China Auto:So far so good

Auto OEMs 2013 performance in line. Hong Kong/ China-listed passenger vehicle OEMs reported in-line 2013 results with the six listed auto OEMs recording net income growth in the 16-583% YoY range. Within the Hong Kong-listed auto OEM space, Great Wall Motor (GWM, 2333 HK, Outperform) and Brilliance China (1114 HK, Outperform) look to have the highest earnings growth momentum with robust 2010-2013 CAGR of 45% and 38%, respectively.

As expected, dealerships miss earnings expectations.The top-three Hong Kong-listed PRC dealerships missed street earnings estimates by 5-12% due to lower-thanexpected ASP and gross profit margin for new vehicle sales.Better news came in the form of robust aftersales revenue growth and healthy financing and insurance commission income. Despite missing street estimates by 10%/5%, Zhongsheng Group (881 HK, Outperform) and China ZhengTong (1728 HK, Outperform) nevertheless reported good net income growth of 35% YoY and 39% YoY in 2013.

Government policy favors NEVs but purchase restrictions add a speed bump to further unit growth for gasoline vehicles. The good news: Following guidance issued by the central government, Beijing and Shanghai released local editions of new energy vehicle subsidies. We expect more pilot cities this year, each rolling out subsidies in support of the NEV market. The bad: The city of Hangzhou has imposed purchase restrictions and further controls on traffic as a means of curbing congestion and air pollution. We take this as a sign of things to come and anticipate other cities will follow suit, including Dalian, Shijiazhuang, Qingdao, Wuhan, Chengdu and Shenzhen. The news does not change our forecast for 10% PV unit growth in 2014F.

Beijing Auto show in late April under the spotlight. Much of the talk on the street right now is of the new models to be unveiled at April’s Beijing Auto show. The Mercedes C-class, the Porsche Macan, BYD-Daimler’s Denza EV and other plug-in vehicles will all be showcased.

GWM, GAC and Zhengtong our preferred plays. We anticipate 2H14F will be better than 1H14F in terms of overall price performance. We prefer (1) Great Wall Motor for its China SUV growth story; (2) GAC Group (2238 HK, Outperform), for its attractive model line-up and profits from new operations; and (3) Zhengtong for its diverse brand portfolio and undemanding valuation.