China Auto 2014 - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2013/10/14/1490... · 10/14/2013 · Great Wall, Brilliance China, Geely and Guangzhou Auto. In the first half of this

www.jpmorganmarkets.com

Asia Pacific Equity Research14 October 2013

China Auto 2014Higher for longer

Head of Asia Auto Research

Nick Lai AC

(852) 2800 8543

[email protected]

Bloomberg JPMA LAI <GO>

J.P. Morgan Securities (Asia Pacific) Limited

See page 29 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.

Towards the peak in 2016E: China’s passenger vehicle (PV) sales growth is expected to slow, but absolute volumes may not peak until 2016E at 21-22mn units, based on our estimates, thanks to income growth and, to a lesser extent, wealth effect through sustained property prices (at least for now). On demand, our view on PV sales includes:1. Raise 2013-15E PV sales growth forecast to 12%, 9% and 8%,

respectively, vs previous 10%/5%/5%. YTD, the run rate is 14%. 2. Replacement demand in 2-3 years: China's much distorted sales

growth of 53%/33% in 2009/10, due to the Rmb4.0 trillion economic stimulus plan in 2008, suggests the next wave of replacement demand should kick in in ~2015/16E, assuming ~6-7 years of car usage life.

3. Geographically, we introduce forecasts of both new car sales and penetration by region towards 2020E. By then, we expect Northern China to see the highest car ownership, while Eastern China is the most crowded (making up 35% of total ~200mn units of PV fleet).

4. Penetration of SUVs should hit 21% in 2015E, if not higher, vs16% in 2013. We believe the saturation point is ~25-30%. SUV remains the most promising sector, growing at the expense of sedans.

5. Affordability is a powerful driver for car demand. We estimate in 2014 that China’s overall per-capita disposable income will exceed the level of the richest Eastern region as of 2012 and it will take just another three years (i.e. by 2016) for the poorest Northwestern region to reach the same. This implies % growth would be strongest in mid to lower-end cars with engine size below 2.0 liters or price point <Rmb200k. This benefits Chinese and low-end JV models.

On supply – overcapacity but highly concentrated: Our analysis on capacity expansion suggests that while industry-wide utilization may drop,continued rising concentration means smaller players would suffer most. By Aug-13, the top 10 of the total 70 automakers accounted for 88% of sales in China, while the bottom 50 altogether merely a meagre 3%.

Two company-specific milestones and events: 1) Great Wall's H8SUV, scheduled to launch in Nov-13, is the first Chinese-made model that is priced at the same level of JV models or ~Rmb200k. Contrary to the consensus bearish belief, we believe this model will be successful as it creates an entirely new market that wasn't available in the past at the same price point. 2) Geely’s potential acquisition of Volvo operations in China when Volvo China turns profitable in late-14E.

Watch two policy moves: 1) Possible further implementation of car purchase limits in tier-two cities to curb pollution and congestion. 2) Support for EV (electric vehicle) will be an ongoing initiative.

Recommendations: We prefer OEM over dealers, parts or trucks. Our top picks are Great Wall, Brilliance, GAC and Geely. We would trade dealers depending on pricing and margin momentum.

Relative share price performance of China auto companies (Oct-11)

Company (rating) 1M 3M YTDBrilliance China (OW) 6% 31% 27%DongFeng (UW) -3% 5% -11%GAC (OW) -5% 10% 22%Geely (OW) -1% 26% 10%Great Wall (OW) 10% 18% 86%Baoxin (N) 5% 52% 26%ZhengTong (N) 4% 52% 1%Zhongsheng (UW) 12% 64% 11%Minth (N) 2% 3% 64%Sinotruk (UW) -5% 0% -37%

Source: Bloomberg.Note: Relative performance to Hang Seng Index

2


Nick Lai(852) 2800 [email protected]

Unstopping growth trend

Chinese autos, year to date, is among one of the few sectors that has outperformedthe market. Can this continue into the 4Q peak season and as we enter 2014? Our view is most likely yes, but investors should differentiate between stocks and sub-sectors. Simply put, our recommendation is: 1) OEMs over parts or dealers, 2) SUVsover sedans and 3) passenger vehicles (PV) over commercial vehicles (CV). We like Great Wall, Brilliance China, Geely and Guangzhou Auto.

In the first half of this report, we aim to address the “demand” equation of the sector.

From acceleration, deceleration to decline

The growth of China's PV market can be dividend into two major stages:

1991 to 2010: During this period, growth of the total vehicle fleet or new car sales was significant, at around a 20% CAGR, thanks to rapid economic growth during the previous Five-Year Plans. New car sales, for instance, posted a 27% CAGR in 2000-05 and remained high at 25% in the next five years.

2011 to 2020E: New car sales growth is expected to first decelerate to mid-single digits before declining in absolute terms after 2016E, in our view. Likewise, vehicle fleet growth is also anticipated to slow down to a 12% CAGR in 2011-20E vs ~20% in the previous two decades.

Figure 1: CAGR analysis: China PV fleet Million units

Source: CEIC, J.P. Morgan estimates.

Figure 2: CAGR analysis: China PV salesMillion units


0

50

100

150

200

250

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

E

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E

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E

1991-2001 CAGR: 18%

2001-2011 CAGR: 22%

2011-2020E CAGR: 12%

0

5

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15

20

25

2000

2005

2010

2015

E

2020

E

2000-2005

CAGR: 27%

2005-2010

CAGR: 25%

2010-2015E

CAGR: 8%

2015E-2020E

CAGR: -4%

We estimate growth of China’s total PV fleet to slow down to a 12% CAGR in 2011-20E from 2001-11 peak levels of a 22% CAGR. PV sales growth is expected to slow to an 8% CAGR in 2010-2015E vs 27% & 25% CAGR in 2000-2005 & 2005-2010. Absolute

volume may not peak until 2016E at 21-22mn units, based on our estimates, thanks to affordability or income growth, as well as replacement demand in ~ 2015/2016E. We believe growth will decline afterwards and CAGR is estimated at -4% in 2015-2020E.

3



We raise PV sales forecastsWe revise up overall auto sales (incl. PV and CV) growth to 11%/8%/7% in 2013/14/15E, respectively, from our previous estimates of 8%/4%/4%. Year-to-Septrun rate of 13% suggests risk to our revised forecast now could remain on the upside. Our seemingly conservative stance is due to the very high base in 4Q12 but our bottom line is simple – we are bullish on auto sales growth and momentum into 2014.

Specifically, in the PV sector, our revised growth forecast now stands at 12%/9%/8% in 2013-15E vs previous projections of 10%/5%/5%, respectively. Year to Sept, PV growth is 14%, mainly boosted by the surprisingly strong September. (see our report, China Auto Drivers, 11 October 2013). This growth could slow down in 4Q13 as 4Q12 was an unusually strong quarter right after the leadership change in China last October.

Table 1: China vehicle demand forecast

Sales Unit ('000) 2008 2009 2010 2011 2012 2013E 2014E 2015ESedan 5,047 7,473 9,494 10,123 10,746 11,498 12,073 12,677MPV 197 249 445 498 493 839 939 1,033SUV 448 659 1,326 1,594 1,998 2,797 3,581 4,297Minivan 1,064 1,950 2,492 2,258 2,256 2,279 2,347 2,394Total PV 6,756 10,331 13,757 14,472 15,494 17,405 18,951 20,411(yoy % change) 7% 53% 33% 2% 4% 12% 9% 8%Bus 253 271 356 403 426 464 478 492Truck 1,641 2,250 2,831 2,702 2653 2,786 2,981 3,130Trailer 194 211 355 258 191 219 230 239Van chassis 88 83 87 84 82 81 85 88Truck chassis 450 498 675 585 460 483 507 527Total CV 2,626 3,313 4,304 4,033 3,811 4,033 4,281 4,477(yoy % change) 5% 26% 30% -6% -5% 6% 6% 5%Total vehicles 9,381 13,645 18,062 18,505 19,305 21,437 23,232 24,888(yoy % change) 7% 45% 32% 2% 4% 11% 8% 7%

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

Figure 3: China vehicle sales forecast (PV+CV)million units, %

Source: CAAM, J.P. Morgan estimates.

Figure 4: China vehicle sales growth – PV vs CV %

Source: CAAM, J.P. Morgan estimates.

By segment, SUVs remain stronger than sedans, and PV stronger than CV

9.4

13.6

18.1 18.5 19.321.4

23.224.9

7%

45%

32%

2% 4%

11%8% 7%

0%5%10%15%20%25%30%35%40%45%50%

0

5

10

15

20

25

30

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

Total vehicle sales YoY growth (RHS)

5%

26%30%

-6% -5%

6% 6% 5%7%

53%

33%

5% 7%12% 9% 8%

-10%

0%

10%

20%

30%

40%

50%

60%

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

CV YoY growth PV YoY growth

Total vehicle sales estimated at ~24.9mn: We estimate China’s total vehicles to grow at 11%/8%/7% in 13E/14E/15E. Total vehicle sales volume is estimated at ~25mn by 2015E.

Raise 2013-15E PV sales growth forecast to 12%, 9% and 8% respectively vs. previous 10%/5%/5%. Year to September, the growth rate is 14%YoY.

CV growth is expected to recover from two consecutive drops in 2011 and 2012. Growth expected at 6%/6%/5% in 13E/14E/15E.

https://jpmorganmarkets.com/research/content/GPS-1228742-0

4



Our sub-sector preferences

SUV > sedan: We believe the SUV (sport utility vehicles) cycle in China will not peak until 2016 or so when penetration hits similar levels to those seen in Korea, Taiwan or the US. The growth of SUVs is clearly at the expense of sedans. By September for instance, the SUV sector is growing at 45%, over three times higher than broader PV of 14%.

PV > CV: CV in China is mainly truck or those related to FAI (fixed asset investment). Structurally we believe the truck sector is facing two challenges:1) China’s economy moving towards a more balanced model between FAI and consumption and 2) substitution effect from better railway network. Both of these factors will reduce truck demand in the longer term, in our view. In contrast to CV, we believe PV will continue to grow at higher rates than CV in the next couple of years.

OEM > dealers or parts because the former generally has the upper hand in terms of pricing power than the latter.

Figure 5: China PV sales forecast – sedans vs SUVs


Figure 6: China CV sales forecast – buses vs trucks


Figure 7: China PV sales breakdown

Source: J.P. Morgan estimates.

Figure 8: China CV sales breakdown


48%

27%

7% 6% 7% 5% 5%

47%

101%

20%25%

40%28%

20%

0%

20%

40%

60%

80%

100%

120%

2009 2010 2011 2012 2013E 2014E 2015E

Sedan SUV

7%

31%

13%

6%9%

3% 3%

37%

26%

-5%-2%

5% 7% 5%

-10%

0%

10%

20%

30%

40%

2009 2010 2011 2012 2013E 2014E 2015E

Bus Truck

75% 72% 69% 70% 69% 66% 64% 62%

7% 6% 10% 11% 13% 16% 19% 21%

0%10%20%30%40%50%60%70%80%90%

100%

2008 2009 2010 2011 2012 2013E 2014E 2015E

Sedan SUV Minivan MPV

62% 68% 66% 67% 70% 69% 70% 70%

10%8% 8% 10% 11% 12% 11% 11%

0%10%20%30%40%50%60%70%80%90%

100%

2008 2009 2010 2011 2012 2013E 2014E 2015E

Truck Bus Trailer Chassis

SUV expected to grow at the expense of sedans: SUV remains the most promising sector, in our view, growing at the expense of sedans. SUV growth is expected at 40%/28%/20%, with sedans at only 7%/5%5% in 13E/14E/15E, based on our forecasts.

In the CV segment, buses are expected to outperform trucks in 13E, but growing at a slower rate in 14E and 15E.

Penetration of SUVs set to hit 21% in 2015E, if not higher, versus 13% in 2012. We believe the saturation point is ~25-30%, which is similar to levels seen in Korea, Taiwan or the US.

In the CV segment, trucks and buses are expected to remain at similar market share as seen in 2012: trucks at ~ 70% of total CV market and buses at ~ 11% of total CV.

5



Replacement demand to kick in around 2015-16E

China’s Rmb4 trillion economic stimulus plan in 2008 during the global financial crisis helped boost PV sales growth to historical highs of 53% in 2009 and then 33% in 2010. Such abnormal growth implies two things:

On the negative side, some of the demand in 2011-12 was potentially brought forward. Indeed, growth in 2011 did slip to 5% and 2012 remained low at 7%.

On the positive side, we should expect the next wave of replacement demand to kick in around 2015-16E, assuming the average car usage life of 6-7 years. This is also our thesis that new car sales will hit the peak in 2016E at 21-22mn units. Afterwards, we expect growth and absolute volume to both decline towards2020E; by then penetration of car ownership will reach around 146/1,000 people.

Figure 9: China PV sales‘000 units, %


Figure 10: China PV sales by region‘000 units,


Penetration on the rise towards 2020E

With our optimistic view on new car sales and growth, we forecast PV penetration, measured by car ownership, will reach ~146 units per 1,000 people by 2020E or more than double from 66 units in 2012. Similarly, we estimate the total PV fleet would increase to ~200mn units in 2020 from 89mn units in 2012.

One key takeaway from this report is we introduce sales volume and penetration forecasts by region in China based on affordability and historical trends of respective regions.

15,495

21,981

-40%

-20%

0%

20%

40%

60%

80%

100%

0

5,000

10,000

15,000

20,000

25,000

2000

2002

2004

2006

2008

2010

2012

2014

E

2016

E

2018

E

2020

E

PV sales YoY growth

Northern

Northeastern

Eastern

CentralSouthern

Western

Northwestern-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2000

2002

2004

2006

2008

2010

2012

2014

E

2016

E

2018

E

2020

E

Peak volume likely in ~2016E: China's much distorted sales growth of 53%/33% in 2009/10 due to the Rmb4.0 trillion economic stimulus plan in 2008 suggests the next wave of replacement demand should come in ~2015/16E assuming ~6-7 years of car usage life.We forecast China’s passenger vehicle (PV) sales growth to slow, but absolute volumes may not peak until 2016E at 21-22mn units, thanks to affordability or income growth and, to a lesser extent, wealth effect through sustained property price (for now).

By region, we expect Eastern China to see the highest PV sales for two reasons: 1) disposable income per capita in Eastern China is expected to reach ~Rmb56k, or 1.2 times the China average by 2020E; and 2) population is expected to be nearly 30% of total China market.

53% growth in 2009 and 33% in 2010

6



By region, we believe Eastern China will continue to see the highest level of vehicle fleet due to better affordability, while Northern China (including Beijing) would have the highest level of car ownership.

Figure 11: China PV fleet size ‘000 units


Figure 12: China PV fleet size by region‘000 units


Figure 13: China PV penetration units per 1000 people


Figure 14: China PV penetration by region units per 1000 people


2012, 89,430

2020E, 207,368

-

50,000

100,000

150,000

200,000

250,000

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

E

2016

E

2018

E

2020

E

Northern

Northeastern

Eastern

CentralSouthern

Western

Northwestern-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

E

2016

E

2018

E

2020

E

2012, 66

2020E, 146

-

20

40

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80

100

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140

160

1992

1994

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1998

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2014

E

2016

E

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E

2020

E

Northern

Northeastern

Eastern

Central

Southern

WesternNorthwestern

-

50

100

150

200

250

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

E

2016

E

2018

E

2020

E

Total PV fleet size expected at ~200mn by 2020: We believe sales volumes will peak in ~2016 then decline afterwards with the PV fleet size hitting ~200mn units in 2020 vs 89mn in 2012.

By region, we expect Eastern China to dominate PV ownership in China because: 1) disposable income per capita in Eastern China isexpected to reach ~Rmb 56k, or 1.2 times the China average by 2020E; and 2) population set to be nearly 30% of total China market.

China PV penetration estimated at ~146 per 1,000 people by 2020, vs 66 per 1,000 people in 2012. This means China will reach similar levels to Taiwan in 1992-1993 and Korea in 1995-1996.

By region, Northern China is expected to see the highest PV penetration. Currently, PV penetration in Northern China is ~1.5 times that of overall China as the PV fleet in this region accounts for 19% of the total China market, while the population is only 12.5% of total China.

7



Figure 15: PV penetration comparison units per 1000 people


Figure 16: GDP per capita comparison USD

Source: CEIC, J.P. Morgan estimates.Note: China GDP per capita forecast for 13E and 14E is from J.P.Morgan economic and policy research team while 15E-18E derived from IMF’s growth forecast of 10%YoY. Forecasts for 19E and 20E derived from 10%YoY growth rate.

Affordability: Richer and richer

Affordability measured by disposable or household income has and will continue to be a powerful trend to auto demand. In the last two decades during 1992 to 2012, we find extremely high statistical correlations between per-capita disposable income (for the urban population) and PV penetration in every region across China.

Figure 17: PV penetration a function of disposable income per capita(historical analysis from 1992 to 2012)units per 1000 population, Rmb


Figure 18: PV penetration a function of disposable income per capita(historical analysis from 1992 to 2012)units per 1000 population, Rmb


According to our China economists, Haibin Zhou and Grace Ng, household income growth is expected to remain at a slightly higher rate of GDP or an ~8-10% CAGR in the next couple of years. This implies:

China

TaiwanKorea

JapanUS

-

100

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1980

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China

TaiwanKorea

JapanUS

0

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1980

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18E

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E

Northern

Southern

Eastern

R² = 0.997

R² = 0.995

R² = 0.998

0

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- 5,000 10,000 15,000 20,000 25,000 30,000

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pen

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tion

(uni

t per

100

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l)

Disposable income per capita (urban population)

Northeastern

Central

WesternNorthwestern

R² = 0.997

R² = 0.997

R² = 0.995R² = 0.996

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Disposable income per capita (urban population)

We forecast China’s PV penetration to reach ~146 per 1000 people, or a similar level to Taiwan in 1992-93 and Korea in 1995-96. China’s GDP per capita is estimated to reach similar levels to the US in 1980-81, Japan in 1985-86, Taiwan in 1995-96 or Korea in

2002-03.

8



Overall per capita disposable income in China will exceed Rmb28,000 in 2014. This will be higher than the richest region Eastern China’s Rmb27,451 as of 2012. At similar income growth, even the poorest Northwestern region will exceed Rmb27,000 in 2016E.

China’s per capita income will likely double by 2020E from 2012.

Figure 19: Disposable income per capita (urban population)Rmb


Figure 20: 2020E population forecast by regionMillion people


Economic and compact car most welcome

Affordability through growth of disposable income will be a powerful driver to car demand especially in the inner land areas, in our view. As discussed above, with the current run rate, even the relatively poor western China can reach the same level of household income in a couple of years as eastern regions as of 2012. The implication of this is simple – percentage PV sales growth will be strongest in the mid to lower end segment. By definition, this segment can be categorized as:

Either engine size below 2.0 liters

Or retail price point below Rmb200,000

Indeed, the latest statistics of Aug-2013 from CAAM (China Association ofAutomotive Manufacturers) show that, among all domestic-made PVs (including CKD or complete knock-down):

Cars with engine size of 1.0-1.6 liters accounts for 61% of total PV sales. Meanwhile, this particular segment grows at 21% YoY vs total PV market's 13% in the same period.

This niche segment is predominantly led by Chinese brands, as the price point in this segment is mostly ~Rmb100,000 or below.

Northern

Northeastern

Eastern

Central

Southern

Western

Northwestern

-

10,000

20,000

30,000

40,000

50,000

60,000

1992

1994

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1998

2000

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2010

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2014

E

2016

E

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E

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E

Eastern, 419

Central, 224

Southern, 209

Northern, 191

Western, 164Northeastern,

112

Northwestern, 102

0%

20%

40%

60%

80%

100%

China population

Total China population in 2020E = 1.4bn

China's overall disposable income per capita is expected to reach ~Rmb 48k by 2020, or twice the level of 2012 number (Rmb 23.6k). Eastern regions (including Shanghai, Fujian, etc.) are the richest regions, with disposable income per capita at ~1.2x of the country.

9



Secondly, cars with an engine size of 1.6-2.0 liters account for 24% of the total market and grew at 13% YoY. The price point of this segment is largely Rmb100,000 to 200,000, with Chinese brands and low-end JV models.

Figure 21: China’s domestic-made PV sales breakdown (incl. sedan, SUV, MPV and crossover) by engine size by Aug-13 (incl. CKD)

Source: CAAM.

Figure 22: China’s domestic made PV sales growth (incl. sedan, SUV, MPV and crossover) breakdown by engine size by Aug-13 (incl. CKD)

Source: CAAM.

Figure 23: China’s domestic-made sedan sales breakdown by engine size by Aug-13 (including CKD)

Source: CAAM.

Figure 24: China’s domestic made sedan sales growth breakdown by engine size by Aug-13 (including CKD)

Source: CAAM.

<1.0 liter, 7%

1.0-1.6 liters, 61%

1.6- 2.0 liters, 24%

2.0- 2.5 liters, 7%

<1.0 liter

1.0-1.6 liters

1.6- 2.0 liters

2.0- 2.5 liters

2.5- 3.0 liters

3.0- 4.0 liters

>4.0 liters

21%

13% 13%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

<1.0 liter

1.0-1.6 liters

1.6- 2.0 liters

2.0- 2.5 liters

2.5- 3.0 liters

3.0- 4.0 liters

>4.0 liters

Total

<1.0, 3%

1.0-1.6, 69%

1.6- 2.0, 22%

2.0- 2.5 , 5%

<1.0

1.0-1.6

1.6- 2.0

2.0- 2.5

2.5- 3.0

3.0- 4.0

>4.0

16%

5%

10%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

<1.0 1.0-1.6 1.6- 2.0 2.0- 2.5 2.5- 3.0 3.0- 4.0 >4.0 Total

Obviously, compact vehicles, i.e. those with engine size of 1.0-1.6 liters, are the most popular in China. The latest statistics suggest that this segment accounts for 61% of total domestic-made PVs in China and grew at 21% YoY vs overall PV of 13%.

1.0-1.6 liter engine cars are mainly dominated by Chinese brands while 1.6-2.0 are led by Chinese and low-end JV models

Likewise, in the sedan segment specifically, compact sedans with engine sizes of 1.0-1.6 liters make up an even higher proportion (69%) of the total sedan market in China. This segment is led by Chinese brands with retail price points mainly below Rmb100,000.

Sedans with engine sizes of 1.6-2.0 liters account for 22% of the total market and the price point in this segment is mainly Rmb100-200,000 with players from both Chinese and JV brands (but for JV brands, models are mainly entry level).

10



Figure 25: China’s domestic-made SUV sales breakdown by engine size by Aug-13 (including CKD, 2-wheel and 4-wheel drive)

Source: CAAM.

Figure 26: China’s domestic made SUV sales growth breakdown by engine size by Aug-13 (including CKD, 2-wheel and 4-wheel drive)

Source: CAAM.

Figure 27: China’s PV sales volume breakdown by province in 2012

Source: China Auto Market.

1.0-1.6, 24%

1.6- 2.0, 50%

2.0- 2.5 , 19%

2.5- 3.0, 5%

<1.0

1.0-1.6

1.6- 2.0

2.0- 2.5

2.5- 3.0

3.0- 4.0

>4.0

176%

32%43%

-50%

0%

50%

100%

150%

200%

<1.0 1.0-1.6 1.6- 2.0 2.0- 2.5 2.5- 3.0 3.0- 4.0 >4.0 Total

Zhejiang

Heilongjiang

Inner Mongolia Jilin

Liaoning

Hebei Tianjin

Beijing

Shanxi Shandong

Henan

Anhui

Jiangsu

Shanghai

Jiangxi

Fujian

Guangdong Guangxi Yunnan

Guizhou

Hunan

Hubei

Sichuan

Shaanxi

Ningxia

Gansu Qinghai

Tibet

Xinjiang

Hainan

Chongqing

3%

Taiwan2%

1%

4%

1%

2% 8%

0%

6%

5%

2%

3%

3%

2%

8%

2%

3%2%

1%

0%

9%3%

3%3%

4%

2%

0%

2%

2%

7%2%

In the SUV space, the sales pattern is very much the same as overall PV or sedans: Compact SUVs with engine sizes of 1.6-2.0 liters are the most popular in China accounting for 50% of sales. Retail price in this segment is largely Rmb100-200,000 and is dominated by both Chinese brands and low-end JV models.

In the low end segment, i.e. price point ~Rmb100,000 and below or engine size of 1.0-1.6 liters, it is mainly controlled by Chinese brands. This segment accounts for 24% of total SUV market and grows rapidly at 176% YoY by Aug-13.

In the mid end segment, namely price point of ~Rmb200-250,000 or engine size of 2.0-2.5 liters, it is mainly led by JV models. This segment makes up 19% of the SUV market.

This segment (1.0-1.6 liters) accounts for 24% of SUV sales and grows the fast. It is dominated mainly by Chinese brands

This is the biggest segment by volume and most lucrative one. It is dominated by Chinese and JV models.

11



Capacity is a challenge, but the industry remains highly concentrated

The demand to supply ratio can continue to worsen in China's motor vehicle market if we simply take collective capacity expansion plans (on a standard double-shift basis) by OEMs.

In 2012 for instance, total PV sales were 15,494k units, while at the same time collective designed capacity in the system is as high as 23mn units, based on our analysis. While we do understand that some of the capacity was only completed during the year and will only translate into production output afterwards and there is a ramp-up period from single to double shifts, the implication for industry players remains the same – the sector is potentially facing overcapacity issues and such pressure would only rise in the next couple of years.

If we simply look at total sales to year-end capacity ratio, the industry-wide ratio is expected to decline gradually from 66% in 2012 to 56% by 2015E. Similarly, in the PV market, the ratio would drop from 67% to 55% in the same period.

Nonetheless, utilization, measured by sales to capacity, varies significantly between the top 10 automakers and the smaller players, and also JVs versus domestic small Chinese brands. As competition continues to intensify, we believe industry leaders will continue to gain share at the expense of the rest. In our analysis, we find:

Utilization of top 10 automakers should be sustained at ~80%, while the remaining 60 will suffer from 46% in 2012 to below 20% by end-2015E.

The auto industry in China remains highly concentrated. The top 10 of the total 70 automakers accounted for 88% of total sales by August this year, a moderate and continued increase from 87% last year. Conversely, the bottom 50 manufacturers altogether only accounted for a meagre 3% by Aug-13. Those are the ones who will suffer the most and would eventually be forced to exit, in our view.

Table 2: China auto supply-demand forecast

Million units 2012 2013E 2014E 2015ETotal auto (PV+CV)Demand (sales) 19 21 23 24Supply (capacity) 29 34 39 44Demand as % of supply (capacity) 66% 63% 59% 56%Total PVDemand (sales) 15 17 19 20Supply (capacity) 23 28 32 37Demand as % of supply (capacity) 67% 63% 58% 55%


12



Figure 28: China auto demand vs supply analysis (PV+CV)Million units

Source: Company, J.P. Morgan estimates.

Figure 29: China PV-demand vs supply analysisMillion units

Source: Company, J.P. Morgan estimates.

Figure 30: Utilization rate analysis: Top 10 players vs the rest

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

Figure 31: Utilization rate analysis: JVs vs domestic brands

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

66% 63%59% 56%

0%

10%

20%

30%

40%

50%

60%

70%

05

101520253035404550

2012 2013E 2014E 2015E

Demand Supply (capacity) Demand as % of supply

67%63%

58%55%

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Demand Supply (capacity) Demand as % of supply

76%85% 81%

76%

46%

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50%

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Top 10 players Others

93% 87% 83% 81%

48% 44% 41% 39%

0%10%20%30%40%50%60%70%80%90%

100%

2012 2013E 2014E 2015E

JV Domestic brand

Still over capacity: Our analysis on capacity expansion in China suggests that while industry-wide utilization may drop, continued rising concentration means smaller players would likely suffer most. Total industry capacity (on a double-shift basis) is expected to top~40mn units by end-2015, implying utilization rates (sales as % of capacity) may drop to ~56% vs ~66% in 2012.

Meanwhile, overall PV capacity is estimated to reach ~ 37mn by 2015, implying utilization may slip to ~55% from ~67% in 2012.

Bigger players enjoy higher utilization rate: As we expect leading automakers would continue to gain market share, utilization (measured by sales as % of year-end capacity) of the top 10 players is expected to stand at around 80% in the next few years, while the overall utilization rate of the other 60 automakers collectively may drop to as low as 19% in 2015 from ~46% in 2012.

JVs enjoy better utilization rate compared with domestic players, especially small ones. Whilst the utilization rate of JVs is estimated to slip to ~81% by 2015E from 93% in 2012, domestic brands could be worse from 48% in 2012 to 39% in 2015, according to our estimates.

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Figure 32: China autos market share (PV+CV), Jan-Aug 2013

Source: J.P. Morgan,CAAM.

Figure 33: China autos YoY growth (PV+CV), Jan-Aug 2013

Source: J.P. Morgan, CAAM.

Two major policy initiatives in 2014

We expect two major policies in the automobile space next year:

Car purchase restrictions to be implemented in selective tier-two cities or provinces, as Chinese leaders attempt to control air-pollution and curb worsening traffic congestion.

Encouragement of new energy cars, especially EV (electric vehicles). It is clear that China has "skipped" the first stage in development of new energy cars(i.e. hybrid) and directly focuses on the other three-plug-in hybrid, fuel-cell vehicle and pure EV when we examine its nationwide subsidy plan.

First, further car purchase restrictions still likely

We believe tackling pollution remains one of the top policy priorities in China. While trying to predict Chinese leaders’ policy moves is unwise, we maintain our view that the likelihood of implementing car purchase limits or quotas in selective tier-two cities or provinces remains high next year.

Where is the auto industry responsible for air pollution?

Autos contribute the majority of toxic gas and inhalable particles. According to China’s Ministry of Environmental Protection (MEP) and our analysis:

SAIC, 24%

Dongfeng, 16%

FAW, 13%Changan,

10%

BAIC, 9%

GAC, 4%

Brilliance, 4%

Great Wall, 4%

Jianghuai, 3% Geely, 2%

Others, 12% 29% 29%

23%

16% 15% 15% 15% 14% 14%

5% 5% 3%

0%

5%

10%

15%

20%

25%

30%

35%

Market share: The top 10 of the total 70 automakers accounted for 88% of sales volume during Jan-Aug 2013, while the bottom 50 accounted for merely 3%.

YoY growth: Top 10 players exhibited average of 16% YoY growth, while the other 60 players grew at only 3% in Jan-Aug 2013. In conclusion, our analysis on auto supply and demand in China suggests that while industry-wide utilization may drop, continued

rising concentration means smaller players would likely suffer the most.

Top 10 players: 88% of total sales

Bottom 50 players:3% of total sales

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Motor vehicle accounts for around 27% of total NOx (nitrogen oxide) emissionsin China. The remainder is from thermal power and non-metal mining industry (which together account for more than half of NOx emissions).

Within the auto industry, related pollutants in addition to NOx include CO (carbon monoxide), PM (particulate matters) and HC (hydrocarbon).

Nearly 60% of NOx emissions are from diesel-powered vehicles, mostly trucks.

Over 90% of PM emissions are from diesel vehicles, mostly trucks.

70% of CO and HC emissions are from petrol-powered vehicles, of which, most are poor quality fleet.

When examining China’s passenger vehicle (PV) fleet, we find that only around 40% of the motor vehicle fleet meets China III (equivalent to Euro III, which was implemented in July 2007) emission standards. Of the remainder, around 25% only meet China II, ~20% China I and the rest ~10-15% not even China I. However, those vehicles which fail to meet China I standards (i.e. less than 15% of vehicles) contribute over 40% of total vehicle emissions in China.

Likely outcome

Currently, three tier-one cities have already introduced car plate quotas or purchase restrictions: Shanghai was the earliest in 1994, followed by Beijing on Dec 23rd 2010 and Guangzhou on June 30th 2012.

Table 3: Car licence scheme comparison in tier-one cities

Beijing Shanghai GuangzhouHow to acquire a car plate Lottery Bidding Bidding LotteryLast average bidding price RMB 84k RMB 12kBidding rate/Winning rate 1% 37% 100% 5%Holding period 3 years 3 years 3 yearsFor electronic vehicles No detail Free plate Lottery (current winning rate is 100%)Avg license price in the 2nd hand market

>RMB 150k RMB 81~82k n/a

Source: Beijing Municipal Commission of Transport, GEMAS, Shanghai Municipal Transport and Port Authority.

Share price implications – What can we learn from history?

In the following analysis, we examine the share price performance of all major OEMs (mainly H shares) three months after the car purchase restrictions were put in place in Beijing in Dec-10 and Guangzhou in Dec-12. We arbitrarily exclude Shanghai in the analysis here as the purchase restriction was implemented a while ago (1994); auto industry dynamics are very different in the last few years versusnearly two decades ago, in our view.

Our findings are:

Three months following Beijing’s imposed car purchase quota, the share prices of Great Wall, SAIC and Brilliance China outperformed the market while Dongfeng Motor, Guangzhou Auto (GAC) and Geely underperformed.

The inconvenient truth:

1. Less than 15% of motor

vehicles contribute over 40% of total vehicle emissions in

China

2. The auto industry accounts for around 27% of NOx

emissions in China

3. Diesel vehicles (mainly trucks) generate more pollution than

petrol-powered vehicles

15



Similarly, three months following Guangzhou's implemented car plate quota, Great Wall, Brilliance China and SAIC still outperformed, while Geely was largely in line but Dongfeng and GAC underperformed.

Among the outperformers in the last two ‘cycles', Great Wall and Brilliance China are proxies for China's SUV and luxury car players, as Great Wall is the first among listed companies to have meaningful exposure (in terms of percentage contribution to the top and bottom line) to SUVs, while Brilliance has a 50-50 JV with BMW, producing BMW’s 3- and 5-series sedan and X1 compact SUV.

On the other hand, Dongfeng Motor and GAC underperformed in the analysis here as they are proxies for the mass market, in our view, given their volume and price points in the retail market.

As a result, we believe if China does impose a broader scale of car purchase limits as we expect now, the share price of Dongfeng (Underweight) might be under pressure again as it is perceived as mass market players with exposure to tier 1 to 5 cities. On the other hand, we believe niche players, such as Brilliance China, Great Wall as well as Geely should weather such regulatory "storm" better given their focus on the luxury car and SUV segments, respectively. We expect both segments to be a multi-year theme.

Figure 34: Three-month relative share price performance of major OEMs following Guangzhou imposed car purchase restriction on June 30th 2012

Source: Bloomberg.

Figure 35: Three-month relative share price performance of major OEMs following Beijing imposed car purchase restriction on December 23rd 2010

Source: Bloomberg.

Second, encouragement of new energy car

China’s NDRC recently jointly announced with the Ministry of Industry and Information Technology (MIIT) the subsidy policy for new energy cars, covering:

1. Pure electric vehicle (EV)

2. Plug-in hybrid (but not hybrid)

3. Fuel-cell vehicle

(40)

(30)

(20)

(10)

-

10

20

30

T T+

2T

+4

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+8

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90

Geely Great Wall Dongfeng Brilliance GAC SAIC

Brilliance

SAIC

Geely

GAC

Dongfeng

Great Wall

(30)

(20)

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-

10

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40

TT

+3T

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+30

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+36

T+3

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+42

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5T

+48

T+5

1T

+54

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7T

+60

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3T

+66

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9T

+72

T+7

5T

+78

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1T

+84

T+8

7T

+90

Geely Great Wall Dongfeng Brilliance GAC SAIC

SAIC

Brilliance

Dongfeng

GAC

Geely

Great Wall

Consistent outperformers

Underperformers

Consistent outperformers

Underperformers

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Of note is that there is still no subsidy for hybrids at a national level, but only for plug-in hybrids (up to Rmb35k), although there is no commercially available plug-in hybrid model in China now.

Our sensitivity analysis on the potential size of the EV market in China

In the following analysis, we adopt various assumptions to derive our assessment of the potential size of the EV market in China:

Table 4: Base case analysis on various assumptions of sales volume, ASP and margin

Total addressable market analysis

Aggregate sales volume in 2013-

15E (units)

Total aggregate volume (units)

Estimated ASP (Rmb'000/unit)

Estimated net margin (%)

Estimated net profit per car

(Rmb'000)

Total revenue

(RMBmn)

Total profit (RMBmn)

No. of tier one cities 5 10,000 50,000 200 3% 6.0 10,000 300No. of tier two cities 35 5,000 175,000 200 3% 6.0 35,000 1,050

Total = 225,000 45,000 1,350

Source: J.P.Morgan.

Table 5: Sensitivity analysis on industry volume, revenue and profit on different assumptions

Sensitivity analysisTotal sales volume (units, 2013-15E)

Total revenue in addressable target market (Rmb million)

Total profit in addressable target market (Rmb'000)

Total sales volume % to 2013E PV market

Base case 225,000 45,000 1,350 1.3%Scenario (1): Sales volume 10% higher 247,500 49,500 1,485 1.4%Scenario (2): Sales volume 20% higher 270,000 54,000 1,620 1.6%Scenario (3): ASP 10% higher 225,000 49,500 1,485 1.3%Scenario (4): ASP20% higher 225,000 54,000 1,620 1.3%Scenario (5): Net margin 4% 225,000 45,000 1,800 1.3%Scenario (4): Net margin 5% 225,000 45,000 2,250 1.3%

Source: J.P.Morgan.

With the above assumptions, we find:

1. Collective size of new energy cars in 2013-15E would range around 225-270,000 units. This is equal to 1.3-1.6% of the total PV market in 2013 based on our estimates; in other words, EV and new energy cars will remain a tiny portion of China’s passenger vehicle market even by 2015E.

Likewise, CAAM (China Association of Automotive Manufacturers) forecasts total EV and new energy cars will top 273,000 units by 2017E from merely 27,432 units in 2012. Even so, 273,000 units represent only 1.6% of China's PV market in 2013.

2. In terms of potential industry revenue, it would be around Rmb45-54 billion. Assuming automakers can make a profit from new energy car business, at 3-6% net margin, estimated industry profit can top Rmb1.4-2.3bn.

Who are relevant players in the EV theme?

Whilst the size of total EV market in China will likely remain tiny, it could be meaningful as we believe only a few selective players will be viable players and share this niche business:

Brilliance China is scheduled to introduce its own-brand EV, Zinoro, in end-13, based on jointly developed technology with BMW. Brilliance targets to sell collectively 1,000 units of EV in 2014-15, equivalent to 0.5% of Brilliance's estimated sales in 2013E. We believe Brilliance China can reach higher sales volume through ramping up its capacity if there is such demand.

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BYD currently has e6, a crossover EV with sales of 1,690 units last year or 0.4% of its total vehicle shipment. BYD also has electric buses that can benefit from the subsidy program.

Geely’s Panda compact EV, while not widely commercially available in the market now, sources technology from its 50-50% JV with Kandi Technologies (stock code: KNDI US).

Guangzhou Auto's Toyota Camry hybrid, although not covered by NDRC's national subsidy program, receives Rmb10k subsidy from Guangzhou government.

Two company-specific events

Great Wall Motor (GWM) – First Chinese automaker attempting to penetrate into mid-end market. Can it succeed? We believe so despite 80-90% of people disagreeing or doubting

GWM is scheduled to launch its largest SUV, H8, in late 2013. Expected price point of the model will be around Rmb200,000, at a similar level to several most popular SUV models by JVs, such as Honda CR-V (retail price range ~Rmb194-263k), VW Tiguan (~Rmb190-356k), Toyota RAV4 (~Rmb188-244k) and Ford Kuga (~Rmb194-276k).

The consensus belief is that GWM's H8 will not sell simply because Chinese customers wouldn’t bother buying a local brand when they have several choices from local-made models by established foreign brands at the same price point. This is only partially true. Contrary to consensus, we believe GWM’s H8 will be a success because it creates a new market that simply wasn't available in the past with the same budget. Specifically, what differentiates H8 from other JV models in the same price level is:

H8 is significantly larger in size; equivalent JV models mentioned above in the same price level are much smaller. In other words, if Chinese customers want to buy an SUV with the same size of H8, their budget needs to be at least nearly twice as high in the past. It is not the case anymore as they will have a new choice (i.e. H8) that was completely not available in the marketplace before.

Functionality of H8 is much better than equivalent models in the same price point, such as window roof, keyless-go, all-in-one control panel (including multi-media and GPS navigation system), automatically adjust seats, 6 air bags, section air-conditioner, etc. Such functionality is almost completely not available from JV models in the same price level. In other words, if Chinese customers want to buy an SUV equipped with such functionality, they have to buy the highest-end JV models or imported ones which are priced 2-4 times higher.

Surely, we understand quality, durability and price in the second hand car market of H8 and other JV models would be different. We believe H8 would be a success if it can reach ~3,000 units of monthly sales in 1H14 and gradually ramp up to ~5,000 units per month in 2H14. Such volume expectations are not aggressive, in our view,when considering current monthly sales volume of equivalent JV models in 1H13-e.g. VW Tiguan around 16-17k units, Honda CR-V around 14k units, Toyota RAV4around 7k units and Ford Kuga around 6k units.

18



Figure 36: Great Wall’s H8 SUV first seen in Shanghai Auto Show in April 2013 (exterior)

Source: Photo taken in Shanghai Auto Show in April-13.

Figure 37: Great Wall’s H8 SUV first seen in Shanghai Auto Show in April 2013 (interior)

Source: Photo taken in Shanghai Auto Show in April-13.

Table 6: Comparison of price and size of major large size SUV in China

Size (mn) GWM H8 Toyota Highlander Hyundai Santafe Audi Q5Audi Q7

(imported)

Length 4,806 4,795 4,725 4,629 5,089

Width 1,975 1,910 1,880 1,898 1,983

Height 1,794 1,760 1,686 1,656 1,737

Retail price (Rmb'000) ~200 249-430 220-310 360-570 821-2,578

Source: Respective automaker.

Geely Auto: Asset injection from Volvo operation in China

Volvo currently has three major operations or production plants in China – Chengdu, Daqing and Taizhou. The Chengdu and Daqing plants are expected to manufacture S60 long-wheel base sedans and XC90 SUV, respectively, and both will start production in 2H13.

Presently, Geely’s parent company holds 70% of Volvo operations in China and the rest is held by Volvo itself. Under China's regulations, foreign partner's holding in an automaker in China can not exceed 50% (and Geely listco is considered a foreign company given it is registered in the Cayman Islands). We believe Geely’s parent will plan to inject its stake in Volvo into Geely listco when Volvo China turns profitable sometime toward end-2014. This, if it materializes, would be a major positive event for Geely listco, in our view. Whilst it is still sometime from here, the key to watch, in our view, is Volvo's sales performance in China as it not only implies the profitability of Volvo but also the timing of such asset injection. In fact, in the year to date, Volvo's sales growth in China has beaten most of its comparable European peers.

The size of GWM’s H8 SUV is larger than most domestic-made JV models and with a lower price point. Meanwhile, entry-level JV models normally are equipped with only basic functionality and not as fancy as the H8.

19



In the following sensitivity analysis, we estimate the profit contribution to Geely could range from ~Rmb300-500mn in 2015 if the asset injection takes place in late 2014. This would be equivalent to 12-19% of Geely's anticipated profit in 2013.

Table 7: Profit contribution estimate from Volvo asset injection to Geely listco in 2015 based on various assumptions

Base case Daqing plant Chengdu plant Total

Models XC90 SUV S60L sedan

Expected sales volume in 2015 10,000 40,000 50,000

Estimated net profit per unit (Rmb'000) 80 40

Estimated profit (Rmb millions) 800 1,600 2,400

Geely parent holding 70%

Profit to Geely parent (Rmb millions) 560 1,120 1,680

Injection to Geely listco (assuming 20%) 20%

Profit contribution to Geely listco 112 224 336

Source: J.P.Morgan estimates.

Table 8: Sensitivity analysis of profit contribution to Geely listco based on different assumptions from base case

Scenario analysis Profit contribution (Rmb million)

Base case 336

Volume 10% higher 347

Volume 20% higher 358

Profit per unit 10% higher 347

Profit per unit 20% higher 358

Asset injection 25% stake 420

Asset injection 30% stake 504


Valuation and recommendation

Our preference in Chinese auto stocks is OEM over parts or dealers, and SUV over sedans. Our top picks include:

Great Wall Motor (OW): Our view on GWM is simple: investors should hold on to the stock throughout the SUV up-cycle until it peaks out in ~2016E. From a bottom-up perspective, we would watch price discount momentum of its major models as a leading indicator of underlying competition dynamics. At the moment, the discount of GWM's most popular SUV, H6, remains negligible at ~2%.

Guangzhou Auto (OW): GAC is a turnaround story driven by its comprehensive new model cycle in the next 12-18 months. (please click here for detailed analysis on GAC). Between two major SOEs, we prefer GAC over Dongfeng Motor (Underweight).

Brilliance China (OW): We believe Brilliance is a long-term strong story, driven by potentially better-than-expected earnings in 2H13 in the near term and also the introduction of the BMW X5 SUV in late-15 or 2016 which could bring significant profit to the company.

https://jpmm.com/research/content/GPS-1131385-0


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Geely Auto (OW): Geely is a late comer in China’s SUV theme. We believe its sales momentum in SUV should pick up strongly from 1Q14 vs the current monthly run rate as the company revises interior designs and also introduces another model (EX8) in late-13. Instead of purely focusing on monthly sales, we would watch Volvo’s localization and corresponding sales performance in 1H14 in China closely as it is leading indicator of potential timing and profit size of Geely's asset injection story towards late 2014.

On the cautious side, our bearishness is with:

Dongfeng Motor (UW): We believe DFM is a fundamental avoid stock in China in the long term due to inefficient allocation of capital, which explains why its ROE is anticipated to decline almost every year since 2012 based on either our forecasts or Bloomberg consensus. Arguing DFM is a Buy due to its cheap valuation wouldn't work, in our view, as the stock is on average trading at ~9x forward PER in the last three years due to a lack of capital management. The company's recent acquisition or expansion into truck business (with Volvo Truck) and also PSA further enhances our reservation on the stock.

Zhongsheng Auto (UW): We believe the stock has run ahead of its fundamentals. Our UW is a valuation call as we would find the stock more attractive towards ~HK$8-9/shr. (Please also click here for our recent analysis on its valuation).

Table 9: Valuation comparison table for China’s auto companies

Company Code RecPrice(LC)

Mkt Cap(US$ Mn) PE(x) PB(x) ROE Div. Yield

11-Oct 11-Oct 13E 14E 13E 14E 13E 14E 13EBrilliance 1114 HK OW 12.38 8,024 14.9 12.1 3.7 2.8 28% 27% 1.0%ZhengTong Auto 1728 HK N 5.60 1,596 10.7 8.2 1.3 1.1 13% 14% 0.9%DongFeng Motor 489 HK UW 11.00 12,223 7.3 7.7 1.3 1.1 21% 16% 2.1%Great Wall Motor 2333 HK OW 46.20 23,251 12.9 9.4 4.2 3.1 36% 38% 0.8%Geely 175 HK OW 4.11 4,665 9.4 7.4 1.6 1.3 19% 20% 1.2%GAC 2238 HK OW 8.52 8,297 19.4 10.0 1.3 1.2 7% 12% 0.3%Minth Group 425 HK N 14.82 2,078 13.0 11.6 1.6 1.4 13% 13% 2.3%Baoxin Auto 1293 HK N 8.04 2,652 13.6 10.1 3.2 2.4 27% 27% 0.0%Zhongsheng 881 HK UW 13.32 3,278 18.7 14.3 2.3 2.0 13% 15% 1.1%Sinotruk 3808 HK UW 3.87 1,378 25.4 14.2 0.5 0.4 2% 3% 2.6%

Average 14.5 10.7 2.1 1.7 18% 18% 1.2%

Source: Bloomberg, J.P. Morgan



21



Table 10: Summary of PTs and risks

Company Ticker RtgShare price

11-Oct (HK$)

PT

(HK$)PT analysis Risks to PT and analysis

Brilliance China 1114 HK OW 12.38 13.0

We remain OW. Our PT (June-14) is HK$13 based on

13x forward PER. This is based on the 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 increasing

competition in China in 2H13-2014. In the Chinese

luxury car segment, Brilliance is our preferred pick.

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

on. We are also cautious on any higher-than-

anticipated loss from mini buses and future new

energy car business.

China

ZhengTong1728 HK N 5.60 5.5

We are Neutral and our Jun-14 PT is HK$5.5 based on

SOTP analysis where we examine and differentiate

underlying values between aftermarket and new car

sales businesses. We estimate ZhengTong’s after-

service business alone is worth HK$4.0/shr (on DCF

basis). This implies the market is currently paying a low

multiple to the company's new car sales, accessory and

future car finance businesses. This is potentially

aggressive, in our view, although we also recognize that

cheap valuation itself is rarely a share price catalyst.

Key upside and downside risks include: (1) better

or worse than expected sales volume and

margin, 2) ability to refinance upcoming due

Rmb2.0bn debt and lower interest in 4Q13.

DongFeng

Motor489 HK UW 11.00 8.5

Our June-2014 PT is HK$8.5 based on FY13E P/E of

6.5x and DCF analysis. This multiple is the mid-range of

DFM’s historical trough valuation of around 5-8x

forward P/E. Given our expectation that DFM will be

undergoing a de-rating (due to competition from entry

level luxury brands and weak truck demand), we believe

that applying an average trough valuation is reasonable.

In our DCF analysis, our key assumptions include risk-

free rate of 5%, risk premium 6%, WACC of 12% and

terminal growth of 2%.

Key upside risks to our PT include: (1) better-

than-expected sales of Japanese cars in China,

including DFM’s Nissan and Honda vehicles,

(2) stronger-than-expected margin improvement

for its passenger and commercial vehicle

businesses, (3) higher than expected dividend

payout and hence higher yield.

Great Wall

Motor175 HK OW 46.20 65.0

We maintain OW on GWM with PT of HK$65 (Dec-14)

on 13x forward PER. Here we take into account nearly

20% earnings upgrade in 2014 and potential re-rating

resulting into PER expansion given our bullish view on

SUV and GWM's H8/H2 new model launches.

Historically, GWM is trading at largely 10-12x PER with

the peak of 18x when it was re-rated. We believe a re-

rating is possible in 2014 and hence see our 13x PER as

reasonable.

Key downside risks to our PT: worse-than-

expected competition in SUVs and pick-up

trucks, both of which are Great Wall’s target

segments. Also, policy risk such as car purchase

restrictions can lead to negative sentiment in the

broader auto market in China.

Geely Auto 2333 HK OW 4.11 7.5

We maintain our OW rating on Geely and June-14 PT is

HK$7.5 based on 13.5x forward PER or the higher end

of its historical trading band but in line with Great Wall

Motor when it re-rated back in 2009-11 when the PER

multiple expanded from 5x to 18x. This may sound

aggressive, but we believe it's not considering Geely's

rapid growth expected in the next 3-4 years, which

suggests a PEG of only 0.5-0.6x. Similarly, during the

rerating cycle of Geely’s closet peer- Great Wall Motor,

its PER multiple expanded from ~5x to 18x in 2009-

2011. Considering Geely’s strong model line-ups in

Key risks to our PT include: Lower-than-expected

sales volume of Geely’s sedan and SUV

businesses and lower-than-expected margins on

heightening competitive pressure along with an

oversupply in the passenger vehicle sector in

2H13-14E leading to a worse-than-expected

price war. Slower-than-expected development

and cooperation with Volvo Car is another

potential swing to the company’s longer-term

profitability and share price performance..

22



both sedan and SUV business in 2H13-2014E, JV

development with Volvo in 2014 and consensus

earnings upgrade (which has been the case since

4Q12), we believe our PT is achievable..

GAC 2238 HK OW 8.52 12.0

We remain OW on GAC and expect consensus to catch

up with our 2014/15 estimates. Our June-14 PT of

HK$12 is based on an expected re-rating multiple of 14x

and DCF analysis. We believe this target is achievable

considering GAC's estimated robust profit rebound in the

next two years. In the DCF analysis, key assumptions

include a risk free rate of 5%, a risk premium of 6% and

terminal growth of 2%.

Key downside risks include: (1) worse-than-

expected sales volumes and margins; and (2) a

failure of new model launches in 2H13-2015.

Minth 425 HK N 14.82 12.0

We maintain a Neutral rating on Minth. Our PT HK$12

(June-2014) is based on 10x forward PER, which is the

average of Minth's historical average since 2008. We

believe this approach is reasonable considering 1) the

company’s improving sales momentum of Japanese

brands and 2) higher cash dividend payout- 40% this

year (vs 30% in the last few years). This places Minth at

the highest payout auto company in our coverage

universe in the China auto space.

Key downside risks to our PT include weaker-

than-expected passenger vehicle sales and a

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 Auto 1293 HK N 8.04 7.0

Our Jun-14 PT of HK$7.00 is based on an SOTP

analysis where we examine the underlying value

between aftermarket and new car sales businesses. We

estimate Baoxin’s AM business alone is worth

HK$5.00/share (on a DCF basis). On the new car sales

business, we assign an industry average P/E of 10x,

which we consider reasonable in a stabilizing pricing

environment in the dealership business.

Key upside and downside risks include: (1)

better- or worse-than expected sales volumes

and margins; and (2) a better- or worse-than

anticipated macro environment and credit

conditions in China in 2H13.

Zhongsheng 881 HK UW 13.32 8.0

Our Jun-14 PT of HK$8.0 is based on a conservative

AM business value (HK$6.5/shr on DCF analysis with

key assumptions including discount rate 11% and

terminal growth 3%) plus 6.0x new car sales 2014E

multiple (similar to its peers, Zhengtong or Baoxin)

Key risks to our PT and analysis include: a)

better-than-expected improvement of Japanese

brands in China in 4Q13-2014, b) Benz reverses

its sales and pricing momentum and catches up

with its peers-BMW and Audi in China. c) higher

than anticipated support from

automakers in the form of rebate or subsidy to

dealers.

Sinotruk 3808 HK UW 3.87 3.7

We maintain our UW rating on Sinotruk. PT (June-14)

is HK$3.7 based on conservative P/B multiple of 0.4x.

We believe this is reasonable as 0.4x is the trough

valuation of the company's historical trading band

(largely between 0.5 and 1.0x). This is based on our

longer-term cautious stance on China’s truck sector.

Key upside risks to our price target and analysis

include: (1) stronger-than-expected heavy-truck

demand in 2H13-2013E; and (2) another major

economic stimulus from the government.

Source: Bloomberg, J.P. Morgan.

www.jpmorganmarkets.com


Great Wall Motor Company Limited

Overweight2333.HK, 2333 HK

Can a stock perform after 500% rally? ▲

Price: HK$46.20

Price Target: HK$65.00Previous: HK$46.00

China

Automobile Manufacture

Nick Lai AC

(852) 2800 8543

[email protected]

Bloomberg JPMA LAI <GO>

J.P. Morgan Securities (Asia Pacific) Limited

YTD 1m 3m 12mAbs 85.2% 11.3% 26.7% 112.4

%Rel 96.3% 11.8% 15.9% 109.0

%

Great Wall Motor Company Limited (Reuters: 2333.HK, Bloomberg: 2333 HK)

Rmb in mn, year-end Dec FY11A FY12A FY13E FY14E FY15ERevenue (Rmb mn) 29,037 41,565 54,195 71,497 82,203EBIT (Rmb mn) 4,090 6,833 10,176 14,095 15,819Net Profit (Rmb mn) 3,426 5,692 8,575 11,832 13,305EPS (Rmb) 1.22 1.87 2.82 3.89 4.37DPS (Rmb) 0.20 0.30 0.30 0.57 0.97Revenue growth (%) 30.9% 43.1% 30.4% 31.9% 15.0%EPS growth (%) 23.6% 53.7% 50.6% 38.0% 12.4%ROE 25.6% 29.8% 36.0% 37.9% 32.1%P/E (x) 29.9 19.5 12.9 9.4 8.3P/BV (x) 6.1 5.2 4.2 3.1 2.4Dividend Yield 0.5% 0.8% 0.8% 1.6% 2.7%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company Data52-week Range (HK$) 46.85-20.40Shares O/S (mn) 3,042Market Cap (Rmb mn) 110,911Market Cap ($ mn) 18,127Price (HK$) 46.20Date Of Price 11 Oct 13Free Float(%) 100.0%3M - Avg daily volume (mn) 5.403M - Avg daily value ($ mn) 27.1HSCEI 1,0580.75Exchange Rate 7.75

See page 29 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.

Great Wall (GWM) has rallied by over 500% in the last three years (Hang Seng index returned 3% over the same period), thanks to solid earnings growth and SUV up-cycle. Despite this, we maintain our bullish stance on the stock and further raise our earnings and PT again – both now stand at the highest end of the Street. GWM is one of our top picks in China’s auto space together with Brilliance, GAC and Geely. Why so bullish? Our investment thesis on GWM is simple – Investors will

be better off holding on to a stock throughout its cycle until it peaks than trying to buy low/ sell high during the cycle. Downgrading a stock during its up-cycle is generally wrong in our view – which we witness from consensus rating changes YTD (according to Bloomberg). In the case of SUVs, we believe penetration will not hit saturation point in China until ~2016E. From a bottom-up view, we believe price discounting is a leading indicator of competitiveness and popularity of underlying models. In GWM’s case, discount of its SUVs is merely ~2-3%.

Consensus too bearish about GWM’s H8 SUV launch: GWM is scheduled to launch its highest end SUV (H8) in end-13 which will be priced at ~Rmb200k, a similar level to several entry level SUV models by JVs. We believe H8 will be successful with its much better functionality and larger size. In other words, H8 is a new product and creates a new market that wasn't available in the past for the same budget.

Earnings upgrade: Back in March when GWM reported strong 2012 results, our earnings estimates and PT were among the highest on the Street (click here). The stock’s continued performance has invited several downgrades afterward which we believe was too early. To reinforce our bullish view; we are revising our 2013/14E estimates by 1%/19% respectively. Our 2014 forecast now stands at 24% above consensus.

Rating, risk: We retain our OW on GWM and increase our PT to HK$65 (Dec-14) on 13x PER from previous HK$46 (Jun-13 or 11x). Risks: worse than expected sales and production shortfall from capacity bottleneck. (Please also refer to our sector note on Oct 13th “China Auto 2014” for further discussion of our bullish view on SUV and GWM).

Great Wall price performance (rebased)

Source: Bloomberg


24



China auto valuation summary

Company Code Rec Price(LC)

Mkt Cap(US$ Mn) PE(x) PB(x) ROE Div. Yield

11-Oct 11-Oct 13E 14E 13E 14E 13E 14E 13EBrilliance 1114 HK OW 12.38 8,024 14.9 12.1 3.7 2.8 28% 27% 1.0%ZhengTong Auto 1728 HK N 5.60 1,596 10.7 8.2 1.3 1.1 13% 14% 0.9%DongFeng Motor 489 HK UW 11.00 12,223 7.3 7.7 1.3 1.1 21% 16% 2.1%Great Wall Motor 2333 HK OW 46.20 23,251 12.9 9.4 4.2 3.1 36% 38% 0.8%Geely 175 HK OW 4.11 4,665 9.4 7.4 1.6 1.3 19% 20% 1.2%GAC 2238 HK OW 8.52 8,297 19.4 10.0 1.3 1.2 7% 12% 0.3%Minth Group 425 HK N 14.82 2,078 13.0 11.6 1.6 1.4 13% 13% 2.3%Baoxin Auto 1293 HK N 8.04 2,652 13.6 10.1 3.2 2.4 27% 27% 0.0%Zhongsheng 881 HK UW 13.32 3,278 18.7 14.3 2.3 2.0 13% 15% 1.1%Sinotruk 3808 HK UW 3.87 1,378 25.4 14.2 0.5 0.4 2% 3% 2.6%Average 14.5 10.7 2.1 1.7 18% 18% 1.2%

Source: J.P. Morgan estimates, Bloomberg.

Key catalyst for the stock price: Upside risks to our view: Downside risks to our view:

•1) Strong earnings results in 3Q13 in late Oct 20132) Successful model launch especially H8 SUV in late 2013 3) Longer term, consensus earnings upgrade in 2014 where we are 24% above the Street

1) Sales performance of its SUV models especially H8 2) Sustainability of margin in 2014

1) Competition in SUV business leafing to price competition and margin contraction2) Failure of new model launches including H8 and H2 SUVs in 4Q13-1Q14

Key financial metrics FY12A FY13E FY14E FY15E Valuation and price target basis

Revenues (LC) 41,565 54,195 71,497 82,203 We maintain OW on GWM and increase our PT to HK$65 (Dec-14) on 13x forward PER from previous HK$46 (Jun-14, on 11x PER). Here we take into account nearly 20% earnings upgrade in 2014 and potential re-rating resulting into PER expansion given our bullish view on SUV cycle and GWM's H8/H2 new model launches. Historically, GWM is trading at largely between 10-12x PER with the peak of 18x when it was re-rated. We believe a re-rating is possible in 2014 and hence see our 13x PER reasonable.

Revenue growth (%) 43.1% 30.4% 31.9% 15.0%

EBITDA (LC) 7,723 10,658 14,655 16,437EBITDA margin (%) 18.6% 19.7% 20.5% 20.0%

Tax rate (%) 15.0% 16.4% 15.7% 16.0%

Net profit (LC) 5,692 8,575 11,832 13,305

EPS (LC) 1.87 2.82 3.89 4.37

EPS growth (%) 53.7% 50.6% 38.0% 12.4% GWM forward PE band

DPS (LC) 0.30 0.30 0.57 0.97BVPS (LC) 7.07 8.60 11.92 15.32

Operating cash flow (LC mn) 4,337 9,207 12,577 14,057Free cash flow (LC mn) 90 5,712 10,082 11,564

Net margin (%) 13.7% 15.8% 16.5% 16.2%

Sales/assets (X) 1.0 1.1 1.2 1.3

Net debt/equity (%) (29.3%) (39.1%) (50.7%) (57.4%)ROE (%) 29.8% 36.0% 37.9% 32.1%

Key model assumptions FY12A FY13E FY14E FY15E

Auto sales growth (YoY) 38% 36% 33% 15%

Auto gross margin 27% 28% 28% 28%

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

Sensitivity analysis Impact on EBIT (%) Impact on EPS (%) JPMe vs. consensus, change in estimates

Sensitivity to FY13E FY14E FY13E FY14E EPS FY13E FY14E

1% decrease in sales volume growth

-0.8% -0.8% -0.8% -0.8%JPMe old 2.79 3.26

1% decrease in gross margin assumption

-5.3% -5.1% -5.3% -5.1% JPMe new 2.82 3.89

% chg 1.0% 19.3%

Consensus 2.6 3.1

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

25



Table 11: Great Wall Motor earnings revisions

RMB mn2013E 2014E

Revised Previous Change % Revised Previous Change %Net Sales 54,195 54,888 -1.3% 71,497 62,822 13.8%Sales growth (%) 30% 32% 32% 14%COGS -38,355 -39,519 -2.9% -50,426 -45,106 11.8%Gross profit 15,839 15,369 3.1% 21,071 17,716 18.9%Gross margin (%) 29.2% 28.0% 29.5% 28.0%Operating profit 10,176 9,990 1.9% 14,100 11,685 20.7%Operating margin (%) 19% 18% 20% 19%Pre-tax profit 10,205 10,166 0.4% 14,125 11,713 20.6%Net profit 8,575 8,474 1.2% 11,832 9,921 19.3%Net margin (%) 16% 15% 17% 16%Net profit growth (%) 51% 49% 38% 17%EPS 2.82 2.79 1.0% 3.89 3.26 19.3%EPS growth (%) 45% 43% 38% 17%


Table 12: GWM earnings estimate comparison between J.P. Morgan and Bloomberg consensus

RMBmn 2013E 2014EJPM 8,575 11,832consensus 7,955 9,578Difference (%) 8% 24%

Source: J.P. Morgan. Bloomberg.

Figure 38: Great Wall H-share vs A-share

Rmb

Source: Bloomberg.

Figure 39: Great Wall A-share Premium (as % of H-share)

Source: Bloomberg.

26



Figure 40: GWM forward PE band

Source: Bloomberg, J.P .Morgan estimates.

Figure 41: GWM forward PE with +/-1.0 standard deviation

Source: Bloomberg, J.P. Morgan estimates.

Figure 42: GWM forward PB band


Figure 43: GWM forward PB with +/-1.0 standard deviation


27



Great Wall Motor Company Limited: Summary of FinancialsIncome Statement Cash flow statementRmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E

Revenues 29,037 41,565 54,195 71,497 82,203 EBIT 4,090 6,833 10,176 14,095 15,819% change Y/Y 30.9% 43.1% 30.4% 31.9% 15.0% Depreciation & amortization 702 890 483 560 618

Gross margin 22.2% 24.1% 29.2% 29.5% 29.4% Change in working capital 363 (41) (71) (146)EBIT 4,090 6,833 10,176 14,095 15,819 Others - - - - -

% change Y/Y 38.3% 64.8% 48.3% 38.6% 12.2% Cash flow from operations 4,449 4,337 9,207 12,577 14,057EBIT Margin 14.1% 16.4% 18.8% 19.7% 19.2%

Net Interest (44) (22) 0 0 (2) Capex (3,759) (4,445) (3,500) (2,500) (2,500)Earnings before tax 4,131 6,841 10,205 14,125 15,846 Cash flow from investing (3,664) (3,936) (3,440) (2,440) (2,440)

% change Y/Y 35.9% 65.6% 49.2% 38.4% 12.2%Tax (620) (1,119) (1,601) (2,263) (2,512) Equity raised/(repaid) 0 0 0 0 0

as % of EBT 15.0% 16.4% 15.7% 16.0% 15.9% Debt raised/(repaid) 5 1 0 0 100Net income (reported) 3,426 5,692 8,575 11,832 13,305 Other 4,115 (69) 0 0 0

% change Y/Y 27.0% 66.1% 50.6% 38.0% 12.4% Dividends paid (663) (1,036) (1,085) (1,971) (3,225)Shares outstanding (MM) 2,814 3,042 3,042 3,042 3,042 Cash flow from financing 3,456 (1,104) (1,085) (1,971) (3,125)EPS (reported Rmb) 1.22 1.87 2.82 3.89 4.37 Beginning cash 2,074 6,306 5,596 10,278 18,443

% change Y/Y 23.6% 53.7% 50.6% 38.0% 12.4% Ending cash 7,107 6,337 10,278 18,443 26,935

Balance sheet Ratio AnalysisRmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Rmb in millions, year end Dec FY11 FY12 FY13E FY14E FY15E

Cash and cash equivalents 7,107 6,337 10,278 18,443 26,935 Operating margin 14.1% 16.4% 18.8% 19.7% 19.2%Accounts receivable 9,382 15,482 12,902 16,131 18,663 Net margin 11.8% 13.7% 15.8% 16.5% 16.2%Inventories 2,777 2,695 3,363 4,421 5,088Others 1,107 1,322 3,394 4,052 3,676 Sales growth 30.9% 43.1% 30.4% 31.9% 15.0%Current assets 20,374 25,848 29,949 43,058 54,374 Net profit growth 27.0% 66.1% 50.6% 38.0% 12.4%

EPS growth 23.6% 53.7% 50.6% 38.0% 12.4%LT investments 76 48 48 48 48Net fixed assets 10,443 14,009 13,456 15,392 17,269 Sales/assets 1.0 1.1 1.2 1.3 1.2Other LT assets 370 448 448 448 448 Assets/equity 2.13 1.98 1.86 1.72 1.63Total Assets 33,135 42,569 46,118 61,163 74,355 ROE 25.6% 29.8% 36.0% 37.9% 32.1%LiabilitiesST loans 0 0 0 0 100Payables 10,011 13,039 11,873 16,758 19,443Others 4,702 6,280 6,333 6,386 6,439Total current liabilities 14,714 19,319 18,206 23,144 25,982Long term debt 0 0 0 0 0Other liabilities 1,400 1,607 1,607 1,607 1,607Total Liabilities 16,113 20,926 19,812 24,759 27,605Shareholders' equity 16,737 21,514 26,177 36,275 46,621Minorities 284 129 129 129 129BVPS 5.95 7.07 8.60 11.92 15.32

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

28



JPM Q-ProfileGreat Wall Motor Co., Ltd. Class H (CHINA / Consumer Discretionary)As Of: 10-Oct-2013 [email protected]

Local Share Price Current: 43.90 12 Mth Forward EPS Current: 3.05

Earnings Yield (& local bond Yield) Current: 9% Implied Value Of Growth* Current: -3.41%

PE (1Yr Forward) Current: 11.4x Price/Book Value Current: 4.4x

ROE (Trailing) Current: 35.33 Dividend Yield (Trailing) Current: 1.72

Summary

Great Wall Motor Co., Ltd. Class H 17420.81 As Of:

CHINA 26.42811 SEDOL 6718255 Local Price: 43.90

Consumer Discretionary Automobiles EPS: 3.05

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 11.35x 2.52 14.69 9.06 8.78 14.16 3.39 -78% 29% -20% -23%P/BV (Trailing) 4.42x 0.20 4.42 1.01 1.38 3.39 -0.63 -95% 0% -77% -69%

Dividend Yield (Trailing) 1.72 0.00 10.17 2.15 2.52 5.81 -0.76 -100% 492% 25% 47%

ROE (Trailing) 35.33 5.45 37.52 17.76 21.00 39.57 2.43 -85% 6% -50% -41%

Implied Value of Growth -3.4% -3.59 0.27 -0.24 -0.50 0.92 -1.91 -10445% 898% -613% -1354%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

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Companies Recommended in This Report (all prices in this report as of market close on 11 October 2013)Baoxin Auto Group Limited (1293.HK/HK$8.04/Neutral), Brilliance China Automotive (1114.HK/HK$12.38/Overweight), China ZhengTong Auto Service Holding Limited (1728.HK/HK$5.60/Neutral), DongFeng Motor Co., Ltd. (0489.HK/HK$11.00/Underweight), Geely Automobile Holdings Ltd. (0175.HK/HK$4.11/Overweight), Great Wall Motor Company Limited (2333.HK/HK$46.20/Overweight), Guangzhou Automobile Group Co. Ltd. (2238.HK/HK$8.52/Overweight), Minth Group (0425.HK/HK$14.82/Neutral), Sinotruk (3808.HK/HK$3.87/Underweight)

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

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for China ZhengTong Auto Service Holding Limited within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Brilliance China Automotive, Guangzhou Automobile Group Co. Ltd., Geely Automobile Holdings Ltd., Great Wall Motor Company Limited, Baoxin Auto Group Limited, China ZhengTong Auto Service Holding Limited, Minth Group, Sinotruk.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Baoxin Auto Group Limited, China ZhengTong Auto Service Holding Limited.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: China ZhengTong Auto Service Holding Limited.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: China ZhengTong Auto Service Holding Limited.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Baoxin Auto Group Limited, China ZhengTong Auto Service Holding Limited.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Baoxin Auto Group Limited, China ZhengTong Auto Service Holding Limited.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from China ZhengTong Auto Service Holding Limited.

"As announced on 3 September 2013, China Zhengtong Auto Services Holdings Limited (“China Zhengtong”) will embark on a seriesof fixed income investor meetings in Hong Kong, Singapore and London commencing on 4 September 2013. A USD-denominated Regulation S credit enhanced senior notes with the benefit of an irrevocable standby letter of credit issued by Bank of China Ltd., Macau Branch transaction with J.P. Morgan Securities plc (“J.P. Morgan”) as bookrunner and joint lead manager may follow, subject to market conditions. In such case, J.P. Morgan would receive fees for so acting. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for China Zhengtong or its associates and may have other interests in or relationships with China Zhengtong or its affiliates, and receive fees, commissions or other compensation in such capacities. This research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.”

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

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

mailto:[email protected]


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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.jpmorganmarkets.com.

Coverage Universe: Lai, Nick YC: Anhui Conch Cement Company Limited - A (600585.SS), Anhui Conch Cement Company Limited -H (0914.HK), Baoxin Auto Group Limited (1293.HK), Brilliance China Automotive (1114.HK), China National Building Material (3323.HK), China Resources Cement (1313.HK), 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), Minth Group (0425.HK), Sinotruk (3808.HK), Zhongsheng Group Holdings (0881.HK)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2013

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 43% 44% 12%IB clients* 57% 49% 39%

JPMS Equity Research Coverage 42% 50% 8%IB clients* 76% 65% 57%

*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.jpmorganmarkets.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.

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.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.

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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Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MIC (P) 049/04/2013 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

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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

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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 September 28, 2013.

Copyright 2013 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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