China Auto:Test Drive with Ronnie | March 2014

January-February 2014 PV unit sales up 11.3% YoY. According to the China Association of Automobile Manufacturers (CAAM), January-February passenger vehicle (PV) sales rose 11.3% YoY to 3.16m units. SUVs were the best performing sub-segment for the period with 40% YoY growth and 17.8% market share. We leave our 2014F PV/SUV unit sales growth forecasts unchanged at 10%/25%. SUVs continue to outperform. We expect SUV unit sales to continue to shine and believe the mid-end SUV segment in the RMB150k-300k range will be the most competitive sub-segment because of the new models from different foreign JVs. Although we see increasing numbers of SUVs from local brands, we believe Great Wall Motor (GWM, 2333 HK, Outperform) and Chang’an (000625 CH, Not Rated) will remain market leaders on the strength of their model line-ups and good brand recognition.

    Emerging luxury brands to contribute more. Unit sales of China’s top-three luxury brands were up 25% YoY in January-February 2014. Geely-Volvo and SAIC-GM are keen to ramp up their local production with new models for 2014. Of the current crop of contenders, we believe sales of Volvo and Cadillac will pick up the most in 2014F because of (1) increasing local capacity, (2) compelling new models, (3) attractive prices for their made-in-China luxury cars and (4) the low-base effect.

    New energy vehicles under the spot light. Following the central government’s revised subsidy policies on new energy vehicles (NEVs) and its commitment to cut emissions, Beijing and Shanghai issued local subsidy guidance coupled with generous offers for license plates. We expect other pilot cities to soon follow suit, which will act as a positive catalyst for NEV plays like BYD (1211 HK, Outperform).

    GWM, GAC and Zhongsheng remain our top picks. We stick to our view that 2H14 will be better than 1H14 in terms of overall stock price performance. We prefer (1) Great Wall Motor for its China SUV growth story, (2) GAC (2238 HK, Outperform) for the sales recovery by its Japanese brands and its recently formed JVs, and (3) Zhongsheng Group (881 HK, Outperform) for robust aftersales revenue growth and its Mercedes margin improvement story. The sector’s undemanding valuations and potential earnings upside support our positive view.