500

3,000

3,500

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012

Production units(lhs) YoY(rhs)

'000 units %1,092

1,019982

1,1331,131

1,028979

874

512589

770

921926

781831

744647

411

824878

1,007

862868797

-60

-40

-20

0

20

40

60

80

300400500600700800900

1,0001,1001,200

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


%

312

230

287

351396

318332

247

153192

267283284266309

275

223227

313350

309270

297290

-80-60-40-20020406080100120

50

100

150

200

250

300

350

400

450

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

21-

3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %

345331306

350310

289317

349

194183212

253254237250252

174

92

202242

334

253239203

-100

-50

0

50

100

150

200

50

100

150

200

250

300

350

400

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %

242228

245

281294

273288

225

114

166

220217225223235230

179 178

232225212207

225 225

-80-60-40-20020406080100120

100120140160180200220240260280300

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

21-

3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %

119113

124119

133128

140

124

82 85

113

129127122123121

93

78

100

147143137135138

-60

-40

-20

0

20

40

60

80

100

708090

100110120130140150160

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %

311301

279

328312310

301296

233

210211

255

283270276

248

199 199

276 276270

285267

256

-50-40-30-20-1001020304050

180

200

220

240

260

280

300

320

340

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

21-

3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %214

195

180

197

213

197189194191

159158

176179

165167

154

133122

161

193

214208

162152

-30

-10

10

30

50

70

90

120130140150160170180190200210220

1-3

4-6

7-9

10-1

21-

3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9

10-1

2

1-3

4-6

7-9E

10-1

2E

2007 2008 2009 2010 2011 2012


'000 units %

43



Figure 12: Domestic Car Production Summary

Source: JAMA

Jun-12 Jun-11 Y-to-CY12 Y-to-CY11

Unit Share YoY% Unit Share Unit Share YoY% Unit Share

Large Passenger Car 405,812 45.4% 10.2% 368,155 49.6% 2,472,646 47.1% 43.2% 1,726,857 50.3%

Compact Passenger Car 209,907 23.5% 34.0% 156,600 21.1% 1,211,614 23.1% 65.6% 731,656 21.3%

Mini Passenger Car 153,532 17.2% 60.0% 95,962 12.9% 846,057 16.1% 81.3% 466,674 13.6%

Subtotal 769,251 86.1% 23.9% 620,717 83.6% 4,530,317 86.3% 54.9% 2,925,187 85.3%

Large Trucks/Vans 52,533 5.9% -0.9% 52,994 7.1% 300,856 5.7% 46.5% 205,298 6.0%

Compact Trucks/Vans 24,980 2.8% 4.0% 24,025 3.2% 136,512 2.6% 37.8% 99,100 2.9%

Mini Trucks/Vans 36,066 4.0% 5.1% 34,310 4.6% 220,861 4.2% 37.8% 160,261 4.7%

Subtotal 113,579 12.7% 2.0% 111,329 15.0% 658,229 12.5% 41.7% 464,659 13.5%

Bus 10,319 1.2% -1.6% 10,485 1.4% 59,458 1.1% 47.9% 40,188 1.2%

Registration 703,551 78.8% 14.9% 612,259 82.5% 4,181,086 79.7% 49.2% 2,803,099 81.7%

Mini Vechile 189,598 21.2% 45.5% 130,272 17.5% 1,066,918 20.3% 70.2% 626,935 18.3%

Total 893,149 100.0% 20.3% 742,531 100.0% 5,248,004 100.0% 53.0% 3,430,034 100.0%

Registration Vehicles

Toyota Motor 311,672 44.3% 24.8% 249,660 40.8% 1,869,017 44.7% 76.7% 1,058,012 37.7%

Nissan Motor 99,800 14.2% -2.5% 102,390 16.7% 578,439 13.8% 28.7% 449,492 16.0%

Honda Motor 60,855 8.6% 69.5% 35,899 5.9% 423,038 10.1% 93.7% 218,429 7.8%

Mazda 74,180 10.5% -7.4% 80,114 13.1% 419,746 10.0% 17.6% 356,791 12.7%

Mitsubishi Motors 32,156 4.6% -32.0% 47,261 7.7% 205,176 4.9% -15.1% 241,645 8.6%

Fuji Heavy 50,257 7.1% 94.4% 25,859 4.2% 261,120 6.2% 76.4% 148,049 5.3%

Suzuki 27,467 3.9% 9.9% 25,000 4.1% 154,093 3.7% 4.7% 147,148 5.2%

Isuzu 21,185 3.0% 0.4% 21,096 3.4% 124,834 3.0% 45.1% 86,007 3.1%

Hino Motor 13,813 2.0% 21.1% 11,403 1.9% 77,963 1.9% 69.1% 46,102 1.6%

　Daihatsu 1,749 0.2% -38.4% 2,841 0.5% 10,339 0.2% -23.1% 13,436 0.5%

UD Trucks 2,090 0.3% -22.5% 2,697 0.4% 12,371 0.3% 19.7% 10,337 0.4%

Mitsubishi Fuso 8,105 1.2% 3.5% 7,833 1.3% 43,512 1.0% 62.9% 26,707 1.0%

Others 222 0.0% 7.8% 206 0.0% 1,438 0.0% 52.3% 944 0.0%

subtotal 703,551 100.0% 14.9% 612,259 100.0% 4,181,086 100.0% 49.2% 2,803,099 100.0%

Mini-vehicles

Suzuki 70,057 37.0% 38.8% 50,475 38.7% 400,701 37.6% 59.6% 251,038 40.0%

　Daihatsu 74,796 39.4% 32.3% 56,548 43.4% 411,206 38.5% 70.2% 241,671 38.5%

Mitsubishi Motors 13,579 7.2% 15.0% 11,808 9.1% 72,471 6.8% 15.0% 63,023 10.1%

Honda Motor 31,166 16.4% 321.7% 7,390 5.7% 164,179 15.4% 241.7% 48,044 7.7%

Fuji Heavy 0 0.0% -100.0% 4,051 3.1% 18,361 1.7% -20.7% 23,159 3.7%

Mazda 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Nissan Motor 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

subtotal 189,598 100.0% 45.5% 130,272 100.0% 1,066,918 100.0% 70.2% 626,935 100.0%

44



Figure 13: Domestic Car Production Summary (Contd.)

Source: JAMA



Toyota Motor 311,672 100.0% 24.8% 249,660 100.0% 1,869,017 100.0% 76.7% 1,058,012 100.0%

<Car> 284,055 91.1% 29.0% 220,274 88.2% 1,705,872 91.3% 80.1% 947,070 89.5%

Luxury car 196,095 62.9% 22.0% 160,672 64.4% 1,215,910 65.1% 76.6% 688,419 65.1%

Compact car 87,960 28.2% 47.6% 59,602 23.9% 489,962 26.2% 89.4% 258,651 24.4%

<Truck> 18,833 6.0% -8.9% 20,684 8.3% 113,278 6.1% 44.6% 78,357 7.4%

Large truck 9,569 3.1% -9.1% 10,523 4.2% 53,894 2.9% 42.7% 37,766 3.6%

Compact truck 9,264 3.0% -8.8% 10,161 4.1% 59,384 3.2% 46.3% 40,591 3.8%

<Bus> 8,784 2.8% 0.9% 8,702 3.5% 49,867 2.7% 53.0% 32,585 3.1%

Nissan Motor 99,800 100.0% -2.5% 102,390 100.0% 578,439 100.0% 28.7% 449,492 100.0%

<Car> 88,789 89.0% -3.0% 91,529 89.4% 523,137 90.4% 30.0% 402,457 89.5%

Luxury car 56,633 56.7% -3.3% 58,586 57.2% 315,912 54.6% 22.0% 258,877 57.6%

Compact car 32,156 32.2% -2.4% 32,943 32.2% 207,225 35.8% 44.3% 143,580 31.9%

Mini car 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

<Truck> 10,559 10.6% 1.0% 10,455 10.2% 52,794 9.1% 16.8% 45,195 10.1%

Large truck 3,306 3.3% -34.2% 5,026 4.9% 20,004 3.5% -10.8% 22,425 5.0%

Compact truck 7,253 7.3% 33.6% 5,429 5.3% 32,790 5.7% 44.0% 22,770 5.1%

Mini truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

<Bus> 452 0.5% 11.3% 406 0.4% 2,508 0.4% 36.3% 1,840 0.4%

Honda Motor 92,021 100.0% 112.6% 43,289 100.0% 587,217 100.0% 120.4% 266,473 100.0%

<Car> 90,136 98.0% 113.3% 42,260 97.6% 569,886 97.0% 119.8% 259,252 97.3%

Luxury car 8,805 9.6% 6.6% 8,258 19.1% 105,754 18.0% 77.0% 59,758 22.4%

Compact car 52,050 56.6% 88.3% 27,641 63.9% 317,284 54.0% 100.0% 158,671 59.5%

Mini car 29,281 31.8% 360.3% 6,361 14.7% 146,848 25.0% 259.7% 40,823 15.3%

<Truck> 1,885 2.0% 83.2% 1,029 2.4% 17,331 3.0% NA 0 2.7%

Compact truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Mini truck 1,885 2.0% 83.2% 1,029 2.4% 17,331 3.0% 140.0% 7,221 2.7%

Mazda 74,180 100.0% -7.4% 80,114 100.0% 419,746 100.0% 17.6% 356,791 100.0%

<Car> 72,613 97.9% -7.1% 78,153 97.6% 413,021 98.4% 18.2% 349,348 97.9%

Luxury car 59,488 80.2% 0.7% 59,081 73.7% 337,633 80.4% 19.3% 282,935 79.3%

Compact car 13,125 17.7% -31.2% 19,072 23.8% 75,388 18.0% 13.5% 66,413 18.6%

Mini car 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

<Truck> 1,567 2.1% -99.8% 978,621 2.4% 5,931,754 1.6% 38.8% 4,273,342 2.1%

Large truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Compact truck 1,567 2.1% -20.1% 1,961 2.4% 6,725 1.6% -9.6% 7,443 2.1%

Mini truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Mitsubishi Motors 45,735 100.0% -22.6% 59,069 100.0% 277,647 100.0% -8.9% 304,668 100.0%

<Car> 39,512 86.4% -25.8% 53,283 90.2% 243,280 87.6% -10.9% 273,089 89.6%

Luxury car 27,877 61.0% -36.5% 43,917 74.3% 187,909 67.7% -14.8% 220,530 72.4%

Compact car 3,833 8.4% 45.9% 2,627 4.4% 14,875 5.4% -18.0% 18,142 6.0%

Mini car 7,802 17.1% 15.8% 6,739 11.4% 40,496 14.6% 17.7% 34,417 11.3%

<Truck> 6,223 13.1% -84.7% 40,695 76.7% 7,473 186.6% NA 0 0.0%

Luxury truck 250 0.5% -43.3% 441 0.7% 946 0.3% -46.3% 1,760 0.6%

Compact truck 196 0.4% -29.0% 276 0.5% 1,446 0.5% 19.2% 1,213 0.4%

Mini truck 5,777 12.6% 14.0% 5,069 8.6% 31,975 11.5% 11.8% 28,606 9.4%

Fuji Heavy 50,257 100.0% 68.0% 29,910 100.0% 279,481 100.0% 63.2% 171,208 100.0%

<Car> 50,257 100.0% 94.4% 25,859 86.5% 261,120 93.4% 68.7% 154,810 90.4%

Luxury car 50,257 100.0% 94.4% 25,859 86.5% 261,120 93.4% 76.4% 148,049 86.5%

Compact car 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Mini car 0 0.0% NA 0 0.0% 0 0.0% -100.0% 6,761 3.9%

<Truck> 0 0.0% -100.0% 4,051 13.5% 18,361 6.6% 12.0% 16,398 9.6%

Mini truck 0 0.0% -100.0% 4,051 13.5% 18,361 6.6% 12.0% 16,398 9.6%

45



Figure 14: Domestic Car Production Summary (Contd.)

Source: JAMA



Suzuki 97,524 100.0% 29.2% 75,475 100.0% 554,794 100.0% 39.3% 398,186 100.0%

<Car> 81,226 83.3% 27.3% 63,805 84.5% 466,648 84.1% 36.3% 342,457 86.0%

Luxury car 6,657 6.8% -43.5% 11,782 15.6% 48,408 8.7% -29.1% 68,289 17.2%

Compact car 19,034 19.5% 60.3% 11,874 15.7% 96,541 17.4% 32.7% 72,763 18.3%

Mini car 55,535 56.9% 38.3% 40,149 53.2% 321,699 58.0% 59.7% 201,405 50.6%

<Truck> 16,298 16.7% 39.7% 11,670 15.5% 88,146 15.9% 58.2% 55,729 14.0%

Compact car 1,776 1.8% 32.1% 1,344 1.8% 9,144 1.6% 50.0% 6,096 1.5%

Mini truck 14,522 14.9% 40.6% 10,326 13.7% 79,002 14.2% 59.2% 49,633 12.5%

Daihatsu 76,545 100.0% 28.9% 59,389 100.0% 421,545 100.0% 65.2% 255,107 100.0%

<Car> 62,663 81.9% 37.6% 45,554 76.7% 347,353 82.4% 76.6% 196,704 77.1%

Luxury car 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Compact car 1,749 2.3% -38.4% 2,841 4.8% 10,339 2.5% -23.1% 13,436 5.3%

Mini car 60,914 79.6% 42.6% 42,713 71.9% 337,014 79.9% 83.9% 183,268 71.8%

<Truck> 13,882 18.1% 0.3% 13,835 23.3% 74,192 17.6% 27.0% 58,403 22.9%

Large truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Compact truck 0 0.0% NA 0 0.0% 0 0.0% NA 0 0.0%

Mini truck 13,882 18.1% 0.3% 13,835 23.3% 74,192 17.6% 27.0% 58,403 22.9%

Mitsubishi Fuso 8,105 100.0% 3.5% 7,833 100.0% 43,512 100.0% 62.9% 26,707 100.0%

<Truck> 7,628 94.1% -93.1% 110,847 93.7% 654,005 994.1% 48.1% 441,632 92.7%

Large truck 6,845 84.5% 6.3% 6,440 82.2% 36,039 82.8% 66.8% 21,602 80.9%

Compact truck 783 9.7% -12.8% 898 11.5% 4,868 11.2% 54.1% 3,160 11.8%

<Bus> 477 5.9% -3.6% 495 6.3% 2,605 6.0% 33.9% 1,945 7.3%

Isuzu 21,185 100.0% 0.4% 21,096 100.0% 124,834 100.0% 45.1% 86,007 100.0%

<Truck> 21,029 99.3% 0.8% 20,870 98.9% 123,716 99.1% 45.6% 84,955 98.8%

Large truck 17,830 84.2% 2.4% 17,417 82.6% 106,206 85.1% 52.3% 69,732 81.1%

Compact truck 3,199 15.1% -7.4% 3,453 16.4% 17,510 14.0% 15.0% 15,223 17.7%

<Bus> 156 0.7% -31.0% 226 1.1% 1,118 0.9% 6.3% 1,052 1.2%

Hino Motor 13,813 100.0% 21.1% 11,403 100.0% 77,963 100.0% 69.1% 46,102 100.0%

<Truck> 13,399 97.0% 47.6% 9,079 94.5% 44,166 95.8% 26.8% 34,829 94.2%

Large truck 12,637 91.5% 21.6% 10,391 91.1% 70,814 90.8% 67.8% 42,196 91.5%

Compact truck 762 5.5% 100.5% 380 3.3% 3,885 5.0% 216.4% 1,228 2.7%

<Bus> 414 3.0% -34.5% 632 5.5% 3,264 4.2% 21.9% 2,678 5.8%

UD Trucks 2,090 100.0% -22.5% 2,697 100.0% 12,371 100.0% 19.7% 10,337 100.0%

<Truck> 2,054 98.3% -23.2% 2,673 99.1% 12,275 99.2% 19.8% 10,249 99.1%

Large truck 1,874 89.7% -26.5% 2,550 94.5% 11,515 93.1% 29.8% 8,873 85.8%

Compact truck 180 8.6% 46.3% 123 4.6% 760 6.1% -44.8% 1,376 13.3%

<Bus> 36 1.7% 50.0% 24 0.9% 96 0.8% 9.1% 88 0.9%

46



Korea

KIA Motors - K3 model launch expected to drive momentum

Market expectation is rising on KIA’s upcoming volume seller new model, K3, scheduled for launch in September. The company recently unveiled its features to the public. K3 is the only full model change from domestic automakers in 2H12. KIA targets monthly domestic sales of 5,000 units, which far exceeds that of its previous model, Forte. Forte’s average monthly sales was 2,000 units.

Though details are yet to be determined, K3's price range is expected to be similar to Hyundai Motor’s Avante (W15.1-19.5mn) and Renault Samsung’s New SM3 (W15.4-19.7mn). Advanced systems such as KIA’s UVO system (infotainment system controlling multimedia via voice and touch-activated features) and LED Daytime Running Light (DRL) will be installed in the model. K3 will share the same platform with Hyundai's Avante, and will also have a 1.6-liter GDi engine with a six-speed automatic transmission.

After its launch in the domestic market in September, K3 will be introduced in major global markets from November, and will be sold worldwide by 1Q13. KIA aims to sell 450K units globally in 2013, including 120K units in China and 280K units in rest of the world. The company expects K3 to become a driver of new volume growth in the competitive China market.

Table 5: Korea Auto – Detailed specifications of K3 vs. peers

Unit K3 Avante SM3

Manufacturer KIA Motors Hyundai Motor Renault-SamsungPrice* Wmn 15.2-19.9 15.1-19.5 15.4-19.8Engine displacement (cc) NA 1,591 1,598 Horsepower (ps) NA 140 117 Fuel efficiency (km/l) 16.5 16.5 17.5

Source: Company data, J.P. Morgan. KIA Motors to release K3 details on Sep 17th. *Price including value added tax (VAT).

Table 6: KIA Motors - Model launching schedule & Model change-over ratio

2012 2013

K9 (KR) : 0.7% Soul (G) : 6%

C'eed (EUR): 4% Carens (G): 1.5%

Sorento (KR/US): 5% Carnival (G) : 2%

K7 (KR): 0.7% K3 (G): 15%*(3/4)=12%

K3 (G): 15%*(1/4)=3.8% Sportage FL (G):12%*(1/2)=6%

K5 FL (G): 7%* (1/2)=3.5%

K7 (US & RoW in March)=0.5%

Source: Company data, J.P. Morgan.

Wan Sun ParkAC

(82-2) 758-5722

[email protected]

J.P. Morgan Securities (Far East) Limited, Seoul Branch

47



India

Two wheeler OEMs to take production cuts

Media (The Hindu) reports that Hero MotoCorp, Bajaj Auto and TVS are expected to go in for production cuts soon, given slowing demand and rising inventories with dealers, as per industry sources. Inventories are up to 40 days in some cases, with dealers.

J.P. Morgan comment

We re-iterate our cautious stance on the two wheeler segment, given slowing sales and rising competition. We are UW on Hero and Neutral on Bajaj (given its broad based product / export presence).

Maruti resumes partial production at Manesar

Maruti has resumed limited operations today at its Manesar plant as it started a few of the production shops (including the weld shop). Maruti has resumed limited operations today at its Manesar plant as it started a few of the production shops (including the weld shop). The plant is initially producing 150 cars per day (vs capacity of 1,700 cars) - production is expected to ramp up gradually from here.

J.P. Morgan comment

As supplies ramp up at Manesar (post the early resolution of the strike) and with product refreshes ahead, we believe Maruti’s market share will now stabilize at levels of ~40% over the near term (after coming off from ~48% over the past two years). However, the industry demand outlook is muted, given elevated interest rates and fuel prices. We re-iterate our Neutral stance given that while the market share will likely stabilize, industry demand outlook remains sedate.

Falling rubber prices to boost Tyres company margins

International rubber prices have declined 30 per cent since beginning of May 2012 in rupee terms and Indian prices are likely to follow since it happens with a lag.Rubber forms 65 per cent of total raw material costs and natural rubber accounts for 60 per cent of total rubber cost (about 40 per cent of revenues).

J.P. Morgan comment

We expect tyre companies to benefit from the falling rubber prices.

Aditya MakhariaAC

(91-22) 6157-3596

[email protected]

Ritesh Gupta(91-22) 6157-3585

[email protected]


48



Taiwan

Flattish growth momentum continues; Hotai Motor to be the only winner

Taiwan auto sales momentum had been weak since 2Q11. We see a sign of pick-up in 2Q12 due to the low base in 2011. 7M12 looked flattish and imported auto sales remained better vs domestic auto sales. Hotai Motor (2227 TT) outperformed itspeers in 1H12, gaining 3.4% market share.

Looking ahead, we expect auto market to remain weak. The slumping economy data around the globe does not bode well for the Taiwan economy, which is highly dependent on the export. When 2012 GDP growth is expected to be merely 1.1% oya (according to our economic team), we don’t think the auto market can pick up any momentum in a real sense. A flattish growth rate for 1H12 is good enough and we expect full-year to be similar.

Hotai Motor, an auto dealer that sells Toyota in Taiwan, was the only one to maintain its positive sales growth in 7M12. Under the current market condition, we believe middle-class auto brands should be less vulnerable compared to luxury brands and therefore we think Hotai Motor should be able to retain its leadership in the 2H12.

Figure 26: Quarterly sales (YoY)

Source: Company reports and J.P. Morgan estimates.

Figure 27: 7M12 sales - growth by segment

Source: Company reports and J.P. Morgan estimates.

Figure 28: Auto sales by type of vehicle and auto seller (7M12)

Source: China Motor and J. P. Morgan

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Nick LaiAC

(886-2) 2725-9864

[email protected]

J.P. Morgan Securities (Taiwan) Limited

49



Indonesia

Honda aims to challenge Nissan in “city cars”

Launch of new “Brio” targets leadership of Nissan March in the segment

Honda targets sales of 1200 Brios a month, aggregating 6,000 units in 2012. The 1,400 cc Brio is available in four models with prices ranging from Rp149 million to Rp170 million ($15,000-18,500).

Subcompacts are a niche segment in Indonesia. We estimate monthly sales of about 3,000 units per month (or about 3% of the overall market for cars). Three models dominate the segment - Nissan March (31% share), Kia Picanto (24%) and Suzuki Splash (19%).

Based on Honda’s 1,200 unit target for the Brio, it appears to target unseating Nissan March as the market leader in the subcompact segment. We estimate that the March sells about 860 units per month.

Subcompacts are the only significant segment of the market where Toyota does not have a presence, and we would not rule out a Toyota entry into the segment which is likely to further pressure incumbents.

Aditya Srinath, CFAAC

(62-21) 5291-8573

[email protected]


50



N: Non-consensus calls

In this section, analysts give their take on the news and the developments in each region that may be pertinent to auto companies.

China

(Extracted from the Note, “China Auto Industry: Assuming coverage with 5 OWs, 3 UWs, 3 structural trends, 3 non-consensus and 2 pair trades” published on 14 August 2012; please see the original note for pricing dates.)

The luxury boom continues: Rising penetration of China’s passenger vehicle (PV) market will be a multi-year theme in the next 10 years, but a rising tide may not necessarily lift all boats due to differences in product, brand and position between companies. A negative wealth effect due to weak equity markets and property tightening will continue to weigh on auto sales toward 4Q12. We assume coverage on 10 China auto stocks with the following recommendations: 1. By segment, structurally we prefer luxury PV over mid to low-end PV and

would avoid commercial vehicle (CV) such as trucks.2. By stock, we rate ZhengTong, Baoxin and Brilliance China OW for their

luxury exposure but believe attractive entry points will emerge toward 4Q12 or end-12 when discretionary spending improves and consensus earnings cuts are behind us. We believe Geely (OW) has the potential to become China's Hyundai Motor and like Great Wall's (OW)’s SUV business for now. We avoid the truck sector due to LT structural challenges and rate Sinotruk and Weichai Power UW. Between GAC (Neutral) and DongFeng (UW), we would turn positive on GAC on its new SUV models and improved 2013 earnings. We think Minth is fairly valued and hence rate it Neutral.

3. Pair trades: a) GAC over DongFeng, and b) PV over CV (such as GAC or Geely over Sinotruk or Weichai Power).

4. Upcoming 1H12 results: We think consensus earnings downgrades of 20-40% are likely although share prices may already reflect this risk.

Three structural trends: 1) China is entering the second stage of the PV penetration cycle, and we expect growth over the next 10 years to be halved but still strong, from 22% CAGR 2000-2010 to 11% CAGR 2011-2020E. We expect total number of PVs on the road will more than double to ~200mn units by 2020E from 75mn in 2011. 2) Among PVs, growth of luxury and ultra-luxury brands is expected to be 3-4 times faster than broader market. We think this luxury boom will extend and move beyond currently mainly tier-1 cities. 3) Conversely, CVs,especially trucks will face two LT structural challenges- substitution effect from improving railway network and slower FAI growth as China transforms itself toward a more balanced economy.

Non-consensus views: 1) Earnings forecasts- we believe the Street’s estimates collectively are lagging underlying developments and could be revised downwards post 1H12 results. 2) DongFeng is a consensus OW stock but we recommend to pair it on the short side against long GAC in upper-mid end PV market. 3) The market’s view on the truck sector is mixed, but we think it is a structural avoid

Nick LaiAC

(886-2) 2725-9864

[email protected]

Jin Luo


Prateek Sharma

(91-22) 6157-3353

[email protected]


Segment Rtg PT (HK$)

Luxury PV

ZhengTong OW 5.5

Baoxin OW 6.0

Brilliance China OW 8.0

Upper-mid end PV/ Sino-foreign JVs

Guangzhou Auto Neutral 6.5

DongFeng Motor UW 10.0

Chinese own brand PV

Geely OW 4.0

Great Wall OW 20.0

Commercial vehicle; Truck

Sinotruk UW 3.7

Weichai Power UW 18.5

Auto parts

Minth Neutral 9.0

Source: J.P.Morgan. *For changes to our ratings and price targets please see Table 2 on page 52

Bloomberg subscribers can use the ticker JPHCHAPV <Index> to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPHCHAPV <Index> could diverge from returns quoted in our research, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For more information, please contact your J.P. Morgan salesperson or the Delta One Desk.

51



sector in the long run. A key upside risk is better-than-expected commodity-related FAI (e.g. steel, cement).

Derivatives strategy: Investors who agree with our bullish view on the overall sector can consider using J.P. Morgan China Passenger Vehicle Basket(Bloomberg: JPHCHAPV <Index>) (see page 79).

Investment summary

Share price performance of automobile sector in China is a simple function of underlying fundamentals - including sales volume and penetration which in turn is a function of discretionary spending. China's luxury boom and hence increasing penetration were two main drivers of the sector's stellar performance of more than 300% since FY2000, according to our China Auto sector index.

Next question is - will we see another 300% rally in the next decade? Our view is:

Penetration of overall passenger vehicle (PV) will remain solid but decelerate to 11% CAGR in 2011-2020E vs. 22% CAGR in 2000-2011.

Within PV segment, growth of luxury and ultra-luxury will be ~3-4 times faster than broader PV market. Obviously, this is the area where we think investors should have exposure.

Commercial vehicles especially trucks is a different story. We think substitution effect from better railway network and China's transformation towards a more balanced economy in the next 5 years will reduce the demand for trucks, hence our cautious stance.

Figure 29: YoY change in overall penetration in China’s automobile market (including passenger and commercial)

Source: CEIC, CAAM.

Figure 30: J.P.Morgan’s China Auto Index (re-based to 100 from FY1995. Index includes all listed H-share auto/ auto parts stocks)

Source: Bloomberg.

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Summary of our view on China auto:

By sector: Passenger >

commercial vehicle (e.g. truck)

Within PV, we prefer luxury over

upper-mid end segment

By stock:

o Luxury PV: ZhengTong (OW),

Baoxin (OW), Brilliance China (OW). We believe better entry

point for ZhengTong and

Baoxin would be toward 4Q12 when discretionary spending

improves and consensus

earnings downgrade is behind

o Upper-mid end foreign JVs:GAC (Neutral), DongFeng

(UW)

o Chinese own-brands: Great

Wall (OW), Geely (OW)

o Commercial: Sinotruk and

Weichai Power (both UW)

o Auto parts: Minth (Neutral)

YoY growth of penetration rate increases from 10% in 2000 to 21% in 2011. In this period, total number of cars (both PV and CV) on the road has increased by nearly 6 times

Along with increasing penetration, auto sector's share price has more than tripled in the same period in 2000-2011, according to J.P.Morgan China auto index

52



In the near term, “negative wealth effect” triggered first by China's property tightening measures since 2H11 and then weak equity markets due to internal/ external headwinds (EU debt uncertainty and China’s slowing economy) have dragged car sales, in particular luxury cars and trucks. This may not turn around significantly until 4Q12 or end-12 when discretionary spending improves. Companies’ earnings estimates at the same time need to be trimmed in our view. We are assuming coverage on 10 Chinese auto stocks with the following revised earnings and ratings. Our top picks on a 12-month horizon are ZhengTong, Baoxin, Brilliance China and Geely (all OW). We are cautious on Sinotruk and Weichai (both UW), and Neutral on Guangzhou Auto but would look to turn positive on its SUV models and improved 2013 earnings. We would also pair Guangzhou Auto (Neutral) over DongFeng Motor (UW) from here. Likewise, pair trade of long passenger over commercial vehicles such as GAC or Geely over Sinotruk/Weichai Power is another investment theme we foresee.

Table 25: Summary of rating and earnings estimate changes (if applicable)

Segment Company (code)Rating Earnings estimate revision PT (HK$/shr)

New Previous 2012E 2013E New (Jun-13) Previous (Dec-12)

Luxury PV

ZhengTong Auto (1728) No change OW -51% -49% 5.5 10.8

Baoxin (1293) No change OW -47% -42% 6.0 11.8

Brilliance China (1114) No change OW No change No change 8.0 11.0

Upper-mid end PV (Sino-foreign JVs)

Guangzhou Auto (2238) No change Neutral -38% -35% 6.5 9.5

DongFeng Motor (489) No change UW No change No change 10.0 13.5

Chinese own-brand PV

Geely (175) No change OW No change No change 4.0 5.1

Great Wall (2333) OW Neutral No change +19% 20.0 12.8

Commercialvehicle (i.e. truck)

Sinotruk (3808) UW Neutral -64% --54% 3.7 4.9

Weichai Power (2338) UW Neutral -26% -24% 18.5 42.0

Auto parts Minth (425) No change Neutral -2% -4% 9.0 9.5

Source: Bloomberg, J.P.Morgan estimates.

We structure this industry report in three main sections:

Summary of our sector and stock views

Discussion and analysis of passenger vehicle market- why we remain upbeat in the next decade and where do potential risks lie

The challenges in commercial vehicle market

Stock and industry action points

We are assuming coverage on 10 Chinese auto stocks with the following recommendations:

By sector, we prefer luxury PV over upper-mid end PV and would avoid truck sector

By stocks in different segments:

o Luxury PV: We are Overweight ZhengTong, Baoxin and Brilliance China

53



o Chinese own-brands: We like Geely (OW), followed by Great Wall Motor (OW)

o Upper-mid end PV: We rate Guangzhou Auto (GAC) Neutral but will look to turn positive depending on its two new SUV model launches in 4Q12-1H13. We are Underweight Dong Feng Motor due to near term concerns over its inventory and longer term competition in upper-middle end PV segment.

o Trucks: We are Underweight both Sinotruk and Weichai Power.

o Auto parts: We think Minth is fairly valued with limited upside catalysts or downside risk, and hence we are Neutral.

On earnings estimates, we believe consensus earnings forecasts on several auto stocks are subject to downside risk (ranging from 20-40%) post 1H12 results in mid to late August.

Timing the entry: Autos, to some extent, is a discretionary product. Slow discretionary spending has and may continue to weigh on new auto sales including luxury PVs for stocks such as ZhengTong and Baoxin, whose share prices have corrected by 40-50% in the last three months. While this may suggest that near-term consensus earnings risks are largely in the prices, we believe attractive entry point may only emerge toward 4Q12 or end-12 when we see stronger evidence of improving discretionary spending.

Pair trades:

o Passenger over commercial vehicle: Either Geely or GAC over Sinotruk or Weichai Power.

o On product launch and earnings momentum into 4Q12-1H13: GAC over DongFeng Motor. In the past one year, DongFeng has outperformed GAC by 19%. We believe the time for a switch is approaching post 1H12 results.

China’s luxury and passenger vehicle boom

We believe China’s luxury boom is a multi-year trend in the next decade and will benefit various brands with exposure to this investment theme, including both consumer products and cars.

First, penetration is still on the rise

China is entering the second stage of PV cycle with a decelerated growth but still rapid one. Our view and forecast of passenger vehicle penetration in terms of CAGR is:

22% CAGR in 2000-2010. During this period, total number of PV surged by over seven times from merely 8.5mn units in 2000 to over 61mn by 2010.

54



11% CAGR in 2011-2020E. In the second phase, penetration should slow partially due to base effect and partially to congestion and relative saturation in tier-one cities. Despite this, we forecast total number of PV on the roads will still more than double from 75mn units in 2011 to around 200mn by 2020E.

In this period, penetration in terms of car ownership per 1,000 people will increase from 55 to around 140 on our estimates. Risk to this forecast is potentially on the upside considering 1) In the US- a similar market in terms of geographical size but only one-fourth of China's population, car ownership is already higher than 400 per 1,000 people now. Likewise, other developed economies such as UK and France, ownership is 450-500. In S. Korea and Taiwan, ownership is 260-290. In Thailand, it was 84 as of 2011. Obviously, the country's affordability, measured by per capita GDP, needs to be taken into account. China's luxury boom (discussed in the next section) leads us to believe demand for passenger car, driven by consumption upgrade trend, has another ~10 years to go.

Figure 31: Passenger vehicle penetration by country analysis (car ownership per 1,000 people)

Source: CAAM, CEIC, WDI. For India, Indonesia, USA, UK and France, the penetration is

based on 2010 statistics and the rest are 2011.

Figure 32: Passenger vehicle penetration analysis in China

Source: CAAM, J.P.Morgan.

Similar analysis of total vehicle penetration in major markets in Asia also suggests that China as well as India and ASEAN are well under-penetrated and hence their ownership growth is significantly higher than that in matured market like Japan, and to a lesser extent, South Korea and Taiwan.

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Figure 33: Total vehicle penetration (PV+CV) analysis (car ownership per 1,000 people)

Source: CAAM, CEIC, J.P.Morgan.

Figure 34: Total vehicle penetration YoY change analysis

Source: CAAM, CEIC, J.P.Morgan.

In the following charts, we further summarize the relations between penetration of premium cars and the country's affordability in terms of per capita GDP (on Purchasing Power Parity basis). Obvious conclusion is penetration in emerging markets such as China and India is on the rise while matured markets like Japan and the US are seeing the opposite.

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Figure 35: China- premium PV penetration vs. per capita GDP

Source: CEIC, TEJ, CIA FactBook, J.P.Morgan.

Figure 36: Taiwan- premium PV penetration vs. per capita GDP


Figure 37: India- premium PV penetration vs. per capita GDP


Figure 38: South Korea- premium PV penetration vs. per capita GDP


Figure 39: Japan- premium PV penetration vs. per capita GDP


Figure 40: US- premium PV penetration vs. per capita GDP


Second, the Luxury boom

The luxury consumption boom is a strong secular growth trend with the upper middle class’ spending power growing rapidly along with wealth accumulation and property market up-cycle. At the top end of China’s consumer spending, we are seeing a boom in luxury consumption with customers chasing global luxury brands, world-class services and products.

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In auto sector, we estimate:

Luxury cars (such as Mercedes-Benz, BMW, Audi and Lexus) will grow at 34% CAGR in 2007-2015E.

Ultra-luxury brands (such as Lamborghini, Ferrari, Bentley and Rolls-Royce) will grow at even faster pace at 43% CAGR.

Broader passenger vehicle market in the same period will also grow rapidly but at slower pace of 13% CAGR.

In other words, we estimate growth of luxury PV segment will move at 3-4 times faster than broader market and should be investors' focus in the next 5-10 years.

Indeed, luxury car penetration when considering the country's affordability (measured by per capita consumption on Purchasing Power Parity basis) suggests that China is currently only at ~30-50% of other markets such as S. Korea, Taiwan, the US, UK and France. Assuming overall car penetration will grow at ~10-12% CAGR in China in the next decade (according to our forecast), it will take another 8-10 years for China to reach the similar car penetration as S. Korea or the US (including luxury segment). At the same time, affordability (in terms of per capita GDP) in China’s tier-1, 2 and 3 cities is around 50-300% higher than the nation’s average. These are the areas where growth and car buyers come from.

Figure 41: YoY growth of new car sales by segment

Source: CAAM, J.P.Morgan.

Figure 42: Penetration analysis of luxury car vs. per capita GDP (on Purchasing Power Parity basis) in 2011

Source: CAAM, CEIC, CIA FactBook.

Against this backdrop, we find that sales volume growth of the luxury passengervehicle segment (comprising luxury as well as ultra-luxury car segments) way outpaces those of the middle and low end car segments.

In 2011 for instance, luxury passenger vehicle segment sales volume rose 35% Y/Y, while overall passenger vehicles sales volume edged up only 5% Y/Y, according to the China Association of Automobile Manufacturers (CAAM). Leading luxury names such as BMW reported 38% Y/Y sales volume growth in China while Mercedes-Benz at 34%.

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CAGR estimates supporting the "luxury boom" theme in 2007-

2015E:

Luxury car: 34%

Ultra-luxury: 43%

Overall PV market: 13%

Growth of luxury cars is 3-4 times faster than overall market in our view

China

58



Meanwhile, ultra-luxury brands such as Bentley, Ferrari and Porsche saw 217%/245%/76% growth in 2011 respectively. Whilst part of this superior performance is driven by a low base, it does suggest an important fact- Chinese customers are chasing luxury brands and their purchasing power cannot be underestimated.

Table 26: China’s luxury brand sales volume analysis

Brands 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015EAudi 100,888 118,118 157,188 225,588 313,036 400,686 496,851 606,158 727,389yoy growth 17% 33% 44% 39% 28% 24% 22% 20%BMW 49,388 62,688 90,536 168,998 232,586 302,362 377,952 491,338 628,913yoy growth 27% 38% 87% 38% 30% 25% 30% 28%Benz 26,880 38,770 68,541 147,672 198,520 242,194 293,055 357,527 429,033yoy growth 44% 77% 115% 34% 22% 21% 22% 20%Volvo 11,500 12,500 22,405 30,522 47,140 58,938 71,904 87,004 104,404yoy growth 9% 79% 36% 54% 25% 22% 21% 20%Infiniti 1,550 4,000 5,000 11,000 19,075 23,272 28,159 33,790 40,210yoy growth 158% 25% 120% 73% 22% 21% 20% 19%Lexus 27,000 32,150 33,000 52,933 56,000 67,200 80,640 95,962 113,235yoy growth 19% 3% 60% 6% 20% 20% 19% 18%Cadillac 5,259 6,585 7,273 9,819 13,255 16,304 19,401 22,894 26,785yoy growth 25% 10% 35% 35% 23% 19% 18% 17%Lincoln 405 130 82 102 138 168 199 232 270yoy growth -68% -37% 24% 35% 22% 18% 17% 16%Acura 904 2,245 2,951 5,222 7,065 8,619 10,171 11,900 13,804yoy growth 148% 31% 77% 35% 22% 18% 17% 16%Saab 531 713 481 320 433 520 603 693 790yoy growth 34% -33% -33% 35% 20% 16% 15% 14%Others 13,135 31,281 54,244 128,622 169,781 207,133 244,417 285,968 331,722yoy growth 138% 73% 137% 32% 22% 18% 17% 16%Total 237,440 309,180 441,701 780,798 1,057,029 1,327,395 1,623,351 1,993,466 2,416,555yoy growth 30% 43% 77% 35% 26% 22% 23% 21%

Source: CAAM, J.P.Morgan estimates.

Table 27: China’s ultra-luxury brand sales volume analysis

Ultra premium brand 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015EJaguar & Land Rover 7,642 11,434 12,813 26,114 42,063 63,000 83,160 108,108 138,500yoy growth 50% 12% 104% 61% 50% 32% 30% 28%Porsche 4,720 8,013 8,660 13,856 24,340 31,642 40,502 51,032 63,280yoy growth 70% 8% 60% 76% 30% 28% 26% 24%Bentley 173 434 415 581 1,839 2,391 3,060 3,856 4,781yoy growth 151% -4% 40% 217% 30% 28% 26% 24%Lamborghini 10 44 46 64 342 462 609 792 1014yoy growth 340% 5% 39% 434% 35% 32% 30% 28%Rolls-Royce 65 84 51 71 100 133 176 229 293yoy growth 29% -39% 39% 41% 33% 32% 30% 28%Ferrari 156 185 161 225 777 1010 1293 1629 2020yoy growth 19% -13% 40% 245% 30% 28% 26% 24%Maserati 179 328 239 335 780 998.4 1,248 1,523 1,827yoy growth 83% -27% 40% 133% 28% 25% 22% 20%Maybach 19 27 14 20 23 29 35 42 49yoy growth 42% -48% 43% 15% 26% 21% 20% 17%Aston Martin 1 9 59 83 190 228 269 315 362yoy growth 800% 556% 41% 129% 20% 18% 17% 15%Others 524 1,321 3,572 4,644 6,037 7,606 9,432 11,507yoy growth 152% 170% 30% 30% 26% 24% 22%Total 12,965 21,082 23,779 44,921 75,098 105,930 137,958 176,958 223,633yoy growth 63% 13% 89% 67% 41% 30% 28% 26%


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China’s luxury passenger vehicle segment is a good proxy to play the luxuryconsumption boom

As luxury passenger vehicles form an essential part of the luxury lifestyle, we are witnessing increasingly large spending on the purchase of luxury vehicles by elite consumers in China. This trend of enlarged spending on the purchase of luxury passenger vehicles is leading to robust growth in the luxury passenger vehicle segment.

Ferrari’s experience in China- what does it tell us?

Chinese customers are different from the rest of the world not only in terms of their willingness and ability to spend, but also the demography. Ferrari is an interesting example on this:

Average age of Ferrari buyers is 47 in the US in 2011. It is staggering at 32 in China- maybe many of young Chinese customers are sponsored or financed by their wealthy parents but it doesn’t change the fact that rich Chinese customers are willing to spend on luxury products.

Likewise, only 10% of Ferrari customers are female in the US. It is twice as high at around 20% in China.

Third, consumption upgrade trend

Firstly, we have noticed that many Chinese consumers, who bought mid-range or upper-mid-range cars in the previous auto booms around 2002-2007, are selling these cars in the second-hand car market before buying new luxury cars. The upper medium-end cars, up to now, have been a very lucrative segment for Chinese auto producers. Currently, China’s annual demand for upper-mid-range passenger vehicles, which are mostly priced at Rmb200k to Rmb300k, is around 1.5 million, according to the China Passenger Car Association (CPCA).

Secondly, we believe the upper-middle class, which has become richer over the past few years, but has yet to own cars, is most likely to choose entry-level luxury cars, such as the BMW 3 Series or Mercedes Benz C-class sedan, as their first luxury cars.

Thirdly, such a consumption upgrade by Chinese upper middle class will likely be magnified, as more and more tier-one and tier-two cities are adopting the car license system to limit car ownership and avoid worsening traffic congestion in China. So far, we already have Beijing, Shanghai and Guangzhou among tier-one and Guiyang among tier-two cities adopting car licensing systems to prevent auto sales growing out of control weighing on the already poor and crowded traffic.

On Aug 3rd 2012, Xi-an, another tier-two city in Shanxi province in western China announced its intention to follow suit. According to CAAM, total number of cars on the road in Xi-an is presently around 1.19mn units as of 2011, or ranked No. 10th in China. At current growth pace, this number would exceed 2mn units in four years according to Xi-an municipal government.

Car license restriction has two implications in our view:

It would certainly “drag" auto sales growth as the length and construction of road/ highway is not able to cope with car demand. This restriction will also

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distort the demand picture in the short-term but such demand would not disappear but be “postponed or extended” to the following years.

Customers would have stronger incentive to buy higher end cars because the "sunk cost" (i.e. car license fee) is the same. For instance, a customer looking to spend ~Rmn180-190,000 to buy a new Toyota Camry sedan would probably consider paying ~10-20% more for an entry-level BMW 3-series sedan or X1 SUV (Sport Utility Vehicle).

We see the emerging “consumption upgrade trend” among the upper-middle class in China as a positive for producers and dealers of luxury passenger vehicles in China, especially those luxury PV producers that can keep coming up with competitive models that take into account the Chinese consumer preferences, such as long axles with more leg room (e.g. BMW’s long-wheelbase 3 and 5-series sedan), and also positive for the dealers that sell such popular brands.

For instance, BMW 5 Series, with long axles and more leg room, has become a popular model in China. Customers who currently drive, for instance, a Teana model of Dongfeng Motor, Accord or Camry of Guangzhou Auto, Mondeo of Changan Ford, or Mazda 6 of FAW Mazda, would probably want to buy entry or middle level luxury cars when they replace existing one in our view.

Fourth, the extension of wealth effect: From tier-1 to tier-2 and 3 cities

So far, we believe that China has witnessed three auto booms:

First auto boom started in 2002/2003, driven by the break-out of car demand in tier one cities.

Second auto boomed kicked off in 2006 and was driven by the break-out of car demand in tier-two cities.

The latest auto boom was triggered by the simulative auto consumption policies introduced in 2009 to revive the economy following global financial crisis in 2008, which led to the break-out of car demand in tier-three cities.

Furthermore, based on our sensitivity analysis, if we conservatively assume China's household disposal income will grow at slower pace than underlying economy at, say, 5% p.a., with around 2% inflation p.a., it would only take 3.2years for tier-two cities and around 8.3 years for tier-three cities to reach similar affordability as tier-one city. Obviously, if overall salary and disposal income grows faster than our assumption, the upgrade trend will be even more powerful.

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Figure 43: China’s auto boom and disposal income of tier-1, 2 and 3 cities

Source: CEIC, J.P.Morgan estimates.

Table 28: Sensitivity analysis- Number of years required for tier-two cities to reach the same level of per capita GDP as tier-one cities based on different household income CAGR and inflation factor

Household income CAGRInflation adjust factor (% p.a.) 4% 5% 6%1% 4.3 3.7 3.22% 3.7 Base case: 3.2 years 2.83% 3.2 2.8 2.5


Table 29: Sensitivity analysis- Number of years required for tier-two cities to reach the same level of per capita GDP as tier-one cities based on different household income CAGR and inflation factor

Household income CAGRInflation adjust factor 4% 5% 6%1% 11.6 9.8 8.42% 9.7 Base case: 8.3 years 7.33% 8.3 7.3 6.5

Source: CEIC, J.P.Morgan estimate.

Driven by the three auto booms, passenger vehicle fleet expanded strongly from 8.5mn in 2000 to 74.9mn in 2011, representing a robust CAGR of 22% over the period, according to CEIC. We further forecast this will hit ~200mn units by 2020E with CAGR at 11% in 2011-2020E. Continued extension of auto boom from tier-1 to tier 3 cities, consumption upgrade trend and rising household disposal income or salary will together drive China's car market in the next 5-10 years in our view.

0

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90 1st tier city household average disposable income in

2011: RMB 80,138

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income in 2011: RMB 64,571

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45,156

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Figure 44: China’s passenger vehicle fleet expansion (million units)


We forecast China’s PV sales volume to grow 5% and 7% in 2012E and 2013E, respectively, following 5% growth in 2011, owing to: (1) China’s PV penetration rate of 55 cars per 1,000 people by end-2011 is already much higher than around 10 cars per 1,000 people in 2002, when the first auto boom started in China; (2) impact of the credit and property tightening since 2H11; and (3) impact of the phasing out of the auto stimulus policies.

Table 30: China auto market sales volume and growth analysis (both PV and CV)

Sales Unit ('000) 2008 2009 2010 2011 2012E 2013ESedan 5,047 7,473 9,494 10,123 10,629 11,373MPV 197 249 445 498 523 559SUV 448 659 1,326 1,594 1,833 2,053Minivan 1,064 1,950 2,492 2,258 2,281 2,304Total PV 6,756 10,331 13,757 14,472 15,265 16,288(yoy % change) 7% 53% 33% 5% 5% 7%

Bus 253 271 356 403 424 445Truck 1,641 2,250 2,831 2,702 2756 2894Trailer 194 211 355 258 263 276Van chassis 88 83 87 84 85 87Truck chassis 450 498 675 585 597 627Total CV 2,626 3,313 4,304 4,033 4,125 4,328(yoy % change) 5.20% 26% 30% -6% 2% 5%Total vehicles 9,381 13,645 18,062 18,505 19,390 20,617(yoy % change) 6.70% 45% 32% 2% 5% 6%


Based on J.P. Morgan’s forecast PV penetration rate or ownership of 55 (per 1,000 people) in 2011 and an estimated 2011-2020E passenger-vehicle sales volume CAGR of 11%, we expect the penetration rate to rise to around 94 per 1,000 peopleby 2015E and approach 140 by 2020E, which, in our view, represents a level that may mark the end of the fast growth period of China’s passenger vehicles.

According to CAAM (China Association of Automobile Manufacturer), China surpassed USA as the largest automobile market in the world in 2009, with sales of 10.3mn PVs. In 2010 and 2011, it carried over its legacy as the largest auto market with the sales of 13.8mn and 14.5mn units of PVs respectively, far exceeding the passenger vehicle sales of second-placed US.

-

50

100

150

200

250

First phase in 2000-2010: auto penetration CAGR at 22%

Second phase penetration CAGR at 11% in 2011-2020E

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To conclude, we believe PV sector in China still offers growth potential, as:

(1) China still has low auto penetration rates of PVs compared to developed nationsor its neighbors in Asia

(2) China’s favorable demographics are likely to continue supporting medium to long term growth, including consumption upgrade, luxury boom extending to tier-2 or 3 cities and increasing disposal income.

Negative wealth effect and its implication to PV market

After two consecutive years of robust growth in 2009-2010 (of 53% and 33% respectively), PV market has slowed to mid-single digits in 2011 and we believe it will remain so in 2012/13E. High base effect is one reason for this but lately "negative wealth effect" has also contributed to auto sales weakness especially including luxury cars in our view.

What is “negative wealth effect”?

Simply put, here we define “negative wealth effect” as a result of Chinese customer’s propensity and willingness to spend is dampened by following two factors, which directly leads to a decline in household wealth:

Poor equity market

Tightening in property market

This wealth effect has negative impact on discretionary spending and auto sales. We also find a meaningful correlation of ~70-80% between both property and equity markets and new auto sales.

How does it impact the auto market?

First, let's look at the equity market

China's A share market, a retail-orientated one, has been poor since May or down 13% since then, and has now given back more than its year to date gains. On a one-year horizon, A-share investors on average have lost 16%.

The number of active investment accounts in A share market has slipped from the peak of 87% at the end of 2010 to currently 82%. Meanwhile, inactive accounts (meaning people stop to trade due to lack of confidence in equity market or economic outlook), have risen to 18% from 13% in the same period.

Similar analysis also suggests a statistically significant correlation (~80%) between number of newly opened investment accounts and new auto sales, including passenger and commercial. While we do recognize that we cannot jump to the conclusion arguing a decrease in new account openings or poor equity market will lead to poor auto sales, we think such a connection does exist because if customers feel less comfortable on future economy or about their job security, their willingness to buy cars will be influenced. For the same reason, we actually find that

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discretionary spending has been declining among department store- measured by SSSG (Same Store Sales Growth).

Figure 45: A-share market index (one-year trend)

Source: Bloomberg.

Figure 46: Number of existing stock trading accounts in A share market

Source: CEIC.

Figure 47: Number of new opened stock investment accounts in A share market (6-month moving average)

Source: CEIC.

Table 31: Correlations between A-share equity market and new auto sales (2007-1H12)

Correlation:No. of new investor account growth vs. Total auto sales growth 80%No. of new investor account growth vs. PV sales growth 79%No. of new investor account growth vs. CV sales growth 77%

Source: CEIC, CAAM, J.P.Morgan.

SSSG slowing also a result of negative wealth effect

China’s discretionary spending momentum, measured by SSSG (Same Store Sales Growth), has been slowing or decelerating since 1H11. On a quarterly basis for instance, SSSG for overall retailers slipped from the peak of 16.7% YoY in 2Q11 to 4.9% YoY in 1Q12 and rebounded slightly to 6.2% YoY in 2Q12. On half year basis,

0%

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Active (%) - LHS Inactive (%) - RHS

0500

1,0001,5002,0002,5003,0003,5004,0004,500

No of New Investor Account: Stock: 6-mnth Moving Average

No of New Investor Account: Stock: 6-mnth Moving Average

Percentage of active trading accounts decrease from 87% in Dec-10 to currently 82%

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such decelerating trend is even more obvious- from 15.3% YoY in 1H11 to 5.5% YoY in 1H12.

Similarly during 2009 and 2010, new auto sales had enjoyed a robust growth of 53% and 33% respectively. Along with slowing discretionary spending, auto sales growth was 5% last year and is expected to remain at similar level in 2012/13E.

Figure 48: Quarterly SSSG analysis (YoY)

Source: CEIC.

Figure 49: Half-year SSSG growth analysis (YoY)

Source: CEIC.

Property market a main driver of negative wealth effect

China’s credit tightening since 2H11 has had a profound impact on both the property market and broader economy, especially those who require "financing" to buy underlying products.

Based on our analysis, residential real estate in China in terms of sales volume, price or ASP has witnessed a slowdown in 2H11-1H12. While people who bought property a couple of years ago may not necessarily suffer any loss as housing prices at current level remain higher than that 3-4 years ago, we believe their willingness, rather than ability, to spend on discretionary products may change and become more cautious.

Indeed, similar to newly opened trading accounts, we also find a high correlation of ~70-80% between various property parameters (such as sales volume, value and ASP) and auto sales. Going forward, we believe overall consumer discretionary spending will likely remain slow in 3Q12 and start to see more obvious improvement from 4Q12 after China's new leadership change is completed and economic policy or any initiative becomes clear. For the same reason, we believe attractive entry point to buy stocks in luxury car segment will emerge toward 4Q12.

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Retailers Retailers (ex sportswear) Sportswear

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Retailers Retailers (ex sportswear) Sportswear

Negative wealth effect from

continued slow property market comes from customers’ less

willingness, not necessary the

ability, to spend on discretionary products

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Figure 50: Historical residential sales volume growth (YoY)

Source: CEIC.

Figure 51: Residential sales volume growth in 1H12 (YoY)

Source: CEIC.

Figure 52: Historical residential sales value growth (YoY)

Source: CEIC.

Figure 53: Residential sales value growth in 1H12 (YoY)

Source: CEIC.

Figure 54: Historical residential ASP growth (YoY)

Source: CEIC.

Figure 55: Residential ASP growth in 1H12 (YoY)

Source: CEIC.

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2006 2007 2008 2009 2010 2011

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Overcapacity a challenge facing PV market

On China autos, we are positive on demand equation and believe rising penetration will be a multi-year structural trend despite short–term slowdown due to negative wealth effect. On supply equation though, we are cautious.

Specifically, we believe major risk facing China's automobile sector, including auto manufacturers and dealers, is the rising overcapacity risk especially in the low-end and medium-end car segments from 2H12.

Consequently, we take a relatively cautious view on passenger vehicle producers that have a lot of exposure to these segments because of the concern that auto producers may face margin erosion pressure from 2H12 when the current round of the capacity expansions by auto JVs focusing on the medium-end car segments will gradually come on stream.

In 2012E, we forecast demand to supply (measured by capacity) ratio in passenger vehicle market will deteriorate to 82% from 99% in 2011, and remain weak in 2013E. Imbalance between demand and supply means 1) automakers will not be able to fully utilize their capacity and 2) price competition may be inevitable if automakers face inventory pressure, in particular in lower end segment.

Table 32: China automobile market demand and supply analysis

In millions FY09 FY10 FY11 FY12E FY13EDemandDomestically made 10.4 13.8 14.5 15.3 16.3Imports 0.7 0.8 1 1.2 1.2Subtotal 11.1 14.6 15.5 16.5 17.5SupplyDomestically made 10.6 14.1 15.1 19.6 23.0Imports 0.7 0.8 1 1.2 1.4Exports 0.2 0.3 0.5 0.7 0.8Subtotal 11.1 14.6 15.6 20.1 23.6Total demand as % of supply 100% 100% 99% 82% 74%


We are comfortable and positive with long-term demand equation

but cautious on supply equation

in China auto market

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Table 33: Capacity expansion plan of China’s PV producers

('000 units)FY09 FY10 FY11 FY12E FY13E

Auto JVsUS 2,070 2,400 2,550 3,240 3,590Shanghai GM 760 850 900 1,330 1,480Changan Ford 410 450 450 600 600SAIC GM Wuling 900 1,100 1,200 1,310 1,510

European 1,903 2,225 2,420 3,580 4,160Shanghai VW 800 860 910 1,270 1,700FAW VW 680 760 810 1,110 1,110BMW 53 75 100 200 300Dongfeng PSA 350 450 500 650 650Beijing Benz 20 80 100 150 200Changan PSA 200 200

Japan 2,030 2,450 2,730 3,250 3,570Guangzhou Honda 360 360 480 480 480Dongfeng Honda 220 240 240 340 360FAW Toyota 450 550 550 650 650Guangzhou Toyota 200 380 430 450 450Dongfeng Nissan 600 720 830 1,130 1,430Changan Suzuki 200 200 200 200 200

Ex-Japan Asian 880 880 980 1,300 1,400Beijing Hyundai 600 600 600 900 900Dongfeng Kia 280 280 380 400 500

Others 20 20 30 100 200

Sub-total 6,903 7,975 8,710 11,470 12,920y/y change 16% 9% 32% 13%

Local car producersGreat Wall Motor 400 400 600 800 1,000Geely 400 680 730 830 880BYD 700 800 1,200 1,400 1,600Chery 600 600 800 1,000 1,300Jianghuai Auto 200 300 600 600 600Chongqing Lifan 100 350 350 400 400FAW Car 200 250 300 400 400FAW Haima 150 300 450 450 450Brilliance China (Zhonghua sedan) 200 200 200 200 200FAW Tianjin Xiali 270 380 430 450 450Hafei 400 400 400 400 400Changan Group 845 1,245 1,245 1,245 1,345Shanghai Auto (local branded) 150 150 350 400 400Southeast Auto 200 200 250 300 300Dongfeng local brand 160 200 240 240 240Changhe Auto 200 200 200 300 300Jiangling Motor 100 200 200 200 200Guangzhou Auto Group 0 0 100 440 490Others 100 150 100 150 400Sub-total 5,375 7,005 8,745 10,205 11,355y/y change 30% 25% 17% 11%

Total capacity 12,278 14,980 17,455 21,675 24,275y/y change 22% 17% 24% 12%

Source: Company, J.P.Morgan estimates.

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Commercial vehicles on a downward trend

Unlike passenger vehicle where we are upbeat on long-term secular trend in the next 5-10 years, we are cautious on commercial vehicle sector especially trucks because of two structural challenges and concerns:

China itself is transforming into a more balanced economy between FAI (Fixed Asset Investment) and domestic consumption in current 12th Five-Year Plan vs. previous economic model or primarily relying on FAI.

Substitution effect of CV/ truck from better and improving railway network across China

First on slowing FAI

Our chief China economist, Haibin Zhou, forecasts that China’s FAI growth will decelerate to 18% in 2013E, from 20% this year and 24% last year or 30% in 2009. While base effect is one reason for such a deceleration, China's transforming economic model does reflect a declining dependence on FAI.

Further investigation into building material sector in particular cement also echoes the thesis of China's declining dependence on FAI because 60-70% of cement consumption comes from public (i.e. infrastructure) and private (i.e. property) sectors and the rest from urbanization. Cement demand growth has slowed from the peak of 18% in 2009 (partially triggered by China’s Rmb4.0 trillions of economic stimulus), to 15% in 2010 and then 11% in 2011. We forecast it will further decelerate to only 3% this year and stay at low single digits in 2013/14E. With weak demand (as well as overcapacity), cement price has witnessed unprecedented consecutive 4 quarters of fall since 3Q11.

For the same reason, management of Sinotruk and Weichai Power- two leading truck manufacturers, indicate that their truck sales have dropped by ~30-40% YoY in 1H12.

Figure 56: China’s FAI growth analysis


Figure 57: Commercial vehicle sales growth by segment analysis


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Truck Trailer

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Figure 58: Sales CAGR analysis by segments in PV market (2008-2013E)


Figure 59: Sales CAGR analysis by segments in CV market (2008-2013E)


Figure 60: China cement consumption YoY growth analysis

Source: China Cement Association, J.P.Morgan estimates.

Figure 61: Average cement price in China

Source: China Cement Association.

Second, railway substitution effect

In the near term, slow FAI is expected to weigh on truck demand and sales in 2H12. Lower base year in 2H11 may help YoY comparison but sequentially we believe demand for CV especially truck will remain slow. Upside risk and catalyst to this cautious view, if any, would come from further economic stimulus initiatives after China's leadership change is completed in 4Q12.

In the longer term though, we are cautious on truck sector due to:

1) Currently around 30-40% of China’s heavy trucks are used to transport bulk commodities such as iron ore, coal, cement, and agricultural products. As China shifts toward a more domestic-consumption driven economy, such demand will decline gradually.

2) The transportation cost of railway is much lower than that of heavy trucks.

As such, we believe China's heavy truck sector’s medium to long-term demand could be negatively affected when China’s major railway expansion program is completed in three to five years. We believe railway capex in China will stay at a high level over the next three years, with China’s original 2020E target railway length of 120,000km potentially being achieved ahead of schedule by 2015E.

18%

23%

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Sedan MPV SUV Minivan Total PV

12% 12%

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1994

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E

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PV is expected to see 19% CAGR, nearly three times higher than CV

Growth in CV is much slower than PV although truck demand is relatively better

Cement price is seeing consecutive 4-quarters of decline since 3Q11

Slowing FAI is expected to continue

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We believe China’s big-ticket spending on railway projects could have significant negative implications for China’s heavy truck sector in the medium term. In other words, we could see more and more cargo transport being conducted along the expanded railway network rather than by heavy trucks along China’s expressways.This substitution effect would further accelerate when considering the cost of transport through railways is well below the cost of transport by heavy trucks along expressways.

Table 34: Summary of China’s railway expansion and extension plan

2005 2006 2007 2008 2009 2010 2011 2006-2010By

2015EBy

2020ERailway capex - total (Rmb billion) 136 208 255 414 701 843 591Railway capex - civil works (Rmb billion) 88 155 179 337 601 707 461Total ending length of operating railway (km)

75,438 76,919 77,904 79,687 85,517 91,000 93,000 91,000>120,00

0120,000

Newly added lines (km) 1,030 1,481 986 1,783 5,830 5,483 2,167 15,562 29,000Total ending length of double-tracked rail (km)

25,566 26,400 27,100 28,925 33,054 37,000 39,000 37,000 >60,000 60,000

Double-tracked as a % of total 33.9% 34.3% 34.8% 36.2% 38.8% 41.1% 42.4% 41.1% 50.0% 50.0%Total ending length of electrified rail (km) 20,151 24,400 25,500 27,599 36,047 42,000 46,000 42,000 >72,000 72,000Electrified as a % of total 26.7% 31.7% 32.7% 34.6% 41.7% 46.6% 49.4% 46.6% 60.0% 60.0%Passenger turnover (billion ppl - km) 606 662 722 773 788 876 961Freight turnover (billion ton - km) 2,073 2,195 2,379 2,512 2,524 2,733 2,913 5,100 5,000

Source: CEIC, MOR, J.P.Morgan estimates.

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Recommendations

The following table summarizes our views, recommendations and risks to our PTs. On the two specific pair trade ideas, the timeframe and potential catalysts we believe include:

PV over CV: Either Geely or GAC over Sinotruk or Weichai. This is a structural call on diverging momentum in PV and CV segments in the next 12 months- the former is still seeing rising penetration while the latter suffers slowing FAI and substitution effect from better railway network. Company specific catalysts for Geely and GAC are potential technology transfer agreement with Volvo Car and new Mitsubishi SUV model launch in 4Q12 respectively. The risk for Sinotruk and Weichai Power is consensus earnings downgrade post 1H12 results.

GAC over DongFeng Motor: In the past 12 months, GAC has underperformed DFM by 22% despite both companies are engaged in the same segment- upper mid end PV business. We believe this trade could reverse in the next 12 months and recommend long GAC over DFM. GAC's upcoming new Mitsubishi SUV model launch in 4Q12 and expected improving earnings in 2013E should be catalysts for the stock while we see limited company specific catalyst from DM.

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Table 35: Summary of PT and risk

Company Ticker RtgShare

price Aug 10 (HK$)

PT (Jun-13) (HK$)

PT analysis Risks to PT and analysis

Brilliance China

1114 HK

OW 7.37 8.0

We are assuming coverage on Brilliance with OW rating and retain 2012/13E earnings estimates. We extend PT to June-2013 at HK$8.0/shr from previous Dec-2012 HK$11.0. We set our PT at a more conservative earnings multiple of 13x forward earnings vs. previous 20x. Our PT is based on average and mid-end of the company’s historical trading range (~9-17x) in the last couple of years. We believe this is reasonable considering the company's exposure to China's luxury boom but also in light of slowing economy internally and externally in 2H12.

Key risks include weaker-than-expected sales volume of BMW’s cars in China, and a sharper-than-expected price cut in China’s auto market, including luxury segment that Brilliance focuses.

DongFeng Motor

489 HK

UW 11.34 10

We are assuming coverage on DFM with a Neutral recommendation (from previous UW). We extend the PT to June-2013 at HK$10 from previous HK$13.3 (Dec. 2012) based on slightly more conservative earnings multiple of 6.5x (vs. previous 8.5x). We believe this is reasonable considering 6.5x is low end of DFM's historical trading band (largely between 6-10x) and also the expectation of limited catalyst in 2H12.

Key downside risks to our PT include: (a) the likely breakout of a price war in China’s passenger vehicle sector; and (b) a weaker-than-expected performance of DongFeng. Key upside risks to our PT include (a) a possible partial rebate from the local government on the City Maintenance & Construction Tax and Education Tax(b) stronger than expected sales volume and margins for its PVs and CVsMotor’s new models.

Geely Auto175 HK

OW 2.57 4.0

Our June-2013 PT of HK$4.0/shr or average of its forward earnings of 10x PER. We believe this is reasonable and not demanding considering 1) a slowing China auto market at the moment and uncertain external environment, but 2) Geely's unique position with access to leading technology in auto industry vs. its Chinese peers. Historically, Geely has traded between 8-13x PER. Our PT is based on medium and average of its historical trading band.

Key risks to our PT include: lower-than-expected sales volume of Geely’s small cars and lower-than-expected margins on heightening competitive pressure along with an oversupply in the passenger vehicle sector in 2012-13E leading to a worse-than-expected price war.

Great Wall Motor

2333 HK

OW 17.84 20.0

We upgrade Great Wall to OW and raise PT to HK$20 (Jun-13) from HK$12.8 (Dec-12), following our 19% earnings upgrade for 2013E. Our PT is based on 10x 2013 PE, or mid-end of the stock’s historical trading range largely between 8-12x.

Key downside risk to our PT: worse than expected competition in SUV and pick-up truck, both Great Wall’s target segments

GAC2238 HK

N 6.05 6.5

We revise down our PT to HK$6.5 (June-2013) from HK$9.5 (Dec-2012), based on revised earnings estimates and DCF analysis. Our PT also translates into 9.5x 2013 PER which we believe reasonable as it is in lower than of GAC's trading band and also in line with broader China market.

Key downside risks to our PT include: (1) oversupply risk in the passenger vehicle sector in 2012-13E; (2) potential risk of rising royalty fees; (3) declining blended profitability of GAC as it expands operations to low-margined own-brand segment; and (4) foreign exchange fluctuation risk. Conversely, upside risks include better than expected sales performance of both JV-brands (i.e. Toyota and Honda) and own-brand cars. Higher than anticipated tax credit can also boost the company's bottom line.

Minth425 HK

N 8.22 9.5

We extend our PT to June-2013 at HK$9.0/shr from previous Dec-12 of HK$9.5. Our revised PT reflects 1) revised earnings estimates (by 2-4% in 2012/13E) and also a lower earnings multiple of 9x 2013, which is 10% discount to Minth's historical average since 2008. We believe this approach is reasonable considering 1) a decelerating auto market in China market and 2) Minth’s earnings growth will slow to ~5-10% in 2012/13E based on our estimates vs. 26% CAGR in 2005-2011.

Key downside risks to our PT include weaker-than-expected passenger vehicle sales and price war in China’s passenger vehicle sector forcing OEMs to cut their purchase prices of auto parts. Key upside risks to our PT include (a) a value accretive M &A in Japanese auto parts market; (b) faster and sharper than expected recovery in China's car market.

Baoxin Auto1293 HK

OW 3.79 6.0

Our June-2013 PT of HK$6.0/shr, based on 9x forward earnings. This is lower end of its trading range and also 10% discount to its closet peer, Zheng Tong Auto's price target, which we believe reasonable given Baoxin's relatively shorter listing history.

Key risks to our PT and analysis include: a) a price war in China’s passenger vehicle sector due to oversupply pressure; (b) failure in meeting Baoxin’s own store expansion plan; (c) worse-than expected competition in luxury car market

China ZhengTong

1728 HK

OW 3.96 5.5Our Jun-13 price target of HK$5.5 is based on a 10x 2013E PER and taking into account of earnings

Key risks to our PT include: a) a price war in China’s PV sector due to oversupply. This

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revision. This is low end of Zheng Tong's trading range and also ~25% discount to the company’s DCF value which we believe is reasonable given ZhengTong's short listing history.

would put pressure on luxury segment too; (b) failure in meeting the company’s own expansion plan; (c) worse-than-expected competition from peers in luxury dealership business.

Sinotruk3808H

KUW 4.29 3.7

We have revised down our PT to HK$3.7 (June 2013) from HK$4.9 (Dec. 2012) on a more conservative PB multiple of 0.4x (vs. previous nearly 0.6x). We believe this is reasonable as 0.4x is the trough valuation of the company's historical trading band- largely between 0.5-1.0x. For Sinotruk's peer- WeiChai Power, we also assume coverage with UW view and apply trough valuation multiple to derive our PT.

Key upside risks to our price target and analysis include: (1) stronger-than-expected heavy-truck demand in 2H12-2013E; and (2) another major economic stimulus from the government.

Weichai Power

2338 HK

UW 22.50 18.5

Together with revised earnings estimate, we cut Weichai's PT to HK$18.5 (June 2013) from previous HK$42 (Dec-2012) on 6x 2013 PER. Historically, Weichai is trading in a wide rage of 5-15x forward earnings. We believe our PT basis is reasonable as it reflects continued de-rating and earnings revision risks. We are assuming coverage on the stock with UW recommendation, from previous Neutral.

Key downside risks to our price target include: (1) lower than expected sales volume and margins of its engines and heavy trucks, (2) rising competition in the domestic engines market. Upside risks to our PT and view include 1) better than expected truck and large size engine sales, 2) major policy response from Chinese leaders- including fiscal and monetary policies, 3) Weichai’s market share gain in its target segments.

Source: Bloomberg, J.P.Morgan.

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Table 36: Regional valuation comparison

Company Code Country Rec Aug-10 Price(LC)

Mkt Cap (US$ Mn)

PE(x) PB(x) ROE Div. Yield

12E 13E 12E 13E 12E 13E 12E1) Auto players in China & HKBrilliance 1114 HK China OW 7.37 5,357 13.7 11.8 3.3 2.6 27% 25% 0%ZhengTong Auto 1728 HK China OW 3.96 1,893 11.0 8.6 1.0 0.9 10% 11% 0%DongFeng Motor 0489 HK China UW 11.34 12,596 7.4 7.2 1.4 1.2 21% 18% 2%Great Wall Motor 2333 HK China OW 17.84 6,189 9.8 9.1 2.2 1.8 25% 22% 2%Geely Automobile 0175 HK China OW 2.57 2,876 8.5 6.8 1.4 1.1 18% 18% 1%

GAC 2238 HK China N 6.05 8,102 14.2 8.8 1.0 1.0 8% 11% 4%Minth Group 0425 HK China N 8.22 1,155 8.9 8.3 1.2 1.1 13% 13% 4%Baoxin Auto 1293 HK China OW 3.79 1,236 7.4 5.9 1.9 1.2 28% 25% 0%

Weichai Power 2338 HK China UW 22.50 5,401 8.5 7.3 1.2 1.0 15% 15% 2%Sinotruk 3808 HK China UW 4.29 1,630 38.8 26.3 0.5 0.5 1% 2% 1%Average of (10) 12.8 10.0 1.5 1.2 16% 16% 2%2) Auto players in IndiaAshok Leyland AL IN India UW 23 1,102 10.8 10.0 1.4 1.4 13% 14% 4%Bajaj Auto BJAUT IN India N 1,676 8,771 15.5 15.1 8.0 6.3 52% 42% 3%Bosch BOS IN India OW 8,836 5,017 21.3 17.5 4.8 4.0 23% 23% 1%Hero Motocorp HMCL IN India UW 1,912 6,906 16.1 14.6 8.9 6.6 55% 45% 2%Mahindra & Mahindra MM IN India N 740 8,211 15.1 15.0 3.6 3.1 22% 20% 2%Maruti Suzuki India MSIL IN India N 1,166 6,091 20.6 14.8 2.2 2.0 11% 13% 1%

Tata Motors TTMT IN India OW 232 12,289 59.3 33.8 2.2 1.7 9% 11% 2%Average of (7) 22.7 17.2 4.5 3.6 26% 24% 2%3) Auto players in IndonesiaAstra International ASII IJ Indonesia UW 7,200 30,741 16.0 13.7 4.1 3.5 28% 28% 3%Average of (1) 16.0 13.7 4.1 3.5 28% 28% 3%4) Auto players in JapanAisin Seiki 7259 JT Japan N 2,455 9,223 14.1 9.0 1.0 0.9 7% 10% 1%Denso 6902 JT Japan OW 2,611 29,428 25.7 12.5 1.1 1.0 4% 9% 2%F.C.C. 7296 JT Japan N 1,259 845 9.6 7.6 0.8 0.8 8% 10% 3%Fuji Heavy Industries 7270 JT Japan OW 625 6,238 10.5 8.5 1.0 0.9 12% 11% 1%Honda Motor 7267 JT Japan OW 2,498 57,687 8.6 7.3 0.9 0.8 11% 12% 3%Mazda Motor 7261 JT Japan OW 94 3,594 23.4 5.4 0.6 0.5 3% 10% 0%Musashi Seimitsu 7220 JT Japan OW 1,448 576 9.4 5.9 0.8 0.7 8% 12% 3%Nissan Motor 7201 JT Japan N 773 44,550 9.0 7.7 1.0 0.9 11% 12% 4%Nissin Kogyo 7230 JT Japan N 1,104 921 8.8 7.4 0.8 0.7 8% 9% 3%Suzuki Motor 7269 JT Japan N 1,498 10,715 11.0 9.5 0.8 0.7 7% 7% 1%TOYOTA BOSHOKU 3116 JT Japan UW 927 2,218 9.5 10.2 1.0 0.9 11% 9% 2%Toyota Motor 7203 JT Japan OW 3,170 139,344 11.4 9.1 0.9 0.8 8% 10% 3%TS Tech 7313 JT Japan N 1,352 1,172 7.5 7.4 0.8 0.8 12% 11% 2%Yamaha Motor 7272 JT Japan N 676 3,014 12.4 7.9 0.7 0.7 6% 8% 0%Average of (14) 12.2 8.2 0.9 0.8 8% 10% 2%5) Auto players in KoreaHankook Tire 000240 KS South Korea OW 41,700 5,610 9.2 8.1 1.6 1.7 19% 20% 1%Hyundai Mobis 012330 KS South Korea OW 315,000 27,105 8.4 7.5 1.7 1.8 23% 23% 1%Hyundai Motor 005380 KS South Korea OW 247,000 48,094 7.4 6.8 1.5 1.2 22% 20% 1%Hyundai Wia 011210 KS South Korea OW 164,500 3,741 10.2 8.8 2.5 2.5 26% 29% 0%Kia Motors 000270 KS South Korea OW 78,800 28,235 7.0 6.2 1.8 1.4 29% 26% 1%Mando 060980 KS South Korea OW 164,000 2,640 11.3 9.6 1.8 1.8 17% 19% 1%Nexen Tire 002350 KS South Korea N 20,850 1,749 14.8 10.7 2.9 2.2 22% 24% 0%Average of (7) 9.8 8.3 2.0 1.8 23% 23% 1%6) Auto players in TaiwanChina Motor 2204 TT Taiwan UW 26.90 1,243 14.6 12.1 0.8 0.8 6% 7% 4%Cheng Shin Rubber 2105 TT Taiwan OW 74.20 6,981 12.0 9.7 2.9 2.5 26% 27% 2%Yulon Motor 2201 TT Taiwan N 56.00 2,940 25.2 22.3 1.3 1.3 5% 6% 2%Average of (3) 17.3 14.7 1.7 1.5 13% 13% 3%Total average (1,2,3,4,5,6) 14.1 10.8 1.9 1.6 16% 17% 2%

Source: Bloomberg, J.P.Morgan estimates.

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Financial ratio analysis and comparison

In our financial analysis across companies and segments, we find that:

ROE

Average ROE in the sector has been generally trending down from 2010 to 2012E as auto sales growth decelerates.

By company, differential can be significant even in the same segment due to difference in leverage and profitability. For instance, in truck segment, Sinotruk's ROE is well below Weichai Power as Sinotruk has much higher debt while Weichai is consistently in net cash position. Similar pattern applies to luxury auto dealer where Baoxin has higher ROE than ZhengTong due to Baoxin’s lower gearing.

Among auto manufacturers, GAC and Geely are expected to deliver sequentially increasing ROE in 2013/14E: GAC is scheduled to launch two new SUV models in 4Q12-1H13 and the profitability of all its Sino-foreign JVs (including Mitsubishi Motors, Honda and Fiat) is expected to improve. For Geely, we believe the synergy of its Volvo acquisition will gradually emerge.

Balance sheet and leverage

7 out of the 10 auto companies we cover are expected to remain in net cash position and hence negative gearing ratio, measured by net debt to equity. Among these 7 companies, DongFeng has lowest debt ratio or its net debt to equity expected to remain at ~(-70%) in 2012/13E, followed by Minth's ~(-54%) and Great Wall ~(-38%). Conversely, Sinotruk has the highest leverage with rising net debt to equity from 30% in 2012E to over 50% by 2014E based on our estimates.

Asset utilization or turnover

Here we measure the company’s asset utilization and efficiency by fixed asset turnover (= revenue divided by fixed asset). We find that:

Auto dealers tend to have significantly higher turnover ratio due to their "asset light" business model compared with manufacturers who require lots of fixed assets (i.e. plants and production lines).

Amongst automakers, DongFeng Motor has the highest turnover ratio while GAC has the lowest but is improving. Both truck companies- Sinotruk and Weichai Power, have similar efficiency ratio. The same applies to Brilliance China and Geely.

Liquidity

We measure liquidity by the company’s current ratio. Our findings include:

For auto dealers, Baoxin is higher than ZhengTong- this pattern is associated with Baoxin’s relatively higher ROE, asset turnover and lower leverage in our view.

Amongst automakers, GAC is well ahead of its peers while Minth is well above the entire sector, driven by its limited debt but rich cash position.

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Table 37: ROE analysis and comparison of 10 Chinese auto stocks under coverage

Segment Company ROE (%)

2010 2011 2012E 2013E 2014E

Auto dealerZheng Tong 12% 10% 10% 11% 13%Baoxin 30% 27% 28% 25% 23%

PV manufacturer

Brilliance 22% 27% 27% 25% 24%Geely 19% 18% 18% 18% 25%Dong Feng 34% 25% 21% 18% 17%Guangzhou Auto 22% 16% 8% 11% 15%Great Wall 31% 26% 25% 22% 19%

CV manufacturer Weichai Power 45% 27% 15% 15% 14%Sinotruck 8% 5% 1% 2% 3%

Auto parts Minth 17% 14% 13% 13% 14%Average= 24% 19% 16% 16% 17%

Source: Company, J.P.Morgan estimates

Table 38: Leverage analysis and comparison of 10 Chinese auto stocks under coverage

Segment Company Net debt to equity (%)

2010 2011 2012E 2013E 2014E

Auto dealerZheng Tong -90% 31% 35% 36% 27%Baoxin 9% -29% 27% 7% 1%

PV manufacturer

Brilliance -47% -9% -6% -3% 2%Geely -7% 15% 34% 26% 26%Dong Feng -84% -72% -71% -71% -72%Guangzhou Auto -26% -24% -11% -7% -8%Great Wall -30% -42% -34% -37% -39%

CV manufacturer Weichai Power -36% -39% -46% -49% -49%Sinotruck 2% 21% 38% 46% 53%

Auto parts Minth -50% -48% -54% -53% -54%Average= -36% -20% -9% -10% -11%


Table 39: Asset turnover analysis and comparison of 10 Chinese auto stocks under coverage

Segment Company Fixed asset utilization (x)

2010 2011 2012E 2013E 2014E

Auto dealerZheng Tong 19.9 14.7 10.1 7.8 7.3Baoxin 14.8 15.0 8.3 8.6 8.3

PV manufacturer

Brilliance 5.6 3.9 3.1 2.7 2.9Geely 3.7 3.1 2.8 2.9 3.9Dong Feng 6.6 6.1 6.0 5.7 5.5Guangzhou Auto 2.9 2.5 1.4 1.2 1.0Great Wall 3.0 2.8 2.7 2.6 2.4

CV manufacturer Weichai Power 6.8 4.1 2.8 2.9 2.9Sinotruck 4.2 3.2 2.1 2.5 2.8

Auto parts Minth 2.9 2.7 2.7 2.9 3.1Average= 7.0 5.8 4.2 4.0 4.0


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Table 40: Liquidity analysis and comparison of 10 Chinese auto stocks under coverage

Segment Company Current ratio (%)

2010 2011 2012E 2013E 2014E

Auto dealerZheng Tong 228% 98% 114% 108% 105%Baoxin 139% 144% 110% 130% 142%

PV manufacturer

Brilliance 89% 92% 121% 157% 201%Geely 133% 113% 108% 101% 108%Dong Feng 131% 130% 131% 137% 143%Guangzhou Auto 457% 349% 246% 221% 214%Great Wall 125% 138% 143% 153% 161%

CV manufacturer Weichai Power 139% 145% 160% 177% 189%Sinotruck 136% 131% 146% 151% 156%

Auto parts Minth 453% 355% 370% 392% 426%Average= 203% 170% 165% 173% 184%


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Thematic Basket – J.P. Morgan China Passenger Vehicle Basket (JPHCHAPV)

Investors who agree with our analyst's bullish view on the China passenger vehicle sector overall can consider using J.P. Morgan China Passenger Vehicle Basket(Bloomberg: JPHCHAPV <Index>). The basket is composed of 7 stocks under the J.P. Morgan coverage that have significant exposure to the China passenger vehicle industry. The basket weights were determined by striking a balance between liquidity and diversity and the basket trades USD 9.3mn/daily assuming one-third of 3-month daily turnover.

Table 41: Components of J.P. Morgan China Passenger Vehicle Basket as of August 10, 2012

Source: J.P. Morgan Derivatives & Delta One Strategy.

Figure 62: J.P. Morgan China Passenger Vehicle Basket segment breakdown


Figure 63: Relative performance of J.P. Morgan China Passenger Vehicle Basket vs benchmark


Bloomberg subscribers can use the ticker JPHCHAPV <Index> to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPHCHAPV <Index> could diverge from returns quoted in our research, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For more information, please contact your J.P. Morgan salesperson or the Delta One Desk.

Price JPM Weight

(HKD) Rating (%)

1114 HK Brilliance China Automotive Luxuryy PV 7.37 4,665.3 14.7 OW 20.8%

489 HK Dongfeng Motor Grp Co Ltd-H Upper-mid end foreign JVs 11.34 4,175.1 24.0 UW 20.4%

175 HK Geely Automobile Holdings Lt Chinese own brand PV 2.57 2,448.7 9.6 OW 19.8%

2333 HK Great Wall Motor Company-H Chinese own brand PV 17.84 2,389.7 14.3 OW 19.5%

1728 HK China Zhengtong Auto Service Luxuryy PV 3.96 1,124.8 5.4 OW 9.9%

1293 HK Baoxin Auto Group Ltd Luxuryy PV 3.79 1,190.0 1.4 OW 4.9%

2238 HK Guangzhou Automobile Group-H Upper-mid end foreign JVs 6.05 1,697.8 4.3 N 4.7%

Ticker Name Segment Market Cap

(USD mn)

3M Avg T/O

(USD mn)

50

60

70

80

90

100

110

Aug-11 Dec-11 Apr-12 Aug-12

JPHCHAPV IndexMXCN Index

Luxury PV36%

Upper-mid end foreign

JVs25%

Chinese own brand

PV39%

Equity Derivatives & Delta One Strategy

Sue LeeAC

(852) 2800-7898

[email protected]

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Valuations

Asian auto OEM valuation comparison (in local F/X)Company Ticker Rating Closing Price Basic Shares (millions) Market Cap Net debt/ Minorities Enterprise Value Sales EBITDA EPS ROE

(Net cash) 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

JapanPV (¥) (bn ¥) (bn ¥) (bn ¥) (bn ¥) (bn ¥) (bn ¥) (bn ¥) (bn ¥) (¥) (¥)Nissan Motor 7201 JP N 730 4,521 3,300 1,136 301 4,737 9,900 10,550 1,846 2,116 86.3 100.2 11.1% 11.9%Toyota Motor 7203 JP OW 3,095 3,448 10,672 2,808 516 13,996 21,500 22,200 4,447 5,709 277.9 347.4 8.1% 9.6%Mazda Motor 7261 JP OW 94 2,999 282 346 1.3 629 2,210 2,340 98 149 4.0 17.4 2.5% 10.3%Honda Motor 7267 JP OW 2,472 1,811 4,478 853 133 5,463 9,856 10,250 1,011 1,141 291.8 341.2 11.4% 12.3%Suzuki Motor 7269 JP N 1,428 561 801 261 137 1,199 2,610 2,740 761 809 136.2 156.9 7.0% 7.0%Fuji Heavy Industries 7270 JP OW 626 783 490 29 1.3 520 1,870 1,924 124 142 59.4 73.9 11.6% 10.7%2WYamaha Motor 7272 JP N 678 350 237 117 36 391 1,227 1,363 62 92 54.4 85.9 5.8% 8.2%

ChinaPV (HK$) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (Rmb) (Rmb)DongFeng Motor 489 HK UW 10.0 8,616 582 (35,934) 3,190 (32,162) 152,940 165,841 15,943 16,368 1.25 1.28 21.2% 18.3%Guangzhou Auto 2238 HK N 5.4 6,435 35,766 (7,305) 976 29,437 11,382 12,361 2,932 4,356 0.35 0.56 7.5% 11.4%Brilliance China 1114 HK OW 7.6 5,026 31,189 (572) (752) 29,864 6,385 6,704 2,567 2,973 0.44 0.51 27.3% 24.6%Great Wall Motor 2333 HK OW 17.5 3,042 360 (7,108) 284 (6,464) 36,486 39,397 5,872 6,333 1.50 1.61 24.6% 21.8%Geely Auto 175 HK OW 2.5 7,478 125 1,512 568 2,205 26,257 33,710 2,897 3,588 0.25 0.31 17.7% 18.3%CVSinotruk 3808 HK UW 4.0 2,761 9,110 4,269 1,819 15,197 24,736 29,439 1,787 2,038 0.09 0.13 1.3% 1.9%Weichai Power 2338 HK UW 20.5 1,999 34,034 (11,332) 5,999 28,701 45,446 51,283 4,990 5,713 2.17 2.52 14.7% 14.7%Auto DealershipChina ZhengTong Auto 1728 HK OW 4.6 2,209 69 1,943 112 2,123 27,952 32,303 1,342 1,621 0.30 0.38 9.8% 11.1%Baoxin Auto 1293 HK OW 3.9 2,529 8,115 (899) 36 7,252 30,185 37,947 1,830 2,404 0.40 0.53 27.7% 25.1%

IndiaPV (Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (Rs) (Rs)Maruti Suzuki MSIL IN N 1,138 289 328,780 (21,992) 0 306,788 402,706 468,830 21,344 30,568 65 87 11.1% 13.2%CVMahindra & Mahindra MM IN N 768 614 471,230 17,907 0 489,137 371,018 412,052 42,854 47,221 49 54 20.5% 19.3%Tata Motors TTMT IN OW 234 3,147 689,711 134,699 0 824,410 2,015,764 2,191,874 279,122 299,591 42 43 29.4% 24.7%2WHero Motocorp Ltd. HMCL IN UW 1,753 200 350,022 (51,676) 0 298,346 257,746 284,401 30,414 33,694 131 140 45.0% 37.4%Bajaj Auto BJAUT IN N 1,615 289 467,328 (52,528) 0 414,800 218,702 248,116 41,615 46,406 119 132 43.8% 38.7%

KoreaPV (W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (W) (W)Hyundai Motor 005380 KS OW 240,500 220 52,976 27,907 0 80,883 84,931 89,080 12,056 12,640 33,545 36,205 22.2% 20.3%Kia Motor 000270 KS OW 74,100 405 0 1,648 0 1,648 48,169 52,525 5,599 6,280 11,293 12,800 29.3% 25.6%

TaiwanPV (NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (NT) (NT)China Motor 2204 TT UW 27 1,384 37,923 (6,507) 0 31,416 33,738 35,135 1,823 1,985 1.8 2.2 5.8% 6.8%Yulon Motor 2201 TT N 54 1,573 85,567 (7,141) 0 78,426 36,642 37,818 1,444 1,544 2.3 2.2 5.0% 6.0%

IndonesiaPV (Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (Rp) (Rp)Astra International ASII IJ UW 6,750 40,484 0 31,879 0 31,879 176,603 211,794 27,855 32,538 450 526 27.8% 27.9%

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Company Ticker Rating Closing Price Price Target P/E P/BV EV/EBITDA EV/Sales Net Debt/EBITDA EBITDA margin2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

JapanPV (¥) (¥)Nissan Motor 7201 JP N 730 780 8.5x 7.3x 0.9x 0.8x 2.6x 2.2x 0.5x 0.4x 0.6x 0.5x 19% 20%Toyota Motor 7203 JP OW 3,095 3,900 11.1x 8.9x 0.9x 0.8x 3.1x 2.5x 0.7x 0.6x 0.6x 0.5x 21% 26%Mazda Motor 7261 JP OW 94 160 23.4x 5.4x 0.6x 0.5x 6.4x 4.2x 0.3x 0.3x 3.5x 2.3x 4% 6%Honda Motor 7267 JP OW 2,472 3,200 8.5x 7.2x 0.9x 0.8x 5.4x 4.8x 0.6x 0.5x 0.8x 0.7x 10% 11%Suzuki Motor 7269 JP N 1,428 1,800 10.5x 9.1x 0.8x 0.7x 1.6x 1.5x 0.5x 0.4x 0.3x 0.3x 29% 30%Fuji Heavy Industries 7270 JP OW 626 730 10.5x 8.5x 1.0x 0.9x 4.2x 3.7x 0.3x 0.3x 0.2x 0.2x 7% 7%2WYamaha Motor 7272 JP N 678 800 12.5x 7.9x 0.7x 0.7x 6.3x 4.2x 0.3x 0.3x 1.9x 1.3x 5% 7%

ChinaPV (HK$) (HK$)DongFeng Motor 489 HK UW 10.0 10.0 6.6x 6.4x 1.3x 1.1x -2.4x -2.7x -0.2x -0.3x -2.6x -3.0x 10% 10%Guangzhou Auto 2238 HK N 5.4 6.5 12.7x 7.9x 0.9x 0.9x 11.4x 8.0x 2.9x 2.8x -1.2x -0.6x 26% 35%Brilliance China 1114 HK OW 7.6 8.0 14.1x 12.1x 3.4x 2.6x 11.7x 10.2x 4.7x 4.5x -0.2x -0.1x 40% 44%Great Wall Motor 2333 HK OW 17.5 20.0 9.6x 8.9x 2.1x 1.8x -1.1x -1.3x -0.2x -0.2x -1.2x -1.4x 16% 16%Geely Auto 175 HK OW 2.5 4.0 8.2x 6.6x 1.3x 1.1x 0.5x 0.5x 0.1x 0.1x 0.2x 0.2x 11% 11%CVSinotruk 3808 HK UW 4.0 3.7 36.4x 24.7x 0.4x 0.4x 10.6x 10.1x 0.8x 0.7x 4.5x 4.7x 7% 7%Weichai Power 2338 HK UW 20.5 18.5 7.7x 6.7x 1.1x 0.9x 5.1x 3.9x 0.6x 0.4x -3.0x -3.2x 11% 11%Auto DealershipChina ZhengTong Auto 1728 HK OW 4.6 5.5 12.9x 10.1x 1.2x 1.1x 2.0x 2.0x 0.1x 0.1x 1.9x 1.9x 5% 5%Baoxin Auto 1293 HK OW 3.9 6.0 8.1x 6.1x 1.9x 1.3x 5.2x 3.7x 0.3x 0.2x 0.7x 0.2x 6% 6%

IndiaPV (Rs) (Rs)Maruti Suzuki MSIL IN N 1,138 1,265 17.6x 13.0x 2.0x 1.7x 15.0x 10.4x 0.8x 0.7x -0.4x -0.4x 5% 7%CVMahindra & Mahindra MM IN N 768 768 15.6x 14.2x 3.2x 2.7x 11.5x 10.4x 1.3x 1.2x 0.5x 0.4x 12% 11%Tata Motors TTMT IN OW 234 285 5.6x 5.4x 1.7x 1.3x 2.9x 2.5x 0.4x 0.3x 0.4x 0.1x 14% 14%2WHero Motocorp Ltd. HMCL IN UW 1,753 1,900 13.4x 12.5x 6.0x 4.7x 9.2x 7.9x 1.1x 0.9x -2.3x -2.5x 12% 12%Bajaj Auto BJAUT IN N 1,615 1,640 13.6x 12.2x 5.9x 4.7x 9.5x 8.1x 1.8x 1.5x -1.7x -2.0x 19% 19%

KoreaPV (W) (W)Hyundai Motor 005380 KS OW 240,500 310,000 7.2x 6.6x 1.4x 1.2x 6.5x 6.0x 0.9x 0.9x 2.1x 1.8x 14% 14%Kia Motor 000270 KS OW 74,100 100,000 6.6x 5.8x 1.7x 1.3x 0.0x -0.2x 0.0x 0.0x NM -0.2x 12% 12%

TaiwanPV (NT) (NT)China Motor 2204 TT UW 27 24 15.2x 12.5x 0.9x 0.8x 15.1x 13.4x 0.8x 0.8x -5.7x -5.7x 5% 6%Yulon Motor 2201 TT N 54 57 23.7x 24.7x 1.3x 1.3x 54.8x 50.4x 2.2x 2.1x -4.5x -5.0x 4% 4%

IndonesiaPV (Rp) (Rp)Astra International ASII IJ UW 6,750 6,100 15.0x 12.8x 3.9x 3.3x 1.2x 1.0x 0.2x 0.2x 1.2x 1.0x 16% 15%

Source: Bloomberg, J.P. Morgan estimates.

Note: (1) Net debt/(Net cash), minorities and enterprise value is for the last reported fiscal year. (2) Valuation priced as of the closing of Aug 31, 2012.

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Asia-ex autoparts suppliers’ valuation comparison (in local FX)

Company Ticker Rating Closing Price Basic Shares (millions) Market Cap Net debt/ Minorities Enterprise Value Sales EBITDA EPS ROE(Net cash) 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

China (HK$) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (mn Rmb) (Rmb) (Rmb)Minth 425 HK N 8.64 1,077 51 (3,018) 155 (2,812) 4,317 4,944 1,060 1,152 0.76 0.82 13.2% 13.4%Weichai Power 2338 HK UW 20.50 1,999 229 (11,332) 5,999 (5,103) 45,446 51,283 4,990 5,713 2.17 2.52 14.7% 14.7%Xinyi Glass 868 HK OW 3.55 3,775 74 2,952 15 3,041 7,885 9,811 1,655 2,387 0.25 0.38 12.4% 17.5%Xingda Intl* 1899 HK NR 2.32 1,525 19 1,119 1,441 2,580 5,143 6,083 929 1,159 0.21 0.28 6.2% 7.1%

India (Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (mn Rs) (Rs) (Rs)Bosch Limited BOS IN OW 8,501 31 266,925 (26,711) 0 240,214 91,294 108,019 16,045 19,246 415 506 22.7% 22.8%

Korea (W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (bn W) (W) (W)Hyundai Mobis 012330 KS OW 307,500 97 0 4,924 0 4,924 30,181 33,987 3,407 3,873 37,449 41,790 23.0% 23.0%Nexen Tire 002350 KS N 19,500 95 0 840 0 840 1,733 2,132 279 358 1,409 1,956 22.1% 24.1%Hyundai Wia 011210 KS OW 180,000 26 0 692 0 692 7,141 8,132 655 765 16,062 18,649 26.1% 29.0%

Taiwan (NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (mn NT) (NT) (NT)Tong Yang Industry* 1319 TT NR 28.5 577 16,446 6,063 0 22,508 18,899 20,990 NM 4,145 2.18 2.44 7.9% 8.0%

Indonesia (Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (bn Rp) (Rp) (Rp)Astra International ASII IJ UW 6,750 40,484 0 24,733 0 24,733 176,603 211,794 27,855 32,538 450 526 27.8% 27.9%

Thailand (THB) (mn THB) (mn THB) (mn THB) (mn THB) (mn THB) (mn THB) (mn THB) (mn THB) (THB) (THB)Somboon Advance Tech* SAT TB NR 29.8 340 10,113 2,718 0 12,831 8,818 9,711 1,771 2,026 2.57 3.09 19.4% 20.6%Aapico Hitech* AH TB NR 20.3 227 4,598 4,758 115 9,471 14,279 15,495 1,025 1,056 2.08 2.21 12.6% 10.8%

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Company Ticker Rating Closing Price Price Target P/E P/BV EV/EBITDA EV/Sales Net Debt/EBITDA EBITDA margin2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

China (HK$) (HK$)Minth 425 HK N 8.64 9.0 9.3x 8.7x 1.2x 1.1x -3.0x -2.9x -0.7x -0.7x -3.3x -3.3x 25% 23%Weichai Power 2338 HK UW 20.50 18.5 7.7x 6.7x 1.1x 0.9x -2.3x -2.9x -0.3x -0.3x -3.7x -4.3x 11% 11%Xinyi Glass 868 HK OW 3.55 5.1 11.8x 7.7x 1.4x 1.3x 1.7x 1.1x 0.4x 0.3x 1.6x 1.0x 21% 24%Xingda Intl* 1899 HK NC 2.32 2.8 9.2x 6.8x 0.5x 0.5x NM NM NM NM 0.7x 0.6x 18% 19%

India (Rs) (Rs)Bosch Limited BOS IN OW 8,501 9,600 20.5x 16.8x 4.7x 3.8x 16.0x 13.2x 2.8x 2.3x -0.6x -0.7x 18% 18%

Korea (W) (W)Hyundai Mobis 012330 KS OW 307,500 390,000 8.2x 7.4x 1.7x 1.7x 2.2x 1.0x 0.2x 0.1x 2.2x 1.0x 11% 11%Nexen Tire 002350 KS N 19,500 22,000 13.8x 10.0x 2.7x 2.0x 3.3x 2.5x 0.5x 0.4x 3.3x 2.5x 16% 17%Hyundai Wia 011210 KS OW 180,000 230,000 11.2x 9.7x 2.8x 2.8x 1.3x 1.1x 0.1x 0.1x 1.3x 1.1x 9% 9%

Taiwan (NT) (NT)Tong Yang Industry* 1319 TT NC 28.5 28.0 13.1x 11.7x 0.9x 0.9x NM NM NM NM NM 1.7x NM 20%

Indonesia (Rp) (Rp)Astra International ASII IJ UW 6,750 6,100 15.0x 12.8x 3.9x 3.3x 1.2x 1.0x 0.2x 0.2x 1.2x 1.0x 16% 15%

Thailand (THB) (THB)Somboon Advance Tech* SAT TB NC 29.8 34.5 11.6x 9.6x 2.1x 1.8x 7.3x 6.4x 1.5x 1.3x 1.5x 1.0x 20% 21%Aapico Hitech* AH TB NC 20.3 20.4 9.8x 9.2x 1.1x 1.0x NM NM NM NM 4.1x 3.6x 7% 7%

Source: Bloomberg, Bloomberg consensus for stocks Not Covered (NC), J.P. Morgan estimates.

NOTE: (1) Net debt/(Net cash), minorities and enterprise value is for the last reported fiscal year. (2) Valuation priced as of the closing of Aug 31, 2012.

(

84



Charts

Asia ex-Japan and China passenger vehicle sector

Asia ex-Japan and China commercial vehicle sector

China passenger vehicle sector

China commercial vehicle sector

Source: Bloomberg.

Jin Luo’s role has been limited to assisting in gathering information for this report

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1W 1M 3M 6M

Maruti Udyog Tan Chong Motor UMW Holdings China Motor

-30%-20%-10%

0%10%20%

1W 1M 3M 6M Ashok Leyland Tata Motors Mahindra & Mahindra

-50%-40%-30%-20%-10%

0%10%20%

1W 1M 3M 6M

Guangzhou Auto Dongfeng Motor Grp Co Ltd Brilliance China Automotive

Great Wall Motor Company Limited Geely Automobile Holdings Ltd

-50%-40%-30%-20%-10%

0%10%20%

1W 1M 3M 6M

Qingling Motors Co Weichai Power Jiangling Motors - B Sinotruk

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Companies Recommended in This Report (all prices in this report as of market close on 31 August 2012)Hyundai Wia (011210.KS/W180000/Overweight), Musashi Seimitsu (7220) (7220.T/¥1467/Overweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Date Rating Share Price (W)

Price Target (W)

02-Apr-11 UW 77300 69000

01-Aug-11 UW 161000 82000

05-Feb-12 UW 128500 98000

30-Apr-12 OW 169000 210000

03-Jun-12 OW 172000 220000

29-Jul-12 OW 163000 230000

Date Rating Share Price (Y)

Price Target (Y)

28-Jul-08 N 2470 3100

08-Aug-08 N 2220 2750

27-Nov-08 N 877 800

01-Jun-09 N 1407 1300

03-Aug-09 N 1873 1600

26-Nov-09 N 1792 2000

21-Jan-11 N 2055 2400

18-Apr-11 OW 1902 2900

07-Nov-11 OW 1805 2800

19-Apr-12 OW 1822 2450

02-Jul-12 OW 1504 2000

0

41,004

82,008

123,012

164,016

205,020

246,024

287,028

Price(W)

Feb11

May11

Sep11

Dec11

Apr12

Aug12

Hyundai Wia (011210.KS, 011210 KS) Price Chart

OW W220,000

OW W210,000

UW W69,000 UW W82,000 UW W98,000 OW W230,000

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Apr 02, 2011.

0

1,037

2,074

3,111

4,148

5,185

6,222

Price(Y)

Sep06

Jun07

Mar08

Dec08

Sep09

Jun10

Mar11

Dec11

Sep12

Musashi Seimitsu (7220) (7220.T, 7220 JT) Price Chart

N Y2,750 N Y1,600 OW Y2,900 OW Y2,000

N Y3,100N Y800N Y1,300N Y2,000 N Y2,400 OW Y2,800OW Y2,450

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jul 28, 2008.

mailto:[email protected]

https://mm.jpmorgan.com/disclosures/company

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The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Lai, Nick YC: Anhui Conch Cement Company Limited - A (600585.SS), Anhui Conch Cement Company Limited -H (0914.HK), Asia Cement (1102.TW), BBMG Corp (2009.HK), Baoxin Auto Group Limited (1293.HK), Brilliance China Automotive (1114.HK), China Motor (2204.TW), China National Building Material (3323.HK), China National Materials (1893.HK), China Resources Cement (1313.HK), China Steel Corp (2002.TW), China ZhengTong Auto Service Holding Limited (1728.HK), DongFeng Motor Co., Ltd. (0489.HK), Geely Automobile Holdings Ltd. (0175.HK), Great Wall Motor Company Limited (2333.HK), Guangzhou Automobile Group Co. Ltd. (2238.HK), Hung Poo Real Estate (2536.TW), Minth Group (0425.HK), Sinotruk (3808.HK), Sinyi Realty (9940.TW), Taiwan Cement (1101.TW), Taiwan Fertilizer Co Ltd (1722.TW), Teco Electric & Machinery (1504.TW), Weichai Power (2338.HK), Yulon Motor Co., Ltd. (2201.TW)

Makharia, Aditya: Ashok Leyland (ASOK.BO), Bajaj Auto (BAJA.BO), Bosch Limited (BOSH.BO), Container Corporation of India Ltd (CCRI.BO), Hero Motocorp Ltd. (HROM.BO), Mahindra & Mahindra (MAHM.BO), Maruti Suzuki India Ltd (MRTI.BO), Tata Motors (TAMO.BO)

Srinath, Aditya: Astra Agro Lestari (AALI.JK), Astra International (ASII.JK), Bank Central Asia (BCA) (BBCA.JK), Bank Danamon (BDMN.JK), Bank Niaga (BNGA.JK), Bank Rakyat Indonesia (BBRI.JK), London Sumatra Indonesia (LSIP.JK), MNC Sky Vision tbk (MSKY.JK), PT Bakrie & Brothers, Tbk (BNBR.JK), PT Bank Mandiri Tbk. (BMRI.JK), PT Bank Tabungan Pensiunan Nasional Tbk (BTPN.JK), United Tractors (UNTR.JK)

Park, Wan Sun: Doosan Heavy Industries & Construction (034020.KS), Doosan Infracore (042670.KS), Hankook Tire (000240.KS), Hyundai Mobis (012330.KS), Hyundai Motor Company (005380.KS), Hyundai Wia (011210.KS), Kia Motors (000270.KS), Korea Aerospace Industries (047810.KS), Mando (060980.KS), Nexen Tire (002350.KS)

Takahashi, Kohei: Aisin Seiki (7259) (7259.T), Denso (6902) (6902.T), F.C.C. (7296) (7296.T), Fuji Heavy Industries (7270) (7270.T), Honda Motor (7267) (7267.T), Mazda Motor (7261) (7261.T), Musashi Seimitsu (7220) (7220.T), Nissan Motor (7201) (7201.T), Nissin Kogyo (7230) (7230.T), Suzuki Motor (7269) (7269.T), TOYOTA BOSHOKU (3116) (3116.T), TS Tech (7313) (7313.T), Toyota Motor (7203) (7203.T), Yamaha Motor (7272) (7272.T)

J.P. Morgan Equity Research Ratings Distribution, as of July 6, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 11%IB clients* 51% 47% 34%

JPMS Equity Research Coverage 44% 48% 8%IB clients* 70% 62% 51%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

mailto:[email protected]

http://www.morganmarkets.com/

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Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

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Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time

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by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised August 25, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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