/Hong Kong China Auto

2013 China Auto Outlook 6 February 2013

Have money, will travel

 10% passenger vehicle unit growth in 2013F. We see Valuations summary urbanization, rising disposal incomes and improvement Brilliance GWM DFM GAC BYD in the domestic economy resulting in China passenger (1114 HK) (2333 HK) (489 HK) (2238 HK) (175 HK) (1211 HK) vehicle (PV) market growth of 10% YoY in 2013F. This Share price (HK$) 10.68 30.00 12.30 6.47 4.08 27.25 would represent a big improvement on 2012 which saw CCBI rating* O O N N O N 7% YoY unit sales growth according to China TP (HK$) 11.7 33.8 13.3 6.70 4.80 25.00 Association of Automobile Manufacturers (CAAM). Upside (%) 10.0 12.7 8.1 3.5 17.6 (8.2) EPS, YoY (%)  Luxury PVs still the sweet spot. Despite slowing FY12F 26.1 53.0 (23.8) (74.5) 23.2 (97.5) overall PV sales, China’s top-ten luxury vehicle brands FY13F 28.6 20.0 14.3 203.1 31.9 N/A recorded 37%/23% YoY growth in 2011/12. We are still P/E (x) positive on China’s luxury PV market because of the FY12F 19.3 13.2 10.9 29.6 14.1 N/A attractive price points of made-in-China luxury vehicles FY13F 14.6 10.7 9.2 9.5 10.4 32.6 and the growing affluence of Chinese consumers, P/B (x) especially within the country’s burgeoning middle class. FY12F 4.8 4.2 1.6 1.2 2.5 2.5 We look for 20% YoY growth for the top-ten luxury FY13F 3.5 3.4 1.4 1.0 2.0 2.2 vehicle makers in 2013F. Our top pick within the luxury Closing price on 6 February 2013 vehicle space remains Brilliance China (1114 HK, * CCBIS ratings: O = Outperform; N = Neutral; U = Underperform Outperform). Source: CCBIS estimates

 GWM and Geely stand out among own-brand vehicle manufacturers. In contrast to China’s comparatively sedate luxury vehicle market, competition among China’s domestic own-brand automakers is intense. Within the listed own-brand PV space, we like Great Wall Motor (GWM, 2333 HK, Outperform) and Geely Auto (175 HK, Outperform) based on their compelling model lineups and superior export capabilities. Following a recent stumble, BYD’s (1211 HK, Neutral) recovery continues; however, its valuation looks stretched.

 Recovery on track for Japanese JVs. We believe (DFM, 489 HK, Neutral) and Guangzhou Automobile Group (GAC, 2238 HK, Neutral) will continue to recover from their 4Q12 troughs, and we anticipate monthly sales will improve in 1Q13F. Yet the mid-end PV space remains precarious due to price

competition among the local US, European and Korean Ronnie Ho JVs. Of the two, we prefer DFM over GAC on the (852) 2533 2486 former’s solid track record and better model lineup. [email protected]

 Brilliance and Geely our preferred plays. We like Candy Tai Brilliance on its BMW PRC growth story and expect its (852) 2844 3606 [email protected] luxury vehicle segment to continue to outperform the

general PV market over the next two years. We also like Ke Qu Geely Auto for its improving SUV model lineup and (852) 2844 3601 export opportunities. [email protected]

Please read the analyst certification and other important disclosures on last page 2013 China Auto Outlook 6 February 2013

China vehicle sector valuation matrix

CCBIS Share price* Market cap EPS growth (%) P/E (x) Company Stock code rating (HK$) (US$m) FY12F FY13F FY14F FY12F FY13F FY14F Passenger vehicle manufacturers Dongfeng Group 489 HK Neutral 12.30 13,622 (23.8) 14.3 11.7 10.9 9.2 8.2 Great Wall Motor 2333 HK Outperform 30.00 12,817 53.0 20.0 16.9 13.2 10.7 8.9 BYD Company 1211 HK Neutral 27.25 8,754 (97.5) N/A 44.8 N/A 32.6 22.1 Brilliance China 1114 HK Outperform 10.68 6,899 26.1 28.6 34.8 19.3 14.6 10.6 GAC Group 2238 HK Neutral 6.47 6,364 (74.5) 203.1 41.1 29.6 9.5 6.5 Geely Auto 175 HK Outperform 4.08 4,333 23.2 31.9 14.5 14.1 10.4 8.9 Average 17.4 14.5 10.9

Commercial vehicle manufacturers 2338 HK Not Rated 33.6 8,560 (34.7) 20.6 9.3 15.1 12.5 11.4 3808 HK Not Rated 5.6 1,994 (53.1) 67.5 29.0 N/A 26.4 20.5 1122 HK Not Rated 2.11 673 (9.3) 21.3 9.1 13.6 11.2 10.3 Average 14.3 16.7 14.1

Auto dealerships Zhongsheng 881 HK Not Rated 13.02 3,194 (29.6) 72.0 28.5 20.5 11.9 9.3 Baoxin Auto 1293 HK Not Rated 8.55 2,810 24.4 69.3 33.6 20.9 12.3 9.2 DCH 1828 HK Not Rated 9.13 2,147 2.2 12.9 19.7 12.3 10.9 9.1 Zhengtong Auto 1728 HK Outperform 7 1,988 20.9 53.5 38.0 18.5 11.7 8.4 Yongda 3669 HK Not Rated 8.73 1,661 N/A 39.4 36.6 19.0 13.6 10.0 Average 18.2 12.1 9.2

Auto and related components Xinyi Glass 868 HK Not Rated 5.19 2,525 (12.7) 43.0 13.7 16.9 11.8 10.4 Johnson Electric 179 HK Not Rated 5.32 2,453 (1.2) 11.8 5.3 13.5 12.1 11.5 Minth Group 425 HK Not Rated 11.42 1,582 7.5 14.5 9.5 11.9 10.4 9.5 Xingda International 1899 HK Not Rated 3.52 690 (26.3) 30.2 20.2 14.3 11.0 9.1 Average 14.2 11.3 10.1 Closing price as of 6 February 2013 Source: Bloomberg, CCBIS estimates

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2013 China Auto Outlook 6 February 2013

We like Brilliance and Geely our preferred plays within the Hong Kong-listed PV space

We continue to like the PRC automobile growth story because of the current low vehicle penetration of the market, rapid urbanization, rising disposal incomes, and the government’s strategic support for the domestic automobile industry. However, downside risks remain, as policy risk and the uncertain macro environment may put the brakes on overall growth in 2013/14F.

 Brilliance China (1114 HK, Outperform) benefiting from the PRC BMW growth story. Brilliance, BMW’s PRC JV partner, is a good proxy for investing in China’s burgeoning luxury vehicle market based on 40%/38% YoY growth in Brilliance-BMW sales in FY13/14F. BMW have had excellent traction with Chinese consumers in the market for luxury cars, which bodes well for the company’s future growth.

 Geely Auto (175 HK, Outperform) riding surging SUV and export growth. Geely has been busy developing manufacturing technologies through in-house innovation and overseas acquisitions. It is now rolling out a new multi-brand strategy to cater to different customer segments. We like the company’s robust model lineupin FY13/14F and superior traction in export sales. It is in good position to ride the recovery in the domestic PV market and growth opportunities in developing countries.

 Great Wall Motor (GWM, 2333 HK, Outperform) a superior SUV brand in China. GWM is an emerging Chinese vehicle maker offering a wide range of vehicles in various product categories. We like the company’s leadership in SUVs and its new SUV model lineup for FY13/14F, especially the H2/H5/H6/H8. GWM’s existing and still competitive models are being sold to both the domestic and export markets and will, we believe, help GWM deliver solid EPS growth in FY13/14F.

 BYD (1211 HK, Neutral) slowly coming back to life. BYD experienced a difficult FY11/12 due to its over-ambitious across-the-board production capacity expansion and inefficient PV channel management. Nevertheless, the stars are beginning to align for BYD as we note (1) improving operating performance for its PV division, (2) a narrowing loss from its solar division, (3) good traction in new energy vehicle sales, notably sales of its plug-in hybrid (“Qing”), E-taxi (“E6”) and E-bus (“K9’), coupled with (4) favorable government subsidies and support from local governments; all of which will serve to beef up sales in FY13F/14F.

 Dongfeng Group (DFM, 489 HK, Neutral) recovery on track. DFM, with its three JVs – (7201 JP, Not Rated), PSA Peugeot Citroen (UG FP, Not Rated) and Honda (7267 JP, Not Rated) – is one of China’s largest automobile manufacturers. Following a dip in sales in 2H12 stemming from the Diaoyu Island dispute, DFM-Honda and DFM-Nissan have slowly recovered from their trough in October 2012. However, the mid-end PV space is still fraught with risk due to price competition among local US, European and Korean JVs. Despite this, DFM remains one of China’s better leading vehicle makers.

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2013 China Auto Outlook 6 February 2013

 Guangzhou Automobile Group (GAC, 2238 HK, Neutral) betting on its new Fiat and JVs. Despite the continuing recovery from the 4Q12 trough by GAC’s Japanese JVs, we believe the medium-term performance of GAC-Honda and GAC-Toyota will be dragged down by the company’s once-popular but now ageing models. Growth will be further constrained by the considerable start-up costs for the recently established GAC-Fiat and GAC-Mitsubishi JVs. Given the headwinds facing GAC, management may look upon FY13F/14F as a consolidation year for the company.

Risks: (1) Restrictions on new vehicle purchases in tier-1 cities beyond Beijing, Shanghai and Guangzhou, where restrictions are already in place, (2) a slowdown in the domestic economy that depresses auto sales, (3) delays in new capacity expansion and new model rollouts, and (4) intensified price competition among local and foreign JV OEMs.

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2013 China Auto Outlook 6 February 2013

Looking for 10% PV unit growth in FY13F

Following 5.4%/6.9% unit growth in FY11/12, we are optimistic about the local PV market for FY13F and expect it to reaccelerate to 10% this year on the back of (1) improvements in the local economy since the 3Q12 trough, (2) rapid urbanization, and (3) rising disposable incomes among Chinese consumers. Although we may see policy headwinds such as vehicle purchase restrictions in tier-1 cities and uncertainty related to the precarious state of the global economy, we believe the current low vehicle penetration rate coupled with the country’s rapidly expanding middle class will support the long-term secular growth story of the domestic auto industry.

GDP growth recovering from 3Q12 trough PV unit growth of 10% in FY13F

% YoY change 2011A 1Q12A 2Q12A 3Q12A 2012F 2013F '000 unit Real GDP 9.20 8.10 7.60 7.40 7.80 8.00 18,000 55% FAI (YTD) 23.80 20.90 20.40 20.50 20.80 21.00 16,000 50%

Retail sales 17.10 14.80 14.00 13.80 14.20 14.50 14,000 45% CPI 5.40 3.80 2.90 1.90 2.60 2.70 40% 12,000 Exports 20.30 7.60 10.50 4.50 8.20 9.50 35% Imports 24.90 7.10 6.50 1.60 5.20 11.50 10,000 30% Trade surplus (US$b) 155.10 1.10 68.80 79.50 220.00 204.00 8,000 25% M2 13.60 13.40 13.60 14.80 13.80 13.00 6,000 20% 1-year deposit rate 3.50 3.50 3.25 3.00 3.00 2.75 4,000 1-year lending rate 6.56 6.56 6.31 6.00 6.00 5.75 15% 2,000 10% Deposit RRR 21.00 20.50 20.00 20.00 20.00 19.00 0 5% 2006 2007 2008 2009 2010 2011 2012 2013F PV PV unit growth YoY Source: CCBIS estimates Source: CAAM, CCBIS estimates

 Strong local economy buoys auto sales. Over the past decade, China’s GDP has been growing at an impressive rate. Both GDP and per capita GDP have quadrupled over the period. During and after the previous financial crisis, GDP growth kept up at an impressive pace (9.2%/10.3%/9.2% in FY09/10/11). Although we saw slowing growth momentum in 2Q12/3Q12, our economist forecasts a modest recovery in GDP to 8.0% in 2013F.

 Urbanization and rising disposable income the catalysts. We anticipate explosive growth within China’s urban populations along with rising disposable income, translating to strong demand for personal vehicles. Despite slowing vehicle sales in FY11/12, we continue to believe that urbanization and China’s growing affluence will support PV sales momentum for years to come.

 A strategic industry enjoying government support. In the wake of the financial crisis of 2009, the Chinese government implemented its Auto Industry Restructuring and Revitalization Plan with the original aim of boosting China’s then-struggling auto industry. After the worst of the crisis had passed, certain favorable policies were terminated, particularly after stronger-than-expected sales performances seen in 2009/10; however, the government kept policies related to energy-saving and instituted new energy-saving vehicle subsidies to support technological development in this area.

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2013 China Auto Outlook 6 February 2013

SUV still the bright spot

Chinese consumers prefer SUVs as this class of vehicle combines the high clearance of off-road vehicles with the spaciousness of station wagons. Today, SUVs are the most desired class of PVs in China due to their robust exteriors, safety record and superior off-road capability. Unit sales of SUVs were up 22.8%/23.5% in 2011/12, making them the best performing sub-category in the country. We attribute excellent SUV sales are in large part due to China’s exploding suburban population and bumpy road surfaces. Despite impressive growth momentum for SUVs, the top-ten selling PV categories were still dominated by sedans in 2012.

VW Tiguan – top-selling SUV with 173k in FY12 DFM-CRV – Second best selling SUV with 169k in FY12

Source: VW Source: Honda

SUV sales growth in China slowed from 100% YoY in 2010 to 23% YoY in 2011/12, though admittedly, 23.5% growth in SUV sales was still better than lackluster PV growth of 6.9% in 2012. Triple-digit sales growth momentum for SUVs may not return, but we remain positive for 2013F/14F because of (1) the still low penetration rate of 12.9% for SUVs, (2) promising new SUV models from leading domestic and foreign JV makers, (3) attractive price points with better quality from local JVs, and (4) comprehensive product lineups catering to different customer demographics.

China top-selling SUVs (2012) SUVs outperforming PVs and sedans

Rank Manufacturer Model Unit sales 70% 1 SH-VW Tiguan 173,100 60% 2 DF-Honda CR-V 169,000 50% 3 GWM Haval H6 132,700 40% 4 BAIC-Hyundai Ix35 108,200 30% 5 DF-Nissan Qashqai 105,100 20% 6 Tiggo3 104,000 10% 7 FAW-Toyota RAV4 98,200 8 FAW-VW Q5 90,200 0% 9 BYD S6 86,900 (10)% 10 DF Yueda-Kia Sportrage 76,000 (20)% (30)% Jul-11 Jul-12 Oct-11 Oct-12 Jan-11 Apr-11 Jun-11 Jan-12 Apr-12 Jun-12 Feb-11 Mar-11 Aug-11 Sep-11 Dec-11 Feb-12 Mar-12 Aug-12 Sep-12 Dec-12 Nov-11 Nov-12 May-11 May-12 PV YoY Sedan YoY SUV YoY Source: CAAM data Source: CAAM data

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2013 China Auto Outlook 6 February 2013

Expecting 23% SUV growth in 2013F

According to CAAM, SUV sales in China topped 2.0m units in 2012, up 23.5% YoY and accounting for 12.9% of all domestic passenger vehicle sales. Yet the PRC SUV penetration rate remains low. The industry’s saving grace is its strong growth momentum – we expect SUV sales growth to maintain at 20-25% YoY in 2013F/14F, on robust end demand for off-road vehicles and increasing numbers of new SUVs being sold at attractive price points by both domestic and joint-venture passenger vehicle OEMs. Virtually all leading passenger vehicle OEMs have stepped up the pace of their SUV launches. Those that will be most successful will be the own-brand and luxury JV OEMs with good brand recognition as we believe these companies will reap the biggest profits from surging SUV demand.

Increasing number of new SUVs in the market since 2012

SUV (RMB) 2010 2011 2012 2013F 2014F PRC brands 80-100k GWM-M4 Changan-CS35 GWM-H2 BYD-S3 100-150k Geely-GX7 Chery-Tiggo 5 New Haval H-5 JAC-S5 Geely-SX7 150-250k -GS5 Geely-EX8 GWM-H8 BYD-S7

JV brands 130-200k Hyundai-ix35 Buick-Encore Ford Ecosport Citroen Cross Ford-Kuga Mitsubishi-ASX Peugeot-3008 Citroen-DS 200-300k Toyota-RAV4 Chevy-Captiva Honda-New CRV Hyundai-Santa Fe Toyota-New RAV4 Renault-Koleos Kia-Sportage VW-Tiguan 300-500k Toyota-Highlander Audi-Q5 MB-GLK facelift Audi-Q5 facelift Mazda-CX5 BMW-X3 JLR-Freelander BMW-X1 facelift Audi-Q3 Volvo-XC60 JLR-Evoque

Imported brands 200-300k Fiat-Freemont Kia-Sorento Subaru-Forester Jeep-Compass Jeep-Liberty Source: Company, CCBIS estimates

Among local brands producing SUVs, GWM remains in the driver’s seat. GWM, which entered the SUV market in FY02, is now one of China’s leading domestic SUV makers, with 147k/280k SUVs sold in FY11/12. The company’s top-selling SUV, the Haval H6, is the only local brand among the top-five best-selling SUVs in China, with 133k unit sales in FY12. Despite greater competition from local OEMs like Geely, BYD, and Chery, we consider the good brand recognition of the Haval series and GWM’s rich model lineup (notably the H2, H5, H6, and H8), a boon as the company strives to maintain its lead over local OEMs.

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2013 China Auto Outlook 6 February 2013

GWM H6 – top-selling domestic SUV with 133k in 2012 Key local SUV makers in 2012

Unit 16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 3 Trumpchi GS5 BYD S6 Haval H6 Geely GX7 ChangAn CS35 Source: GWM Source: CAAM data

Mid-end SUV competition heating up. The mid-end SUV segment, with ASPs in the RMB150k-300k range, will be the most competitive segment in 2013F/14F, in our view, because of the increasing number of new joint ventures like GAC-Mitsubishi, GAC-Fiat, DFM-Renault and Changan-PSA, to name just a few. New models will be launched from all of China’s leading JV manufacturers. In 2012, Tiguan (FAW-VW) and CRV (DFM-Honda) were the top-two best-selling SUVs, with unit sales that topped 173k and 169k, respectively. Looking further down the road, we view the RAV4 (FAW-Toyota) and Kuga (Changan-Ford) as strong contenders to break into the top-five bestselling SUV spots in 2H13F.

Toyota RAV4 Ford Kuga

Source: Toyota Source: Ford

Luxury JVs the sweet spot. In contrast to the mid-end category, we expect China’s luxury vehicle makers to enjoy robust demand for SUVs mainly based on the country’s growing affluence. FAW-Audi has taken a commanding lead within this category as its popular Q5 posted unit sales of over 90.2k units, a 53.8% YoY increase in 2012. To extend its lead, FAW-Audi will introduce a compact SUV, the Q3, in 1H13F. In view of FAW-Audi’s recent moves, we see no cause for it to relinquish its lead within the luxury SUV market. Its strongest contenders in 2014F/2015F, in our view, will be the localized X3 (Brilliance-BMW), the XC60 (Geely-Volvo), and the Evoque (Chery-JLR).

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2013 China Auto Outlook 6 February 2013

BMW X3 Range Rover Evoque

Source: BMW Source: Land Rover

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2013 China Auto Outlook 6 February 2013

Export markets the wild card

After years of in-house R&D and expansion of new vehicle production capacity, we now see certain domestic automakers making good traction within the export market, especially Russia, Africa, South America and Eastern Europe. From 2003, the number of exported vehicles increased up until the credit crisis of FY08. But by 2010 the export market had fully recovered and according to CAAM, Chinese automakers sold 588K passenger vehicles to the overseas market in 2012, an increase of 24.5% YoY. GWM and Geely Automobile sold 95k and 102k units, respectively, representing 15% and 22% of total sales for the year.

Increasing exports of PVs from Chinese automakers

'000 unit 600 110% 100% 90% 500 80% 70% 60% 400 50% 40% 30% 300 20% 10% 200 0% (10)% (20)% 100 (30)% (40)% (50)% 0 (60)% 2009 2010 2011 2012 Jul-12 Jul-11 Oct-12 Oct-11 Jan-12 Apr-12 Jun-12 Jan-11 Apr-11 Jun-11 Aug-12 Sep-12 Dec-12 Aug-11 Sep-11 Dec-11 Feb-12 Mar-12 Feb-11 Mar-11 Nov-12 Nov-11 May-12 May-11 Total PV export YoY

Source: CAAM

Unlike the slowing domestic PV market, leading own-brand domestic manufacturers enjoyed superior unit sales growth within the developing markets in 2011/12. However, we see domestic and foreign JV automakers pursuing different sales strategies according to their respective domestic capacity expansion plans.

 Low-end SUVs and sedans still the mainstream. Despite strong growth momentum in 2011/12, we still see good potential for the low-to-mid-end export markets of the domestic automakers given their competitive pricing strategies and quality value-for-money models. Last year, GWM and Geely sold 95k and 102k PVs, respectively, to the overseas market, and they expect to record 20% and 50% YoY sales growth in FY13F, with most of the growth from sales to emerging countries.

 Made-in-China luxury sedans the medium-term goal. The big-three German luxury makers have tailor-made a long sedan for the mainland market. Each of the big-three offers a long wheelbase sedan for the BMW 5-series, Audi A4/A6, and Benz E-series. In the medium term, should the big-three German companies manage to satisfy demand within the PRC, only then would they consider selling the long wheelbase luxury sedan model to emerging markets.

 New energy vehicles the long-term target. Part of the PRC government’s 12th Five-year Plan is to jump-start new energy vehicle adoption in China, with the first step being to assist the R&D efforts of local auto manufacturers developing electric vehicles. The long-term goal is to create a new energy vehicle market within five to ten years. We view this as a long-term positive to domestic hybrid/EV manufacturers like BYD.

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2013 China Auto Outlook 6 February 2013

Strong demand for luxury vehicles to continue

Sales of China’s top-ten luxury brand vehicles were up 23% YoY to 1.1m units in 2012F, according to our estimate, outperforming overall PV unit growth of 7% YoY during the year. In fact, luxury vehicle makers with a strong local foothold have consistently outperformed their international peers in terms of unit growth and market share. Two good examples of luxury vehicle makers with strong local ties are Audi and BMW, which both recorded superior sales growth in China of 31% and 40% YoY, respectively, in 2012. We anticipate their success will extend into 2013F/14F, largely due to their well-established dealership networks, customized long-wheel-base (LWB) sedans, and successful local JV partners.

Top-five luxury brands unit sales in China in 2010-2015F

Units Audi BMW Mercedes JLR Lexus 2010 225,588 44% 158,489 84% 147,670 116% 26,114 96% 52,933 53% 2011 309,888 37% 217,068 37% 193,339 31% 42,063 61% 56,303 6% 2012 405,838 31% 303,169 40% 196,211 1% 73,347 74% 64,000 14% 2013F 487,006 20% 363,803 20% 225,643 15% 95,351 30% 80,000 25% 2014F 574,667 18% 429,287 18% 259,489 15% 123,956 30% 92,000 15% 2015F 660,867 15% 493,680 15% 298,412 15% 154,946 25% 105,800 15% Source: CAAM data, CCBIS estimates

All major luxury brands expanding in China. Looking to take advantage of China’s expanding wealthy classes, Germany’s top-three luxury automakers have stepped up efforts to impress their more affluent Chinese customers. So far, Audi and BMW have done a good job attracting China’s luxury shoppers, recording over 31% YoY unit sales growth in 2012. Audi continues to take the lead in the luxury vehicle market with total sales of 405,838 units. BMW (including Mini) has followed Audi’s lead with 40% YoY growth to 303,169 units. Mercedes did not fare quite as well due to channel and model issues. It produced a flat year with 196,211 deliveries (up 1% YoY). In order to keep up with China’s rising affluence and growing demand, Germany’s top-three luxury automakers have plans to expand their PRC JV production capacity.

Audi Q5 – China’s best-selling luxury SUV of FY12 Audi A6L – China’s best-selling luxury sedan of FY12

Source: Audi Source: Audi

Germany’s top-three luxury vehicle brands together sold 905,218 units in 2012, with local manufacturers making up more than 60% of total unit sales for the year. Audi entered the PRC market much earlier than its German rivals; moreover, its made-in-China A4L and A6L were well-received. So far, Audi has taken the lead in the local luxury market with over 80% unit sales from its PRC JV facilities. Around 50% of the vehicles manufactured by BMW and Mercedes-Benz were from their JV facilities.

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2013 China Auto Outlook 6 February 2013

Market share of luxury brands for 2012 (Audi in the lead) 20% YoY growth for BMW and Audi in 2013F

Other '000 unit JLR 7% 500 6% Volvo 4% Audi 400 35% Lexus 5% 300

Benz 200 17%

100

0 BMW Audi BMW Mercedes Lexus Volvo JLR Cadillac Porsche 26% 2009 2010 2011 2012 2013F Source: Company data, CCBIS estimates Source: Company data, CCBIS estimates

Audi’s vehicle sales in the China market over the past few years have been encouraging in large part due to the popularity of the made-in-China long-wheel-base A6L and A4L. Besides Audi’s long-wheel-base luxury sedan, its Q5 compact-size luxury SUV has also been well-received by China’s rising middle class because of the Audi SUV’s superior all-wheel drive capability, appealing exterior design and outstanding engine performance. In 2013F, FAW-Audi’s new Foshan facility will roll out the compact Q3 SUV and possibly the compact A3 sedan. Despite intense competition within China’s luxury vehicle market, we believe both Audi and BMW are capable of delivering 20% unit growth in 2013F because of their more extensive distribution networks and higher localized ratios.

BMW and Audi the top performers

'000 unit 420 120%

360 100%

300 80%

240 60%

180 40%

120 20%

60 0%

0 (20)% 2008 2009 2010 2011 2012 J-12 F-12 M-12 A-12 M-12 J-12 J-12 A-12 S-12 O-12 N-12 D-12 BMW + Mini Audi (Inc. HK) Benz (Inc. HK) BMW+Mini YoY Audi YoY Benz YoY Source: Company data

Following the Audi and BMW success stories, other leading foreign luxury brands have been working to fast track local JV production capacity expansion. In particular, Geely-Volvo, Chery-JLR, and DFM-Infiniti are keen to expand their local production facilities and increase their respective localization ratios. Among all the contenders, we believe sales growth of Range Rover and Volvo will pick up the most in 2014F because of new local capacity and their growing number of price competitive made-in-China luxury models.

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2013 China Auto Outlook 6 February 2013

Still early days for new energy vehicle adoption

Responding to gas demand rising and greater call for clean air quality, the Chinese government is keen to put its weight behind the development of new energy vehicles. One of its first initiatives was to revise its targets for new energy vehicle sales. It is now looking for accumulated sales of 500k by 2015F and 5.0m new energy vehicles by 2020F. To achieve this end the central government is now providing subsidies of around RMB50k-60k per vehicle for electric and plug-in hybrid vehicles.

Car & Driver’s 2012 vehicle of the year, the “Tesla S” BYD “Qin” will be on the market by 2Q13F

Source: Tesla Source: BYD

Lagging developed countries (with good reason). China is lagging other developed countries in hybrid and electric vehicle mass market adoption because of the unattractive price point of its hybrids. In our view, there are several important factors that need to be in place to ensure the success of mass adoption of hybrid vehicles within the China market, including: (1) real and nominal incomes at levels much higher than the current average for regions lying outside the main cities; (2) more well developed cities capable of accommodating clean energy-related infrastructure; (3) local government stimulus plans such as cash subsidies, tax deductions and reserved parking for energy efficient cars in busy business areas; and (4) a citizenry appreciative of the need to protect the environment.

Hybrid/EV not having a good start in China. Hybrid vehicles have been under the spotlight ever since Toyota (7203 JP, Not Rated) launched the popular “Prius”. In FY12, Toyota sold 318k / 237K Prius in Japan/US, dominating the market for hybrid vehicles. Compare this performance with Toyota China, which sold only around 2.4k Prius in China because of the unattractive price point of the vehicle vis-à-vis the China market. Besides hybrid vehicles, the new energy vehicle market includes pure electric vehicles; however, a number of practical challenges must be overcome before this latter category gains traction. For one, the range of electric cars is still relatively short and maintenance costs are too high. Electric vehicles have a bright future once the technology matures and the necessary infrastructure is developed, and both will take years to realize.

Public transportation a good starting point. In our view, public transportation, including taxis and metropolitan buses, remain an excellent starting point for China as it strives to make transportation within its borders more energy efficient. A case in point is BYD, now collaborating with the Shenzhen and Changsha city governments on a pure electric taxi and bus pilot project.

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2013 China Auto Outlook 6 February 2013

BYD – E6 (taxi) in Shenzhen BYD – K9 (bus) at LAX airport

Source: BYD Source: BYD

Nationwide pilot project. Although China is still in the early stages of hybrid/EV adoption, various cities across the country, including Shanghai, Changchun, Shenzhen, Hangzhou and Hefei, have already begun pilot testing new energy vehicles. Citizens of Shenzhen, for example, will receive up to RMB80k towards the purchase of a plug-in hybrid vehicle or RMB120k towards the purchase of a pure electric vehicle. Over and above the purchase subsidies the city government is offering, Shenzhen has put numerous new energy vehicles, mainly E-taxis and E-busses, on the road. Since new energy vehicles were included as part of the 12th Five-year Plan, more and more cities are following Shanghai and Hangzhou’s lead by devoting greater resources to their incipient new energy vehicle programs.

SAIC- E50 EV BAIC-E150 EV

Source: SAIC Source: BAIC

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2013 China Auto Outlook 6 February 2013

Rating definitions Outperform (O) – expected return > 10% over the next twelve months Neutral (N) – expected return between -10% and 10% over the next twelve months Underperform (U) – expected return < -10% over the next twelve months Analyst Certification: The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of the report; (ii) neither they nor their respective associate(s) serves as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective associate(s) has any financial interests in the securities covered in this report. Disclaimers: This report is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly owned subsidiary of CCB International (Holdings) Limited (“CCBIH”) and China Construction Bank Corporation (“CCB”). 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