Recent channel check takeaways -
2013 should be a better year
Fasten seatbelt for FY12E surprises; 2013E ride should be smoother
________________________________________________________________________________________________________________
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.
Vincent Ha, CFA
Research Analyst
(+852) 2203 6247
vincent.ha@db.com
Nora Min
Research Associate
(+852) 2203 6130
nora.min@db.com
Top picks
Brilliance China (1114.HK),HKD10.26 Buy
Baoxin Auto Group (1293.HK),HKD8.19 Buy
Companies Featured
Dongfeng Motor (0489.HK),HKD12.78 Buy
2011A 2012E 2013E
P/E (x) 9.0 10.8 8.3
Guangzhou Auto (2238.HK),HKD6.71 Hold
2011A 2012E 2013E
P/E (x) 10.3 19.9 10.1
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 Buy
2011A 2012E 2013E
P/E (x) 17.3 17.1 13.3
BYD (1211.HK),HKD26.05 Sell
2011A 2012E 2013E
P/E (x) 53.0 730.4 43.7
Baoxin Auto Group (1293.HK),HKD8.19 Buy
2011A 2012E 2013E
P/E (x) 22.8 24.7 14.6
Zhengtong Auto Services
(1728.HK),HKD6.98
Hold
2011A 2012E 2013E
P/E (x) 27.1 18.6 13.2
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 Upside
Baoxin 9.5 7.5 16.0%
Zhengtong 7.6 6.1 8.9%
Zhongsheng 13.4 12.7 15.3%
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
dealers and FY12 results could lead to short-term share price shocks. Our top
picks are still Brilliance for OEMs and Baoxin for dealers.
Reiterating our above-consensus passenger vehicle sales growth forecasts
After attending the expert’s presentation and noting the upbeat targets set by
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
recovery in demand for Japanese brands, although a full recovery is unlikely in
early 2013 given the overhang from the Sino-Japanese island dispute.
Inventory levels and price discounts on easing trends in 4Q12
The OEMs and dealers we recently talked to said that inventory levels had
declined and discounts had been narrowed in general in 4Q12. This demandsupply
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
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.
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.
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.
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.