Chinese Auto Sector outlook

Scott Laprise Discounts helping sales [email protected] While we see potential upside for Japanese automakers as sales recover, (86) 1059652126 consumer sentiment is still poor, and downside risk in the form of ASP George Yang declines remains the biggest risk. Dealerships saw sales recover during (86) 2120205807 the Golden Week holidays and decreasing inventory on the back of discounting, especially for the Japanese automakers. Overall we remain negative on the sector as we think ASP deterioration will continue amid lesser demand on a tightened economy.

Japan automakers picking up q During our dealership visits, we started to see car sales picking up for the Japanese 10 October 2012 automakers and inventory decreasing. q The dealerships, however, reported increasing discounts compared to our last visit China with Camry at 14% compared to 12% from our last visit and the Accord at 16%. q The Japanese automakers are losing market share to non-Japanese automakers Autos and we think the situation will likely last about 3 months.

Companies mentioned: Non-Japanese discounts stable and sales up BYD (1211 HK - SELL) q Dongfeng (489 HK – U-PF) Non-Japanese auto brands offered around 8% to 10% discount across the board. GAC (2238 HK - SELL) q SVW Passat has 8% discount and sales staff proud of the car. Great Wall (2333 HK - BUY) q SVW Passat is more popular compared to SVW Skoda Superb even with less interior space and options. The superb model has a Rmb40k discount, about 16% of MSRP.

Luxury discount unchanged q BMW only offers discounts on imported sedans. The discount on imported 5 series is about 8%, and discount on the imported 7 series is about 10%. q Brilliance BMW sedans have no discount at the moment with little inventory. q Audi offers 12% discount on domestic made A4L and A6L. The A7 discount decreased from 21% to 15%.

Sector de-rating risk remains q The sector is trading at 9.96xPE2012 and 8.54xPE2013 consensus. q Great Wall Motor (BUY) is trading at 12.4xPE12CL and 9.5xPE13CL and at 12.09xPE2012 and 11.01xPE2013 consensus. q Dongfeng (U-PF) is trading at 7.3xPE12CL and 6.6xPE13CL and at 5.6xPE2012 and 4.95xPE2013 consensus. q GAC (SELL) is trading at 12.1xPE12CL and 9.8xPE13CL. The company is trading at 5.53xPE2012 and 4.68xPE2013 consensus. q BYD (SELL) is trading at 19.79xPE2012 and 15.06xPE2013 consensus.

Trading upside as Japanese dealers recover but fundamentals still declining

0.00% -2.00% -4.00% -6.00% -8.00% -10.00% -12.00% -14.00% -16.00% -18.00% DFM stock performance since Aug 24th 2012 UPF Call -20.00% 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------t t t t p p p p p p p p p p p p p p p g g g g c c c c e e e e e e e e e e e e e e e u u u u O O O O S S S S S S S S S S S S S S S A A A A www.clsa.com Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com [email protected] FIRST LAST 10/14/12 06:36:04 AM Hong Kong Highpower Prepared for: ThomsonReuters Discounts helping sales Chinese Auto

Discounts helping sales – auto dealership visits post holidays Sales improved during We visited SVW (include Skoda), SGM, GAC Honda, GAC Toyota, DFM Honda, October national holiday Audi and BMW dealerships in Shanghai yesterday and GAC Toyota in Beijing at cost of high level of after we came back from the national holiday. All of the non-Japanese brands discount saw an increase in sales compared to the same period last year. However the sales staff complained profitability may not go up as they were offering big discounts from the middle of September in order to attract consumers.

The dealers said they are likely going to cut back discounts by the end of the year as there will likely be more buyers with demand to pick up. We do not agree as we do not see improvement in the overall economy, which will improve consumer spending. Most Chinese consumers are expecting less income or at least no increase in wealth in 2012 and 2013. We expect the discount level to at least continue until the end of this year. On a long-term view we remain positive on the auto sector as we do think there is a strong desire to own cars and consumers are in good financial shape. But with the government maintaining a tightened stance on the economy negative sentiment will remain, with car sales growth low at around 0% YoY. We are seeing some signs of loosening but little impact thus far. Sentiment is the key and for this we will need a strong government stance.

The Japanese brands were offering around 10% discount below Rmb200k.

The Japanese brands were offering around 15% discount to automobiles above Rmb200k.

The other non-Japanese mid to high end brands were offering around 8% to 10% discount all across the line.

Luxury brands are now cutting back on discount. Audi dealerships are offering 12% discount on A4L and A6L model.

BMW only offers discounts on imported models: imported 5 series has an Rmb50k discount and imported 7 series got around 10% discount.

The Japanese automakers had nearly no customers during our visit. The sales staff said they did see a sales decline compared to August. They said they had customers cancelling orders in order to buy the alternative automobiles from the German, American and Korean brands.

They also mentioned that the impact on Japanese brand sales in Shanghai caused by the dispute over the Senkaku (Diaoyu) islands was mild compared to other cities, as people in Shanghai are less worried their Japanese automobiles will be destroyed by angry mobs demonstrating against Japan. They expect the same brands to perform worse in other cities. At the Beijing Toyota dealer they did see a slowdown in sales but now sales are returning. We did not expect this issue to last and we think there may be some overhang for the next month or two.

We also highlight that most dealerships mentioned a decrease in inventory during the national holiday period.

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Japanese autos saw sales declining We visited GAC Honda, GAC Toyota and DFM Honda dealerships in Shanghai. The dealerships were all empty during our visit except DFM Honda which had one group of customers. The dealers said the protests in Shanghai were mild compared to other cities so their customers were not so worried about the safety of their automobiles.

GAC Honda – Accord gets 16% discount, worse than before The GAC Honda dealership had no customer during our visit. The dealership was offering Rmb40k off on the Rmb259k Honda Accord, about 16% of discount.

The Honda city has about Rmb13k off which was about 10% of discount.

The sales staff said inventory went down during the national holiday as the automakers were sending them fewer shipments. They said they were not clear whether the factories will continue to ship fewer shipments. If the automakers try to push inventory to them again, they will have to cut ASP more in order to sell.

Figure 1 Figure 2 Accord discount was highlighted in yellow at Rmb40k Honda Accord with 16% discount

Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets

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Figure 3 GAC Honda auto shipments were up 8.73% YTD in August Manufactur Brand Sales er Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month Guangqi Accord 2.0L 6,058 50,449 53,755 67.95 (6.15) Honda Accord 2.4L 2,760 22,820 40,793 (9.77) (44.06) Accord 3.5L 0 2 1 * 100 Crosstour 2.4 3,865 21,579 0 2.3 * Crosstour 3.5 6 853 1,681 0 (49.26) Fit 1.3L (two-box) 3,042 17,762 6,236 10.22 184.83 Fit 1.5L (two-box) 1,010 9,120 6,213 19.81 46.79 Honda EVERUS S1 1,571 17,507 12,387 25.28 41.33 1.3L Honda EVERUS S1 131 1541 1,133 25.96 36.01 1.5L New City 1.5L 9,826 72,387 71,546 36.49 1.18 New City 1.8L 15 732 748 (34.78) (2.14) Odyssey 1,761 15,995 17,719 0.92 (9.73) Total 30,045 230,747 212,212 23.25 8.73 Source: CAAM

GAC Toyota – Camry gets 14% discount, worse than before GAC Toyota dealership also had no customers during our visit. The sales staff was not even interested to talk to us upon arrival unlike our previous visit.

The 2.0L Toyota Camry had discount of 11% and the 2.5L Camry had discount of 14%. The dealer said they had about 10 or more inventory.

Figure 4 Figure 5 2.5L Camry had 14% discount 2.0L Camry had 11% discount

Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets

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Figure 6 GAC Toyota shipments were up 10.49% YTD in August Manufactur Brand Sales er Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month GAC Toyota Camry 2.0L 3,494 15,241 54,299 (11.77) (71.93) Camry 2.4L 0 0 38,527 (100) (100) Camry 2.4L Hybrid 18 117 125 * (6.4) E'Z 1.6 14 499 839 (41.67) (40.52) E'Z 1.8 2,567 12,947 3,107 9.51 316.7 E'Z 2.0 1 9 38 * (76.32) Highlander 2.7L 6,456 47,100 47,745 (1.16) (1.35) Highlander 3.5L 727 6,159 9,211 (34.21) (33.13) New Camry 2.0L 7,553 40,689 0 23.25 * New Camry 2.5 438 1144 0 * * Hybrid New Camry 2.5L 3,080 48,464 0 (18.97) * Yaris 1.3 2 24 85 (33.33) (71.76) Yaris 1.6 1,551 10,229 11,305 (14.69) (9.52) Total 25,901 182,622 165,281 0.72 10.49 Source: CAAM

What is interesting to note from the table above, are the SUV sales are slowing. We are starting to see this for most of the high-end SUVs.

DFM Honda – CRV now has inventory The DFM Honda dealership had one group of customer during our visit. They were looking at the new CRV. The CRV now has inventory compared previously a one month wait list at the beginning of the year. The dealership complained this has much to do with the disputed island issue as consumers turn away to VW Tiguan and Hyundai ix35.

DFM – shipments reported by DFM DFM shipped 156,271 units in September, down (-21.9%) YoY, about (- 17.3%) below our expectation.

DFM Nissan shipped 44,591 units, down (-44.27%) YoY, about (-43%) below our expectation.

DFM Honda shipped 17,741 units, down (-19.14%) YoY, about (-39%) below our expectation.

DFM PSA shipped 42,728 units, up 9.17% YoY, 37% above our expectation.

DFM A-share SUV shipped 3,450 units, down (-10.41%) YoY, about (- 5%) below our expectation.

DFM Liuzhou shipped 12,210 units, up 32.29% YoY, about 1.7% above our expectation.

DFM self-brand shipped 7,095 units, up 127.4% YoY, more than double our expectation.

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CV shipped 28,456 units, down (-33.4%) YoY, about (-16%) below our expectation.

We think the slowdown of Nissan and Honda brand has to do with the disputed island issue as Chinese consumers protest against Japanese automobiles. Many dealerships reported people cancelling orders and went to buy alternative automobiles from German, American and Korean automakers. But we expect short lived.

We want to highlight the reason why Nissan saw a bigger drop compared to Honda was because Nissan had little impact from last year’s Japan earthquake as they recovered quickly. Their production was nearly up to normal speed in September 2011.

Honda on the other hand recovered slower than Nissan after the earthquake. They also had a generation change of the Civic model. They only shipped 1 unit of Civic in September 2012. If Honda was also producing at normal rate, we should also see about (-40%) drop.

Other headlines: Hyundai shipped 84.1 units in September, up 14% YoY.

Kia shipped 43,639 units in September, up 0.3% YoY.

SGM shipped 120k units, up 3.7% YoY.

SGM Wuling shipped 119k units, up 0.4% YoY.

BMW shipped 27,000 units (include imports), up 55% YoY.

Benz shipped 16,806 units (include imports), up 10% YoY.

Audi shopped 35,512 units (include imports). Up 20.5% YoY.

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Figure 7 This is the first time we DFM Honda offered Rmb30k off on Rmb270k CR-V saw discount on CR-V. We think this has to do with the disputed island issue as consumers may turn to VW Tiguan or Hyundai ix35

Source: CLSA Asia-Pacific Markets

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Figure 8 DFM Honda shipments up 28.2% YTD mainly due to introduction of new models and growth of CRV Manufacture Brand Sales r Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month Dongfeng CIIMO 1,435 9,276 0 29.16 * Honda Civic 7,520 59,932 59,422 4.26 0.86 ELYSION 1,518 4,125 0 (18.69) * Honda CR-V 2.0 7,525 54,464 52,053 (11.1) 4.63 Honda CR-V 2.4 8,221 66,879 36,748 (1.32) 81.99 Spirior 740 10,640 11,929 8.82 (10.81) Total 26,959 205,316 160,152 (2.56) 28.2 Source: CAAM

Germans and Americans doing better The German and American brands were doing better. We think one of the main reasons was due to consumers turning away from Japanese automobiles and choosing the German and Americans as alternatives. We noticed about a 10% discount for the American and German dealerships we visited on the mid to high end sedans.

SVW – People prefer VW Passat over Skoda Superb We visited SVW and SVW Skoda dealership, both had three to four groups of customers. The dealerships were offering around 8% to 10% discount on SVW Passat, SVW Skoda Octavia.

We were surprised that the Skoda Superb which was supposed to offer better leg room and equipment compared to the SVW Passat was not as popular. The Superb had a 16% discount with Rmb40k off on Rmb240k sedan. The sales staff said it was because VW brand was still viewed as the more superior brand compared to Skoda, so most of the consumers who were looking to buy Rmb240k German sedans turned to Passat instead even with fewer options and less interior space.

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Figure 9 Figure 10 The 2.0L engine Skoda Superb was offering Rmb40k The popular SVW Passat which only has 8% discount discount, about 16%

Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets

SVW was also selling the new Lavida sedan which had the generic front end look of all of the new generation VW sedans. The sales staff said the new model has about a 1 month of wait list and consumers were very interested at a price point of Rmb130k.

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Figure 11 SVW shipments were up 11.59% YTD in August Manufactur Brand Sales er Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month Shanghai-VW Cross Polo 1,467 11,592 178 (2.85) 6,412.36 Lavida 1.4T 349 23,570 25,312 * (6.88) Lavida 1.6L 11,116 102,551 112,787 58.44 (9.08) Lavida 2.0L 41 42 14,411 * (99.71) NMS 1.4T 1,906 13,079 1,605 44.18 714.89 NMS 1.8T 14,014 95,143 31,795 10.93 199.24 NMS 2.0T 373 20,487 11,763 (19.78) 74.16 NMS 3.0V6 151 2,332 0 (34.35) * New Lavida 1.4L 3,124 5,407 0 * * New Lavida 1.6L 5,609 8,147 0 * * New Polo 1.4L (two- 7,463 38,949 40,106 38.67 (2.88) box) New Polo 1.6L (two- 5,403 27,288 31,017 49.92 (12.02) box) Octavia 1.4T 1,012 12,259 14,008 (8.5) (12.49) Octavia 1.6L 9,739 72,272 54,924 11.65 31.59 Octavia 1.8T 39 1,094 3,011 (56.18) (63.67) Octavia 2.0L 295 5,138 10,626 5.36 (51.65) Octavia 2.0T 130 912 1,044 27.45 (12.64) POLO GTI 323 323 0 * * Passat lingyu 1.8T 1,062 15,022 40,902 (35.32) (63.27) Passat lingyu 2.0L 284 4,369 14,852 (10.69) (70.58) Passat lingyu 2.8L 0 0 201 * (100) Polo Jinqing 1.4L 0 0 4 * (100) (two-box) Polo Jinqing 1.6L 0 1 3 * (66.67) (two-box) Polo Jinqu 1.4L 9 14,904 22,054 (97.06) (32.42) (three-box) Polo Jinqu 1.6L 42 5,252 7,039 (88.4) (25.39) (three-box) Santana 1.8L 9,151 74,411 68,166 (6.56) 9.16 Santana Vista 6,145 66,566 65,322 (34.25) 1.9 Santana Vista (CNG) 1,106 7,477 7,073 * 5.71 Skoda Fabia 1.4L 2,567 20,348 20,212 4.39 0.67 Skoda Fabia 1.6L 1,229 9,758 13,264 46.14 (26.43) Superb 1.4T 1,618 10,958 7,662 (3) 43.02 Superb 1.8 2,031 15,462 22,977 22.13 (32.71) Superb 2.0T 57 884 2,074 (17.39) (57.38) Tiguan 2WD 1.4 352 2,944 0 * * Tiguan 2WD 1.8 6,098 53,051 19,698 (18.07) 169.32 Tiguan 4WD 1.8 5,395 42,602 41,934 6.39 1.59 Tiguan 4WD 2.0 1,943 25,980 25,690 (33.78) 1.13 Touran 1.4T 3,639 25,495 16,900 11.32 50.86 Touran 1.8T 0 5 286 * (98.25) Touran 2.0L 0 0 354 * (100) Total 105,282 836,074 749,254 17.44 11.59 Source: CAAM

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SGM – about 10% discount SGM dealership had two groups of consumers during our visit. The dealership offered around 8% to 12% discount across the board. The dealership said inventory decreased during September and the national holiday period so they were cutting back on discounts. They said they do not have worry to finish their annual target so the discount level may remain at a low level.

Figure 12 Figure 13 SGM was offering Rmb30k worth of decoration to the The LaCrosse model has about 10% discount Regal model

Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets

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Figure 14 SGM shipments were up 11.94% YTD in August Manufacturer Brand Sales Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior Month YTD Shanghai-GM AVEO 1.4L (three-box) 4,788 31,269 3,963 (8.08) 689.02 AVEO 1.4L (two-box) 67 1,941 1,221 (21.18) 58.97 AVEO 1.6L (three-box) 8 2,844 2,677 (87.5) 6.24 AVEO 1.6L (two-box) 112 962 4,360 (2.61) (77.94) Buick GL8 2,515 18,315 15,626 8.97 17.21 Buick New GL8 2,945 23,978 34,548 (13.36) (30.6) Buick Park Avenue 2.8L 0 0 1 * (100) Buick Park Avenue 3.0L 23 330 1,370 (14.81) (75.91) Buick Park Avenue 3.6L 0 0 1 * (100) Cadilliac SLS 472 3,726 4,823 11.85 (22.75) Chevrolet Aveo 0 1 0 * * Chevrolet Cruze 1.6L 18,070 127,937 109,374 22.76 16.97 Chevrolet Cruze 1.6T 34 847 1,664 (26.09) (49.1) Chevrolet Cruze 1.8L 1,939 26,545 27,837 (22.5) (4.64) Chevrolet Epica 1.8L 1,946 14,347 24,962 67.04 (42.52) Chevrolet Lova 1.2L 0 0 1 * (100) Chevrolet Lova 1.4L 0 1 54,752 * (100) Chevrolet Lova 1.6L 0 0 3,381 * (100) Excelle 22,879 191,259 163,503 5.29 16.98 Excelle GT 1.6L 9,351 70,939 42,182 9.64 68.17 Excelle GT 1.6T 326 2,343 6,669 4.49 (64.87) Excelle GT 1.8L 1,347 10,090 14,665 39.44 (31.2) Excelle XT 1.6L 3,602 26198 13,520 19.55 93.77 Excelle XT 1.6T 409 3,293 6,000 40.07 (45.12) Excelle XT 1.8L 1 220 5,066 * (95.66) LaCROSSE 2.4 0 0 (1) * (100) Malibu 1.6T 139 139 0 * * Malibu 2.0 5,801 15,120 0 352.85 * Malibu 2.4 503 5,447 0 64.38 * New LaCROSSE 2.0T 213 3,097 6,554 (4.48) (52.75) New LaCROSSE 2.4 6,383 49,281 64,456 10.2 (23.54) New LaCROSSE 2.4(Hybrid) 7 168 0 * * New LaCROSSE 3.0 214 1,470 3,001 397.67 (51.02) New Regal 1.6T 127 461 991 71.62 (53.48) New Regal 2.0L 6,150 41,978 34,663 22.27 21.1 New Regal 2.0T 622 3,643 2,308 54.73 57.84 New Regal 2.4 287 4,910 11,778 (14.33) (58.31) Regal 0 0 0 * * Sail 1.2L (three-box) 9,908 65,060 54,764 20 18.8 Sail 1.2L (two-box) 551 5,343 9,146 40.92 (41.58) Sail 1.4L (three-box) 12,118 106,932 45,245 (10.18) 136.34 Sail 1.4L (two-box) 1,440 7,982 5,437 (4.45) 46.81 chevrolet Captiva 905 5,315 0 126.25 * Total 116,202 873,731 780,508 13.44 11.94 Source: CAAM

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Luxury brands discount unchanged We visited BMW and Audi dealerships in Shanghai and found discount levels decreased for Audi and stayed the same for BMW.

Audi – A4L and A6L has about 12% discount in October The Audi dealership we visited had 5 groups of customers. Most of them were looking at the A6L. The dealership offered a 10% discount on the A4L and A6L. They then also offered one year worth of insurance if the customer decided to pay for the car before the end of October, which brings the discount up to 12%.

My assistant bought the Audi A7 with a 21% discount during the middle of August and the discount level is only 15% with decreasing inventory.

Figure 15 Audi A7 discount went The imported Audi A7 had a 21% discount during middle of August, now only has down to 15% as 15% discount as inventory went down inventory went down

Source: CLSA Asia-Pacific Markets

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Figure 16 FAW Audi shipments were 36.21% YTD in August Manufactur Brand Sales er Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month FAW-Audi Audi A4L 1.8T 440 3,365 3,795 62.36 (11.33) Audi A4L 2.0T 7,604 65,029 51,142 38.51 27.15 Audi A4L 3.0L 0 0 13 * (100) Audi A6L 2.0T 413 32,729 37,293 (50.42) (12.24) Audi A6L 2.4L 38 10,664 26,079 375.00 (59.11) Audi A6L 2.7L 0 798 167 * 377.84 Audi A6L 2.8L 90 1,454 6,528 (32.33) (77.73) Audi A6L 3.0L 1 303 2,408 0.00 (87.42) Audi C7 2.5 8,766 38,966 0 (9.00) * Audi C7 2.8 1,225 6,397 0 (26.25) * Audi C7 3.0 342 2,414 0 (41.34) * Q5 8,129 57,426 33,754 7.51 70.13 Total 27,048 219,545 161,179 3.32 36.21 Source: CAAM

BMW offered Rmb50k off its imported 5 series The BMW dealership had 6 groups of customers during our visit. Most of them were considering the Brilliance BMW 5 series. The Brilliance BMW 5 series and 3 series had no discount. The dealership was offering Rmb50k off on the Rmb62k imported 5 series. The 7 series had a 10% discount.

The dealer said they do not expect ASP to change much by the end of the year as inventory went down during September and national holiday period.

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Figure 17 Brilliance BMW 5 series Consumers checking out 5 series continue to be the most popular choice for BMW customers

Source: CLSA Asia-Pacific Markets

Figure 18 Brilliance BMW shipments were up 52.99% YTD in August Manufactur Brand Sales er Aug Jan-Aug Jan-Aug % Change 12 12 11 Prior YTD Month BMW BMW 3 series 2,105 9,326 18,012 177.7 (48.22) Brilliance BMW 5 series 10,900 69,671 43,948 18.14 58.53 BMW X1 2,329 15,732 0 0.09 * Total 15,334 94,729 61,960 24.56 52.89 Source: CAAM

Negative on the sector until new policy comes The sector is trading at 9.96xPE2012 and 8.54xPE2013 consensus. The stocks are trading at 1.98xPB2012 and 1.65xPB2013 consensus without BYD. The stocks are trading at 7.14x and 6.18x EB/EBITDA in 2012 and 2013 consensus without GAC and Brilliance.

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Figure 19 Consensus EV/EBITDA in 2012 and 2013 EV/EBITDA 2012 2013 DFM 2.89 2.59 Great Wall 8.63 7.55 BYD 10.16 8.61 Brilliance 50.89 42.31 GAC 50.49 29.67 Geely 6.9 5.98 average 21.66 16.12 average without GAC and Brilliance 7.14 6.18 Source: Bloomberg

Great Wall is trading at 12.4xPE12CL and 9.5xPE13CL. The company is trading at 11.01xPE2013 and 2.28xPB2013 consensus. We have a BUY on Great Wall as it continues to benefit from SUV growth and outperforms in PV segment growth.

DFM is trading at 7.3xPE12CL and 6.6xPE13CL. The company is trading at 4.95xPE2013 and 0.93xPB2013 consensus. We have an U-PF call on DFM as the previous expected government incentives did not come through, so we expect ASP deterioration in 12CL and 13CL with slow growth rate.

GAC is trading at 12.1xPE12CL and 9.8xPE13CL. The company is trading at 4.68xPE2013 and 0.68xPB2013 consensus. We have a SELL call on GAC as we expect ASP deterioration due to tough mid to high end segment competition.

BYD is trading 15.06xPE2013 and 1.05xPB2013 consensus. We are SELLers of the stock.

Figure 20 Sector is trading at The sector is trading at 9.96xPE2012 and 8.54xPE2013 consensus without BYD 9.96xPE2012 and xPE 8.54xPE2013 consensus 2012 2013 without BYD 25

19.79 20

15.06 15.25 15 12.09 11.30 12.53 11.01 9.53 10

5.60 5.53 4.95 4.68 5

0 Geely Great Wall DFM BYD Brilliance GAC

Source: CLSA IBES

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Figure 21 Auto consensus PE in 2012 and 2013 Ticker Last Price 2012 2013 Geely 175 HK 2.49 11.30 9.53 Great Wall 2333 HK 17.17 12.09 11.01 DFM 489 HK 7.39 5.60 4.95 BYD 1211 HK 10.90 19.79 15.06 Brilliance 1114 HK 7.15 15.25 12.53 GAC 2238 HK 3.93 5.53 4.68 average 11.59 9.63 average w/o BYD 9.96 8.54 average w/o BYD and Brilliance 8.63 7.54 Source: IBES

Figure 22 Auto consensus PB in 2012 and 2013 Ticker Last Price 2012 2013 Geely 175 HK 2.49 1.67 1.43 Great Wall 2333 HK 17.17 2.63 2.28 DFM 489 HK 7.39 1.12 0.93 BYD 1211 HK 10.90 1.14 1.05 Brilliance 1114 HK 7.15 3.75 2.93 GAC 2238 HK 3.93 0.74 0.68 average 1.84 1.55 average w/o BYD 1.98 1.65 average w/o BYD and Brilliance 1.54 1.33 Source: IBES

Figure 23 Auto consensus ROE in 2012 and 2013 Ticker Last Price 2012 2013 Geely 175 HK 2.49 17.1 16.8 Great Wall 2333 HK 17.17 22.5 21.2 DFM 489 HK 7.39 21.5 20.1 BYD 1211 HK 10.90 6.1 7.1 Brilliance 1114 HK 7.15 27.5 26.0 GAC 2238 HK 3.93 14.4 15.2 average 18.16 17.76 average w/o BYD 20.58 19.88 average w/o BYD and Brilliance 18.85 18.34 Source: IBES

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Figure 24 Great Wall stock price Great Wall stock price went up 31% since our BUY call on May 30th 2012 went up 31% since our BUY call on May 30th 2012 35.0% Great Wall stock performance since May 30th 2012 BUY Call 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0%

Source: IBES

Figure 25 DFM stock price went DFM stock price went down (-16%) since our UPF call on Aug 24th 2012 down (-16%) since our UPF call on Aug 24th 2012 0.00% -2.00% -4.00% -6.00% -8.00% -10.00% -12.00% -14.00% -16.00% -18.00% DFM stock performance since Aug 24th 2012 UPF Call -20.00% 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------t t t t p p p p p p p p p p p p p p p g g g g c c c c e e e e e e e e e e e e e e e u u u u O O O O S S S S S S S S S S S S S S S A A A A Source: IBES

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Figure 26 GAC stock price went GAC stock price went down (-14%) since our SELL call on Aug 30th 2012 down (-14%) since our th 4% SELL call on Aug 30 GAC stock performance since Aug 30th 2012 SELL Call 2012 2% 0% -2% -4% -6% -8% -10% -12% -14% -16%

Source: IBES

Figure 27 BYD stock price went BYD stock price went down (-70%) since we first went to SELL on Aug 24th 2010 down (-70%) since we 60% first went to SELL on Aug BYD stock performance since we downgrade to SELL on Aug 24th 2010 24th 2010 40%

20%

0%

-20%

-40%

-60%

-80%

-100% 0 1 0 1 0 1 2 0 1 1 2 1 2 2 1 2 2 1 1 2 1 2 1 2 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l t t r r r r c c v y y v n n p p p g g g b b n n u u c c p a a p e e o o e e e a a e e a a u u u u u J J J J O O J J A A F F M M D D S S S A N A N A M M Source: IBES

The Japanese automakers are trading on average 9.29xPE2013 and 0.97xPB2013 consensus.

The Korean automakers are trading at 6.33xPE2013 and 1.26xPB2013 consensus.

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Figure 28 Auto Comp Sheet as of Oct 8th 2012 PE PB ROE Ticker Last Price 2012 2013 2012 2013 2012 2013 Geely 175 HK 3.07 13.95 11.76 2.07 1.76 17.1 16.8 Great Wall 2333 HK 21.2 14.93 13.59 3.25 2.81 22.5 21.2 DFM 489 HK 9.12 6.91 6.12 1.38 1.15 21.5 20.1 BYD 1211 HK 13.46 24.43 18.59 1.40 1.29 6.1 7.1 Brilliance 1114 HK 8.83 18.83 15.46 4.63 3.62 27.5 26.0 GAC 2238 HK 4.85 6.83 5.77 0.92 0.83 14.4 15.2 SAIC 600104 CH 13.8 6.49 5.69 1.27 1.06 21.0 20.1 FAW 000800 CH 6.84 11.59 10.44 1.25 1.18 5.9 6.8 Foton 600166 CH 6.21 9.86 7.78 1.24 1.09 14.4 13.6 VW VOW GR 132.8 6.62 5.79 0.93 0.81 15.5 15.0 Daimler DAI GR 38.275 7.22 6.52 0.95 0.87 13.7 14.3 BMW BMW GR 60.135 7.50 7.15 1.28 1.15 18.3 16.6 Toyota 7203 JP 3000 34.46 11.51 0.92 0.88 2.7 8.1 Honda 7267 JP 2361 8.19 0.89 0.0 11.2 Nissan 7201 JP 656 8.32 6.48 0.89 0.80 11.0 12.8 Suzuki 7269 JP 1602 16.00 11.75 0.93 0.86 5.8 7.4 Isuzu 7202 JP 387 8.78 8.52 1.69 1.42 20.4 19.7 Hyundai 005380 KS 236500 7.33 6.74 1.46 1.22 21.4 18.9 Kia 000270 KS 71300 6.44 5.92 1.63 1.31 28.5 23.9 GM GM US 24.57 6.60 5.35 1.10 0.87 21.8 22.0 Ford F US 10.05 6.70 5.71 2.00 1.49 38.8 35.6 TATA TTMT IB 269.7 7.72 6.73 3.00 2.16 46.7 37.1 Source: IBES

Companies mentioned BYD (1211 - HK$13.46 - SELL) Dongfeng (489 - HK$9.12 - UNDERPERFORM) Dongfeng Auto (N-R) GAC (2238 - HK$4.85 - SELL) Great Wall Motor (2333 - HK$21.20 - BUY)

Key to CLSA investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded.

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