2016741_GS - China Automobiles - 101005

Tian Lu, CFA SAC License No. S1420210060003 +86(10)6627-3036 tian.lu@ Beijing Gao Hua Securities Company Limited
The author acknowledges the role of Yipeng Yang of Gao Hua Securities in the preparation of this product
Initiating GAC with Neutral
We believe GAC’s earning growth will resume due to: 1) expanding product portfolio via Linian, Trump-chi, and Fiat launches; 2) removal of capacity constraints; 3) stock swap reducing minority interests. Our PB/ROE target price implies 11.5% upside potential.
After 4 consecutive months of mom falling sales, China’s car market showed strong growth in August thanks to the positive impact of a Rmb 3,000 subsidy for fuel efficient cars (engines not more than 1.6 liter, and fuel consumption 20% below the current national standard). We believe industry profitability (in terms of ROE) will remain high over the next 3 years, but gradually fall from a 2010 peak due to: 1) volume growth slowing from 26% in 2010E to 11% in 2011E and 2012E; 2) Aggressive price cuts from BYD and Toyota (mainly FAW-Toyota) imposing pricing pressure on both local and international brands (but we do not anticipate a price war as overall capacity constraints will likely remain until 2H2012E); 3) Extensive new model launches will reduce average sales per model over the next 2-3 years; 4) Auto policies turning less favourable with stimulus packages being phased out in favour of a more “G 12.2% 12.3%
10.0%
Risks
1) Slower-than-expected market growth; 2) higherthan-expected price erosion. Stock Valuation Summary
Valuation Summary - Auto China 9/30/2010 12-month Potential Ticker Company name Currency Rating Close TP - New upside/downside 2333.HK Great Wall Motor Co. HK$ Buy 21.00 23.78 13.2% 600104.SS SAIC Motor Rmb Buy 16.85 18.93 12.3% 2238.HK Guangzhou Automobile Group Co HK$ Neutral 13.36 14.90 11.5% 000625.SZ Chongqing Changan Auto (A) Rmb Neutral 10.99 12.18 10.8% 0489.HK Dongfeng Motor HK$ Neutral 15.88 17.56 10.6% 200625.SZ Chongqing Changan Auto (B) HK$ Neutral 6.94 7.09 2.2% 000800.SZ FAW Car Rmb Neutral 18.57 18.74 0.9% 0175.HK Geely Automobile Holdings HK$ Neutral 3.85 3.30 -14.2% 1211.HK BYD Company HK$ Sell 62.35 42.03 -32.6%
Gao Hua Securities Investment Research
2
October 5, 2010
China: Automobiles
Executive Summary
We revise up our 2010/11/12E car sale volumes by 4%/3%/2% on strong August market volumes; we believe industry profitability (ROE) will remain at a high levels, but gradually reduce from a peak in 2010
5.0%
0.0% 2005 2006 2007 2008 2009 2010E 2011E 2012E
Average ROE
Note: Average ROE of the Chinese auto companies covered by Gao Hua Securities: SAIC, Dongfeng, Changan, FAW Car, GAC, BYD, Great Wall, and Geely. Source: Company data, Gao Hua Securities Research estimates.
October 5, 2010
China: Automobiles
Research Report
China Autos: Initiate on Great Wall (Buy) and GAC (Neutral); restacking our auto stocks
Industry context
30.0%
25.9%
25.0%
22.9% 21.1%
20.0%
18.4%
19.9%
Initiating Great Wall with Buy
Great Wall has gained market share from 1.3% in 2007 to 2.2% YTD Aug 2010. It dominates the lowend SUV market, is aggressively launching new sedan models, and is building up its export business. Its current valuation is attractive with 13.2% upside potential to our PB-ROE based TP.
China auto stocks restacking
We downgrade Changan (A) from Buy to Neutral due to concerns over falling margins and prices of low-price car and minivan. We maintain SAIC Motor as a Buy due to its recent strong market share. We maintain a Sell on BYD as most of the current news flow boosts sentiment rather than fundamentals. We keep Neutral ratings on FAW Car, Changan (B), Geely, and Dongfeng. We adjust our EPS estimates for 2010-12 by -16% to 16% and our target prices by 2% to 40%.
Source: Datastream, Gao Hua Securities Research estimates.
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