Claire Yuan Director China Auto Industry Is On Track Stephen Chan Associate Director

For Healthy Growth China Manufacturing Team Corporate Ratings March 9, 2021 China’s Light Vehicles: Healthy Growth Ahead

– We anticipate 5%-9% growth (vs. the previous 4%-6%) in China’s light vehicle sales in 2021, after a stronger-than-expected 2020. – China’s economic recovery and supportive government policies underpin the growth, likely offsetting disruptions from auto-chip supply. – Rated original equipment manufacturers (OEMs) will likely outperform the industry, though our expectation is more conservative than their ambitious growth targets for this year.

LV Sales To Grow Healthily In 2021-2022 Rated OEMs Aim For A Robust Recovery

China light vehicle sales (left scale) 2020 sales 2021 sales 2021 targeted volume target sales volume Year-on-year change (right scale) Auto OEMs growth* (in ‘000 units) growth* 28 20% 27 15% China FAW Group Co. Ltd. 7.0% 4,000 7.9% 26 10% 25 5% (2.2%) 3,292 14.8% Co. Ltd. 24 0%

Units (mil.) Units Beijing Automotive Group 23 -5% (15.4%) N/A N/A Co. Ltd. 22 -10% 21 -15% Automobile (3.2%) 1,530 15.9% Holdings Ltd. 2015 2016 2017 2018 2019 2020 2021e 2022e

Note: Our estimates are for wholesale (sales from automakers to dealers). LV- *Year on year change in number of units sold. OEMs--Original equipment -Light vehicles including passenger vehicles and light commercial vehicles. e-- manufacturers. N/A--Not available. Sources: S&P Global Ratings, Company Estimate. mil.--Million. Sources: S&P Global Ratings, China Association of disclosures. Automobile Manufacturers (CAAM).

2 Proprietary Brands Are On The Ascendant

– Chinese brands have gained share in the passenger vehicle market since July 2020, likely due to the “going to the countryside” campaign (encouraging some of the more price-sensitive consumers in lower-tier cities to buy cars). Such policies could support this trend in 2021. – As a result, the market share of Japanese and German brands shrank. Japanese brands were more resilient in 2020, due to strong products and high residual value. – For premium brands, we believe consumption upgrades and the launch of more compact models will support continuous market share expansion.

China's Proprietary Brands Are Gaining Share Premium Brands Continue To Expand Their Share

China proprietary (left scale) Premium brands German brands (right scale) Chinese proprietary brands Japanese brands (right scale) Joint-venture brands--mass market 42% 27% 100% 6% 6% 7% 9% 11% 13% 14% 40% 25% 80% 38% 41% 41% 41% 38% 38% 23% 36% 39% 60% 36% 21% 40% 34% 19% 56% 53% 51% 50% 51% 51% 20% 47% 32% 17% 0% 2017 2018 2019

Jul-20 2015 2016 2017 2018 2019 2020 Jan-21 Oct-20 Apr-20 Jan-20 Jan-21 Jun-20 Feb-20 Dec-20 Aug-20 Sep-20 Nov-20 Mar-20 May-20

Sources: S&P Global Ratings, China Passenger Car Association (CPCA). JV--Joint venture. Sources: S&P Global Ratings, China Passenger Car Association (CPCA).

3 NEV: A New Growth Stage From 2021

– China’s new energy vehicle (NEV) market entered a post-subsidy era from mid-2020, with rising end- consumer acceptance. – We anticipate NEV sales to grow by 40%-50% year on year in 2021-2022, with more traditional OEMs launching NEV models. – Proprietary brands, which currently account for ~70% of the NEV retail sales, are likely to maintain their dominant position in the year; though we anticipate intensifying competition from JV brands. – China aims for an NEV penetration rate of 20% by 2025, from 5% in 2020, as the country advances toward its ambitious carbon neutral goal. We think the target is likely achievable, with leading OEMs setting aggressive NEV sales targets to take share in this fast-growing segment.

NEVs Likely To See High Growth In 2021-2025 Emerging Brands Are Recording Robust Growth NEV sales (left scale) 2020 NEV sales Year-on-year YoY change (right scale) Emerging brands (units) change NEV penetration rate (right scale) Tesla (China) 137,459 N/A* 7 60% 6 Nio 43,728 113% 5 40% 4 Xpeng 27,041 112% 20% 3 32,624 N/A* Units (mil.) Units 2 0% 1 22,495 33% 0 -20% 2019 2020 2021e 2022e 2023e 2024e 2025e *Tesla (China) started production in October 2019; Li Auto only started NEV--New energy vehicle. e--Estimate. YoY--Year on year. mil.--Million. deliveries in December 2019. NEV—New energy vehicle. N/A--Not available. Sources: S&P Global Ratings, CAAM. Sources: S&P Global Ratings, company disclosures.

4 China’s OEMs Have Yet To Shake Off Negative Bias – Our ratings on Chinese auto OEMs and suppliers still have a net negative bias, which has been moderating since the second half of 2020 alongside the market recovery. – We expect most rated OEMs’ revenue to grow by 5%-10% in 2021 and their margins to return to pre- pandemic levels on higher volume and continued cost cutting. – The global auto chip shortage may ease gradually in the second half of 2021and we currently don’t see material effect for rated Chinese OEMs. Based on our understanding, they have been able to secure chip supply; though visibility is low on inventory levels. – Issues to monitor: sales momentum, stability of supply chains, margin levels, and leverage trends.

Rated Carmakers To Further Recover In 2021 Leverage And Margin Pressure Weigh On Ratings

Rated auto OEMs revenue YoY change (left scale) Auto OEMs Issuer credit rating EBITDA margin (right scale) China FAW Group Co. Ltd. A/Stable/-- 10% 11.0% Dongfeng Motor Group Co. Ltd. A/Negative/-- Beijing Automotive Group Co. Ltd. BBB/Negative/-- 8% 10.5% BAIC Motor Corp. Ltd. BBB/Negative/-- Geely Automobile Holdings Ltd. BBB-/Negative/-- 6% 10.0% Zhejiang Geely Holding Group Co. Ltd. BBB-/Negative/-- 4% 9.5% Auto suppliers 2% 9.0% Contemporary Amperex Technology Co. Ltd. BBB+/Stable/-- Johnson Electric Holdings Ltd. BBB/Stable/-- 0% 8.5% Nexteer Automotive Group Ltd. BBB-/Negative/-- Yanfeng International Automotive Technology 2018 2019 2020e 2021e 2022e BBB-/Stable/-- Co. Ltd.

OEM--Original equipment manufacturer. e--Estimate. YoY--Year on year. OEMs--Original equipment manufacturers. Source: S&P Global Ratings. Sources: S&P Global Ratings, company disclosures.

5 Related Research

– Bulletin: Geely Auto's Collaboration With Brings Synergy While Lowering Execution Risk, Feb. 25, 2021 – Research Update: Yanfeng International Automotive Technology Outlook Revised To Stable From Negative; 'BBB-' Rating Affirmed, Jan. 14, 2021 – Bulletin: Zhejiang Geely Boosts Its Prospects With Baidu Tie-Up, Jan. 12, 2021 – China Carmakers Juggle Supply Lines And Production To Address Chip Shortage, Dec. 10, 2020 – Research Update: Zhejiang Geely Holding And Subsidiary Geely Auto 'BBB-' Ratings Affirmed; Off Watch Negative; Outlook Negative, Nov. 27, 2020 – Research Update: China FAW Group Outlook Revised To Stable On Resilient Performance; 'A' Rating Affirmed, Nov. 6, 2020 – Global Auto Sales Forecasts: Hopes Pinned On China, Sept. 17, 2020

6 Analytical Contacts

Claire Yuan Stephen Chan

Director Associate Director

(852) 2533-3542 (852) 2532-8088

[email protected] [email protected]

Chloe Wang Lawrence Lu

Associate Senior Director

(852) 2533-3548 (852) 2533-3517

[email protected] [email protected]

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