CHINA：AUTOMOBILES：2013_OUTLOOK：PREFER_LUXURY_AND_SUV_OVER_HDT;_ADDING_BAOXIN_TO_CL-BUY_JAC_UP_TO_BUY-2013-01-18.ppt

,buy*,buy*,buy,rating,hk$,hk$,hk$,hk$,hk$,hk$,hk$,rmb,hk$,hk$,-54.1%,january 17, 2013 china: automobiles equity research 2013 outlook: prefer luxury and suv over hdt; adding baoxin to cl-buy, jac up to buy,more positive but utilization still a concern,buy baoxin, adding to cl; jac up to buy;,we raise our 2013/14 car market growth estimates from 7.8%/8.2% to 8.5%/8.5% on recovering consumer confidence, strong gdp outlook, and dealer destocking throughout 2h12. we remain concerned, however, about lower utilization levels,brilliance and 3) industry consolidation. we add baoxin to our conviction list on its strong,related research china: automobiles; impact of anti-japan protests on earnings/tps; downgrade great wall h to neutral, september 28, 2012; stock valuation summary,in 2013e/14e. we revise 2013e/14e eps by -82% to 47% and 12-m tps by 9%-181%.,expense control and underappreciated earnings boost from the ncga acquisition. we downgrade,valuation summary - auto china ticker company name currency 600104.ss saic rmb 1293.hk baoxin hk$ 600741.ss huayu rmb,1/16/2013 12-month potential close tp up/downside 16.68 21.64 29.7% 7.26 9.21 26.9% 10.19 13.39 31.4%,brilliance to neutral as we think its secular growth,0489.hk dongfeng 600418.ss jac,hk$ rmb,buy buy,12.56 6.71,14.71 7.67,17.1% 14.3%,q1: will chinas luxury fever continue? yes chinas luxury car market will grow 15-18% in 2013-15e on continued wealth expansion and the mix shift towards entry-level luxury.,is fully priced in following the 49% price surge since last may. we upgrade jac to buy and changan a/b to neutral as we expect them to benefit from higher suv mix in 2013e.,1899.hk xingda 1728.hk zhengtong 1114.hk brilliance 200625.sz changan (b) 0175.hk geely 000800.sz faw car 3808.hk sinotruk 2333.hk great wall (h) 0881.hk zhongsheng 2238.hk gac,neutral neutral neutral neutral neutral neutral neutral neutral neutral neutral,3.59 6.21 10.34 5.02 4.10 7.86 6.19 27.65 11.30 7.25,4.01 6.82 11.25 5.46 4.35 8.13 6.36 27.87 11.15 7.11,11.8% 9.9% 8.8% 8.8% 6.0% 3.4% 2.7% 0.8% -1.4% -2.0%,0425.hk,minth,hk$,neutral,10.88,10.22,-6.1%,000338.sz weichai (a),rmb,neutral,24.53,21.83,-11.0%,q2: does suv surge have room to run?,sell weichai h on rich valuation,000625.sz changan (a) 601633.ss great wall (a) 2338.hk weichai (h),rmb rmb hk$,neutral neutral sell,6.62 25.46 34.35,5.69 21.31 25.92,-14.1% -16.3% -24.5%,yes we expect the suv market to grow 22-25% in 2013-15 on strong customer preference, extensive product offering, and fuel efficiency. q3: are hd trucks more elastic to macro? no domestic hdt will grow only 5-6% in 2013- 15e due to moderate recovery in fai/logistics, long-term cargo shift from road to rail, drop-and- pull technology, and underutilized fleet.,given our updated expectation for a moderate hdt market recovery in 2013-14, we find weichai hs valuation too rich after the 46% price increase since last september. we also see downside risk for weichais share in the hdt engine market as some major customers plan to source engines internally. we also expect the near-term earnings contribution from the hydraulics/forklifts division will be limited. reinstating weichai h at sell.,1211.hk byd hk$ sell 26.90 12.35 *denotes the stock is on our regional conviction list. source: datastream, gao hua securities research estimates,yipeng yang +86(10)6627-3189 beijing gao hua securities company limited the goldman sachs group, inc.,goldman sachs 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. for reg ac certification and other important disclosures, see the disclosure appendix, or go to /research/hedge.html. analysts employed by non-us affiliates are not registered/qualified as research analysts with finra in the u.s. global investment research,3,5,8,14,18,21,27,30,36,44,2,january 17, 2013,china: automobiles,contents executive summary: we prefer luxury and suv over hdt in 2013 we are more positive on chinas car market outlook in 2013, but utilization still a concern question 1: will luxury fever continue? yes adding baoxin to conviction list baoxin (1293.hk): buy (adding to cl) for higher luxury mix, strong aftermarket growth, solid expense control, and underappreciated acquisition of ncga brilliance (1114.hk): downgrade to neutral on fair valuation question 2: does suv surge have room to run? yes driven by strong customer preference, extensive product offering, and fuel efficiency jianghuai (600418.ss): upgrade jac to buy on higher suv exposure, strong cash return, and solid balance sheet changan a (000625.sz)/b (200625.sz): up to neutral on strong product cycle & earnings potential from ford jv question 3: dramatic rebound coming for hdt as in previous cycles? no we see only a moderate recovery for hdt in 2013 weichai h (2338.hk)/ a (000338.sz): sell/neutral on slower earnings recovery vs. recent share price surge,china auto valuations disclosure appendix the prices in the body of this report are based on the market close of jan 16, 2013 for a/h stocks and us/eu/japan stocks. the author would like to thank yuqian ding for her valuable contribution to this report. exhibit 1: valuation summary china auto coverage,49 55,valuation summary - auto china,1/16/2013 12 month 12 month,potential,ticker,company name,currency,rating,close tp-new,tp-old,up/downside,methodology,key risks,600104.ss 000800.sz 000625.sz 200625.sz 0489.hk 2333.hk 0175.hk 1211.hk 2238.hk 3808.hk 2338.hk 000338.sz 0425.hk 1899.hk 600418.ss 600741.ss 1293.hk 1728.hk 0881.hk 1114.hk 601633.ss,saic faw car changan (a) changan (b) dongfeng great wall (h) geely byd gac sinotruk weichai (h) weichai (a) minth xingda jac huayu baoxin zhengtong zhongsheng brilliance great wall (a),rmb rmb rmb hk$ hk$ hk$ hk$ hk$ hk$ hk$ hk$ rmb hk$ hk$ rmb rmb hk$ hk$ hk$ hk$ rmb,buy* neutral neutral neutral buy neutral neutral sell neutral neutral sell neutral neutral neutral buy buy buy* neutral neutral neutral neutral,16.68 7.86 6.62 5.02 12.56 27.65 4.10 26.90 7.25 6.19 34.35 24.53 10.88 3.59 6.71 10.19 7.26 6.21 11.30 10.34 25.46,21.64 8.13 5.69 5.46 14.71 27.87 4.35 12.35 7.11 6.36 25.92 21.83 10.22 4.01 7.67 13.39 9.21 6.82 11.15 11.25 21.31,18.88 6.89 3.26 1.94 11.56 22.06 3.96 10.92 5.15 4.28 na na 9.40 2.70 5.44 11.15 6.08 4.84 9.15 9.53 18.30,29.7% pb-roe: a share 3.4% past 20 day avg. price -14.1% pb-roe: a share 8.8% a-b premium 17.1% pb-roe: h share 0.8% pb-roe: h share 6.0% pb-roe: h share -54.1% sotp -2.0% pb-roe: h share 2.7% pb-roe: h share -24.5% pb-roe: h share -11.0% pb-roe: a share -6.1% pb-roe: h share 11.8% pb-roe: h share 14.3% pb-roe: a share 31.4% pb-roe: a share 26.9% pb-roe: h share 9.9% pb-roe: h share -1.4% pb-roe: h share 8.8% pb-roe: h share -16.3% pb-roe: a share,higher price/margin erosion; weaker local brand sales progress in the restructuring; higher/lower vol of new models and price higher/lower vol/price of suv/low-end sedan/minivan higher/lower vol/price of suv/low-end sedan/minivan lower price/volume; slower recovery of nissan/hondas sales higher/lower price erosion; higher/lower volume in compact suv/sedan; higher/lower government subsidy; higher/lower vol/price of new models higher vol/price of new car models; higher e-bus sales; higher subsidy higher/lower vol. of new models hhigher/lower vol of hdt domestic/export market stronger than expected export growth; asp/ms gain on strict implementation of euro iv emission standard stronger than expected export growth; asp/ms gain on strict implementation of euro iv emission standard quicker/slower japanese brands vol. recovery; higher/lower pricing higher/lower radial cord/sawing wire price erosion suv volume/pricing due to competition; lower than expected commercial vehicle higher price erosion of components; weaker sales volume price/margin erosion of new car sales; potential restriction from bmw on new car sales post ncga acquisition strong/lower price/volume of luxury car strong/lower price/volume of luxury car; japanes brands recovery higher/lower vol./price; higher/lower electric vehicle expenditure higher/lower price erosion; higher/lower volume in compact suv/sedan;,notes: priced as of market close on jan 16, 2013. * denotes the stocks are on our regional conviction list. source: datastream, gao hua securities research estimates. goldman sachs global investment research,1,2,3,3,january 17, 2013,china: automobiles,executive summary: we prefer luxury and suv over hdt in 2013 we are more positive on china car market outlook in 2013, but utilization is still a concern we raise our car market growth forecasts in 2013/14 from 7.8%/8.2% to 8.5%/8.5% and forecast a 2015 growth rate of 8% on recovering consumer confidence, strong gdp growth outlook, and dealer destocking in 2h12. we are still concerned on the decrease in the passenger car industrial capacity utilization rate from 96% in 2011 to 75% in 2014e (see exhibit 7), which might lead to weak price/margin. three questions for which segments will grow faster in 2013; we prefer luxury and suv over hdt exhibit 2: we prefer luxury and suv over hdt in 2013. buy baoxin (cl) and jac, sell weichai h,key questions will the luxury sector continue to outpace the overall car market? is suv fever sustainable? will the hdt market rebound rapidly like it did in 2009?,conclusions yes, especially the entry-level luxury segment higher growth of customer base and affordability. more model localization will drive demand further. luxury dealers will benefit from stable new car sales gpm, ramp-up of aftermarket, and consolidation. yes, strong customer preferences drive the fever clear customer preference for suvs. more extensive suv product offerings. better suv fuel efficiency in china than the us. no, only moderate recovery estimated in 2013/14 existing hdt fleet is huge, young, but underutilized. long-term risks: gdp growth drivers change from fai to consumption, cargo transport shifts from road to rail,stock implications buy baoxin, add to cl. downgrade brilliance to neutral on fair valuation. upgrade jac to buy. upgrade changan (a/b) to neutral from sell. sell weichai (h) on rich valuation. neutral on weichai (a),implementation of drop-and-pull technology. source: global insight; gao hua securities research estimates. goldman sachs global investment research,4,january 17, 2013,china: automobiles,q1: will luxury fever continue? yes buy baoxin (adding to cl) on strong expense control and underappreciated earnings boost from ncga acquisition we forecast chinas luxury car market will grow 18%/15%/15% in 2013/14/15 due to expansion of the upper and upper middle class as well as the mix shift towards entry-level luxury. china had the 4th highest number of high net worth individuals (net worth us$1mn) in the world in 2011 and we believe the further expansion of the upper and upper middle class will boost the secular growth of the luxury market in china. we believe luxury car affordability will also increase as a result of increasing mix from entry- level luxury and more luxury models localized in china. we believe luxury dealers will benefit from: 1) stable high gpm from luxury new car sales; 2) robust aftermarket growth; and 3) industry consolidation. we add baoxin to our conviction list due to its strong expense control and underappreciated earnings boost from the ncga acquisition (which we expect to contribute 47% of baoxins sales volume growth in 2013e). we also downgrade brilliance to neutral as we believe its strong secular growth is fully priced in post the 49% price surge since may 2012. q2: does suv surge have room to run? yes upgrading jac to buy and changan a/b to neutral we forecast the suv segment to grow by 25%/25%/22% in 2013/14/15 on clear customer preferences and extensive product offerings. a 2012 survey by tencent/sinotrust suggested that 75% of potential car buyers and 57% of existing car owners would select an suv as their first choice for a family car. in addition, suv fuel efficiency is better in china than the us, so we see limited downside risks from potential legal restrictions or decrease in customer purchase intention due to fuel consumption considerations. we upgrade jac to buy from neutral and changan a/b to neutral from sell on their higher suv mix in 2013e vs. 2012. we like jac for stronger volume growth, strong suv product cycle, robust cash return, and solid balance sheet. jac is currently trading at 10.5x/1.3x 2013e pe/pb, one of the lowest p/es among a-share peers. key risks include weaker-than-expected suv volume/pricing due to competition and lower-than-expected sales growth of commercial vehicles. we upgrade changan (a/b) to neutral from sell mainly on strong product cycle and earnings contribution from its jv with ford. q3: is hdt more elastic to macro? no, not like previous cycles reinstating weichai h at sell unlike previous cycles, we forecast the domestic hdt market to grow only moderately in 2013/14/15 by 6%/6%/5%. we see a relatively slow recovery of fai/logistic activities in the near term and believe the negative long-term impacts from replacement of railway cargo transportation, drop-and-pull, and existing under-utilized hdt fleet will gradually kick in. in addition, we see downside risk for weichais share of the hdt engine market as some major customers (e.g., foton/hualing) are planning to source engines internally. we estimate the near-term earnings contribution from the hydraulics/forklifts division will be limited due to the strong competitive positions of the existing four international players in the construction machinery hydraulics components market in china. as a result we find weichai hs valuation too rich after the 46% share price increase since september and hence move the stock to sell from not rated. weichai h is currently trading at 14.4x/2.0x 2013e pe/pb, one of the highest p/es among the auto peers. the valuation also looks rich vs. the historical median 8.6x 12m forward p/e. the key risks include: engine asp/ms gain on upgrade of emission standard to euro iv since mid-2013e; stronger-than-expected linde hydraulics sales/profit growth; and stronger-than- expected hdt export from its subsidiary shaanqi. goldman sachs global investment research,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012e,2013e,2014e,2015e,24.1%,-,5,january 17, 2013,china: automobiles,we are more positive on chinas car market outlook in 2013, but utilization still a concern we see strong near-term market rebound in 1q13 due to steady dealer destocking through 2h12 we increase car market growth in 2013e/14e from 7.8%/8.2% to 8.5%/8.5% and forecast a 2015 growth rate of 8% on recovering consumer confidence and strong gdp growth outlook. based on china automobile dealer association data, we see the average dealer inventory decreased gradually throughout 2h2012. weak sales of japanese brands in china in the wake of anti-japan protests since september 2012 helped non-japanese brands increase sales volume and lower their dealer inventory. meanwhile japanese brands also took this opportunity to help their dealers destocking by trimming production/wholesale volume to a level lower than retail volume. we believe industry production/wholesale volume will be strong in 1q2013 when dealers start restocking again.,exhibit 3: we forecast car market to grow at 8.5%/8.5%/8.0% over 2013-15 passenger car sales volume in mn units, yoy growth in %,exhibit 4: dealer inventory days fell in 2h12 inventory parameter = monthly sales volume / inventory volume,25,80.3%,65.7%,51.1%,100%,2.50,20,16.5%,32.5% 22.4%,35.4% 8.7% 9.2%,8.5%,8.0% 8.5% 17.6,50%,2.00,15,1.7%,13.8%,7.4%,11.7,12.7,13.9,15.0 16.3,0%,10,8.6,-50%,1.50,5,0.8 0.8,1.4,2.3 2.6,3.3,4.3,5.3 5.7,-100%,1.00,0,passenger car sales volume,-150% passenger car growth rate (yoy) (rhs),0.50,2011,2012e,2013e,2014e,2015e,gdp growth rate (yoy),9.3%,7.6%,8.1%,8.4%,8.3%,jan-12,feb-12,mar-12,apr-12,may-12,jun-12,jul-12,aug-12,sep-12,oct-12,nov-12,passenger car sales volume (in mn units)_old passenger car growth rate (yoy)_old passenger car sales volume (in mn units)_new passenger car growth rate (yoy)_new passenger car growth rate (yoy) change (new vs. old),12.7 8.7% 12.7 8.7% na,13.9 9.2% 13.9 9.2% na,14.9 7.8% 15.0 8.5% 0.6%,16.2 8.2% 16.3 8.5% 0.9%,17.4 8.0% 17.6 8.0% 0.9%,source: global insight, gao hua securities research estimates. goldman sachs global investment research,source: china automobile dealer association.,11/2011,1/2011,3/2011,5/2011,7/2011,9/2011,1/2012,3/2012,5/2012,7/2012,9/2012,passengercarsalesvolumein000unit,2007,2005,2002,100,200,300,90,0,6,january 17, 2013,china: automobiles positive impact on auto market from strong consumer confidence and stable gdp growth outlook although exhibit 5 shows only a loose correlation between consumer confidence and passenger car sales volume growth, we believe the two sets of data are generally moving in the same direction. the pickup of consumer confidence could indicate a car market recovery. meanwhile, there is a strong correlation between gdp growth and car market. our higher car market growth forecasts are supported by our ecs teams forecast for chinas macro economy to resume a growth rate of 8% in 2013.,exhibit 5: consumer confidence picking up since 2h12 passenger car retail yoy growth in % and consumer confidence index; jan 11- nov 12,exhibit 6: strong gdp growth outlook will also boost car market hdt sales volume in 000 units; real gdp index base year 2000 = 100,