China Auto Sector. Selectively accumulate in 2013

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1 Asia Pacific/China Equity Research Automobile Manufacturers Research Analysts Jack Yeung Contribution by Alex Yang China Auto Sector INITIATION Selectively accumulate in 2013 Figure 1: Valuation comparison TP Up/down Price Mkt cap 6M ADTO P/E (x) Company Ticker (HK$) side (%) Rating (HK$) (US$ mn) (US$ mn) 13E 14E Brilliance 1114.HK O , BYD 1211.HK N , Dongfeng 0489.HK O , Geely 0175.HK U , Great Wall 2333.HK O , GAC 2238.HK N , Note: O = Outperform. N = Neutral, U = Underperform. Source: Bloomberg consensus, Credit Suisse estimates Luxury segment continues to outperform. By the end of 2012, China s USD millionaires reached more than 1mn, and a growing middle class particularly brand conscious that wants luxury cars that have been stretched to offer more space. As a result, sales of luxury vehicles and SUVs are outpacing the market with little sign of slowing down. Given the strong demand and enhanced local production, we expect China s luxury auto sales to grow at 20-25% p.a. by 2015, compared with about 8-1 growth for overall passenger vehicle (PV) sales. Mid-to-high end segment s competition intensifies. Japanese brands had a difficult year in 2012 due to anti-japan sentiment in China. Its sales started to recover at the end of 2012 with massive discounts and new model launches in These new models will have lower ASPs, which puts a lot pressure on some mid-end brands like Hyundai. We believe 2013 will be a recovery year for Japanese brands as they often known for better value for money and cheaper price will make them even more attractive. SUV segment: New battlefield with strong demand. More than 20 new SUV models are going to be launched across different segments in 2013, which will intensify competition among SUV makers. However, given the low SUV penetration rate and strong upgrade and replacement demand, we expect SUV sales to remain over 2 growth for the next 2-3 years. Initiating on the China auto sector with OUTPERFORM. Given China s low penetration rate and rising household income, we believe its PV segment will grow 8-1 for the next 3-5 years. We initiate coverage on Great Wall with OUTPERFORM (TP HK$ % upside), on BYD with NEUTRAL (TP HK$20.00, 12.5% downside) and on Geely with UNDERPERFORM (TP HK$3.50, 14.2% downside). We upgrade Guangzhou Auto to NEUTRAL (TP HK$6.50, 9% downside) and maintain OUTPERFORM on Brilliance (TP HK$12.00, 13.4% upside) and Dongfeng Motors (TP HK$14.00, 16.3% upside). Our top pick for the long term remains Brilliance and our near-term top pick (next 12 months) is Dongfeng Motors. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit or call +1 (877) US Disclosure: Credit Suisse 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and table Figure 2: Growth of China auto sales by segment 6 Figure 3: Foreign brands PV market share in China 25% % 1 5% E 2014E 2016E 2018E 2020E Auto sales YoY % PV sales YoY % CV sales YoY % Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Nov-12 Japanese German American Korean French Source: CAAM, Credit Suisse estimates Figure 4: Luxury PV sales in China '000 Units 2,500 2,252 2,000 76% 1,877 53% 1,551 1,500 39% 1,272 33% 42% 25% 1,017 25% 1,000 22% 29% 22% 21% % 5% 7% % E 2013E 2014E 2015E Luxury PV sales (LHS) Luxury PV sales YoY (RHS) Total PV sales YoY (RHS) Source: Roland Berger, Credit Suisse estimates Source: CAAM Figure 5: SUV sales as % of China s PV sales 16% 14% 12% 1 8% 6% 4% 2% Jan/04 Oct/05 Jul/07 Apr/09 Jan/11 Oct/12 SUV sales as % of PV sales Source: CAAM Figure 6: Valuation comparison of major listed automakers Upside/ Share Market Dividend Company Ticker TP downside price cap P/E (x) P/B (x) yield (%) ROE (%) (HK$) (%) (HK$) (US$mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Brilliance 1114.HK , BYD 1211.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Mkt cap wtd avg Source: Bloomberg consensus China Auto Sector 2

3 Selectively accumulate PV growth remains solid in 2013 China s low auto penetration rate and strong income growth will further its growth in the passenger vehicles (PV) segment in the next 3-5 years. Low-tier cities and inland regions have lower-than-average auto penetration rates, higher income growth rate as well as higher GDP growth; we believe they will become major auto markets in the next 5-10 years. Although automakers are expanding capacity aggressively, their overall utilization rate is still above 7. Automakers also have the flexibility to adjust their capacity plans to meet real demand growth. SUV segment: New battlefield with strong demand China s sports utility vehicle (SUV) segment has maintained strong sales growth in recent years despite slowing PV sales in 2011 and Over 20 new SUV models are planned to be launched in 2013 across all segments. We expect competition within the SUV segment to intensify, as most JV players are equally competitive. However, we note that rising upgrade and replacement demand will mainly benefit the mid-to-low end SUV segment. We expect Great Wall to maintain its leadership in this segment due to lack of strong competitors. Mid-to-high end segment: Intensifying competition Due to anti-japan protests in China in 2012, Japanese brands had a difficult year last year. Its sales started to recover at the end of 2012 with massive discounts and new model launches in 2013 in hoping to regain some of its lost market share. These new models will have lower ASPs, which will put a lot pressure on some of the mid-end brands like Korean brands. With cheaper price, we believe sales of Japanese brands will recover significantly in 2013 as they often known for better value for money. Luxury segment: Rising along with wealth in China China s luxury auto segment is still in its early growth stage, with a low penetration rate. We believe growing wealth will drive the country s luxury auto sales. We also expect strong waves of replacement purchases to support luxury auto sales in the next 3-5 years. Many luxury brands have launched their economy models with prices close to the mid-tohigh end. We believe these models will become strong engines for luxury auto sales and help luxury automakers to gain market share from mid- to high-end players. Valuation and stock picks We are initiating China Auto Sector with OUTPERFORM given China s low penetration rate and rising household income. We initiate on Great Wall Motor with an OUTPERFORM (TP HK$30.00 based on 13x 2013E EPS) given its leading position in China s SUV segment. For BYD, we initiate with NEUTRAL, (TP HK$20.00 based on a sum-of-the-parts valuation) as we believe its electric cars are yet to be commercialized. We initiate coverage on Geely with an UNDERPERFORM (TP HK$3.50 based on 10x 2013E EPS) as we believe it will face competition from JV brands moving toward low-end segment as it tries to move upward. We upgrade Guangzhou Auto to NEUTRAL from UNDERPERFORM (TP HK$6.50 based on 10x 2013E EPS) given recovering Japanese auto sales. Brilliance remains OUTPERFORM (TP HK$12.00, based on 14x 2013E EPS) as our long term top pick for the sector and Dongfeng Motors maintains OUTPERFORM, (TP HK$14.00, based on 9x 2013E EPS) as our near term (12 month) top pick for the sector. China s low auto penetration rate and strong income growth will further its PV growth in the next 3-5 years We expect competition in the SUV segment to intensify but demand to remain strong Japanese brands new models in 2013 would help them to regain market share but intensify competition in mid-to-high end segment We believe rising wealth in China will continue to drive luxury auto sales We are positive on sector growth and initiate coverage on Great Wall Motor, BYD, and Geely. Brilliance and Dongfeng Motors remain our top picks China Auto Sector 3

4 2013E ROE (%) 2013E P/B (x) 08 January 2013 Sector valuation comparison Figure 7: Auto sector valuation table Share Dividend Ticker price Mkt cap P/E (x) P/B (x) yield (%) ROE (%) Company (local ccy) (US$ mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E H share automakers Brilliance China Auto 1114.HK , BYD 1211.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Qingling Motors 1122.HK Sinotruk 3808.HK 6.2 1, Weichai Power Co HK , Mkt cap wtd avg Global automakers Honda Motor , Nissan Motor , Toyota Motor , Mitsubishi Motors , (2.6) (2.9) Mitsubishi Corp , Mazda Motor ,488 (3.1) (2.6) Hyundai Motor KS , Kia Motors KS , Ford Motor Co. F.N , General Motors Corp. GM.N , Fiat FIA.MI , BMW AG BMWG.DE , Porsche Auto PSHG_p.DE , Daimler DAIGn.DE , Mkt cap wtd avg Source: Bloomberg consensus Figure 8: Comparison within our coverage P/E vs RoE 35.0 Figure 9: Comparison within our coverage P/E vs P/B Dongfeng Motors Brilliance Great Wall Motor Geely Guangzhou Auto BYD E P/E (x) Dongfeng Motors Brilliance Great Wall Motor Geely Guangzhou Auto BYD E P/E (x) Source: Bloomberg consensus Source: Bloomberg consensus China Auto Sector 4

5 Table of contents Selectively accumulate... 3 PV growth remains solid in SUV segment: New battlefield with strong demand... 3 Mid-to-high end segment: Intensifying competition... 3 Luxury segment: Rising along with wealth in China... 3 Valuation and stock picks... 3 Sector valuation comparison... 4 PV growth remains solid in Low penetration rate suggests high growth potential... 6 Income growth is driving auto sales... 8 Growing demand in low-tier cities and inland regions... 9 Risks of oversupply SUV segment: New battlefield with strong demand Low SUV penetration rate with strong sales Upgrade and replacement demand to boost sales New model launches to intensify competition Limited competition in mid-to-low end segment Mid-to-high end segment: Intensifying competition Slowdown of PV sales Intensifying competition in PV segment Japanese brands to regain market share in Low-end segment is under pressure Luxury segment: Rising alone with wealth in China Low luxury auto penetration rate Growing wealth strengthens luxury auto demand Replacement demand drives luxury auto sales Proliferation of economy models Restrictive policies won t hurt luxury segment Great Wall Motor (2333.HK / 2333 HK) BYD Co Ltd (1211.HK / 1211 HK) Geely Automobile Holdings Ltd (0175.HK / 175 HK) Guangzhou Automobile Group (2238.HK / 2238 HK) Dongfeng Motors Group Co Ltd (0489.HK / 489 HK) Brilliance China Automotive Holding (1114.HK / 1114 HK) China Auto Sector 5

6 PV growth remains solid in 2013 Low penetration rate suggests high growth potential China s auto penetration rate (number of vehicles owned by per 1,000 people) was around 69 in 2011, much lower than mature auto markets such as Japan and Korea, Germany, and the US (Figure 10). It is also lower than the world s average of around 140. Given China s GDP per capita already exceeded US$5,000 in 2011, we believe its reasonable auto penetration rate is around 100 (Figure 10). However, most provincial regions in China have penetrations rate below 100 (Figure 11), suggesting high potential for auto sales growth. China s auto penetration rate is much lower than mature auto markets, suggesting high growth potential for auto sales Figure 10: 2011 auto penetration rate by country (No. of autos per 1,000 people) United states (815) Japan (622) Germany (567) Korea (381) China (69) GDP per capita (USD) ,000 10, ,000 Source: United Nation Statistics, Ward Auto, CEIC, IMF, Credit Suisse estimates Figure 11: 2011 China auto penetration rate by region No. of autos / 1,000 persons Beijing Zhejiang Tianjin Shanghai GDP per capita (RMB) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Source: CEIC, Credit Suisse estimates China Auto Sector 6

7 We plot the GDP per capita and auto penetration rate of more than 100 countries in Figure 10. We find auto penetration rates generally grow with GDP per capita and follow an S- shaped curve. We note that China is entering a stage of high growth on this S curve (Figure 10). We also note that growth of China s GDP per capita and its auto penetration from has generally followed the trend for Korea over (Figure 12). We expect China to continue to follow Korea s growth trends of between 2012 and According to International Monetary Fund (IMF) estimates, China s GDP per capita is likely to exceed US$9,500 in 2017, similar to Korea s in 1994 when Korea s auto penetration rate reached 167. We assume China s auto penetration rate will reach 160 in Then we use Korea s auto penetration rate for as a proxy to simulate China s penetration rate over (Figure 12). This suggests China s total number of autos would reach around 200 mn units in 2016 and its annual auto sales growth rate would be maintained at around 1 by 2015 then 8-9% up to 2020 (Figure 13 and Figure 14). We expect China s annual auto sales growth rate to be around 1 by 2015 and 8-9% up to 2020 Figure 12: Growth of GDP per capita and auto penetration rate USD Korea No. of vehilces per 1,000 people USD China No. of vehilces per 1,000 people 25, , , , , , , , , , E 2020E GDP per capita (LHS) Auto penetration rate (RHS) GDP per capita (LHS) Auto penetration rate (RHS) Source: World Bank, IMF, Credit Suisse estimates Figure 13: Growth of auto sales and auto population ('000 units) ('000 units) 350,000 40,000 Figure 14: Growth of auto sales by segment 6 300,000 35, ,000 30, , ,000 25,000 20,000 15, ,000 10, , E 2014E 2016E 2018E 2020E 5, E 2014E 2016E 2018E 2020E Auto sales (RHS) Total No. of autos (LHS) Auto sales YoY % PV sales YoY % CV sales YoY % Source: CAAM, Credit Suisse estimates Source: CAAM, Credit Suisse estimates China Auto Sector 7

8 Income growth is driving auto sales We expect China s auto sales to exceed 19 mn units in 2012, representing a CAGR of more than 2. This remarkable growth was mainly driven by a fast-growing domestic economy and rising individual incomes, with real GDP growing by around 1 p.a. from and Chinese disposable incomes per capita also growing by double digits. According to the National Bureau of Statistics, China s disposable income per capita for urban residents in 1H12 increased 13.3% YoY to Rmb13,679 or US$2,183, faster than 1H11 s 11.2%. During the same period, cash income per capita for rural residents increased 16.1% to Rmb4,303 or US$687, much faster than the growth of disposable income per capita for urban residents. With this rise in income, China s middle class defined as individuals earning more than Rmb50,000 or US$7,978 annually doubled 2006 s scale of about 12% of the country s total population in 2010 and may account for about 45% of the total population by 2020 (Figure 15). We believe the emergence of China s middle class is the power engine that will drive China s auto sales in the next few years. We believe strong income growth and rising middle class will be major engines for China s auto sales Figure 15: Growth of middle class in China 200 % 45 million E Number of middle class household or higher (LHS) Share of middle class & higher (RHS) Source: CEIC, Credit Suisse estimates Figure 16: Income growth of Chinese households income YoY 25% 2 15% 1 5% % Urban household Rural household Source: CEIC Figure 17: Income distribution of Chinese urban households % RMB ' Source: National Bureau of Statistics, CEIC % Share of urban households with annual income > RMB100,000 China Auto Sector 8

9 Growing demand in low-tier cities and inland regions The number of China s urban residents exceeded rural residents for the first time in The Chinese government was anticipating an urbanization rate of 51.5% by 2015E, which seems to have been easily realized in Tier 2 and 3 cities are the major engine of China s urbanization. Tier 2 cities accounted for around 16% of the country s population, but generated about 3 of total GDP and consumed over half of its foreign direct investment (Figure 18). The GDP growth rate of Tier 2 cities is about 2% higher than the whole economy in 2011 (Figure 19). We estimate that new car sales in Tier 2 cities will grow more than 1 p.a. by This rate would be 5-8% higher in Tier 3 cities, but less than 5% in Tier 1 cities, mainly due to auto restrictive policies. Moreover, China s inland regions have lower auto penetration rates, but higher income (indicated by GDP per capita) growth rates than the national average (Figure 20 and Figure 21). We believe auto sales growth in these regions will also be faster than other parts of China. We believe auto sales growth in low-tier cities and inland regions will be faster than the national average Figure 18: GDP contribution of Tier 1 and 2 cities 10 Figure 19: GDP growth rates of Tier 1 and 2 cities % % 64% 63% 62% % 58% % % 23% 24% 23% 26% 26% 26% 27% 27% % 13% 13% 14% 14% 14% 14% 13% 13% 12% 12% Tier-1 cties Tier-2 cities Other cities 5% 2,002 2,003 2,004 2,005 2,006 2,007 2,008 2,009 2,010 2,011 China total Tier-1 cties Tier-2 cities Source: CREIS, CEIC, Credit Suisse estimates Figure 20: PV penetration rate (number of PV per 1,000 persons) by region Source: CREIS, CEIC, Credit Suisse estimates Figure 21: CAGR of GDP per capita by region National average = 55.3 National average = 16.3% Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates China Auto Sector 9

10 Risks of oversupply The return to strong growth in Chinese vehicle sales has prompted a wave of investment in new capacity. It has raised concerns that the industry could be left with a supply glut when sales growth slows following the end of government incentive schemes. The National Development and Reform Commission (NDRC) estimated that the industry was using 8 of its installed capacity in 2011, while we expect this to drop to about 75% in 2012 and less than 7 by Compared with JVs, domestic brands seem to be more aggressive on capacity expansion (Figure 22 and Figure 23). They also have much lower capacity utilization rates (Figure 24 and Figure 25). We expect domestic brands to be more rational facing the slowdown of demand in the low-end segment. As most new capacities are still being planned, there would be sufficient time for them to adjust their capacity expansion to fit the industry s demand growth. Domestic brands have higher risks of overcapacity. Figure 22: Capacity expansion of major JVs Figure 23: Capacity expansion of major domestic brands JVs Domestic brands DF Honda FAW Xiali GAC Toyota Jianghuai Changan Ford Mazda FAW Car GAC Honda Changan Auto DF PSA Brilliance Auto DF Yueda Kia Shanghai Auto FAW VW Geely FAW VW BYD SH VW Great Wall Motor SH GM Chery ,000 1,500 2, ,000 1,500 2, E capacity 2015E capacity 2012E capacity 2015E capacity Source: Company data Figure 24: Capacity utilisation rate of JVs Million units JVs % % 12 75% E 2013E 2014E 2015E Source: Company data Figure 25: Capacity utilisation rate of domestic brands Million units Domestic brands % 53% % 32% E 2013E 2014E 2015E PV capacity* (LHS) Capacity utilization rate (RHS) PV capacity* (LHS) Capacity utilization rate (RHS) * Including capacities for sedan, SUV and MPV Source: Company data, Credit Suisse estimates * Including capacities for sedan, SUV, and MPV Source: Company data, Credit Suisse estimates China Auto Sector 10

11 SUV segment: New battlefield with strong demand Low SUV penetration rate with strong sales SUVs are expected to contribute around 13% of China s PV sales in 2012, compared with about 5% in 2004 (Figure 26). However, this ratio is still much lower than the more than 3 in the US and Australia, and is also lower than China s neighbor such as Russia (Figure 27). SUV sales have grown much stronger than the PV industry in recent years (Figure 28). This is probably due to Chinese customers preferences for a more spacious driving experience, better visibility, outdoor lifestyles and better handling over tough road conditions. Moreover, prices for SUVs seem to be more resilient compared with other PV products, implying a lucrative playground for automakers (Figure 29). Given the low penetration rate and strong demand, we believe China s SUV sales will remain strong in the next few years, which should attract more players to enter the market. China s SUV penetration rate is lower than major economies. We believe the segment s sales will remain strong in next few years. Figure 26: SUV sales as a % of China s PV sales 16% 14% 12% 1 8% 6% 4% 2% Figure 27: 2011 SUV sales as a % of PV sales (by country) 35% 32% % 25% 2 16% 15% 11% 1 5% Jan/04 Oct/05 Jul/07 Apr/09 Jan/11 Oct/12 SUV sales as % of PV sales China US* Germany Russia Australia SUV sales as % of taotal PV sales (RHS) Source: CAAM Source: CAAM, VDA, FCAJ, SMMT Figure 28: PV sales growth by segment Sales YoY% E 2013E 2014E 2015E Source: CAAM, Credit Suisse estimates Total PV Sedan MPV SUV China Auto Sector 11

12 Figure 29: PV prices by segment 4 2 Price change (%) vs. Jan 2008 price Jan-08 Dec-08 Nov-09 Nov-10 Oct-11 Oct-12 PV Sedan SUV Mini Bus Source: NDRC Upgrade and replacement demand to boost sales The SUV segment grows the fastest among all PV segments in China. One of the main reasons for this increase is that Chinese customers tend to choose bigger vehicles to upgrade/replace their existing car. A family car is quickly becoming a desired, and attainable, consumer product in China. Many Chinese consumers have already purchased a first, entry-level car and will be ready to upgrade to newer, better models. According to Sinotrust s latest survey done in November 2012 on Chinese car owners preferences on their second vehicle, over 8 of Chinese car owners have only one car, who will become the major engine for auto sales in the next few years. Moreover, around 4 of Chinese car owners have indicated that they are going to buy an SUV as their second car, just behind sedans 49% (Figure 30: ). Also, the majority of upgrade and replacement purchases focus on models with an engine size between 1.7 and 2.0L and prices of Rmb50, ,000 (Figure 31, Figure 32). These models are usually classified as the mid-end and mid-to-low end segments. Therefore, we believe the mid-end and mid- to low-end SUV segments will have high sales growth potential given rising upgrade and replacement demand. We expect rising upgrade and replacement demand to mainly benefit mid-end and mid-to-low end SUV sales. Figure 30: Preference on vehicle model for first vehicle vs. second vehicle in China % 6.8% Hatchback sedan 64.4% 48.6% 39.8% 16.9% 2.5% 1.4% 1.8% 1.4% 0.5% 0.2% 0.8% 0.3% Sedan SUV MPV Cross-over Minibus Others Figure 31: Preference on engine size for first vehicle vs. second vehicle in China % % % 26.3% % 2 7.1% 1 1.2% 7.1% 0.6% % 1.2% 0.4% 0.4% <1.0L L L L L L >4.0L 1st vehicle 2nd vehicle 1st vehicle 2nd vehicle Source: Sinotrust, Credit Suisse estimates Source: Sinotrust, Credit Suisse estimates China Auto Sector 12

13 Figure 32: Preference on price of first vehicle vs. second vehicle in China % % 22.6% % 7.5% % 0.7% 3. <Rmb 30k Rmb 30-50k Rmb k Rmb k Rmb k >Rmb 300k 1st vehicle 2nd vehicle Source: Sinotrust, Credit Suisse estimates New model launches to intensify competition Attracted by the lucrative SUV market, many automakers launched their new models to gain market share. Generally, JVs have launched more new models than domestic brands, expanding their market share since 2008 (Figure 33). Four new models were launched in 4Q12 and over 20 new models are in the 2013 pipeline across different segments (Figure 34 through to Figure 38). In the high-end and luxury segments, Audi Q3 should become a strong competitor for the BMW X1, while the Land Rover Freelander 2 and Volvo XC60 will likely compete with each other starting 4Q13 (Figure 35). In the mid-to-high end segment, new models account for almost 4 of the total number of models (Figure 36). JV producers are major players in this segment and we expect their average margins to decline as competition intensifies. Although new models also account for around 4 of total models in the mid-end segment (Figure 37), we believe that Great Wall will retain its position as the No.1 best-selling brand. Its competitors in the mid-end segment are mainly domestic players not specialized in SUVs and with tiny market shares (Figure 38). Over 20 new models are due to be launched in 2013, which will intensify competition in the SUV segment Figure 33: SUV sales by automaker type % 45% 4 38% 48% 59% 57% 62% 59% 61% 63% 66% E 2013E 2014E 2015E JVs Domestic brands Source: CAAM, Credit Suisse estimates China Auto Sector 13

14 Figure 34: Launch time of new models Buick Encore Changan CS35 Mitsubishi ASX Beijing B40 Ford Kuga Peugeot 3008 JAC Rein II Geely Emgrand SX7 Zotye T600 Audi Q3 Benteng X80 Yongman T5 Mitsubishi Pajero Sport Mazda CX-7 Geely Emgrand EX8 Ford Ecosport Geely Emgrand EX6 Mazda CX-5 Chery T21 Great Wall H2 Geely Gleagle GX5 Haima C2 Beijing SC20 Volvo XC60 Land Rover Freelander 2 Skoda Yeti Chevrolet Orlando - 100, , , , , , ,000 4Q12 1Q13 2Q13 3Q13 4Q13 RMB New models Source: Company data, Credit Suisse estimates Figure 35: Price range of China-made SUV models in high-end and luxury segments 200, , , , , , ,000 Toyota Prado Nissan Murano Volvo XC60 Benz GLK Audi Q5 Land Rover Freelander 2 BMW X1 Toyota Highlander Audi Q3 Mitsubishi Pajero Mitsubishi Pajero Sport RMB Existing models New models Source: Company data China Auto Sector 14

15 Figure 36: Price range of China-made SUV models in mid-to-high end segment 100, , , , , ,000 Mazda CX-7 VW Tiguan Ford Kuga Chevrolet Captiva Nissan X-Trail Roewe W5 Nissan Paladin Mazda CX-5 Luxgen 7 Toyota RAV4 Honda CR-V Skoda Yeti Kia Sportage R Hyundai IX35 Peugeot 3008 Changfeng Leopard CS7 Chevrolet Orlando Hyundai Tucson Nissan Qashqai Kia Sportage Trumpche GS5 Benteng X80 Hawtai Boliger Mitsubishi ASX Buick Encore Jiangling Yusheng Geely Emgrand EX8 RMB Existing models New models Source: Company data Figure 37: Price range of China-made SUV models in mid-end segment 75, , , , , ,000 Beijing B40 Changfeng Leopard CT5 Zhonghua V5 Dongfeng Oting Great Wall H5 Landwind X Series Haima 7 Great Wall H6 Great Wall H3 Ford Ecosport Yongman T5 JAC Rein II Chery T21 BYD S6 Geely Gleagle GX7 Geely Emgrand SX7 Zotye T600 JAC Rein Huanghai V3 Chery Tiggo Great Wall H2 RMB Existing models New models Source: Company data China Auto Sector 15

16 Figure 38: Price range of China-made SUV models in low-end segment 50,000 75, , ,000 Hawtai Santa Fe Haima C2 Changan CS35 Lifan X60 Geely Emgrand EX6 Zotye 5008 Beijing SC20 RMB Existing models New models Source: Company data Limited competition in mid-to-low end segment Top JVs have equal strengths in the mid-to-high end SUV segment (Figure 39). Many of them are launching new models in 2013 and competition would become tougher. In contrast, the mid-to-low end SUV segment is dominated by Great Wall Motor (Figure 40). More than ten new models will be launched in 2013 in this segment. However, we believe Great Wall will be able to keep its leadership given its traditional strength in SUV and its good brand image. We expect the mid-to-low end segment to have less intensive competition but higher sales growth potential, which will mainly benefit Great Wall Motor. We believe Great Wall will continue to lead the mid-tolow end SUV segment due to lack of strong competitors Figure 39: Market share in mid-to-high end SUV segment Jan-Nov E Others 11% SH VW 19% Others 2 SH VW 17% FAW Toyota 1 DF Yueda Kia 12% DF Honda 17% FAW Toyota 9% DF Honda 16% DF Nissan 14% BJ Hyundai 17% DF Yueda Kia 11% DF Nissan 12% BJ Hyundai 15% Source: CAAM, Credit Suisse estimates Figure 40: Market share in mid-to-low end SUV segment Jan-Nov E Hawtai 4% Geely 4% Brilliance Auto 6% Jiangnan 6% Others 19% BYD 11% Chery 14% Great Wall 36% Hawtai 4% Geely 8% Brilliance Auto 5% Jiangnan 7% Others 21% BYD 9% Chery 13% Great Wall 33% Source: CAAM, Credit Suisse estimates China Auto Sector 16

17 Mid-to-high end segment: Intensifying competition Slowdown of PV sales China s auto sales slowed down after its high growth of (Figure 41). In the first 11 months of 2012, China s auto sales grew 3.9% YoY, rebounding a little from 2.6% for We expect its entire 2012 sales to reach around 19 mn units. The YoY growth rate of its quarterly sales has dropped to single digits since 1Q11 when most of the government s stimulus policies faded (Figure 42). Mid-to-high end PV sales have closely followed the industrial trend in recent years (Figure 43). We expect them to keep growing in single digits by 2015 (Figure 43). Given the slowdown of China s PV sales, we believe the mid-to-high end segment will grow in the single digits by 2015 Figure 41: Auto sales of major countries 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 '000 units E China India Japan Western Europe Russia USA (Light vehicles) Brazil Source: CAAM, Gasgoo, Wind, Credit Suisse estimates Figure 42: China s passenger vehicle (PV) sales ('000 units) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 26% 25% 17% 17% 9% 8% 7% 8% 3% 2% -2% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E YoY China's PV sales (LHS) China's PV sales YoY (RHS) Source: CAAM, Credit Suisse estimates China Auto Sector 17

18 Figure 43: PV sales comparison by segment % 6 53% % 42% 33% 25% 25% 29% 22% 22% 21% 2 7% 1 1 7% 9% 5% E 2013E 2014E 2015E -2 Mid-to-high end YoY Luxury YoY Ultra-luxury YoY Total PV YoY Source: Roland Berger, Credit Suisse estimates Intensifying competition in PV segment China s auto sector is highly competitive and original equipment manufacturers (OEM) are flooding the market. There are more than 50 auto makers in China and the industry is relatively fragmented. Foreign brands dominate, with their Chinese JVs accounting for almost 7 of China s PV sales. Among them, GM and Volkswagen had a joint market share of around 35% in the first 11 months of 2012 (Figure 44). Their market shares have improved quickly in recent years, as Japanese brands lost market share in the mid- to high-end segment, especially after the Diaoyu islands dispute in mid-september The joint market share of domestic auto brands has kept decreasing in recent years, mainly due to weakening low-end PV sales, and is now less than one-third in Meanwhile, auto prices have also kept falling in recent years due to intensifying competition, while luxury auto prices are much more resilient compared with other segments (Figure 46). JVs are gaining market share in China s PV segment, while auto prices are declining due to intensifying competition. Figure 44: PV market share of major foreign auto brands in China 2 18% 16% 14% 12% 1 8% 6% 4% 2% GM Volkswagen Nissan Hyundai Toyota Honda Ford Kia PSA Jan-Nov 2012 Source: CAAM, Credit Suisse estimates China Auto Sector 18

19 Figure 45: PV market share of major domestic auto brands in China 6% 5% 4% 3% 2% 1% Chery Geely Great Wall BYD Brilliance Changan Jianghuai Lifan Jan-Nov 2012 Source: CAAM, Credit Suisse estimates Figure 46: Change of auto prices by segments (Jan 2008 price = 100) Jan-08 Jun-08 Dec-08 Jun-09 Nov-09 May-10 Nov-10 May-11 Oct-11 Apr-12 Oct-12 PV Mini Small Medium Class High Class Luxury Source: Cheshi, Credit Suisse estimates Japanese brands to regain market share in 2013 Probably due to conservative market strategies, Japanese auto brands market shares have kept declining in recent years. Moreover, they suffered strikes from the Japanese earthquake in March 2011 and the Diaoyu island dispute in September Top Japanese auto brands such as Nissan, Toyota, Honda, and Mazda saw their Sep-Nov 2012 sales decline sharply from the previous year (Figure 47). Japanese brands joint market share in China has fallen below 2 in the first 11 months of 2012 from more than 22% in 2010 (Figure 48). The market share losses of Japanese brands are mainly the gains of JV brands especially German brands such as Volkswagen (Figure 48). Domestic players have not gained much, as they do not have intensive overlap with Japanese brands, which primarily focus on the mid-to-high end segment. December 2012 shipment of major Japanese auto brands rebounded to around 75-85% of their December 2011 levels, suggesting a recovery is on track (Figure 47). Through our channel checks, we also learn that inventories at dealers have dropped to months from their peaks at 2-3 months in October Retail of Japanese auto brands in December 2012 has also We expect Japanese brands new models to help them regain market share in 2013 China Auto Sector 19

20 recovered to similar level as in December Brands, such as Nissan and Honda, plan to launch their new generation of sedans in 2013, which we expect will help them improve sales and regain market share. We expect these models to have lower ASPs than existing ones, which will not only intensify competition in the mid-to-high end segment, but also post high price pressure on the mid-end segment. However, luxury brand economy models are priced close to Japanese brands high-end models. Facing this top-down price pressure from the luxury segment, we expect Japanese brands to encounter a tough recovery in Figure 47: China sales of major Japanese auto brands China sales YoY (%) Sep-12 Oct-12 Nov-12 Dec Nissan Toyota Honda Source: Company data, Credit Suisse estimates Figure 48: Foreign brands PV market shares in China 25% 2 15% 1 5% Jan-09 May-09 Oct-09 Feb-10 Jul-10 Dec-10 Apr-11 Sep-11 Jan-12 Jun-12 Nov-12 Japanese German American Korean French Source: CAAM Low-end segment is under pressure Usually PVs with an engine size of less than 1.6L are classified as low-end vehicles in China. They achieved impressive sales growth in 2009, outpacing the country s PV sector (Figure 49). However, since 2010 the sales of low-end PVs have generally underperformed the sector (Figure 49). And we expect the share of low-end sedans (including A00, A0 and A classes) in China s total PV sales to drop to around 51% in 2012 from over 53% in 2006 (Figure 50). Given the slowdown in sales, we believe the peak period of strong demand growth for low-end vehicles has already passed. Automakers with a primary focus on low-end sedans, such as Geely and BYD, are therefore likely to be seriously affected. Low-end PV sales is slowing down as demand weakens. China Auto Sector 20

21 Jan, 2009 Apr, 2009 Jul, 2009 Oct, 2009 Jan, 2010 Apr, 2010 Jul, 2010 Oct, 2010 Jan, 2011 Apr, 2011 Jul, 2011 Oct, 2011 Jan, 2012 Apr, 2012 Jul, January 2013 Figure 49: China s low-end PV sales growth vs. total PV sales growth y-y Source: CEIC, Credit Suisse estimates Figure 50: China PV sales by class 10 Engine <=1.6L Total PV % 25% 25% 28% 31% 3 31% 2% 3% 3% 1% 2% 2% 3% 18% 2 19% 16% 15% 15% 15% % 35% 38% 36% 37% 38% % 14% 12% 11% 1 11% 1 6% 6% 6% 5% 5% 5% 4% E A00 A0 A B C Others PVs * A00, A0 and A classes are usually classified as low-end sedans; B class is usually classified as mid-end sedans; C class is usually classified as mid- to high-end sedans Source: CAAM, Credit Suisse estimates Given cooling sales in China s sedan market, major sedan manufacturers are fighting for market share, which is likely to become more difficult, as all the other rivals are increasing their efforts. Domestic sedan makers face more pressure from foreign brands and their JVs. Almost all of their market shares in China s sedan segment kept declining since 2009 (Figure 51). In the past few years, many JVs have launched self-owned brands using their old mid-end platforms (Figure 52). These JV self-owned brands have as good a product quality as their mid-end parents. However, most of them are priced below Rmb100,000, which is the traditional price range for low-end vehicles. We believe the top-down competition from JVs self-owned brands will continue to compress margins for domestic sedan makers such as Geely and BYD. JV self-owned brands are positing top-down competition pressure on low-end segment China Auto Sector 21

22 Figure 51: Sedan market shares of top domestic automakers % % 4.2% 3.7% 3.4% 3.2% 0.8% 2.1% 0.2% Geely Auto Chery Auto BYD Changan Auto Great Wall Motor 3.5% 2.4% 1.8% 1.8% 1.7% Tianjin FAW Auto FAW Car 0.2% 1.2% Jianghuai Auto Jan-Nov 2012 Source: CAAM, Credit Suisse estimates Figure 52: Official prices of major JV self-owned brands Self- Lowest Highest Lowest Highest owned price price Original price price Manufacturer brand (Rmb) (Rmb) platform (Rmb) (Rmb) GAC Honda Linian 69,800 99,800 Honda City 96, ,800 SH GM Wuling Baojun 62,800 95,800 Chevrolet Spark 77,800 88,800 DF Nissan Venucia 67,800 83,800 Nissan TIIDA 105, ,800 DF Honda CIIMO 111, ,800 Honda Civic 131, ,800 Source: Company data, Credit Suisse estimates China Auto Sector 22

23 Luxury segment: Rising alone with wealth in China Low luxury auto penetration rate Luxury PVs contribute to about 7% of total PV sales in China. This compares with 13% in the US and more than 2 in Europe (Figure 53). Luxury PVs account for about 9% of total automobiles in China, lower than most mature auto markets such as the US, Germany and the UK (Figure 54). Therefore, we believe that there is still large potential for luxury auto sales growth in China. We expect the luxury segment to keep growing at 20-25% p.a. by 2015 (Figure 56,Figure 57). We believe luxury auto sales have high growth potential in China mainly due to a low penetration rate Figure 53: Luxury* PV sales as % of total PV sales (2011) 35% Figure 54: Luxury* PV as % of total number of autos (2011) 35% 3 29% 3 29% 25% 23% 25% 2 15% 1 7% 13% 1 9% 2 15% 1 9% 11% 15% 16% 5% 5% 3% China US** Japan Germany Russia UK China US Japan Germany Russia UK Luxury* PV sales as % of taotal PV sales Luxury* vehilce as % of total number of automobiles * Includes both luxury and ultra-luxury models. * Includes both luxury and ultra-luxury models ** PV sales here refer to light vehicle sales. Source: SXRB, Credit Suisse estimates Source: CPCA, LMC Automotive, AEB, Credit Suisse estimates Growing wealth strengthens luxury auto demand Figure 55: Growth of number of millionaires in China % '000 persons 1,200 72% 964 1, % % 8% H12-12% -6% Number of millionaires (RHS) Number of millionaires y-y (LHS) Source: Capgemini, Merrill Lynch Global Wealth Management, RBC Wealth Management, Citi Private Bank, Credit Suisse Research Institute China Auto Sector 23

24 Figure 56: Luxury PV sales in China '000 Units 2,500 2,000 76% 1,877 2, ,500 1, % 22% % 7% % 29% % 718 1,551 42% 1,272 1,017 25% 22% 21% 2 5% 7% 1 1 9% E 2013E 2014E 2015E Luxury PV sales (LHS) Luxury PV sales YoY (RHS) Total PV sales YoY (RHS) -2 Source: Roland Berger, Credit Suisse estimates Figure 57: Ultra-luxury PV sales in China '000 Units % 79 79% 77% % 53% % 33% % 22% % 5% 7% 1 1 9% % E 2013E 2014E 2015E Ultra-luxury PV sales (LHS) Ultra-luxury PV sales YoY (RHS) Total PV sales YoY (RHS) Source: Roland Berger, Credit Suisse estimates Replacement demand drives luxury auto sales Most Chinese auto buyers are still first-time buyers and contributed more than 9 of total auto sales in 2011 (Figure 58). As the auto stock ages in China, people who bought their cars during should be looking to make a replacement purchase in the next few years. This trend may continue and we believe that replacement demand will gradually become the major driver of China s auto sales in the next 5-10 years. It is difficult to describe the Chinese customers affinity for luxury goods, such as luxury cars. In particular, they love SUVs or luxury cars for their second car. Since about 2003, China's affluent population has completely overtaken Americans with similar incomes in the purchase of luxury vehicles (Figure 59). For the same income bracket per 1,000 households, Chinese customers purchase nearly six times as many luxury cars as Americans do. We believe replacement demand will boost luxury auto sales in China, stronger than it did in other developed countries. We believe replacement demand will be the major driver of luxury auto sales in China China Auto Sector 24

25 Figure 58: New demand vs. replacement demand % 5% 25% 17% 5 76% 87% 91% 94% 95% 75% 83% 5 24% 13% 9% China (2010) China (2011) India Korea USA Japan UK German Replacement demand 1st time demand Source: JD Power, Wardsauto, China Auto Market Figure 59: Luxury car sales per 1,000 households with annual disposable incomes over US$100,000 Unit US Unit China Source: Euromonitor, US Census Bureau, HIS, World Bank, TNS, Credit Suisse estimates Proliferation of economy models Many luxury brands have launched their economy models with affordable prices. Some of them are selling below Rmb300,000, which is the traditional price range for the mid-to-high end segment (Figure 60 through to Figure 63). Major economy models, such as the Mercedes-Benz C class, BMW 3 series, Audi A4L and Volvo S60, are also the best-selling models for these luxury brands. We believe their good brand image and attractive prices will enable them to expand their customer base and gain market share from mid-to-high end players. This should fuel their sales growth in the next 3-5 years. Luxury brands economy models will help them to boost sales and gain market share China Auto Sector 25

26 Figure 60: Official prices of luxury brands economy models vs. key mid-to-high end models 100, , , , , , , , , , ,000 BMW New 3 Series Volvo S60 BMW 3 Series Mercedes-Benz C Class Audi A4L Nissan Teana Buick LaCrosse Honda Accord Toyota Camry VW Passart RMB Source: Company data Figure 61: Nov 12 retail prices of luxury brands economy models vs. key mid-to-high end models 100, , , , , , , , , , ,000 BMW New 3 Series Volvo S60 BMW 3 Series Mercedes-Benz C Class Audi A4L Nissan Teana Buick LaCrosse Honda Accord Toyota Camry VW Passart RMB Source: Channel checks with dealers China Auto Sector 26

27 Figure 62: Comparison among cheapest economy models of major luxury brands Model Official price ( 000 Rmb) Dec-12 Retail price ( 000 Rmb) Mercedes-Benz C Class BMW 3 Series BMW New 3 Series (Long-wheelbase) Audi A4L Volvo S60 C180 CGI Classic 318i Advance 320Li Fashion 30TFS I MT Comfort 2.0T Advance Size (m) 4.581/1.770/ /1.817/ /1.811/ /1.826/ /1.865/1.484 Wheelbase (m) Trunk volume (litre) Tank volume (litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 115/ / / / /5000 Max toque (n.m/rpm) 250/ / / / / Acceleration km/h (seconds) Transmission 7AT 6AT 8AT 6MT 6AT Fuel consumption (L/100km) Warranty 2 years 2 years 2 years 2 years 2 years or 100,000 km Emission standard Euro IV Euro IV Euro IV National IV National IV Source: Xcar, Channel checks with dealers Figure 63: Major luxury models with retail prices below Rmb300,000 Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Brand Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) Mercedes-Benz C180K CGI Classic C200 CGI C200 CGI Fashion BMW 318i 2.0 AT Advance Audi A4L TFSI MT Comfort A4L TFSI CVT Comfort A4L TFSI CVT Standard A4L TFSI CVT Comfort Volvo S60 2.0T Advance S60 2.0T T5 Smart S60 2.0T T5 Comfort S60 2.0T DCTT5 Smart S60 2.0T DCTT5 Comfort S60 1.6T DCTDRIVe Smart S60 1.6T DCTDRIVe Comfort S60 1.6T DCTDRIVe Smart S60 2.0T DCTT5 Comfort S60 2.0T DCTT5 Delux Lexus CT200h 1.8 CVT Elite CT200h 1.8 CVT Advance Source: Channel checks with dealers China Auto Sector 27

28 Sep-10 Dec E 2013E 2014E 2015E 2016E 08 January 2013 Restrictive policies won t hurt luxury segment Beijing and Guangzhou are adopting restrictive policies on auto sales to control congestion. Beijing announced the most strict restrictive policies on auto license plates in December The new measures set a 2011 annual quota for Beijing s new PV licenses of only 240,000 units, compared with its 2010 total auto sales of around 900,000 vehicles. Quotas for new car licenses are distributed by lottery draw, while upgrading/replacement purchases are not regulated by the new measures once an owner disposes of his/her old car. With this new license quota limit, car growth in Beijing has slowed down since 2011 (Figure 64). Accordingly, the CAGR for total number of autos in Beijing is expected to drop to about 3.7% in E from over 11% for It is also estimated that only one person in 20 can win the quota to buy a new car. Moreover, people with that precious quota are less likely to buy a cheap car, which in turn stimulates luxury auto sales. Further, luxury autos are bought by Chinese customers mainly as status symbols rather than a mode of transportation. Although some of the potential buyers may not have a valid Beijing license to bypass the quota application, they are still allowed to buy cars with non-beijing licenses with some restrictions on driving areas. Guangzhou s government announced its own auto purchase restriction policy on 30 June In the coming year, the number of incremental small- and medium-sized passenger cars in Guangzhou is capped at 120,000 units, translating into a monthly quota of 10,000 units. However, data shows that 226,000 vehicles were registered with license plates in Guangzhou in 2011, equivalent to around 19,000 units per month. As in Beijing, we believe auto buyers are more likely to choose high-end models, boosting sales of luxury autos. We believe restrictive policies in Tier 1 cities will create opportunities for luxury auto sales given precious quota and licences Figure 64: Number of automobiles in Beijing million vehicles m (2010 Sep) m (2010 Dec) 6 0 Source: Beijing Municipal Commission of Transport China Auto Sector 28

29 Asia Pacific / China Great Wall Motor Rating OUTPERFORM* [V] Price (04 Jan 13, HK$) Target price (HK$) 30.00¹ Upside/downside (%) 18.3 Mkt cap (HK$ mn) 84,052 (US$ 10,845) Enterprise value (Rmb mn) 58,413 Number of shares (mn) 3, Free float (%) week price range ADTO - 6M (US$ mn) 16.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Research Analysts Jack Yeung jack.yeung@credit-suisse.com Price (LHS) Rebased Rel (RHS) Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 07/01/13 On 07/01/13 the spot exchange rate was HK$7.75/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) (2333.HK / 2333 HK) Greatly moving ahead Initiate with OUTPERFORM. We initiate coverage on Great Wall Motor (GWM) with an OUTPERFORM rating and a target price of HK$30.00, which implies 18.3% potential upside. GWM is the largest SUV maker in China with a market share around 13%. It is also China s largest pick-up maker, contributing 33% of the country s total pick-up sales. Strong SUV demand. China s SUV segment is growing much faster than its other PV segments. It contributes 13% of the country s total PV sales vs. 32% in the US, implying high growth potential for SUV sales in China. Many Chinese car owners are choosing SUVs as their second vehicle. Therefore, we expect upgrade and replacement demand to become the major engine for SUV sales in the next few years. As the largest SUV maker in China, we believe GWM will be the major beneficiary of this strong SUV demand. New plant to support sales. GWM s H6 is facing capacity constraints, with a waiting list of around 20 days. GWM will open its second plant in Tianjin in 2H13, adding about 100,000 units of initial capacity. C50 will be transferred to the new plant to leave the existing plant purely for H6 production. We believe this arrangement will lay a solid foundation for GWM s SUV sales in 2013 and GWM also plans to launch five new models in 2H13, which we believe will enhance its leading position in this segment. Key downside risks include: (1) tougher-than-expected competition in the SUV segment; (2) slower-than-expected ramp up of its new capacity. Valuation. China s SUV sales are growing at more than 2 per year, similar to its luxury auto sales. We believe that GWM is well positioned in the SUV sector and should trade at 13x 2013E EPS, a premium to its Chinese peers (10x 2013E EPS) given its higher-than-peers sales growth rate, margins as well as strong product mix. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 30, , , ,770.0 EBITDA (Rmb mn) 4, , , ,098.9 EBIT (Rmb mn) 3, , , ,559.8 Net profit (Rmb mn) 3, , , ,140.7 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 29

30 Greatly moving ahead No.1 SUV producer Hover series has been the No.1 best-selling SUV brand in China since Its first sedan-chassis SUV H6 was launched in August Its sales hit 15,800 units in November 2012, versus less than 6,000 in January Despite price cuts offered by its competitors, H6 s prices have stayed resilient throughout the year and customers still need to queue up for the vehicle. We believe H6 s strong sales is mainly due to GWM s traditional strength in SUV production. We believe that GWM will maintain its leadership in the SUV segment over the next few years and be the major beneficiary of the strong SUV demand. Dominant pick-up market share GWM is also China s largest pick-up producer, contributing about a third of the country s total pick-up sales. In particular, its key pick-up brand, Wingle, has maintained its position as the No.1 best-selling pick-up for 15 years. Given GWM s dominant share in the pick-up segment, we believe other players will not be able to challenge its leadership in the next few years. Moreover, we believe demand for pick-up trucks in inland regions will maintain strong growth in the next few years with GWM being the largest beneficiary. Expanding capacity + new models GWM s second plant in Tianjin will start operations in 2H13, adding about 100,000 units of capacity by end C50 will be transferred to the second plant and the existing plant will be used to purely produce H6. We believe the capacity expansion will lay a solid foundation for GWM s sales growth in the next few years. The company also plans to launch five new models in 2H13. We believe they will help to enhance its sales and improve its ASP. In particular, H8 is GWM s first SUV model priced above Rmb150,000, which we expect to help improving its brand image and paving the way for its further expansion. Solid exports and sedan sales GWM is the fifth-largest auto exporter in China. SUVs and sedans have become its major export drivers in recent years. Its H6 has received the European Union s market entry permit in December 2012, which would boost its exports to European markets starting from Its sedan exports grew the fastest among all segments in 2012 and we expect it to remain solid in the next few years. GWM s two key sedan models the C30 and C50 are very competitive in the low-end segment. We believe the sportive versions C30 and C50 to be launched in 2013 will enhance GWM s sedan sales. We also expect sedans to be a stable sales engine for the firm in the next two years. Initiate with an OUTPERFORM We initiate coverage on GWM with an OUTPERFORM rating given its leading position in China s SUV segment. We believe it is well positioned to cater to strong SUV demand growth in China. Our target price for GWM is HK$30.00 based on 13x 2013E EPS. We believe it deserves to trade at premium toward its domestic peers (10x 2013E EPS), given strong sales volume in SUV, leading position in pick-up tracks as well as higher than industry average margins. Downside risks include tougher-than-expected competition in the SUV segment and slower-than-expected ramp-up of GWM s new capacity. We believe GWM will be able to maintain its leadership in China s SUV market We believe GWM will maintain its No.1 position in the pick-up segment and benefit from rising demand in inland regions We expect GWM s expanding capacity and new models to enhance its position in the SUV segment We expect solid export and sedan business to be GWM s stable sales engine in the next two years Initiate with an OUTPERFORM with TP based on 13x2013E EPS China Auto Sector 30

31 Great Wall Motor 2333.HK / 2333 HK Price (04 Jan 13): HK$25.35, Rating:: NEUTRAL [V], Target Price: HK$30.00, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside E auto sales: 750,000 units Central Case E auto sales: 701,000 units Downside E auto sales: 650,000 units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 30,089 41,600 47,220 54,770 Cost of goods sold 22,594 30,889 35,212 41,021 SG&A 2,477 3,203 3,636 4,217 Other operating exp./(inc.) EBITDA 4,641 6,945 7,920 9,099 Depreciation & amortisation ,247 1,539 EBIT 3,967 6,010 6,673 7,560 Net interest expense/(inc.) (22.9) (18.4) (30.2) (42.3) Non-operating inc./(exp.) Associates/JV Recurring PBT 4,133 6,228 6,929 7,865 Exceptionals/extraordinaries (2.2) Taxes 620 1,059 1,178 1,573 Profit after tax 3,511 5,169 5,751 6,292 Other after tax income Minority interests Preferred dividends Reported net profit 3,426 5,045 5,613 6,141 Analyst adjustments Net profit (Credit Suisse) 3,426 5,045 5,613 6,141 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT 3,967 6,010 6,673 7,560 Net interest Tax paid (620) (1,059) (1,178) (1,573) Working capital 303 1, Other cash & non-cash items 799 1,135 1,474 1,802 Operating cash flow 4,449 7,167 7,373 8,334 Capex (3,759) (4,000) (3,800) (3,500) Free cash flow to the firm 690 3,167 3,573 4,834 Disposals of fixed assets Acquisitions (7.4) Divestments 1,802 Associate investments Other investment/(outflows) (1,700) Investing cash flow (3,664) (4,000) (3,800) (3,500) Equity raised 3,894 Dividends paid (663.4) (347.4) (511.5) (569.1) Net borrowings 4.8 Other financing cash flow Financing cash flow 3,456 (347) (511) (569) Total cash flow 4,241 2,820 3,061 4,265 Adjustments (7.9) Net change in cash 4,233 2,820 3,061 4,265 Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 6,306 9,126 12,187 16,452 Current receivables 10,033 12,296 13,958 16,189 Inventories 2,777 3,554 4,052 4,720 Other current assets 1,259 1,257 1,257 1,257 Current assets 20,374 26,235 31,454 38,619 Property, plant & equip. 7,392 10,457 13,010 14,971 Investments Intangibles 1,871 1,871 1,871 1,871 Other non-current assets 3,420 3,420 3,420 3,420 Total assets 33,135 42,060 49,833 58,959 Accounts payable 10,011 12,448 14,167 16,476 Short-term debt Current provisions Other current liabilities 4,702 6,370 7,184 8,278 Current liabilities 14,714 18,818 21,351 24,754 Long-term debt Non-current provisions Other non-current liab. 1,400 1,400 1,400 1,400 Total liabilities 16,113 20,218 22,751 26,154 Shareholders' equity 16,396 20,929 25,973 31,491 Minority interests Total liabilities & equity 33,135 42,060 49,832 58,958 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Auto sales volume (Unit) 463, , , ,000 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 2,814 3,042 3,042 3,042 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) (37.0) (41.8) (45.0) (50.2) Net debt/ebitda (x) (1.36) (1.31) (1.54) (1.81) Interest cover (x) (173) (327) (221) (179) Source: Company data, Thomson Reuters, Credit Suisse estimates MF P/E multiple Source: IBES 12MF P/B multiple China Auto Sector 31

32 No.1 SUV producer GWM is China s largest SUV producer, with a current market share around 13%, much higher than other top players (Figure 65). Its SUV sales have maintained strong growth in recent years, generally outperforming the industry average and major JV SUV makers (Figure 66, Figure 67 and Figure 68). In particular, its Hover series have been ranked the No.1 best-selling SUV in China since 2009, contributing to about half of its SUV sales and more than 2 of its total auto sales. Its first sedan-chassis Hover SUV H6 was launched in August 2011, mainly competing with domestic SUV models such as the BYD S6, Geely GX7 and Chery Tiggo (Figure 70). Despite price cuts offered by these domestic models, the H6 has the most resilient retail prices and customers still need to queue for the vehicle. H6 sales hit 15,800 units in November 2012 versus less than 6,000 in January Its strong sales are probably due to its outstanding quality and GWM s good brand image in the domestic market. Given China s rising SUV demand and GWM s traditional strength in SUV production, we believe it will maintain its leadership in the SUV segment in the next few years. GWM is China s No.1 SUV makers. We believe it will maintain its leadership in the SUV segment in the next few years. Figure 65: Top-15 SUV producers in China Company JV/Indigenous 2011 sales Market share (%) Jan-Nov 12 sales Market share (%) Key model Great Wall Motor Indigenous 164, , Hover Shanghai VW JV 129, , Tiguan Dongfeng Honda JV 160, , CR-V Beijing Hyundai JV 154, , Tucson, IX35 Dongfeng Nissan JV 140, , Qashqai, X-Trail FAW Toyota JV 129, , RAV4 Chery Auto Indigenous 115, , Tiggo Dongfeng Yueda KIA JV 109, ,837 Sportage, Sportage 5.9 R FAW VW JV 58, , Audi Q5 BYD Indigenous 60, , S6 GAC Toyota JV 94, , Highlander Jiangnan Auto Indigenous 73, , Zotye T600 Brilliance Auto Indigenous 1, , Zhonghua V5 Hawtai Auto Indigenous 18, , Santa Fe Dongfeng Yulong JV 7, , Luxgen 7 Source: CAAM, Credit Suisse estimates Figure 66: SUV market share of top producers 16% 14% 12% 1 8% Figure 67: SUV sales of top producers ('000 units) % 4% 2% Great Wall Motor Shanghai VW Dongfeng Honda Beijing Hyundai FAW Toyota - Great Wall Motor Shanghai VW Dongfeng Honda Beijing Hyundai FAW Toyota E Source: CAAM, Credit Suisse estimates E Source: CAAM, Credit Suisse estimates China Auto Sector 32

33 Figure 68: Great Wall s SUV sales vs. China SUV sales % % 10 88% 46% 5 29% 32% 2 8% E 2013E 2014E Figure 69: Great Wall s revenue by product 10 4% 4% 1% 1% 1% 1% 1% 5% 9 28% 8 27% 34% 25% 23% 21% 7 47% % 4 46% 4 55% 59% 62% % 35% 1 25% 24% 19% 17% 16% E 2013E 2014E China SUV sales YoY Great Wall Motor SUV sales YoY Pick-up truck SUV Sedan Others Source: CAAM, Great Wall Motor, Credit Suisse estimates Source: Great Wall Motor, Credit Suisse estimates Figure 70: Comparison of Great Wall H6 and its major competitors Model Great Wall H6 BYD S6 Geely GLEagle GX7 Chery Tiggo 1.5TMT Urban 2.0MT Delux 2.0MT Comfort 2.0MT Elite Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.640/1.825/ /1.855/ /1.833/ /1.765/1.705 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 110/ / / /5750 Max toque (n.m/rpm) 210/ / / / Acceleration km/h (s) Transmission 6MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 5 years or 100,000km 4 years or 100,000km 3 years or 100,000km 2 years or 60,000km Emission standard National IV National IV National IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 33

34 Dominant in pick-up segment GWM is also China s largest pick-up producer with a market share of around 33% (Figure 72). Its Wingle series has been the No.1 best-selling pick-up for 15 years, with sales almost equivalent to the aggregate pick-up sales of the No.2 and No.3 players JAC and Zhengzhou Nissan (Figure 71). Given GWM s dominant share in the pick-up segment, we believe that other players would not be able to challenge its No.1 position in the next few years. Pick-up has also shown stronger growth potential than other CV products in China. Pick-up sales grew by around 7% YoY in the first ten months of 2012, the highest in the CV segment (Figure 73). More than half of the pick-ups are priced below Rmb80,000, and we believe domestic automakers led by GWM will continue to dominate the market (Figure 74 and Figure 75). Except for several affluent coastal regions, pick-up demand primarily came from inland regions (Figure 76). These regions have higher GDP growth rates than the national average and are the major engine of China s urbanization. We believe that demand for pick-ups in these regions will remain strong in the next few years and the company is expected to be the largest beneficiary. GWM is also China s No.1 pick-up maker. We believe it will benefit from strong pickup demand in inland regions. Figure 71: Pick-up market share of top producers 35% 3 25% 2 15% 1 5% Figure 72: Pick-up sales of top producers ('000 units) Great Wall Motor JAC Zhengzhou Nissan Zhongxing Foton - Great Wall Motor JAC Zhengzhou Nissan Zhongxing Foton E E Source: CAAM, Credit Suisse estimates Figure 73: China s CV sales by segment ('000 units) MDT and HDT -24.4% YoY % YoY 13 Medium and large Buses Source: State Information Centre % YoY % YoY % YoY 228 Light CVs Pick-up Minibus 2011 sales Jan-Oct 2012 sales Source: CAAM, Credit Suisse estimates Figure 74: Price distribution of pick-ups % 13.4% 12.9% 3.9% 2.2% 2.7% 6.1% 5.5% 8.5% 25.1% 23.2% 20.5% 6.6% 20.4% 26.3% 18.1% 17.4% 11.7% 24.4% 20.3% 19.2% Below RMB60k RMB60k-69k RMB70k-79k RMB80k-89k RMB90k-100k RMB100k-110k Above RMB110k Source: Sinotrust China Auto Sector 34

35 Figure 75: Comparison of Great Wall Wingle and its major competitors Model Great Wall Wingle Zhongxing Grandtiger Dongfeng Ruiqi Huanghai Dachaishen 2.4MT Biz Delux 2.4MT 4G69 2.4MT Standard 2.4MT 4WD Delux Official price ( 000 Rmb) Dec-12 retail price ('000 Rmb) Size (m) 5.020/1.720/ /1.750/ /1.690/ /1.850/1.760 Wheelbase (m) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 100/ / / /5250 Max toque (n.m/rpm) 200/ / / / Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 2 years or 50,000km 2 years or 50,000km 2 years or 60,000km 2 years or 50,000km Emission standard National IV National III National IV + OBD National IV Source: Xcar, Channel checks with dealers Figure 76: Distribution of pick-up sales in China Annual sales (units) Source: CPCA, CAAM, Credit Suisse estimates China Auto Sector 35