Long-term growth prospects for China’s
passenger car market remain strong …
 … but car sales growth may disappoint
in 2012, on weak consumer sentiment
and higher savings
 We like selected auto stocks; OW(V)
Great Wall and Brilliance; initiate UW(V)
on GAC; downgrade Geely to UW(V)
Short-term headwinds. The long-term outlook for China’s
passenger car sales remains robust, but the market faces a
slowdown in the short term. Consumer confidence is weak,
while the trend in money supply shows consumers are
probably saving more and spending less. As a result, we see
passenger car sales volume growth slowing to 7.2% in 2012,
behind GDP growth, potentially disappointing the market.
Capacity concerns overdone. On the other hand, we think
the risk of overcapacity is low in 2012. While designed
capacity is set to rise 20% for 2012, 60% of it will come on
stream only in 2H. This means the effective capacity increase


for 2012 will be 10-15%, indicating that the risk of cut-throat
price competition remains low.
Government “buy Chinese” policy not enough. The
government’s new vehicle procurement policy is set to
remove foreign joint ventures from the list of authorized
suppliers. This could raise demand for domestic brands by
5%, but we are uncertain about execution at the local
government level. We believe domestic brands will continue
to lose market share in the mass market to foreign brands, as
consumer preferences continue to shift.
Be selective. We see the performance of domestic brands
diverging for company-specific reasons and due to segment
trends; guiding our view on individual names. Brilliance
stands to benefit from its premium car exposure, while
Great Wall (an Asia Super Ten portfolio stock) is wellpositioned
in the high-growth SUV segment and has a
focused product offering; both are rated OW(V). On other
hand, the prospects for GAC look clouded, as its two
Japanese JVs compete with each other, and Geely shares
look to have priced in the company’s good export growth
prospects and news of its parent’s acquisition of Volvo; we
rate GAC and Geely UW(V).
Investment summary 3
Short-term outlook: missing a
gear 7
Overcapacity concerns
overdone 10
Competitive landscape 14
Long-term outlook remains
positive 16
Valuation and risks 28
Appendix 31
Disclosure appendix 36
Disclaimer 39