CHINA_PASSENGER_VEHICLE_SECTOR：RECENT_CHANNEL_CHECK_TAKEAWAYS-2013_SHOULD_BE_A_BETTER_YEAR-2013-01-31.ppt

buy,buy,buy,hold,buy,sell,upside,16.0%,deutsche bank markets research,asia china automobiles & components,industry china passenger vehicle sector,date 31 january 2013 forecast change vincent ha, cfa nora min,recent channel check takeaways - 2013 should be a better year,research analyst (+852) 2203 6247 ,research associate (+852) 2203 6130 ,fasten seatbelt for fy12e surprises; 2013e ride should be smoother in our january conference and tour, we met with the ir teams of two auto oems and three auto dealer groups. we also paid visits to three auto/auto parts manufacturing plants. in addition, an expert from the state information centre made a presentation about the auto sector outlook. the major takeaway is that as oems in general have prudent 2013 targets, there is likely to be a favourable demand-supply balance, benefiting both oems and dealers profitability. nonetheless, 2h12e operations could be worse than expected for,top picks brilliance china (1114.hk),hkd10.26 baoxin auto group (1293.hk),hkd8.19 companies featured dongfeng motor (0489.hk),hkd12.78 2011a 2012e 2013e,dealers and fy12 results could lead to short-term share price shocks. our top,p/e (x),9.0,10.8,8.3,picks are still brilliance for oems and baoxin for dealers. reiterating our above-consensus passenger vehicle sales growth forecasts,guangzhou auto (2238.hk),hkd6.71 2011a 2012e 2013e,after attending the experts presentation and noting the upbeat targets set by,p/e (x),10.3,19.9,10.1,geely and beijing hyundai, we maintain our above-consensus passenger vehicle (pv) sales growth forecast of 11% in 2013. we are particularly upbeat on the suv and luxury segments and believe they will continue to outperform the overall pv sales growth rate in the near to mid term. we also expect local brands to outperform the average chinese auto market due to ongoing urbanisation in lower-tier regions. last but not least, we expect a further,geely auto (0175.hk),hkd4.18 buy 2011a 2012e 2013e p/e (x) 11.7 14.4 11.8 brilliance china (1114.hk),hkd10.26 2011a 2012e 2013e,recovery in demand for japanese brands, although a full recovery is unlikely in,p/e (x),17.3,17.1,13.3,early 2013 given the overhang from the sino-japanese island dispute. inventory levels and price discounts on easing trends in 4q12,byd (1211.hk),hkd26.05,2011a 2012e 2013e,the oems and dealers we recently talked to said that inventory levels had,p/e (x),53.0 730.4,43.7,declined and discounts had been narrowed in general in 4q12. this demand- supply balance should indicate a better operating backdrop for oems and dealers for 2013e. nevertheless, as 1) the pace of the luxury brand dealerships new car sales margin recovery appears slower than expected, and 2) the,baoxin auto group (1293.hk),hkd8.19 buy 2011a 2012e 2013e p/e (x) 22.8 24.7 14.6,negative margin impact on the japanese brand dealers due to the island dispute was worse than expected in 4q12, we think that the 2h12 dealership margin recovery did not materialise as we originally expected.,zhengtong auto services (1728.hk),hkd6.98 p/e (x),hold 2011a 2012e 2013e 27.1 18.6 13.2,maintaining oem outlook but a bit more prudent on dealers outlook while maintaining our stance for the oems at the moment, we cut fy12-14e earnings for dealers due to a slower-than-expected new car sales margin recovery. however, as we remain upbeat on the outlook for auto after-sales service business, which has not been affected so far, we keep our recommendations and raise our dcf-derived target prices by lowering our wacc in expectation of less market risk aversion to the dealership names.,zhongsheng group (0881.hk),hkd11.62 buy 2011a 2012e 2013e p/e (x) 16.2 24.9 12.3 auto dealers target price revision company new tp old tp baoxin 9.5 7.5,oem top pick is brilliance; dealer top pick is baoxin among the chinese oems, we like brilliance the most, as its bmw jv sales are on track for a better 2013, with more capacity to produce the new 3 series.,zhengtong zhongsheng,7.6 13.4,6.1 12.7,8.9% 15.3%,in the dealership space, we like baoxin the most after its completion of the acquisition of yanjun and it becoming the largest bmw dealer group in china.,key downside sector risk: a weaker-than-expected macro recovery dragging down sales growth. key upside sector risk: faster-than-expected realisation of the macro recovery, boosting auto demand.,the report changes target prices and estimates for several companies under our coverage. for a detailed,listing of the estimate changes, see figure 14 on page 10. _ deutsche bank ag/hong kong deutsche bank does and seeks to do business with companies covered in its research reports. thus, 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. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,160,60,31 january 2013 automobiles & components china passenger vehicle sector key takeaways from channel checks with auto oems list of ir teams/companies that we met and visited in january auto/auto part manufacturers: beijing benz, beijing hyundai, geely auto, hyundai mobis, volkswagen china auto dealership groups: baoxin, yongda, zhengtong and zhongsheng industry expert: mr. xu changming, general director and senior economist from state information centre industry expert thinks that industry fundamentals will improve mr. xu changming, general director and senior economist specialising in auto sector studies at chinas state information centre, made a presentation to our clients in mid- january regarding the outlook for the chinese auto market in 2013. to recap, mr. xu expects the 2013 passenger vehicle (excluding mini-cars) demand growth rate to accelerate to 10%, based on an underlying 2013 gdp growth assumption of 8%. his core rationale is a warm-up in economic growth. in terms of segmentation, mr. xu also sees stronger growth in 1) the low-price segment with third/fourth-tier city development and 2) the high-price segment with the rise in upgrade demand in first/second-tier cities. mr. xu also notes that as lots of auto manufacturers conservatively guide for single-digit growth in 2013 production, demand and supply should be in better balance and the industry fundamentals could therefore improve vs. 2012 (when manufacturers optimism countered lukewarm market demand, leading to inventory and pricing pressure). in the long run, even though additional capacity and retreating utilisation would imply weaker bargaining power for manufacturers, mr. xu is not too concerned about the risk of severe market over-capacity as he believes that auto manufacturers will fine-tune their china capacity plans after recent years slower auto sales growth.,figure 1: china vehicle sales forecast comparison,figure 2: china passenger vehicle ownership trend (# cars per 1,000 people),similar to db, mr. xu from the state information centre,sic forecast,db forecast,also has a relatively upbeat,passenger vehicle commercial vehicle aggregate vehicle,10.0% 5.0% 8.0%,11.5% 10.3% 11.3%,140 120 100 80,pv sales growth forecast for 2013. he also expects auto ownership to continue to,surge in 2011-20. 40 20 0,2000,2005,2010,2015e,2020e,source: state information centre, deutsche bank page 2,source: state information centre,deutsche bank ag/hong kong,jan-09,apr-09,jul-09,oct-09,jan-10,apr-10,jul-10,oct-10,jan-11,apr-11,jul-11,oct-11,jan-12,apr-12,jul-12,oct-12,jan-09,apr-09,jul-09,oct-09,jan-10,apr-10,jul-10,oct-10,jan-11,apr-11,jul-11,oct-11,jan-12,apr-12,jul-12,oct-12,31 january 2013 automobiles & components china passenger vehicle sector regarding the sino-japanese island dispute, mr. xu thinks that european brands in china have benefited the most at the expense of the japanese brands sales, followed by the korean brands and us brands. he expects the japanese auto brands china market share to recover to a level somewhere in between their current market share level and the recent peak before the dispute escalated, but the extent of recovery will rely on the time it takes to repair the two governments relationship. in general, we think that mr. xus optimistic tone on the china auto sector echoes ours. at the moment, our 2013 vehicle sales growth estimate of 11% is also at the high end of consensus, backed by our optimism on a china gdp growth recovery (to 8.2% in 2013e) and improving auto consumption sentiment. geely auto eyes sales growth outperformance in 2013 geely auto had meetings with our clients in mid-january. after beating its 460k-unit 2012 sales target with 483k-unit sales (up 15% yoy), the company is aiming high with a 560k-unit 2013 sales target (up 16% yoy), well ahead of industry growth. to elaborate, geely will rely on three key drivers for growth: boost in export from about 102k units in 2012 to about 150k units in 2013 ramp-up of suv sales with the existing gleagle gx7, 1h13e launch of an englon suv model and 2h13e launch of an emgrand model introduction of geely cars equipped with its own dsi automatic transmissions the company does not expect much capex for fy13 given that it has sufficient capacity in place and sees room for margin expansion with 1) higher production utilisation and 2) better economies of scale. regarding inventory trends, the company expects total inventory levels to ease further when it gets closer to the chinese new year, which is a strong selling season. last but not least, geely continues to expect the stable receipt of government subsidy inflows in fy13. geelys 2012 sales volume and its 2013 sales target are slightly higher than our original expectations. considering the companys sales resilience in 2h12, with new model sales and booming exports, we think that the companys volume expectations are definitely not out of reach. geelys optimism reaffirms our view that even though the china auto sales growth rate has slowed down in recent years, companies with popular products, such as geely, can still achieve solid growth in the foreseeable future.,figure 3: geely auto monthly domestic vehicle sales trend,figure 4: geely auto monthly export sales trend,geely has recently showed strength is both local and,(units) 60,000 50,000 40,000 30,000 20,000 10,000 0,(yoy%) 200% 150% 100% 50% 0% -50%,(units) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0,(yoy%) 800% 600% 400% 200% 0% -200%,export sales. we expect this strength to continue on better local economic growth and further urbanisation.,source: company data deutsche bank ag/hong kong,source: company data,page 3,sep-11,sep-12,dec-12,nov-10,feb-12,mar-11,oct-12,apr-12,31 january 2013 automobiles & components china passenger vehicle sector volkswagen group china stays upbeat on the chinese market our clients had a lunch meeting with volkswagen chinas ir team in mid-january. the volkswagen brand maintained its top-ranked market share among auto brands in china in 2012. for 2013, the company conservatively targets 8-10% sales growth but it has a high conviction of achieving that. at the moment, its jvs are producing at 100% utilisation and the company is adopting a very cautious approach in terms of capacity planning. within the pv segments, volkswagen is very optimistic about the outlook for the suv sub-segment and believes that this segment still has huge potential in china. therefore, it plans for the local production of audi q3 in 2013. in the luxury car segment, audi a3 will start its local production in the new foshan plant in 2013 according to the companys “go south” strategy. last but not least, volkswagen china has been tracking the dealership inventory situation in the industry and it mentioned that inventory levels have showed signs of easing across the industry since 4q12.,figure 5: volkswagen brands and industrys dealership inventory levels in china,as tracked by volkswagen,(months) 3.0 2.5,industry shanghai vw,audi skoda,faw vw,their brands inventory and the industrys inventory level in china seemed to ease in 4q12, which should be perceived as a positive,2.0 1.5 1.0 0.5 0.0 source :volkswagen group china, cpca deutsche bank all in all, we think that volkswagens plan in china demonstrates that major oems are well aware of the actual china market growth prospects and are ready to match those with well-planned capacity expansion. therefore, the risk of over-capacity is likely to be overstated by the market, in our view. beijing hyundai plant visit we visited beijing hyundais plant no. 2 in mid-january. its annual production capacity expanded to 900k units in mid 2012 and the brand sold 859,595 units in 2012 (up 16.9% yoy and beating its original target of 800k units). beijing hyundai currently manufactures 11 kinds of models and more than 90% of the components it sources are locally made in china. for 2013, the brand aims to sell 970k units of cars (up 12.8% yoy), to be driven by newer models such as elantra langdong compact sedan and santa fe suv. it appears that the company is confident about reaching this ambitious growth target and has hopes of beating it. at the moment, beijing hyundais dealership inventory level is healthy at about 1.7 months. page 4,development for both oems and dealers. deutsche bank ag/hong kong,2007,2008,2009,2010,2011,2012,31 january 2013 automobiles & components china passenger vehicle sector,figure 6: beijing hyundai annual passenger vehicles sales trend,figure 7: beijing hyundai 2012 sales volume breakdown,beijing hyundai has been outperforming market growth,(units) 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0,(yoy%) 100% 80% 60% 40% 20% 0% -20% -40%,model accent verna elantra elantra yuedong elantra langdong i30 sonata moinca ix35 santa fe tucson,type sales volume sub-compact sedan 3,200 sub-compact sedan 204,963 compact sedan 64,368 compact sedan 214,753 compact sedan 81,827 compact hatchback 1,645 mid-size sedan 100,478 mid-size sedan 16,903 suv 108,241 suv 7,033 suv 56,184,in the past five years with popular models in the popular compact and suv segments. the company remains upbeat on 2013 with a growth target of 12.8%.,total,859,595,source: china association of automobile manufacturers (caam),source: caam,conclusion 1 a better 2013e in sight after discussions with major oems that outperformed in 2012 (in terms of sales), such as volkswagen and hyundai, our impression is that while they in general provide conservative 2013e volume targets after a lukewarm 2012, they are indeed more upbeat about 2013 demand growth vs. 2012. with cautious production growth planning and demand warming up, we foresee improvements in industry pricing and inventory conditions, which bodes well for both oems and dealers. whats more, we believe that with an appropriate product mix for 2013e, certain manufacturers could beat market expectations of single-digit volume growth this year. as such, we reiterate brilliance as our oem top pick given our optimism on the bmw 3 series sales ramp-up in the fast-growing luxury segment. we also like geely, which will benefit from the local brand demand recovery, driven by urbanisation and export, and the beefing up of its suv product portfolio. last but not least, we have a buy rating on dongfeng in expectations of a gradual japanese brand models sales recovery, further boosted by its late 1q13e launch of the dongfeng nissan teana mid-size sedan.,deutsche bank ag/hong kong,page 5,sep-12,jun-12,jul-12,aug-12,nov-12,dec-12,oct-12,jan-13,0%,31 january 2013 automobiles & components china passenger vehicle sector key takeaways from channel checks with auto dealers zhongsheng hit hard by island dispute in 2h12 but recovering zhongsheng had meetings with our clients in mid-january. the company observed an overall improvement in inventory and retail price discounts in 2h12 in general. however, its japanese car sales and business margins were badly impacted by the sino-japanese island dispute in september and october 2012, although sales had already recovered to about 80% of normal levels by the end of 2012. moreover, sales of luxury japanese brand lexus recovered faster than those of zhongshengs mass market japanese brands, with lexus inventory currently below the companys average of roughly 1.5 months. in 2013, zhongsheng aims to expand its 4s store network by 20-30 stores, with nine stores already under construction, via organic growth and m&as. management believes that the sales performance of mercedes benz, which is lagging audi and bmw in china right now, will be on the path to recovery in 2013 after the consolidation of its wholesale network in china.,figure 8: mercedes benz 2012 sales growth in china as compared to zhongsheng 50% 45% 40% 35% 30% 25% 20%,figure 9: actual retail price trend of a mercedes benz s300l in china (suggested price starting at rmb930k) rmb 780,000 760,000 740,000 720,000 700,000,besides the island dispute, zhongshengs fy12 business was also scarred by the slow sales of mercedes benz. even though benz sales within zhongsheng surged with new store openings, pricing has been under pressure. the,15% 10%,680,000,company,expects,an,5%,660,000,improvement in 2013 with,benz sales growth in china (yoy),zhongsheng benz sales growth (yoy),more,new,model,source: company data, deutsche bank estimate,source: deutsche bank estimate,contributions to drive sales.,for the japanese brands, zhongsheng still thinks that they can stay competitive in china as long as the island dispute does not deteriorate, since there are still lots of great japanese car models not launched in china. last but not least, zhongshengs after- sales service continues to expand healthily, with about 2m se