2014 China Auto Outlook:Shifting gears

10% passenger vehicle (PV) unit growth in 2014F,sustained by urbanization, rising disposal incomes and astable domestic economy. This rate of growth would beslower than the 15.7% YoY unit sales growth reached in2013, according to the China Association of AutomobileManufacturers (CAAM).

Bumper SUV unit sales, up 49.6% YoY in FY13, are set tocontinue in 2014F based on (1) the low penetration rate ofSUVs in China; (2) promising new SUV models fromleading domestic and foreign JVs; (3) attractive price pointswith higher quality SUVs; and (4) enriched product line-upscatering to different customer demographics. Taking intoaccount these tailwinds, we anticipate SUV unit salesgrowth of 25% or more in 2014F.

Localization of luxury vehicles supports growth.Despite the slow start to luxury vehicle sales early this year,sales momentum picked up in 2H13. We are still positive onthe China luxury PV market because of price-competitivelocalized luxury vehicles and the growing affluence ofChinese middle-class consumers. We look for 17% YoYgrowth from luxury vehicle makers in 2014F. Among the topluxury brands, we think Mercedes, Volvo and Cadillac havethe best growth outlook for both 2014F and 2015F.

Mixed performance by domestic brands. In contrast toChina’s luxury vehicle segment, competition among China’sdomestic auto makers has intensified owing to theown-brands from foreign JVs as well as increasing R&Dcosts required to remain competitive. Great Wall Motor(GWM, 2333 HK, Outperform) and Geely Automobile(175 HK, Neutral) are the only established home-grownbrands capable of competing with the foreign brands, in ourview. As a result, we expect market share for China’sdomestic car brands to shrink further in 2014F.

GWM, GAC, Zhongsheng our preferred plays. Weexpect 2H14 to be better than 1H14 in terms of priceperformance. We prefer (1) GWM for its China SUV growthstory; (2) GAC (2238 HK, Outperform), for the recovery ofits Japanese brands and the profits from its recentlyestablished JVs; and (3) Zhongsheng (881 HK,Outperform) for better aftersales revenue growth and itsMercedes growth story. Undemanding valuations andpotential earnings upside support our overall positive view.