Chinese Auto:1H15results

Volume, pricing, margin, mid-term guidance, & RRR cut.

Despite a slower 2Q15, the impact to pricing and margin is limited.

OEMs’ margin eroded 0.5-3% YoY, and dealers’ new car sales margineroded 0.7-2.0% YoY but improved from 2H14 with healthy growthand stable margin from after-market business. Some OEMs guided formedium-term (5% CAGR) volume growth amid the 3.5% RRR cut toauto financing. We trimmed our 15CL-17CL EPS forecast by 0.2-5.6%but we find value after a 30-70% correction from June peak. We arebuyers of Great Wall/DFG and upgrade GAC to O-PF.

Winners and losers.

OEMs reported revenue growth from -17.5% to 45.4% YoY, margin erosion of 0.5-3.3% (less BAIC) due to the slowdown in 1H15. Brilliance (1114.HK - NR) was theloser while BAIC (1958 .HK – NR) and Geely (175.HK - NR) outperformed.

Four dealers have reported 1H15 results with revenue growth from -11% to 18% inwhich new car sales grew -14% to 18% YoY while after-market business grew 9%-23% YoY. New car sales margin improved from 2H14 for most of the dealers.

Guiding medium term volume growth.

Despite slowing growth in 1H15, most management remained optimistic aboutmedium-term demand outlook and some guided China’s (PV) demand to expandCagr of ~5% over the next 5-10 years. Geely and DFG are likely beneficiaries.

The relaxation of 3.5 ppt cut on RRR for auto financing companies not only has adirect implication of 3% more (net) loan allocation but political read-thru ofBeijing’s intention to support auto sales to stabilize the economy.

Currency risk is limited as most companies guided for 1-2% impact to EPS.

SUVs/new models driving market share gains.

Between the brands, YTD outperformers include Honda, Toyota and Beijing-Benzamong the foreign players, and other local players such as Great Wall, Geely, JAC,Chery, BYD. YTD underperformers include VW, GM, Hyundai, Kia and JLR.

Looking forward, OEMs with strong product cycles including Benz, Nissan and BMWwill most likely win market share while Audi and VW are potential losers.

The risk to profitability is intense competition and excess capacity.

Finding value after recent correction.

We trimmed our EPS by 0.2-5.6% for 15-17CL to factor in volume and margin riskbut we find value in the sector after a 30-70% correction from the June peak.

China auto related equities (less BYD) are trading at 5.8x 16PE (vs 5Y avg of 9.5xPE) and we value the sector at 7x PE (lower than 5Y -1sd) despite slower growth.

We maintain BUY on DFG and Great Wall, and upgrade GAC to O-PF (from U-PF).

and our TPs of HK$11.8, HK$30.6 and HK$6.43 imply 57%, 47%, 16% upside.