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					             China / Hong Kong Industry Focus
             Automobile Sector
Page 1
                                                                                                                 9 June 2011

         Fortune favours the dealers                                                                             HSI: 22,869
         •     Luxury brand auto dealers flourishing on low
               penetration rates and growing affluence; robust
               demand despite auto curbs in Beijing                                                              ANALYST
                                                                                                                 Rachel MIU · (852) 2863 8843·
         •     Inflationary pressures and capacity build-up key                                                  rachel_miu@hk.dbsvickers.com
               concerns for mass-market automakers
         •     Expect weak auto sales till inflection point in August
               when rising volumes in 4Q should push full year total                                              Recommendation & valuation
               volume growth to 8%
         •     Top auto dealer picks are China ZhengTong and                                                                                           Target                              FY11F  Mkt
                                                                                                                   Company                     Price     Price      Upside Recom              PE  Cap
               Zhongsheng Group for their luxury auto brand
                                                                                                                                                HK$       HK$           %                      x US$m
               exposure. Our pick of automaker is Dongfeng Motor.
                                                                                                                   Auto dealers
         Low luxury car penetration rate. China’s luxury car                                                       China
         market accounted for only c.5% of total sedan sales last                                                  ZhengTong                    8.99       10.9           21        Buy       20.2     2,311
         year, despite growing wealth and thus consumption. The                                                    (1728 HK)
         recently imposed auto curbs in Beijing is shifting buying                                                 Zhongsheng
         from low-end to expensive cars, due to the limited licences                                                                          14.84        18.6           25        Buy       15.5     3,641
                                                                                                                   (881 HK)
         available. On the affordability front, the average disposable
                                                                                                                   Dah Chong
         income in Tier 2 cities of RMB20K-30K last year is                                                        Hong                         8.27        9.9           20        Buy       10.8     1,934
         beginning to match Tier 1 cities’ RMB30-33K, implying                                                     (1828 HK)
         huge potential for luxury cars sales there. Another attraction                                            Sparkle Roll
         is that the luxury segment has fewer brands, is less                                                      (970 HK)
                                                                                                                                                1.47       n.a.          n.a.        NR       15.8         562
         fragmented, and hence faces less competition.                                                             Pang Da Auto
                                                                                                                                              33.29        n.a.          n.a.        NR       19.7     5,389
         Mass-market automakers facing new challenges.                                                             (601258 CH)
         Chinese self-brand automakers are facing a double                                                         Lentuo Int'l
                                                                                                                                                4.98       n.a.          n.a.        NR         5.0        147
         whammy: margin compression from rising costs and stiff                                                    (LAS US)
         competition from foreign JV brands. As an additional 20%+
         of existing production capacity or 4m units are expected to                                               Automakers
         come on stream in 2012, a supply glut is possible. Even so,                                               Dongfeng Motor
                                                                                                                                  13.16                    15.6           19        Buy         8.5 14,576
         luxury brand automakers are and will fare better as demand                                                (489 HK)
         outstrips supply. 4M11 luxury car sales grew >50% y-o-y vs.                                               Brilliance China
                                                                                                                                                6.97        9.1           31        Buy       16.5     4,477
         7.8% for the sedan segment.                                                                               (1114 HK)
                                                                                                                   Geely
         Auto dealers deserve more. Luxury auto brands generally                                                   Automobile                   2.88        3.3           15       Hold       10.1     2,759
         have better pricing power and higher margins from                                                         (175 HK)
         associated maintenance and servicing businesses. Estimated                                                Guangzhou
         earning growth of auto dealers is >50% compared to                                                        Auto                         8.22       n.a.          n.a.        NR         8.7    6,496
         automakers’ averaged growth of 20% this year. Since                                                       (2238 HK)
         luxury cars form part of the high-end discretionary sector,                                               Great Wall
         dealers here deserve better valuations compared to                                                        Motor                          11       n.a.          n.a.        NR         7.8    3,872
         automakers. In this report, we extended our analysis of the                                               (2333 HK)
         automobile sector by initiating coverage on auto dealers                                                  BYD Co Ltd
                                                                                                                                              23.95        n.a.          n.a.        NR       18.1     7,004
         with a positive outlook while maintaining a neutral view on                                               (1211 HK)
         automakers. Valuations of auto dealers are based on DCF,
                                                                                                                  Source: DBS Vickers
         using WACC and terminal growth of 11% and 2-3%
         respectively. We believe auto dealers’ valuations are still                                              Based on closing prices as at 7 Jun 2011
         attractive based on their FY12 earnings prospect.



             In Singapore, this research report or research analyses may only be distributed to Institutional    “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
             Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,   (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from
             Chapter 289 of Singapore.                                                                           or in connection with this report.”
             www.dbsvickers.com
             Refer to important disclosures at the end of this report
             ed- JW/ sa- CW
Industry Focus
Automobile Sector



Table of Contents
Investment summary                                                          3

Auto dealer company summary                                                4

Auto dealership the next up cycle                                          5
    Substantial upside on luxury car demand                                 5

    Auto dealers have better operating leverage                             8

Positive market prospect for dealership market                             9
    Dealership market relatively young and expects fast development         9

Investment risks in the auto dealership sector                            12
                                                  th
Overall auto market development under 12 Five-Year Plan                    13
    Auto consumption continues to grow                                     13

Investment concerns of automakers and inflection point for auto sector     16
    Watch out for a sales turnaround                                       16

Valuation and recommendation                                               18
    Higher valuations for auto dealers warranted compared to automakers    18

Stock Profiles                                                             30
    China ZhengTong (1728 HK)                                              30

    Zhongsheng (881 HK)                                                    60

    Dah Chong Hong (1828 HK)                                               81

    Sparkle Roll (970 HK)                                                 101

    Pang Da Auto (601258 CH)                                              122

    Lentuo International (LAS US)                                         128

    Dongfeng Motor (489 HK)                                               134

    Brilliance China (1114 HK)                                            136

    Geely Automobile (175 HK)                                             138

    Great Wall (2333 HK)                                                  140

    Guangzhou Automobile (2238 HK)                                        142

    BYD Co. Ltd. (1211 HK)                                                144

Appendix                                                                  146



Page 2
                                                                                                                Industry Focus
                                                                                                          Automobile Sector




Investment summary                                                auto consumption will continue to rise. By 2015, for example,
                                                                  we estimate new vehicles sales to reach 24.8m units, 2011-
                                                                  2015 CAGR of 6.2%.
Auto dealership networks crucial to luxury automakers. Auto
assemblers are relying more on auto dealership networks to        Investment risks on auto dealers and automakers. There are two
penetrate new markets. The role of premium and ultra premium      key investment risks, those faced by auto dealers and those by
auto brand dealerships is becoming more critical to automakers    auto assemblers.
to help establish a strong presence in China. Premium brands
automakers have identified China an important long-term           Generally, auto dealers’ sales are dependent on quota
growth market, given its strong economic fundamentals and         allocations and the size of the automakers’ advertising budgets;
low penetration rate for luxury cars. Last year, luxury cars      intense competition especially in the mass market segment;
accounted for approx. only 5% of total sedans sold. Long-term     rising costs for new dealership acquisitions; potential threats
prospects are promising and offer vast sales upside.              from auto restrictions in major cities. However, at least for
                                                                  luxury auto dealers, competition is less intense as there are
Premium and ultra premium auto brands command better              fewer players.
margins and face lesser competitions as they are selling niche
products where the number of brands is fewer. Hence, the           Certain automakers are facing short-term parts supplies
market is less fragmented and consumers are less price-sensitive. disruptions from Japan in 2Q-3Q; inflation pressure on higher
                                                                   production costs; over-capacity; and potential threats from auto
Challenges and opportunities faced by automakers. The              restrictions in major cities.
challenges faced by Chinese self-owned brands are more
formidable than those encountered by the foreign JV brands.        Valuations and top picks. We prefer auto dealers and premium
With a shift in consumption toward larger cars (due to rising      branded automakers, as these are in better position to defend
income levels) and foreign JVs introducing new models              margins and to capture new demand from the “trading up”
encroaching into their territory (i.e. T2 and T3 cities), Chinese  phenomenon favouring luxury auto brands. Earnings outlook of
self-owned brands are struggling. The termination of the           auto dealers is stronger, at >50% compared to averaged
subsidy policy which used to favour Chinese self-branded           growth of 20% for the automakers.
automakers has also affected sales.
                                                                   The business models of auto dealers are slightly more
Sino-foreign JVs are aggressive in launching self-owned brands compelling, as they have more scope to grow their after-sales
co-developed with their foreign partners in order to penetrate     market, in turn boosting profit margins. On this basis, auto
untapped markets. These new models are competitively priced        dealers should be valued at a premium to automakers but at a
in order to rival the Chinese self-branded vehicles. The less than discount to general retailers, since these are not regarded as
100 vehicles per 1,000 people penetration rate in Tier 2 (‘T2’)    pure retail companies.
and Tier 3 (‘T3’) provinces, represents a large potential market
for foreign JV automakers. What is more, T2 and T3 cities’         Applying DCF on auto dealers, we employ a WACC of 11% and
disposable incomes are catching up with T1 cities, hence           terminal growth factor of 2-3% to arrive at the TP of each of
affordability for luxury cars is the highest it has been.          the listed auto dealers. Based on our DCF calculation, this
                                                                   translates into a FY12 average PE of 12.9x for the sector. We
2011 total auto sales growth revised to 8%, but mid-term           believe DCF will better capture the fair values of the auto
outlook remains positive. In the wake of 5M11 sales data and       dealers as they are rapidly expanding their dealership network in
the impact from the disruption to Japan auto parts supplies, we the coming years to fuel earnings growth.
have revised down our 2011 volume projection from 20m units
to c.19.5m units. This represents c.8% growth from last year’s     China ZhengTong and ZhongSheng Group are our top picks for
c.18m units sold.                                                  their luxury auto brand exposure as well as fast network
                                                                   expansion program.
However, we believe mid-term prospects remain bright, given
the low auto penetration rates and rising income levels. China     Automakers have been de-rated recently due to slowing
had about 60 vehicles per 1,000 population for the country as a demand and vehicle supply shortages. On average, these
whole last year, extremely low compared to developed nations. companies are valued at 11.6x on FY11 earnings. We believe
With China being the second largest economy in the world,          the inflection point is around August, where auto parts supplies




                                                                                                                            Page 3
Industry Focus
Automobile Sector



should gradually resume back to normal levels and with the         company achieved 63% growth to approx. 100K volume sales.
unleashing of pent-up demand boosting 4Q sales. Nevertheless,      Japanese brands accounted for approx. 84% of total volume
we recommend investors to look more to FY12 due to its             last year.
stronger earnings outlook and valuation of 9.9x. Our pick is
Dongfeng Motor for its strong management quality to                Dah Chong Hong (1828 HK). The group is a diversified
overcome current challenges.                                       conglomerate with auto retailing, food & consumer products
                                                                   trading and logistic services. DCH is the national distributor of
Auto dealer company summary                                        Bentley and Isuzu in China and has 55 4S shops in the mainland.
                                                                   The company plans to add 10-15 new outlets this year to boost
China ZhengTong (1728 HK). Company has 24 ‘4S’ (sales, spare its auto business. It has 13 Bentley shops and plans to have
parts, servicing and survey) shops selling super luxury and luxury another 5 Bentley dealerships this year, given the potential
cars such as Porsche, BMW, Audi and mid-high end vehicles          offered by the luxury market. DCH represents 20 auto
such as Nissan, Honda, Buick and etc. ZhengTong is the second companies, including Mercedes Benz, Audi, Volkswagen and
largest BMW dealership group in China, with 10 shops selling       the major Japanese brands.
the BMW marque. The company plans to double its 4S shops
this year and add 20 more outlets next year to drive growth.       Sparkle Roll (970 HK). An ultra premium brand management
Luxury auto brands accounted for over 60% of total revenue         company, Sparkle Roll sells Bentley, Lamborghini and Rolls-
last year. The company sold about 24,000 automobiles last year. Royce autos mainly in Beijing and surrounding areas. In non-
                                                                   auto operations, its sells watches (Richard Mille, DeWitt,
ZhongSheng Group (881 HK). ZhongSheng is one of the leading Parmigiani), jewellery (Boucheron, Federico Buccellati) and fine
auto dealership groups with 98 4S shops last year. The company wine (Groupe Duclot, Chateau Margaux). Auto sales remain a
offers a wide selection of vehicles including luxury and super     large part of its total business but the company intends to
luxury brands such as Porsche, Mercedes Benz, Lexus and Audi       leverage on its cross-selling abilities to promote luxury goods to
while mid-end brands include models from Toyota, Honda,            its auto customers. The company operates mainly in Beijing and
Nissan and General Motors. The company intends to establish        intends to open new shops in Tianjin and Dalian to expand its
40 new 4S shops each year for 2011 and 2012. Last year, the        auto coverage.




 Page 4
                                                                                                                                                             Industry Focus
                                                                                                                                                     Automobile Sector




Auto dealership the next up cycle                                           Compared to other more mature markets such as North
                                                                            America and Western Europe, where their luxury car sales
Substantial upside on luxury car demand                                     market was about 2-3x larger than China last year, China’s
                                                                            enormous potential is undeniable. Now that China has over
Focus on luxury. The Chinese automobile industry has grown                  taken Japan as the second largest economy in the world, major
rapidly over the past two years. However, with the expiry of the            international automobile companies are vying to secure a slice
stimulus policy, we expect moderate growth in auto sales this               the world’s largest auto market.
year. We recommend investors to focus on the luxury car
segment, due to several factors supporting demand. On the flip              Worldwide premium segment
side, mass-market automakers are likely to face new challenges
over the near-term, where competition is intensifying, from                 Region ('000 units)                          2010                 2020           % Chg
both Chinese self-brands and foreign JV brands.
                                                                            China*                                        727             2,080                     186
We favour the 4S auto dealers due to their stronger earnings                Japan                                         144               225                      55
outlook and sustainable business models, as they offer the full             North America                               1,687             2,580                      53
suite of services across the entire auto dealership value chain.            Western Europe                              2,448             3,170                      30

Low penetration of luxury cars even in T1 cities. Looking at                * China includes Mainalnd China, Hong Kong and Taiwan
sales of the more popular luxury branded cars in China,
                                                                            Source: Global Insight
penetration of luxury cars is still very low, compared to
developed countries. Looking at sales by foreign JVs of Audi
                                                                            In addition, since historically, sales of luxury cars have been
(A4 and A6), BMW (3 and 5 series), Mercedes Benz (C and E
class) these three major brands accounted for roughly only 3%               centred mainly in Tier-1 (T1) cities in China and automakers are
of last year’s sedan sales, low given the size of the consumer              now making in roads into the Tier-2 (T2) and Tier-3 (T3) cities,
market and rising consumption. Bundling in imports of                       due to the vast untapped potential in these cities. Hence, we
additional models, the percentage was approx. 5% of total                   can safely infer that while luxury car penetration in T1 cities
sedan sales.                                                                remains low, T2 cities provide another growth engine for luxury
                                                                            auto brands in China.

Sales of luxury cars in China through JVs
                                                                            Automobiles per 100 Urban Household – Tier I province

 units
 200,000                                                                     unit
 180,000                                                                     40
 160,000                                                                     35
 140,000
                                                                             30
 120,000
 100,000                                                                     25
  80,000                                                                     20
  60,000
                                                                             15
  40,000
  20,000                                                                     10
       0                                                                      5
            2004

                   2005

                          2006

                                 2007

                                        2008

                                               2009

                                                      2010



                                                             4M10

                                                                     4M11




                                                                              0
                                                                                    1997
                                                                                           1998
                                                                                                   1999
                                                                                                          2000
                                                                                                                 2001
                                                                                                                        2002
                                                                                                                                2003
                                                                                                                                       2004
                                                                                                                                              2005
                                                                                                                                                      2006
                                                                                                                                                             2007
                                                                                                                                                                     2008
                                                                                                                                                                            2009
                                                                                                                                                                                   2010




           Audi (4 & 6 series)                   Mercedes-Benz
           BMW*                                  Volvo (S40 & S80)
                                                                                                  Beijing                      Shanghai                        Guangdong
* BMW include imports of 3 series in 2010
                                                                            Source: CEIC
Source: CAAM




                                                                                                                                                                                    Page 5
Industry Focus
Automobile Sector



                                                                                                            eventually represent the brand and image of the cars. From the
Automobiles per 100 Urban Household – Tier II province                                                      chart below, German sedan sales overtook Japanese car brands
                                                                                                            both in April and May 2011, largely due to shortages in auto
 unit                                                                                                       supplies post the Japan earthquake.
 30

 25                                                                                                         Sedan sales by country mix

 20
                                                                                                             '000 units
 15                                                                                                          400
                                                                                                             350
 10
                                                                                                             300
  5                                                                                                          250
  0                                                                                                          200
                                                                                                             150
        1997
               1998
                      1999
                             2000
                                    2001
                                           2002
                                                   2003
                                                          2004
                                                                 2005
                                                                        2006
                                                                               2007
                                                                                      2008
                                                                                              2009
                                                                                                     2010



                                                                                                             100
               Zhejiang                           Tianjin                             Jiangsu                 50
               Hubei                              Yunnan                              Sichuan                  0  Apr-08
                                                                                                                   Jun-08
                                                                                                                  Aug-08
                                                                                                                   Oct-08
                                                                                                                  Dec-08
                                                                                                                  Feb-09
                                                                                                                  Apr-09
                                                                                                                   Jun-09
                                                                                                                  Aug-09
                                                                                                                   Oct-09
                                                                                                                  Dec-09
                                                                                                                  Feb-10
                                                                                                                  Apr-10
                                                                                                                   Jun-10
                                                                                                                  Aug-10
                                                                                                                   Oct-10
                                                                                                                  Dec-10
                                                                                                                  Feb-11
                                                                                                                  Apr-11
Source: CEIC

                                                                                                                       Self-owned Brands           Japanese Brands
Fewer players, less fragmented market and less price sensitive.
                                                                                                                       German Brands               American Brands
Ultra premium and premium segments have fewer players and
hence, competition is less intense, compared to the mass-                                                   Source: CAAM
market brands where the market is more fragmented. Premium
brands cars are dominated mainly by foreign brands, such as
                                                                                                            In 2009, there were approx. 82 ultra premium, 826 premium
those from Germany, Italy, UK and etc. This provides luxury car
                                                                                                            and 6,454 middle market branded dealership stores in China.
automakers with better pricing power over the mass-market car
                                                                                                            Competition is generally less intense at the top of the pyramid
manufacturers, as brand royalty plays a bigger role in consumer
                                                                                                            but becomes tougher moving down to the middle markets. In
buying a particular brand of cars. These premium auto brands
                                                                                                            China, new dealership stores are subject to government
are more stringent in selecting their dealers as they will
                                                                                                            regulations and approvals.



Dealership stores distribution

  Number
  of stores                                                                                                                       Ultra premium
                                                   82                                            2-8m                             Porsche, Bentley ,Rolls-Royce,
                                                                                                                                  Lamborghini, Bugatti, Maserati, Ferrari
                                                                                                                                  Premium
                                                                                             300k - 1m                            Audi, BMW, MINI, Lexus,
                                                  826
                                                                                                                                  Mercedes Benz, Volvo
                                                                                                                                  Middle market
                                                  6,454                                      100-300k                             Honda, Toyota, Fiat, Peugeot Citroen,
                                                                                                                                  Nissan, Volkswagen, Buick

                                                                                                <100k               Sale value    Low end
                                           Numerous                                                                               Geely, BYD, Chery, Hafei, Chang’an
                                                                                                                     per car
                                                                                                                      (RMB)

Source: ACMR, DBS Vickers




 Page 6
                                                                                                                                                                                      Industry Focus
                                                                                                                                                                          Automobile Sector




Key statistics of dealership stores, 2009                                                                            Automobile purchasing loan

Segment                                No. of          No. of Average no. of                                          RMB bn                                                                         %
                                      brands      dealerships    dealerships
                                                                                                                      250                                                                            14
                                      sold in stores in China     stores per
                                        2009    (as of 31 Dec         brand                                                                                                                          12
                                                                                                                      200
                                                        2009)                                                                                                                                        10
                                                                                                                      150                                                                            8
Ultra premium                                 11                             82                                  7
                                                                                                                      100                                                                            6
Premium                                       12                            826                                 69
                                                                                                                                                                                                     4
Middle market                                 26                          6,454                                248     50
                                                                                                                                                                                                     2
Source: ACMR
                                                                                                                        0                                                                            0




                                                                                                                              2000

                                                                                                                                     2001

                                                                                                                                            2002

                                                                                                                                                   2003

                                                                                                                                                          2004

                                                                                                                                                                 2005

                                                                                                                                                                        2006

                                                                                                                                                                               2007

                                                                                                                                                                                       2008

                                                                                                                                                                                              2009
The chart below shows the price index of the different auto
segments. Generally, the luxury brand price index has been                                                                           Automobile purchasing loan (LHS)
relatively stable compared to other categories.                                                                                      Auto loan as % of consumer loan (RHS)

Automobile price index - Domestic made                                                                               Source: CEIC


 Jan 2004 = 100                                                                                                      Curbs on car owner ship minimal impact on luxury brands.
 110                                                                                                                 Beijing implemented a licensing policy to curb the rapid rise in
 100                                                                                                                 cars in the city. For 2011, the government will issue 240,000
                                                                                                                     licences for new vehicle purchases. However, this quota does
  90
                                                                                                                     not take into account vehicles to be scrapped this year, hence
  80
                                                                                                                     the final number of cars sold could be higher than the original
  70                                                                                                                 licences quota. According to market estimates, there could be
  60                                                                                                                 250K units of old vehicles being upgraded/replaced, hence
  50                                                                                                                 total vehicle sales in Beijing could be approx. 500K units this
                                                                                                          Apr-11
       Jan-04

                Sep-04

                         May-05

                                  Jan-06

                                           Sep-06

                                                    May-07

                                                             Jan-08

                                                                      Sep-08

                                                                               May-09

                                                                                        Jan-10

                                                                                                 Sep-10




                                                                                                                     year, compared to 890K units last year.

                                                                                                                     The curb could drive demand away from mass market cars to
                         PV                                                    Mini                                  luxury brands, given the limited number of licences available.
                         Small                                                 Medium class
                                                                                                                     We therefore believe the curb in Beijing will have a bigger
                         High class                                            Luxury
                                                                                                                     impact on the low-end mass-market segment.
Source: CEIC


Availability of auto financing builds brand royalty for luxury
brands and lifts future sales. Since the liberalisation of the
auto financing industry several years ago, automakers are
starting to offer auto financing services to retain customer
royalty and generate brand awareness. Although auto
financing is still new in China, we believe people will gradually
grapple onto auto financing as a concept matching levels seen
in the developed nations, where over 50% of auto sales are
financed by banks or financial institutions.




                                                                                                                                                                                                     Page 7
Industry Focus
Automobile Sector



Impact of Beijing restriction on BMW sales                         Number of motor vehicles in Beijing & Shanghai


                         160,000                                    '000 units
                         140,000                                    4,000
                         120,000                                    3,500
                         100,000      149,278      -63%
Beijing passenger car                                               3,000
                          80,000
market decreased by                                                 2,500
                          60,000
63% YTD March.            40,000                    55,553          2,000
                          20,000
                                                                    1,500
                               0
                                       3M10          3M11           1,000
                                                                      500
                         25%
                                                   20.9%                0




                                                                            1995
                                                                                   1996
                                                                                          1997
                                                                                                 1998
                                                                                                         1999
                                                                                                                2000
                                                                                                                       2001
                                                                                                                              2002
                                                                                                                                     2003
                                                                                                                                             2004
                                                                                                                                                    2005
                                                                                                                                                           2006
                                                                                                                                                                  2007
                                                                                                                                                                         2008
                                                                                                                                                                                2009
                         20%
However, premium         15%
                                    10.4%                                                               Shanghai                                             Beijing
segment’s penetration
ratio in Beijing         10%
                                                                   Source: CEIC
doubled                   5%

                          0%                                       Auto dealers have better operating leverage
                                     3M10           3M11
                                                                   Dealership network expansion drives earnings momentum.
                         30%
                                                 2,831 units       Luxury brand auto dealers are clearly attracted by the low auto
                         25%                                       penetration rates and thus huge potential. These companies
                         20%       2,770 units
Moreover, BMW’s                                                    are broadening their customer base by aggressively expanding
segment share in         15%                                       their sales networks. For example, both Zhongsheng (881 HK)
Beijing was further                                 24.4%          and China ZhengTong (1728 HK) planned to increase their
                         10%
                                    17.9%
improved                  5%                                       sales outlets this year by 41% and 100% respectively, either by
                                                                   way of M&A or organic growth. This compares with Dah
                          0%
                                                                   Chong Hong (1828 HK) and Sparkle Roll’s (970 HK) planned
                                     3M10           3M11
                                                                   sales points increase of 27% and 100% respectively (due to
Source: BMW Group
                                                                   the small base effect).

There are market talks that such policy will be extended to
                                                                   Auto dealers profile
other major cities. Although we would not be surprised if this
occurred, the impact of this restriction would likely be similar
                                                                                                                                        No. of outlets
to Beijing. Although Shanghai’s existing auto control measures
                                                                                                                                      10A       11F                             12F
have been in place for over 10 years, the auto market there has
continued to grow over the years.                                  China ZhengTong                       1728 HK                            24              48                   68
                                                                   Zhongsheng                             881 HK                            98             138                  178
                                                                   Dah Chong Hong                        1828 HK                            55              70                   70
                                                                   Sparkle Roll                           970 HK                             3               6                    6

                                                                   Source: Companies


                                                                   High margin auto after-sales business. We are confident in
                                                                   dealers’ ability to take advantage of their growing mid-high
                                                                   end and luxury customer pool to drive future demand for
                                                                   maintenance and servicing. Generally, these services have
                                                                   better gross margins of 50-65% compared to pure auto sales,
                                                                   where average gross margins were 5-9%.




 Page 8
                                                                                                                             Industry Focus
                                                                                                                       Automobile Sector



                                                       th           th
Generally, major servicing will emerge in the 4 and 9 year                       single brand counterparts as the former have stronger financial
after the vehicle is purchased. After-sales revenue of auto                      muscle to explore new regions and negotiate better terms with
dealers accounted for <10% of total revenue in 2010 for the                      automakers, leveraging on their economies of scale, strong
HK-listed auto dealers, and we expect this to be maintained at                   relationship with automakers and proven track record.
a similar level since new car sales will continue to dominate                    Therefore large-scale, trans-regional dealership chains have
total revenue. Luxury brands car owners are likely to choose                     been emerging in China in recent years.
the original dealers where they had bought their cars for
servicing requirements.                                                          Besides this, these multi-brand dealerships have a better
                                                                                 chance of acquiring single store dealers, hence eliminating
                                                                                 competition and raising the profile of the dealership presence
Turnover mix of 4S dealership stores in the PRC
                                                                                 in the region in question.

 RMB bn
                                                                                 Regional distribution of 4S dealerships by number of
 2,500
                                                                                 stores as at 31 Dec 2008
 2,000
                                                                                                                           Northeast
 1,500
                                                                                                                            China
 1,000                                                                                                                       7%
                                                                                                East China
   500                                                                                             31%                         Northwest
     0                                                                                                                           China
                                                                                                                                  7%
          2005


                 2006


                          2007

                                 2008


                                        2009

                                               2010E


                                                            2011E


                                                                         2012E




                                                                                        North
                        Pre-owned automobile sales                                                                             Mid-south
                                                                                        China
                        After-sales services                                                                                     China
                                                                                         18%
                        New automobile sales                                                                                      9%
                                                                                                  Southwest
Source: ACMR                                                                                                                South
                                                                                                    China
                                                                                                                            China
                                                                                                     15%
                                                                                                                             13%
According to a market survey by ACMR, the aging luxury car
population is expected to boost after-sales market revenues                      Source: ACMR
from RMB240bn in 2009 to RMB490bn by 2012, CAGR of
c.27%.
                                                                                 Growing affluence in T2 cities drives consumption. Coupled
                                                                                 with a rapidly urbanizing population, the rapid growth in GDP
Positive market prospect for dealership market
                                                                                 and rising disposable incomes are creating a large consumer
                                                                                 market. In per capita terms, urban residents have seen
Dealership market relatively young and expects fast                              disposable income increase from RMB6,280 to RMB17,175
development
                                                                                 over the past decade, representing a CAGR of 12%. This rise
                                                                                 has led to the creation of a middle and upper-middle class who
More 4S dealership stores in the pipeline. Since the mid-1990s,
                                                                                 are driving up demand for premium products, including
4S dealership stores started to flourish in China, acting as a
                                                                                 premium branded automobiles in the PRC and other luxury
bridge between the automakers and end-customers. 4S dealers
                                                                                 products. The Chinese economy will remain strong in the
are preferred by auto buyers as they provide full suite of
                                                                                 coming years, despite the short-term tightening measures
support services, especially in spare parts and servicing.
                                                                                 aimed at reining in inflation.
Sales of auto vehicles through 4S dealership stores grew at a
CAGR of 28.3% from 2005 to 2009, generating revenue of
RMB1,073bn, up from RMB396bn. Revenue is projected to hit
RMB1,943bn by 2012, CAGR of >20%.

Advantages of multi-branded over single brand auto dealers.
Multiple brand dealers have certain advantages over their




                                                                                                                                           Page 9
Industry Focus
Automobile Sector




Per capita income drives vehicle sales                                                         GDP per capita – Tier 1 cities

 RMB                                                                              '000 units    RMB
 25,000                                                                               20,000    100,000
                                                                                      18,000     90,000
 20,000                                                                               16,000     80,000
                                                                                      14,000     70,000
 15,000                                                                               12,000     60,000
                                                                                      10,000
                                                                                                 50,000
 10,000                                                                               8,000
                                                                                      6,000      40,000
  5,000                                                                               4,000      30,000
                                                                                      2,000      20,000
      0                                                                               0          10,000
           2000
                  2001
                         2002
                                2003
                                       2004
                                              2005
                                                     2006
                                                            2007
                                                                   2008
                                                                          2009
                                                                                 2010




                                                                                                      0




                                                                                                              2000

                                                                                                                      2001

                                                                                                                              2002
                                                                                                                                      2003

                                                                                                                                              2004
                                                                                                                                                       2005

                                                                                                                                                               2006

                                                                                                                                                                      2007
                                                                                                                                                                              2008

                                                                                                                                                                                      2009

                                                                                                                                                                                             2010
               Disposable Income per Capita: Urban (LHS)
               Net Income Per Capita: Rural (LHS)                                                                            Beijing                                         Shanghai
               Sales volume - PV & CV (RHS)                                                                                  Guangzhou                                       Shenzhen

Source: CEIC                                                                                   2010 figures for Guangzhou & Shenzhen are not available yet.

                                                                                               Source: CEIC
T2 city economies have been growing rapidly in recent years,
(using average GDP as an indicator). Since T2 cities are growing
at a relatively faster pace compared to their T1 counterparts,
the GDP disparity is expected to narrow in the coming years, as                                GDP per capita – Tier 2 cities
is evident in the following two charts.
                                                                                                RMB
Based on 2010 disposable income per capita statistics, some T2                                  80,000
cities in the coastal areas income levels were equivalent to                                    70,000
those of T1 cities 4-5 years ago. Hence, it is fair to assume that                              60,000
disposable incomes in T2 cities should catch up quickly with                                    50,000
the current level of T1 cities, thus representing a good growth
                                                                                                40,000
opportunity for mid-high end and luxury brands auto dealers.
                                                                                                30,000
In addition, T2 urbanisation rates are rising, thus creating a
large market for these car dealers to exploit.                                                  20,000
                                                                                                10,000
                                                                                                      0
                                                                                                          2000

                                                                                                                     2001

                                                                                                                             2002

                                                                                                                                     2003

                                                                                                                                             2004

                                                                                                                                                      2005
                                                                                                                                                              2006

                                                                                                                                                                      2007

                                                                                                                                                                              2008

                                                                                                                                                                                      2009

                                                                                                                                                                                             2010




                                                                                                               Zhejiang                             Tianjin                          Jiangsu
                                                                                                               Hubei                                Yunan                            Sichuan

                                                                                               Source: CEIC




 Page 10
                                                                                                                                                                    Industry Focus
                                                                                                                                                         Automobile Sector




Disposable income per capita – Tier 1 cities                                              Disposable income – China urban vs Japan*

 RMB                                                                                       US$                                                                                      US$
 35,000                                                                                    3,000                                                                                  20,000
                                                                                                                                                                                  18,000
 30,000                                                                                    2,500                                                                                  16,000
 25,000                                                                                                                                                                           14,000
                                                                                           2,000
 20,000                                                                                                                                                                           12,000
                                                                                           1,500                                                                                  10,000
 15,000                                                                                                                                                                           8,000
                                                                                           1,000                                                                                  6,000
 10,000
                                                                                             500                                                                                  4,000
  5,000                                                                                                                                                                           2,000
      0                                                                                         0                                                                                 0




                                                                                                     2000
                                                                                                            2001
                                                                                                                   2002
                                                                                                                          2003
                                                                                                                                 2004
                                                                                                                                        2005
                                                                                                                                               2006
                                                                                                                                                      2007
                                                                                                                                                             2008
                                                                                                                                                                    2009
                                                                                                                                                                           2010
           2000

                  2001

                         2002

                                2003

                                        2004

                                               2005

                                                      2006

                                                             2007

                                                                    2008

                                                                            2009

                                                                                   2010




          Beijing                      Shanghai                     Guangdong                         China urban (LHS)                                      Japan* (RHS)

Source: CEIC                                                                              * Exclude agriculture, forestry & fisheries

                                                                                          Source: CEIC


Disposable income per capita – Tier 2 cities                                              In Japan, luxury car sales had been steady during 2005-2007
                                                                                          until the global financial crisis set in and sent premium car sales
                                                                                          down. Last year, these recovered to post about 8% growth
 RMB
 30,000                                                                                   from their low in 2009. In terms of luxury car penetration,
                                                                                          China is still at its infancy. Based on last year’s total sedan sales,
 25,000
                                                                                          luxury cars accounted for approx. 5% of the total.
 20,000
                                                                                          Low auto penetration despite being the largest automobile
 15,000                                                                                   market in the world. China was ranked #1 in the global
 10,000                                                                                   automobile market with a total of approx. 18m new vehicles
                                                                                          sold in 2010, achieving a CAGR of approx. 26% from 2006 to
  5,000
                                                                                          2010. Out of the total vehicles sold last year, passenger
      0                                                                                   vehicles accounted for 76% or 13.7m units, an increase of
           2000

                  2001

                         2002

                                2003

                                        2004

                                               2005

                                                      2006

                                                             2007

                                                                    2008

                                                                            2009

                                                                                   2010




                                                                                          33% y-o-y.

          Zhejiang                        Tianjin                          Jiangsu        We had earlier projected total volumes to reach 20m units this
          Hubei                           Yunnan                           Sichuan        year (+y-o-y 10%). However, based on 5M11 sales which rose
                                                                                          4.1% over the same period last year, we decided to cut our
Source: CEIC                                                                              growth forecast to 8% for 2011, arriving at total sales forecast
                                                                                          of 19.5m units. This is largely attributable to the production
Changing consumption patterns. The Chinese economy                                        disruptions at the Sino-Japan auto JVs as well as delays in
overtook Japan to become the second largest global economy                                vehicles imports from Japan.
in dollar terms last year. This in turn implies a huge domestic
market as strong economic growth over the past few years has                              Although the 2011 outlook is a little bumpy between 2Q to 3Q,
produced a large wave of wealthy entrepreneurs and                                        we are expecting the mid-term to remain positive. By 2015, we
professionals who can afford a better lifestyle and luxury cars.                          forecast auto sales to reach 24.8m units, representing 2011-
China’s urban disposal income is about 7 years away from                                  2015 CAGR of 6.2%. The low penetration rate of approx. 60
Japan’s current level.                                                                    per 1,000 population offers tremendous upside. Hence, our
                                                                                          growth assumptions for 2011-2015 appear reasonable.
                                                                                          Moreover, premium and ultra premium branded automobiles




                                                                                                                                                                                    Page 11
Industry Focus
Automobile Sector



sales values have experienced a rapid surge and are expected                  Sales and sales forecasts of the passenger automobile
to grow at CAGR (2009-2012) 29% and 40% respectively,                         after-sales market in the PRC*
based on a survey report on the Chinese auto sector issued by
ACMR. Market dominance by a few luxury brands offer                            RMB bn                                                                              %
tantalising financial benefits to dealership operators who are                 600                                                                                 40
fortunate to feature these brands.                                                                                                                                 35
                                                                               500
                                                                                                                                                                   30
                                                                               400
Household automobile penetration in the PRC, 2010                                                                                                                  25
                                                                               300                                                                                 20
 %                                                                                                                                                                 15
                                                                               200
 40                                                                                                                                                                10
        33.8                                                                   100
 35                                                                                                                                                                5
 30                  26.6         26.4                                            0                                                                                0




                                                                                          2005

                                                                                                   2006

                                                                                                            2007

                                                                                                                    2008

                                                                                                                           2009

                                                                                                                                     2010E

                                                                                                                                               2011E

                                                                                                                                                          2012E
 25
                                                             National
 20                                           16.8        average: 13.1%
 15                                                                                                Sales (LHS)                    YoY growth (RHS)
 10                                                         8.6       5.5
  5                                                                           * Including the sales of automobile accessories and spare parts as well
  0                                                                           as repair, maintenance and detailing services
                                               Shanghai




                                                                      Hubei
                      Guangdong
           Beijing




                                   Zhejiang




                                                            Sichuan




                                                                              Source: ACMR




Source: CEIC                                                                  New passenger automobiles sold through 4S dealership
                                                                              stores in the PRC
Rapid growth in demand for after-sales services. Since the mid-
                                                                               RMB bn                                                                             %
1990s, 4S dealership stores have gained consumer acceptance
                                                                               2,500                                                                              45
and become an important point of contact between the auto
                                                                                                                                                                  40
assemblers and consumers in the Chinese automobile market.                     2,000                                                                              35
The rapid growth of premium brand automobiles has created a
                                                                                                                                                                  30
growing after-sales market for maintenance and repair services.                1,500
                                                                                                                                                                  25
According to the survey by ACMR, over 77% of premium
                                                                                                                                                                  20
brand automobiles owners prefer 4S dealership stores for their                 1,000
                                                                                                                                                                  15
maintenance and repairs. As vehicles begin to age, the demand                                                                                                     10
                                                                                 500
for such services, especially from ultra premium and premium                                                                                                      5
brand car owners will increase and be beneficial for 4S                               0                                                                           0
dealerships.
                                                                                            2005

                                                                                                     2006

                                                                                                             2007

                                                                                                                    2008

                                                                                                                           2009

                                                                                                                                    2010E

                                                                                                                                             2011E

                                                                                                                                                       2012E




                                                                                                   Sales (LHS)                    YoY growth (RHS)

                                                                              Source: ACMR

                                                                              Investment risks in the auto dealership sector


                                                                              Advertisements drive sales. Sales of vehicles by 4S shops
                                                                              depend largely on advertising and promotion activities by auto
                                                                              assemblers and principals. The following chart suggests that a
                                                                              typical auto assembler requires a hefty sales expense budget in




 Page 12
                                                                                                                                            Industry Focus
                                                                                                                                   Automobile Sector



order to promote a new model/brand. Any cut in such selling       dealerships is driving up acquisition costs. From our
expense budget could directly impact sales of the auto dealers.   understanding, premium and ultra premium brand stores are
                                                                  much sort after and valuations are high at approx. 10x forward
Selling expense ratio to auto dealers’ revenue                    earnings. These high acquisition costs could hinder expansion
                                                                  unless auto dealer groups opt for organic growth, (which tends
                                                                  to take about 3 years to achieve the same result).
 RMB m                                                   %
 70,000                                                  6.0
                                                                  Overall auto market development under 12th Five-Year
 60,000                                                  5.0      Plan
 50,000
                                                         4.0
 40,000                                                           Auto consumption continues to grow
                                                         3.0
 30,000
                                                                  Moderate industry growth more appropriate to avoid
                                                         2.0
 20,000                                                           overheating. After chalking up impressive y-o-y growth of 45%
 10,000                                                  1.0      and 32% in 2009 and 2010 respectively, we expect growth to
                                                                  moderate this year. At the end of 2010, the total vehicle
      0                                                  0.0
              2007       2008       2009       2010               population in China reached about 80m units, translating into
                                                                  a penetration rate of about 60 vehicles per 1,000 people, still
          Total revenue of auto dealers (LHS)
                                                                  low compared to the other more developed nations like the US,
          Avg selling exp ratio of auto manufacturers (RHS)
                                                                  Japan and Korea, where penetration ranged from 300-800 per
                                                                  1,000 people.
Note: Auto dealers’ revenue from Dah Chong Hong, China
ZhengTong and ZhongShen
                                                                  Annual sales volume projections
Selling expense ratios of Dongfeng Motor and GAC

Source: Companies                                                  m units                                                                                         %
                                                                   30                                                                                               50
Volume sales dependent on quota allocations. Auto dealers are                                                                                                       45
normally allocated their quota of certain models/brands of         25                                                                                               40
vehicles by the auto assemblers once a year. There are risks       20                                                                                               35
that auto assemblers might terminate the dealership                                                                                                                 30
                                                                   15                                                                                               25
agreement or reduce the quota allocation to a certain outlet,
                                                                                                                                                                    20
hence affecting future earnings.                                   10                                                                                               15
                                                                    5                                                                                               10
Intense competition at low-mid end. In 2009, there were 82                                                                                                          5
ultra premium, 826 premium and 6,454 mid-high end                   0                                                                                               0
                                                                         2004
                                                                                 2005
                                                                                        2006
                                                                                               2007
                                                                                                      2008
                                                                                                             2009

                                                                                                                    2010
                                                                                                                           2011F
                                                                                                                                   2012F
                                                                                                                                           2013F
                                                                                                                                                   2014F
                                                                                                                                                           2015F




dealership stores in China. These stores sold 11 ultra premium,
12 premium and 26 mid-high end brands. At the low-end of
the value chain, there are numerous auto brands, largely                        Sales volume (LHS)                                 YoY growth (RHS)
dominated by the Chinese self-owned brands. Hence, the ultra
premium and premium brands face less competition compared         Source: CEIC, DBS Vickers
to the lower end of the automobile segment.
                                                                  We believe the government prefers a more sustainable long-
The barriers to entry for ultra premium and premium brands
                                                                  term sales growth rate. China’s low penetration rate and rising
are higher as auto manufacturers only tend to give
                                                                  income should support a growing auto consumption market.
authorisation to dealership groups with strong track records,
                                                                  The China Association of Automobile Manufacturers (CAAM)
sound finances and experienced industry players.
                                                                  also believes new vehicle sales could reach 25m units under the
Dealership competition is more intense at the low-mid end of      12th Five-Year Plan. We believe the demand drive will come
the auto spectrum.                                                from an emerging middle income group who aspire to a better
                                                                  quality lifestyle.
Hike in the price of dealerships acquisition. As dealer groups
compete for new outlets, competition in acquiring existing




                                                                                                                                                                   Page 13
Industry Focus
Automobile Sector



PRC auto penetration projections                                                                             end of the market. For example, Dongfeng Nissan JV and
                                                                                                             Guangqi Honda have developed self-branded cars; Qicheng (
 units per 1,000 people                                                                            m units      ) and Trumpchi (    ) respectively to compete with Chinese
 140                                                                                                   200   self-owned brands in the new emerging cities.
 120                                                                                                   180
                                                                                                       160   Also, the Chinese government’s focus of small displacement
 100                                                                                                   140   vehicles will not change under the 12th Five-Year Plan. This is
  80                                                                                                   120   due to rising concerns surrounding carbon emissions in China.
                                                                                                       100
  60                                                                                                   80    However, small displacement vehicles have lower gross margins
  40                                                                                                   60    compared to the mid to luxury cars. Therefore, as these
                                                                                                       40
  20                                                                                                         automakers shift more into the T3 and T4 cities, we should
                                                                                                       20
    0                                                                                                  0     expect some margin compression due to product mix change.
            1980

                          1990

                                  2000

                                             2005

                                                        2008

                                                                 2009

                                                                               2010F

                                                                                         2011F

                                                                                                   2015F




                                                                                                             Industry consolidation will benefit larger auto groups. Industry
                                                                                                                                                                              th
                                                                                                             consolidation is a long process and will continue under the 12
                                         Penetration rate (LHS)
                                                                                                             Five-Year Plan, since it was introduced in 2009. We believe the
                                         Vehicle population (RHS)
                                                                                                             larger auto SOE will take the lead in the consolidation process.
Source: CEIC, DBS Vickers                                                                                    In the longer term, the consolidation will eliminate inefficient
                                                                                                             plants and improve the competitiveness of the Chinese auto
                                                                                                             assemblers.
Foreign JVs aggressive strategy for T2 to T4 cities. The
addressable market within T2 to T4 tier cities is huge. Based on                                             Guangzhou Automobile Group Company (2238 HK) is gaining
2009 official figures, there were approx. 170m households in                                                 momentum in its M&A strategy since the government
     nd       rd
the 2 and 3 tier cities. The low auto penetration rates in                                                   announced the scheme in 2009.
these cities means a large addressable market to automakers.
Hence, T2 and T3 cities are the new battle grounds for foreign                                               More efforts to promote alternative energy vehicles but
JV brands.                                                                                                   earnings impact limited. We do not think alternative energy
                                                                                                             vehicle sales will have a meaningful impact on earnings in the
Income per capita vs population size                                                                         next five years, given that most of the initiatives are still at their
                                                                                                             embryonic stage. Although an alliance was formed by 16 auto-
                                                                                                             related groups, their immediate action plan is to set certain
 RMB                                                                                             person m
 25,000                                                                                              1,360   industry standards for the electric vehicle (EV) makers, batteries
                                                                                                     1,340   and parts suppliers, charging infrastructure supports and other
 20,000                                                                                                      ancillary services.
                                                                                                     1,320
 15,000                                                                                              1,300
                                                                                                             At present, an industry leader has yet to emerge in the new
                                                                                                     1,280
 10,000                                                                                                      energy vehicle segment. Based on official statistics, 54
                                                                                                     1,260
                                                                                                             automakers’ 190 models were classified under the new energy
                                                                                                     1,240
  5,000                                                                                                      vehicles catalogue last year, and 7,181 electric vehicles (EV)
                                                                                                     1,220
                                                                                                             were produced. Several companies have or are developing car
        0                                                                                            1,200
                                                                                                             batteries and parts for future EV application. Although several
                   2000
                           2001
                                  2002
                                          2003
                                                 2004
                                                         2005
                                                                2006
                                                                        2007
                                                                                  2008
                                                                                         2009
                                                                                                 2010




                                                                                                             names have emerged in the EV space, they have yet to achieve
                     Disposable Income per Capita: Urban (LHS)                                               any meaningful earnings impact, as sales remain negligible.
                     Net Income Per Capita: Rural (LHS)
                     Population (RHS)                                                                        The government is committed to invest more money into the
                                                                                                             new energy vehicle sector. Under a long-term plan (from 12th
Source: CEIC                                                                                                 to 13th Five-Year Plans), the government will spend RMB100bn
                                                                                                             to develop the EV industry. The huge budget encompasses EV
To capture this potential, automakers from both the domestic                                                 purchase subsidies, development budget to automakers and
self-owned and foreign JV brands are launching more basic                                                    infrastructure support. The Chinese government implemented
models of small displacement capacity cars (1.6L and below                                                   a pilot project in several cities to promote EV sales, with
capacity) for this customer group. In addition, foreign auto JV                                              subsidies ranging from RMB80K to RMB120K for every pure EV
companies are launching self-developed models for the lower-                                                 purchased.




 Page 14
                                                                                                                                                                                         Industry Focus
                                                                                                                                                                              Automobile Sector




Electrical vehicle subsidy pilot scheme

                                                                Central government                             Local government                                           Max subsidy
RMB                        City                               Pure electric     Hybrid                      Pure electric    Hybrid                                 Pure electric     Hybrid
2nd batch                  Beijing                                     60,000                      50,000          60,000                      50,000                      120,000                     100,000
1st batch                  Shanghai                                    60,000                      50,000          40,000                      20,000                      100,000                      70,000
1st batch                  Shenzhen                                    60,000                      50,000          60,000                      30,000                      120,000                      80,000
1st batch                  Hangzhou                                    60,000                      50,000          60,000                      30,000                      120,000                      80,000
1st batch                  Hefei                                       60,000                      50,000          20,000                      20,000                       80,000                      70,000
1st batch                  Changchun                                   60,000                      50,000          40,000                      40,000                      100,000                      90,000

Source: MOF, MOST,MIIT, NDRC


The government’s determination to develop the alternative
                                                                                                            Diesel consumption on transport, storage and telecom
energy vehicle market is due to rising vehicle fuel consumption
trend in China.
                                                                                                             m tonnes                                                                                  YoY,%
                                                                                                             100                                                                                               90
Gasoline consumption on transport, storage and telecom                                                        90                                                                                               80
                                                                                                              80                                                                                               70
                                                                                                              70                                                                                               60
 m tonnes                                                                                 YoY,%                                                                                                                50
                                                                                                              60
 35                                                                                               70                                                                                                           40
                                                                                                              50                                                                                               30
 30                                                                                               60          40                                                                                               20
                                                                                                  50          30                                                                                               10
 25                                                                                               40          20                                                                                               0
 20                                                                                               30          10                                                                                               (10)
                                                                                                  20           0                                                                                               (20)
 15
                                                                                                                   1986
                                                                                                                          1988
                                                                                                                                 1990
                                                                                                                                        1992
                                                                                                                                               1994
                                                                                                                                                      1996
                                                                                                                                                             1998
                                                                                                                                                                    2000
                                                                                                                                                                           2002
                                                                                                                                                                                  2004
                                                                                                                                                                                         2006
                                                                                                                                                                                                2008
                                                                                                                                                                                                       2010F
 10                                                                                               10
                                                                                                  0
  5                                                                                               (10)                                         Diesel consumption (LHS)
  0                                                                                               (20)
                                                                                                                                               YoY growth (RHS)
      1986
             1988
                    1990
                           1992
                                  1994
                                         1996
                                                1998
                                                       2000
                                                              2002
                                                                     2004
                                                                            2006
                                                                                   2008
                                                                                          2010F




                                                                                                            Source: CEIC, NDRC
                              Gasoline consumption (LHS)
                              YoY growth (RHS)

Source: CEIC, NDRC




                                                                                                                                                                                                               Page 15
Industry Focus
Automobile Sector




Investment concerns of automakers and inflection point            policy to restrict the number of new vehicles in the city to 240K
for auto sector                                                   over a 12-month period, averaging 20K per month. This
                                                                  represented a 73% reduction from the 890K vehicles sold in
                                                                  2010. New car buyers now have to go through a lottery
Watch out for a sales turnaround
                                                                  procedure to obtain a licence to purchase a car. However, for
                                                                  replacement of old cars, owners are not required to obtain the
Short-term production disruption inevitable. The Japanese auto
                                                                  licences.
JVs in China are expected to face short-term production
disruption post 11th March earthquake. The impact of this
                                                                  Apart from Beijing, Shanghai implemented an auction system
should start to emerge from May onwards, as auto
                                                                  back in 1994 to restrict the car population in the city. Based on
manufacturers’ auto parts inventories would have been utilised.
                                                                  available data from 2002 to 2010, the total number of auto
We expect the gradual resumption of auto parts production in
                                                                  licences there increased from c.32K to c.103K, representing an
Japan and the situation should ease around July/August.
                                                                  annual increase of c.16%, despite the auto licensing program.
Among the Chinese auto assemblers, several auto groups such
as First Auto Work Group, Dongfeng Group, Guangzhou
                                                                  Shanghai licence plates trend
Automobile Group (GAC), and etc have foreign partnerships
with Honda, Toyota, Nissan and other major Japanese auto
brands. Due to the logistics problems, Honda’s local JVs with                                                                                 %
                                                                   120,000                                                                    80
GAC and Dongfeng Motor were shut for 2-3 weeks for
                                                                                                                                              70
scheduled maintenance starting 30 April. However, the              100,000
                                                                                                                                              60
Japanese partners have committed to provide sufficient auto         80,000                                                                    50
parts for the Chinese market from their global production                                                                                     40
network.                                                            60,000
                                                                                                                                              30
                                                                    40,000                                                                    20
Japan exported some JPY691bn worth of auto parts to China                                                                                     10
last year, up from JPY499bn in 2008. In 1Q11, total exports         20,000
                                                                                                                                              0
amounted to JPY159bn, and April exports fell 22% yoy to                   0                                                                   -10
                                                                              2002

                                                                                     2003

                                                                                             2004

                                                                                                    2005

                                                                                                           2006

                                                                                                                  2007

                                                                                                                         2008

                                                                                                                                2009

                                                                                                                                       2010
JPY52bn due to the natural disaster.

Japan auto parts exports to China                                                           No. of plates for auction (LHS)
                                                                                            YoY growth (RHS)

 JPY bn                                                    %
                                                                  Source: Shanghai Government Website, Alltobid.com
 80                                                      200
 70                                                      150
 60                                                               Expect weak monthly sales until inflection from pent-up
 50                                                      100      demand in July/August. The monthly sales in April started to
 40                                                      50       reflect the slowing growth momentum, as anticipated.
 30                                                      0        However, monthly sales will remain weak from May-July, of
 20                                                               which we also anticipate some price reductions to boost sales.
 10                                                      (50)
                                                                  The auto price index has exhibited softness in prices especially
  0                                                      (100)
                                                                  in the small-medium auto categories. May 2011 auto sales fell
     Jan-05
     Jun-05
    Nov-05
    Apr-06
    Sep-06
    Feb-07

    Dec-07
    May-08

    Mar-09
    Aug-09
      Jul-07




     Jan-10
     Jun-10
    Nov-10
    Apr-11
    Oct-08




                                                                  4% y-o-y to 1.38m units, attributable to expiry of auto
                                                                  subsidies, auto sales restriction in Beijing, high oil price and
               Japan auto parts exports to China (LHS)
                                                                  shortage of auto parts from Japan. As a result, 5M11 total
                                                                  sales grew 4.1% from same period last year to approx. 7.92m
               YoY growth (RHS)
                                                                  units.
Source: CEIC


Auto sales controls in major cities could hit mass market
brands. On 24 Dec 2010, Beijing implemented a car control




 Page 16
                                                                                                                                                                                         Industry Focus
                                                                                                                                                                            Automobile Sector



                                                                                      We expect the sales inflection point to start in late July or early
Monthly total vehicle sales in China                                                  August, releasing some of the pent-up demand till the rest of
                                                                                      the year. Consequently, we are forecasting sales momentum to
 '000 units                                                                           be strong in 4Q, bringing our full year sales growth forecast to
 2,000                                                                                8%. We therefore recommend investors to re-look at the
 1,800                                                                                automakers starting in July to catch the next wave.
 1,600
 1,400                                                                                Inflationary pressures and rising raw material costs. We are
 1,200
                                                                                      expecting margin compression from rising raw material costs as
 1,000
   800                                                                                well as product-mix changes. Our sensitivity analysis of a 5%
   600                                                                                hike in material costs will shave net earnings by over 10% for
   400                                                                                automakers, assuming no cost pass-through. It is worth noting
   200                                                                                that pricing power of most automakers is almost zero,
     0                                                                                especially for the low-end car models, while luxury car
                       Mar

                             Apr




                                                                    Oct
                                                 Jul




                                                                                Dec
         Jan

                Feb




                                           Jun


                                                       Aug

                                                              Sep
                                     May




                                                                          Nov




                                                                                      manufacturers are slightly better, due to price inelasticity of the
         2006                      2007                2008                2009
                                                                                      target buyers. Our steel analyst has projected flat-steel sheet
         2010                      2011                                               prices to increase 15% y-o-y to approx. RMB4,400/ton (ex-VAT)
                                                                                      this year.
Source: CEIC
                                                                                      China steel price – Hot rolled flat-steel sheet (ex VAT)


                                                                                       RMB/ton
Monthly total vehicle sales growth in China
                                                                                       5,500

 YoY growth (%)                                                                        5,000
 140
 120                                                                                   4,500
 100
                                                                                       4,000
  80
  60                                                                                   3,500
  40
  20                                                                                   3,000
   0
                                                                                       2,500
 (20)
                                                                                                        Apr-08
                                                                                                                 Jul-08
                                                                                                                          Oct-08


                                                                                                                                            Apr-09
                                                                                                                                                     Jul-09
                                                                                                                                                              Oct-09


                                                                                                                                                                                Apr-10
                                                                                                                                                                                         Jul-10
                                                                                                                                                                                                  Oct-10


                                                                                                                                                                                                                    Apr-11
                                                                                               Jan-08




                                                                                                                                   Jan-09




                                                                                                                                                                       Jan-10




                                                                                                                                                                                                           Jan-11



 (40)
                      Mar

                             Apr




                                                                    Oct
                                                 Jul




                                                                                Dec
        Jan

               Feb




                                           Jun



                                                       Aug
                                                              Sep
                                    May




                                                                          Nov




         2006                      2007                2008                2009       Source: Bloomberg
         2010                      2011

                                                                                      Capacity expansion at record levels by 2012. According to a
Source: CEIC
                                                                                      survey by NDRC and China Auto Tech R&D Centre, at end
                                                                                      2009, China had c.14m of production capacity among the
Passenger vehicle sales were flat in May, translating into 5M11
                                                                                      country’s 30 largest automakers. Currently, these automakers
total sales of 6m vehicles, an increase of 6.1% from the same
                                                                                      are expanding their capacity and it was reported that about
period last year.
                                                                                      some 4-5m of new capacity will be ready by end 2012, largely
                                                                                      by the large SOE auto groups. However, the actual new
May 2011 commercial vehicles sales contracted 14.2% y-o-y to
                                                                                      capacity brought on could end up lower than the reported
approx. 340K units, and 5M11 sales were down 2.1% to
                                                                                      figure. Some of the new capacity will be used to fill the export
1.89m units, due largely to weaker macro outlook as the
                                                                                      orders, which are gradually picking up.
government tightened credit.




                                                                                                                                                                                                                    Page 17
Industry Focus
Automobile Sector



We believe a potential glut in capacity is slowly building up in    dealers, network coverage, management capabilities and
the near term before being digested over the longer-term. In        financial health, we like both China ZhengTong (1728 HK),
our view, the foreign JV brands have more latitude to stagger       ZhongSheng (881 HK). Dah Chong Hong (1828 HK) is ranked
capacity growth while concerns should mainly centre on the          behind China ZhengTong and ZhongSheng because of its
Chinese self-branded automakers. Certain foreign JVs are            diversified business portfolio. Sparkle Roll (970 HK) is the
facing a capacity issue as demand is beginning to out-strip         smallest operator among dealership players.
supply.
                                                                    Favour auto dealers with strong luxury brands. Three European
Valuation and recommendation                                        auto brands top the luxury car segment in China. The ranking,
                                                                    in terms of sales volume is Audi, BMW and Mercedes Benz. In
Higher valuations for auto dealers warranted compared to            total, they accounted for over 60% of total luxury car sales last
automakers                                                          year.

Automakers valuation de-rated. The Chinese auto sector has          Sales of 3 major premium brands in China
been de-rated due to a slowdown in growth. At current prices,
the average sector FY11 PE is 11.6x, reflecting a healthy,
                                                                     units
though slower sales growth outlook. At the peak of the
                                                                     600,000
valuation cycle, these companies were trading at approx. 14x
PE. We prefer Dongfeng Motor (489 HK) in the mid-high end            500,000
of the auto value chain and avoid Chinese branded automakers,
due to the lack of catalyst to drive up share prices. Dongfeng       400,000
Motor remains our top pick in the auto assembly sector largely
                                                                     300,000
because of its strong management team to deliver solid
performance and attractive valuation.                                200,000

Luxury brand automaker highest earnings multiple. Brilliance         100,000
China (1114 HK), the luxury car maker which has a JV with
                                                                             0
BMW Group, is trading on FY11 PE of 16.5x, highest among
                                                                                      FY08                 FY09          FY10
the H-listed auto companies. We believe the shares have
                                                                                    BMW             Audi          Mercedes-Benz
further upside potential, supported by a strong product
pipeline (both the BMW and minibus operations). The plan to
                                                                    Note: Figures include imports
revamp its minibus production means a new technology
platform will be ready by 2015. However, the company might          Source: Companies
issue equity to finance its BMW JV business expansion in China,
which could explain the recent pull back in share price.            Among the four listed auto dealers, China ZhengTong carries
                                                                    Audi, BMW/MINI and Porsche, while ZhongSheng has Audi,
Auto dealers’ valuation could re-rate further. We believe           Mercedes Benz, Porsche, and Lamborghini as their premium
investor interest in the auto sector will switch to the auto        brands. Dah Chong Hong holds the Audi and Bentley while
dealers. Since auto dealers have greater scope to build up a        Sparkle Roll is in the ultra premium segment with Rolls-Royce,
steady recurring income stream due to their integrated              Lamborghini and Bentley under its umbrella. Hence, China
business models ( compared to pure auto assemblers), they are       ZhengTong stands out as it is also the second largest BMW
trading at a premium to the automakers. Luxury auto dealers         auto dealer group in China and BMW is one of the major
are enjoying strong luxury car demand and better profit             premium bands in the country.
margins from a gradual increase in repair & maintenance
services. Although auto dealers are not exactly treated as pure     Valuation of auto dealers based on DCF. We compute the fair
retail concept plays, they deserve to trade at a higher valuation   valuations of auto dealers using DCF, applying WACC of 11%
than auto assemblers but at a discount to pure retailers.           and terminal growth rate of 2-3%. We initiate BUY on
                                                                    ZhengTong, Zhongsheng and Dah Chong Hong.
Based on FY11 earnings estimates, the sector average valuation
is 15.6x. Looking at the brands carried by these listed auto




 Page 18
                                                                 Industry Focus
                                                              Automobile Sector




Profit margin – auto dealers vs auto makers

 %
 12
 10
  8
  6
  4
  2
  0
 (2)
 (4)
           2007          2008          2009        2010
                    Auto dealers              Auto makers

Auto dealers include China ZhengTong, Zhongsheng, Dah Chong
Hong, Sparkle Roll, Pang Da Auto and Lentuo Int’l

Automakers include Dongfeng Motor, Brilliance China, Geely
Automobile, Guangzhou Auto and Great Wall Motor

Exclude Geely for 2007 profit margin

Source: Bloomberg




                                                                         Page 19
                                                                                                                                                                                    Industry Focus
                                                                                                                                                                                 Automobile Sector


Peers comparison table – Auto dealers

                                          China ZhengTong           Zhongs heng Group               Dah Chong Hong                   Sparkle Roll                    Pang Da                       Lentuo
Bloomberg code                                     1728 HK                     881 HK                      1828 HK                       970 HK                    601258 CH                       LAS US
Price (local currency)                                8.99                       14.84                         8.27                         1.47                       33.29                         4.98
Total issued shares (mil)                            2,000                       1,908                        1,819                        2,976                       1,049                           29
Market Cap (US$m)                                    2,311                       3,641                        1,934                          562                       5,389                          147

Rating                                                  BUY                        BUY                            BUY                         NR                           NR                          NR
Target price                                           10.9                        18.6                            9.9                       n.a.                         n.a.                        n.a.
Upside (%)                                               21                         25                             20                        n.a.                         n.a.                        n.a.

No. of dealership stores                                  24                         98                             55                          3                         926                         40+
(2010)
                                                                                                A diversified business                               Multibrands, offering 83
                                                                                             group with operations in                                  brands from domestic
                                Focuses on ultra premium,         Focuses on ultra                                      Sells ultra prem ium cars,                             Sells cars mainly in Beijin,
                                                                                                auto distribution and                                    and foreign brands,
Business profile            premium and m id-high end car premium , premium and                                         watches, jewelleries and                              but expanding into Tianjin
                                                                                                 dealership, food and                                   across the sedan and
                                                    brands mid-high end car brands                                                      fine wine                                              and Hebei
                                                                                              consumer products and                                       com mercial vehicle
                                                                                                      logistic services                                              segment

                                                                Porsche, Mercedes Benz,         Bentley, Isuzu, Audi,                                   Audi, Mercedes-Benz,      FAW-Volkswagen, Audi,
                            Porsche, BMW, MINI, Audi, DF
                                                                           Lexus, Audi,     Mercedes Benz, Toyota,         Bentley, Lamborghini,      Toyota, Mazda, Honda,        FAW-Mazda, Shanghai-
Main auto brands                 Nissan, DF Honda, Buick,
                                                                  Lam borghini, Toyota, Nissan, Honda etc, about 20                   Rolls-Royce    Subaru, Changan, Chery,     Volkswagen, Toyota, and
                                      Hyundai, Chevrolet
                                                                          Honda, Nissan                       brands                                                     etc.           Changan-Mazda


                              2nd largest BMW dealership                                                                                                                          Ranked top 50 private
                                                                     Head-start in M&A      A long established history Cross-selling of non-auto         Super wide network
                             group in China. Sales of BMW                                                                                                                      auto retailer in Beijing in
Competitive edge                                                     strategy to expand       in auto distribution and     luxury goods to auto           coverage across the
                              and Audi accounted for over                                                                                                                     terms of new vehicle sales
                                                                      dealership outlets           dealership business                 custom ers                     nation
                                60% of total sales in 2010                                                                                                                              revenue in 2009


                                                                                           Large exposure in Japanese Sales largely dependent                                    Limited store coverage as
                                 Lack of experience in M&A          A large exposure to                                                          Carries too many brands,
Weakness                                                                                          auto brands and too on quota allotment from                                      concentration mainly in
                                                   activities           Japanese brands                                                                       lack of focus
                                                                                                           diversified            car principals                                                   Beijing


Source: Companies, DBS Vickers




Page 20
Industry Focus
Automobile Sector


Peers comparison table – Auto dealers (continued)

                                      China ZhengTong*     Zhongsheng Group*   Dah Chong Hong*   Sparkle Roll^*     Pang Da       Lentuo
Bloomberg code                                  1728 HK               881 HK           1828 HK          970 HK    601258 CH       LAS US
Valutaion
PE (x)
2009                                                77.0                41.0             20.9             38.7        29.9           5.0
2010                                                41.6                21.9             10.6             24.6        24.5           4.3
2011F                                               20.2                15.5             10.8             15.8        19.7           5.0
2012F                                               12.3                10.2              8.9             12.0        15.3           3.4
P/Cash flow (x)
2009                                                63.0                34.9             24.4             35.5        26.0           4.0
2010                                                36.9                19.2             11.2             23.5        20.7           2.5
2011F                                               18.8                13.2             11.5             15.2         9.8           8.7
2012F                                               11.6                 9.0              9.3             11.5         7.8           3.7
EV/EBITDA (x)
2009                                                43.7                23.8             15.3             30.4          n.a.         3.3
2010                                                24.4                13.9             11.5             20.5          n.a.        (0.9)
2011F                                               10.8                 9.4              7.8             12.0          n.a.         2.2
2012F                                                7.4                 6.7              6.8              7.9          n.a.         1.4
Yield (%)
2009                                                 0.0                 0.0               1.9             0.5          0.0          0.0
2010                                                 0.0                 0.0               2.8             0.8          0.0          0.0
2011F                                                0.0                 0.0               2.8             1.3          1.0         12.0
2012F                                                0.0                 0.0               3.4             1.7          1.3         17.7
PBR (x)
2009                                                25.3                 9.1               2.7             5.0        14.2           2.3
2010                                                18.1                 3.8               2.2             4.2         9.2           0.9
2011F                                                3.7                 3.2               1.9             3.3         3.6           1.2
2012F                                                3.1                 2.5               1.7             2.7         3.0           1.1
Net Debt / Equity (x)
2009                                                 0.4                 0.2               0.1            Cash         Cash        234.8
2010                                                 0.5                 0.1               0.2            Cash         Cash         17.0
2011F                                               Cash                 0.2               0.1            Cash          n.a.         n.a.
2012F                                               Cash                 0.2               0.1            Cash          n.a.         n.a.

^FY09: FY10; FY10; FY11; FY11: FY12F; FY12: FY13F

Source: Companies, *DBS Vickers




                                                                                                                               Page 21
                                                                                                                                  Industry Focus
                                                                                                                               Automobile Sector


Peers comparison table – Auto dealers (continued)

                                        China ZhengTong*    Zhongsheng Group*   Dah Chong Hong*   Sparkle Roll^*     Pang Da            Lentuo
Bloomberg code                                    1728 HK              881 HK           1828 HK          970 HK    601258 CH            LAS US
Financials
Revenue (US$m)
2009                                                  769              2,118              2,855            157        5,424               343
2010                                                1,240              3,710              4,141            399        8,291               510
2011F                                               2,897              6,554              5,190            571        9,875               592
2012F                                               4,964              9,254              6,197            789       12,154               997

Revenue growth (%)
2009                                                 63.6                30.1              13.9            99.4        46.1               26.7
2010                                                 61.3                75.2              45.0           154.4        52.8               48.7
2011F                                               133.6                76.6              25.3            43.1        19.1               16.2
2012F                                                71.4                41.2              19.4            38.4        23.1               68.4

Net Profit (US$m)**
2009                                                  23                  73                87               15         156                19
2010                                                  43                 159               137               23         191                24
2011F                                                114                 235               178               36         274                29
2012F                                                188                 356               218               47         352                43

Net profit growth (%)
2009                                                331.6              115.4               20.6          (159.5)       68.0               71.1
2010                                                 89.2              119.0               57.3            57.2        22.2               29.7
2011F                                               168.2               47.5               30.0            55.7        43.7               20.3
2012F                                                64.2               51.5               22.2            31.4        28.4               46.6

Gross margin (%)
2009                                                  8.3                 8.6              13.1            17.3        10.3               11.9
2010                                                  9.0                 9.5              12.2            11.8        10.8               10.9
2011F                                                 9.6                 9.8              12.6            12.9         n.a.               n.a.
2012F                                                 9.6                10.3              12.7            13.3         n.a.               n.a.

Net margin (%)
2009                                                  2.9                 3.4               3.1             9.3         2.9                5.5
2010                                                  3.4                 4.3               3.3             5.7         2.3                4.8
2011F                                                 3.9                 3.6               3.4             6.2         2.8                5.0
2012F                                                 3.8                 3.8               3.5             5.9         2.9                4.3
^FY09: FY10; FY10; FY11; FY11: FY12F; FY12: FY13F
** Normalised net profit for Dah Chong Hong
Source: Companies, *DBS Vickers


Page 22
Industry Focus
Automobile Sector


Peers comparison table – Auto dealers (continued)

                                        China ZhengTong       Zhongsheng Group       Dah Chong Hong   Sparkle Roll     Pang Da   Lentuo
Bloomberg code                                   1728 HK                881 HK              1828 HK       970 HK     601258 CH   LAS US

FY10 revenue breakdown (US$m, non-calendarised data)
New car sales                                         1,082             3,387                 3,167          115        7,786      475
After-sales business                                    93                325                     -             5         427       42
Others                                                  65                       -             973            37           88        2
Total                                                 1,240             3,712                 4,141          157        8,302      519


FY10 gross profit breakdown (US$m, non-calendarised data)#
New car sales                                           58                195                  167            10          679       30
After-sales business                                    41                159                     -             3         135       25
Others                                                  13                       -              35            14           82        2
Total                                                  112                354                  202            27          897       57


FY10 gross margins by products (%)#
New car sales                                           5.4                5.8                  5.3           9.0         8.7      6.2
After-sales business                                   44.1               48.9                    -          60.0        31.7     59.7
Others                                                 19.9                      -              3.6         45-50        92.7     91.9
Total                                                   9.0                9.5                 12.2          17.3        10.8     10.9

# FY10 operating profit & margin for Dah Chong Hong

Source: Companies, DBS Vickers




                                                                                                                                  Page 23
Industry Focus
Automobile Sector

Peers comparison table - automakers


                                                                                             Guangzhou
                              Dongfeng                                                       Automobile
                                Motor^             Brilliance^     Geely^    Great Wall#         Group#         BYD#
Bloomberg code                     489                    1114        175          2333            2238         1211
Price (HK$)                      13.16                    6.97       2.88         11.00            8.22         23.95
Issued shares (m)                8,616                   4,997      7,451         2,738           6,148         2,275
Market cap (HK$m)              113,388                 34,792      21,460        30,120          50,537        54,489

Rating                              BUY                  BUY        HO LD     Not Rated        Not Rated     Not Rated
Target price                      15.60                 9.10         3.30           n.a.             n.a.          n.a.
Upside (%)                         18.5                 30.6         14.6           n.a.             n.a.          n.a.

Key brands                  Honda Civic                 BMW          Geely        Haval    Honda Accord,          BYD
                               Peugeot                 Jinbei      Englon       Voleex         Fit, City &
                                 Nissan                           Emgrand       Wingle           Odyssey
                             Dongfeng                              Gleagle      Gleagle             Linian


Headquarters                      Hubei            Shenyang      Hangzhou         Hebei      Guangzhou       Shenzhen

Valuation
Revenue (RMB m)
2009                              91,758               6,149        14,069       12,396            50,254      39,469
2010                             122,395               8,949        20,099       22,175            59,848      46,685
2011F                            135,354              10,126        24,229       29,856            72,036      55,350
2012F                            152,399               8,598        27,857       36,673            86,653      64,041

Revenue growth (yoy, %)
2009                                30.0                 12.4       228.0          51.0              14.8         47.3
2010                                33.4                 45.5        42.9          78.9              19.1         18.3
2011F                               10.6                 13.2        20.5          34.6              20.4         18.6
2012F                               12.6                (15.1)       15.0          22.8              20.3         15.7
                                                                                                                         .
Net profit (RMB m)
2009                               6,250              (1,640)        1,183        1,023             2,032        3,794
2010                              10,981               1,271         1,368        2,698             4,295        2,523
2011F                             11,160               1,757         1,753        3,221             4,882        2,519
2012F                             12,486               2,076         1,981        3,918             5,945        3,058

Net profit growth (yoy, %)
2009                                58.0                n.m.         34.5          99.3             29.7         271.5
2010                                75.7                n.m.         15.7         163.9            111.4         (33.5)
2011F                                1.6                38.2         28.1          19.4             13.7          (0.2)
2012F                               11.9                18.1         13.0          21.6             21.8          21.4

PE (X)
2009                                15.1                n.m.         14.0          24.5              12.6         11.3
2010                                8.6                 22.8         12.9           9.3               7.4         18.0
2011F                               8.5                 16.5         10.1           7.8               8.7         18.1
2012F                               7.6                 14.0          8.9           6.5               7.0         15.0

# Consensus

Source: Bloomberg, CAAM, Companies, ^DBS Vickers




 Page 24
                                                                                                         Industry Focus
                                                                                                    Automobile Sector

Peers comparison table – automakers (continued)

                                                                                                Guangzhou
                              Dongfeng                                                          Automobile
                                Motor^             Brilliance^       Geely^       Great Wall#       Group#       BYD#
Bloomberg code                     489                    1114         175              2333          2238       1211

P/Cash Flow (X)
2009                                  9.6               (14.3)         10.7             18.2          11.2         7.7
2010                                  6.4                84.2           9.3              7.9           7.6         9.6
2011F                                 7.1                95.7           7.8              7.4           9.3         7.6
2012F                                 6.4                95.6           6.9              5.9           7.0         8.5

EV/EBITDA (X)
2009                                 6.1                 93.7           8.3             17.8           3.7         7.1
2010                                 3.4                 18.1           7.0              6.3           2.0        10.6
2011F                                3.6                 13.1           6.8              6.0           4.1         9.8
2012F                                3.2                 11.6           3.0              4.8           3.2         8.7

Yield (%)
2009                                 0.8                  0.0           0.8              1.1           0.0         0.0
2010                                 1.6                  0.0           1.0              2.2           1.6         0.0
2011F                                1.2                  0.0           1.5              2.7           2.3         0.6
2012F                                1.3                  0.0           1.7              3.3           2.8         0.6

PBR (X)
2009                                 3.5                  5.8           2.8              3.3           2.1         2.6
2010                                 2.5                  4.6           2.2              2.5           1.6         2.5
2011F                                2.0                  3.6           1.8              1.9           1.4         2.1
2012F                                1.6                  2.9           1.6              1.5           1.2         1.8

Net Debt/Equity (X)
2009                                cash                 cash          cash             cash          cash           7
2010                                cash                  55           cash             cash          cash         57
2011F                               cash                  32             19              n.a.          n.a.        n.a.
2012F                               cash                  22           cash              n.a.          n.a.        n.a.

EBITDA margins (%)
2009                                13.6                  4.3          13.8             10.3           9.8        16.5
2010                                15.4                 19.0          13.0             16.0          12.6        12.1
2011F                               13.2                 23.0          12.9             15.0           9.1        11.0
2012F                               13.2                 30.7          12.7             15.1           9.5        10.8

Production capacity (units)
Passenger                   1,201,000                110,000        560,000          300,000       990,000     800,000
Commercial                    521,000                           -             -      100,000        21,500               -

Sales volume (units)
2009                          1,430,700              123,874        326,710          209,860       578,322     430,000
2010                          1,945,956              165,668        415,843          363,482       660,286     519,800
2011F                         2,161,103              207,646        479,774          500,000       756,666     580,000

# Consensus

Source: Bloomberg, CAAM, Companies, ^DBS Vickers




                                                                                                                Page 25
Industry Focus
Automobile Sector




Peers valuation – Auto dealers

                                                 Mkt               PE     PE    PEG     PEG Yield Yield P/Bk P/Bk EV/EBITDA ROE ROE
                            Currency Price       Cap    Fiscal    11F    12F    11F     12F 11F 12F 11F 12F 11F 12F 11F 12F
Company Name             Code       Local$      US$m        Yr      x      x      x       x    %     %     x    x    x    x  %   %

Hong Kong
Dah Chong Hong*       1828 HK     HKD 8.27      1,934 Dec-10 10.8        8.9    (4.3)   0.4    2.8    3.4    1.9    1.7 7.8       6.8    19.1    20.2
Zhongsheng*            881 HK     HKD 14.84     3,641 Dec-10 15.5       10.2     0.4    0.2    0.0    0.0    3.2    2.5 9.4       6.7    23.0    27.8
China ZhengTong*      1728 HK     HKD 8.99      2,311 Dec-10 20.2       12.3     0.2    0.2    0.0    0.0    3.7    3.1 10.8      7.4    31.9    27.7
Sparkle Roll^*         970 HK     HKD 1.47        562 Mar-10 15.8       12.0     0.3    0.4    1.3    1.7    3.3    2.7 12.0      7.9    23.4    24.6
WO KEE Hong            720 HK     HKD 0.198        59 Dec-10 n.a.        n.a.    n.a.   n.a.   n.a.   n.a.   n.a.   n.a. n.a.     n.a.    n.a.    n.a.
New Focus Auto         360 HK     HKD   2.5       183 Dec-10 13.9        9.9     0.1    0.2    n.a.   n.a.   n.a.   n.a. n.a.     n.a.    n.a.    n.a.
Average                                                      15.3       10.7    (0.7)   0.3    1.0    1.3    3.1    2.5 10.0      7.2    24.3    25.1

Other Asia
Jardine C&C        JCNC SP        SGD 39.26 11,359     Dec-10    12.0   10.7    20.9 0.9       2.1    3.4    n.a.   n.a.   6.8    6.0 n.a. n.a.
Zhejiang Zhongda 600704 CH        CNY 17.08 1,158      Dec-10    12.0    9.9     0.5 0.5       n.a.   n.a.   1.5    1.3    n.a.   n.a. n.a. n.a.
Pang Da Auto     601258 CH        CNY 33.29 5,389      Dec-10    19.7   15.3     0.8 0.5       1.0    1.3    3.6    3.0    n.a.   n.a. 20.1 21.3
Hotai Motor         2207 TT       TWD 95.3 1,814       Dec-10    10.9   11.8    (6.9) (1.6)    5.5    5.2    n.a.   n.a.   n.a.   n.a. n.a. n.a.
Average                                                          13.6   11.9     3.8 0.1       2.9    3.3    2.6    2.2    6.8    6.0 20.1 21.3

US
AutoNation              AN US     USD   33.79   4,997 Dec-10 18.3 15.8           0.6    1.0 0.0 n.a.         2.3    2.0    12.8 11.6 13.1 12.6
Group 1 Auto           GPI US     USD   36.46     876 Dec-10 11.7 9.8            0.3    0.5 0.9 0.9          1.0    0.9    10.2 9.2 8.7 9.5
Asbury Auto           ABG US      USD   15.53     511 Dec-10 9.8 7.7             0.3    0.3 n.a. n.a.        1.4    1.2     8.9 7.7 16.7 17.4
CarMax^               KMX US      USD   27.37   6,183 Feb-11 15.1 13.5           2.2    1.1 n.a. n.a.        2.3    1.9    13.5 12.3 16.5 15.1
Lentuo Int'l           LAS US     USD    4.98     147 Dec-10 5.0 3.4             0.1    0.1 12.0 17.7        1.2    1.1     2.2 1.4 26.3 34.1
Average                                                      13.7 11.7           0.9    0.7 0.4 0.9          1.7    1.5    11.4 10.2 13.8 13.7

^FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




 Page 26
                                                                                                                                    Industry Focus
                                                                                                                            Automobile Sector


Peers valuation – Auto manufacturers

                                                       Mkt              PE    PE   PEG PEG Yield Yield P/Bk P/Bk EV/EBITDA                  ROE     ROE
                                  Currency    Price    Cap    Fiscal   11F   12F   11F 12F 11F 12F 11F 12F 11F 12F                           11F     12F
Company Name            Code                 Local$   US$m        Yr     x     x     x   x    %     %     x    x    x     x                   %       %
Hong Kong
Guangzhou Auto          2238 HK      HKD       8.22  6,496 Dec-10 8.7   7.0 (0.6)          0.3   2.3    2.8    1.4    1.2     4.1  3.2 17.9         19.0
Sinotruk HK             3808 HK      HKD       5.72  2,030 Dec-10 8.6   7.6   4.2          0.6   2.4    2.8    0.7    0.6     5.4  4.9  8.1          8.9
Dongfeng Motor*         489 HK       HKD      13.16 14,576 Dec-10 8.5   7.6   5.2          0.6   1.2    1.3    2.0    1.6     3.6  3.2 26.4         23.7
Brilliance China*       1114 HK      HKD       6.97  4,477 Dec-10 16.5 14.0   0.4          0.8   0.0    0.0    3.6    2.9    13.1 11.6 24.4         22.8
Great Wall Motor        2333 HK      HKD         11  3,872 Dec-10 7.8   6.5   0.4          0.3   2.7    3.3    1.9    1.5     6.0  4.8 27.2         26.2
BYD Co Ltd              1211 HK      HKD      23.95  7,004 Dec-10 18.1 15.0 (28.7)         0.7   0.6    0.6    2.1    1.8     9.8  8.7 12.8         13.1
Qingling Motors         1122 HK      HKD       2.39    763 Dec-10 14.2 13.0   0.9          1.4   5.5    5.9    0.7    0.7    n.m. n.m.  4.9          5.2
Geely Automobile*       175 HK       HKD       2.88  2,759 Dec-10 10.1  8.9   0.4          0.7   1.5    1.7    1.8    1.6     6.8  3.0 19.9         18.9
Average                                                           11.6  9.9 (2.2)          0.7   2.0    2.3    1.8    1.5     7.0  5.6 17.7         17.2
China
SAIC Motor              600104 CH    CNY      17.35 24,742 Dec-10 9.5   8.0         0.7    0.4   1.5    1.8    2.0    1.6   5.0  4.4        24.7    23.8
FAW CAR                 000800 CH    CNY      13.42  3,370 Dec-10 10.9  9.3         1.4    0.5   2.8    3.4    2.0    1.6   5.5  4.4        20.8    21.1
CQ Changan Auto         200625 CH    HKD       5.62  1,940 Dec-10 6.1   5.5        (0.5)   0.5   4.3    4.7    n.a.   n.a. 25.3 19.4         n.a.    n.a.
Beiqi Foton Motor       600166 CH    CNY       8.68  2,825 Dec-10 8.6   7.6         0.5    0.6   1.7    2.3    1.9    1.6   n.a. n.a.       17.1    16.7
Tianjin Faw Xiali       000927 CH    CNY       7.64  1,880 Dec-10 23.3 20.4         0.3    1.4   2.2    2.7    2.8    2.5   n.a. n.a.       15.3    17.0
DongFeng Auto           600006 CH    CNY       4.55  1,404 Dec-10 12.5 10.4         0.5    0.5   2.9    3.5    1.3    1.1   8.9  6.9        12.2    13.5
Anhui Jianghuai Auto    600418 CH    CNY      10.17  2,022 Dec-10 7.7   6.1         0.2    0.2   3.1    5.4    1.9    1.5   5.3  4.1        25.8    26.9
Zhengzhou Yutong Bus    600066 CH    CNY      21.93  1,759 Dec-10 11.1  9.0         0.5    0.4   2.8    3.2    3.0    2.4   8.2  6.6        31.1    29.2
Haima Investment        000572 CH    CNY       5.19  1,317 Dec-10 18.1 16.2        (2.2)   1.4   n.a.   n.a.   n.a.   n.a. n.a. n.a.         n.a.    n.a.
GAC Changfeng Motor     600991 CH    CNY      15.15  1,218 Dec-10 20.4 17.9         0.1    1.3   n.a.   n.a.   2.8    2.3 10.4   8.0        12.5    15.2
Average                                                           12.8 11.1         0.2    0.7   2.6    3.4    2.2    1.9   9.8  7.7        19.9    20.4
US
Ford Motor              F US          USD     13.95 52,985 Dec-10      7.1   6.7   1.8     1.3   0.0    0.0    7.5    3.6     9.4     8.2   98.7    45.5
Average                                                                7.1   6.7   1.8     1.3   0.0    0.0    7.5    n.a.    9.4     8.2   98.7    45.5
Korea
Kia Motors*@            000270 KS KRW 72300 26,662 Dec-10 10.2               9.2   0.4     0.9   0.8    1.0    2.4    1.9    10.8    10.0   26.5    23.3
Hyundai Motor*@         005380 KS KRW 238000 48,471 Dec-10 11.1              9.7   0.7     0.7   0.4    0.4    2.0    1.6     7.6     6.7   20.2    18.7
Average                                                    10.6              9.5   0.5     0.8   0.6    0.7    2.2    1.8     9.2     8.4   23.4    21.0
Japan
Toyota Motor^           7203 JP        JPY    3285 141,778 Mar-11 26.2 11.1        (7.3)   0.1   1.6    2.4    1.0    0.9    15.1    10.0    3.8     8.4
Honda Motor^            7267 JP        JPY    3020 68,476 Mar-11 14.3   8.8        (0.5)   0.1   2.0    2.8    1.1    1.0     9.7     6.5    8.1    12.7
Nissan Motor^           7201 JP        JPY     782 44,251 Mar-11 13.5   7.5        (0.6)   0.1   1.8    3.1    1.1    0.9     7.5     5.6    7.8    13.3
Average                                                           18.0  9.1        (2.8)   0.1   1.8    2.8    1.1    1.0    10.8     7.4    6.6    11.5
Europe
BMW GR                  BMW GR        EUR 60.43   6,423      Dec-10 9.3   8.4       0.3    0.8   3.3    3.9    1.5    1.3     7.4     7.1   16.9    16.4
Saab AB                 SAABB SS      SEK    149  2,642      Dec-10 12.5 11.4       0.1    1.2   2.7    3.0    1.3    1.2     0.0     0.0   11.3    11.2
Fiat SpA                F IM          EUR   7.25 13,563      Dec-10 23.8 12.1      (0.9)   0.1   1.5    2.1    0.9    0.8     3.5     3.0    4.5     8.5
PEUGEOT SA              UG FP         EUR 27.79   9,540      Dec-10 5.1   3.8       0.5    0.1   3.8    5.1    0.4    0.4     5.8     5.2    9.5    11.6
Porsche Auto            PAH3 GR       EUR 47.355 21,271       Jul-10 5.9  5.1       n.a.   0.3   0.3    0.4    0.5    0.5    n.m.     0.0   10.1    10.8
Daimler AG              DAI GR        EUR 47.135 73,672      Dec-10 8.9   7.5       0.4    0.4   4.5    5.2    1.2    1.1     7.8     7.0   14.6    15.4
Average                                                              10.9 8.1       0.1    0.5   2.7    3.3    1.0    0.9     4.9     3.7   11.2    12.3
Malaysia
Proton Holdings^*       PROH MK MYR            3.48    635 Mar-11      9.5   8.9   0.7     1.4   5.7    3.4    0.3    0.3     2.2     2.4    3.7     3.9
Indonesia
Astra Int'l             ASII IJ       IDR    59600 28,344 Dec-10 15.0 13.2         1.3     0.9   2.8    3.2    4.1    3.5     0.0     0.0   29.3    28.1

^ FY11/FY3/12; FY12/FY3/13
@ Fully Diluted EPS
Source: Bloomberg, *DBS Vickers




                                                                                                                                               Page 27
Industry Focus
Automobile Sector


Peers valuation - Luxury general retailers

                                               Mkt                          11F                                  12F
                                      Price    Cap Fiscal      PE P/Sales    P/Bk Yield   ROE      PE P/Sales   P/Bk Yield   ROE
Company Name                   Code    HK$    HK$m     Yr       x       x       x    %     %        x       x      x    %     %

Chow Sang Sang                116 HK 25.15    17,025   Dec   19.1    1.2     2.7   1.9    14.6   16.0    1.0    2.4   2.3    15.6
Emperor Watch                 887 HK 1.32      8,868   Dec   18.4    1.5     2.6   1.6    16.4   15.2    1.2    2.3   2.0    16.2
Hengdeli Holdings*           3389 HK 4.42     19,440   Dec   22.3    1.3     3.1   1.6    14.8   18.2    1.1    2.6   1.9    15.6
Luk Fook Holdings^#*          590 HK 32.7     17,740   Mar   18.8    1.9     4.6   2.2    26.6   15.2    1.5    3.9   2.8    27.8
Oriental Watch*^              398 HK 5.01      2,352   Mar   12.2    0.9     1.3   1.8     8.3   10.0    0.5    1.1   1.9    11.7
                                                             18.2    1.4     2.9   1.8    16.1   14.9    1.1    2.5   2.2    17.4

# Fully Diluted EPS

^ FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




 Page 28
                    Industry Focus
                 Automobile Sector




STOCK PROFILES




                            Page 29
China / Hong Kong Company Focus
China ZhengTong Auto
Bloomberg: 1728 HK Equity                |   Reuters: 1728.HK


DBS Group Research . Equity                                                                             9 June 2011

BUY HK$8.99 HSI : 22,869                                                                            Tapping the upwardly mobile
(Initiate Coverage)
Price Target : 12-Month HK$10.90                                                                    •     Second largest BMW dealership in China riding high on
Reason for Report : Initiation                                                                            insatiable demand for luxury cars
Potential Catalyst: New dealership outlets to boost sales
                                                                                                    •     Planning to triple the number of dealerships over the next
Analyst                                                                                                   two years boosting profits substantially
Rachel MIU +852 2863 8843
rachel_miu@hk.dbsvickers.com                                                                        •     Initiate with BUY rating and TP of HK$10.9
                                                                                                    Carries the two most popular European luxury car brands.
                                                                                                    China ZhengTong Auto Services (ZhengTong) is the second
Price Relative                                                                                      largest BMW dealer and a major ‘4S’ (sales, spare parts,
        HK$                                                          Relative Index                 service and survey) dealership group in China. It focuses on
      9.60
                                                                                219
                                                                                                    premium brands such as BMW, MINI, Porsche and Audi. Sales
      9.10
      8.60
                                                                                169                 of BMW and Audi cars accounted for 65.4% of ZhengTong’s
      8.10                                                                                          premium auto segment last year. ZhengTong had 24 ‘4S’
                                                                                119
      7.60
      7.10
                                                                                                    stores across 14 cities nationwide last year.
      6.60                                                                      69

      6.10                                                                                          Tripling number of dealerships. ZhengTong intends to triple
      5.60
         Dec-10                          Mar-11
                                                                                19
                                                                                                    its number of dealerships to 68 by 2012 to drive future
       China ZhengTong Auto (LHS)                    Relative HSI INDEX (RHS)
                                                                                                    growth. These new stores will be located in high GDP growth
                                                                                                    regions. The rapid roll out of new stores is expected to fuel
Forecasts and Valuation                                                                             strong sales growth, driven by demand from a growing middle
                                                                                                    income group with an increasing penchant for luxury cars.
 FY Dec (RMB m)                      2009A         2010A           2011F          2012F             BMW Group launching new products in China. ZhengTong is
 Turnover                             4,981         8,034         18,771         32,170
                                                                                                    the sole BMW dealership group in China with coverage across
 EBITDA                                 261           486          1,139          1,845
 Pre-tax Profit                         198           390          1,025          1,706             six provinces and regions. BMW Group’s planned new product
 Net Profit                             146           276            740          1,215             launches in 2012/2013 should boost ZhengTong’s sales
 Net Pft (Pre Ex.)                      146           276            740          1,215             prospects. Sales of BMW cars in China from the local JV
 EPS (RMB)                             0.10          0.18           0.37           0.61
 EPS (HK$)                             0.12          0.22           0.44           0.73
                                                                                                    surged 66% y-o-y in 4M11, which signals that demand for
 EPS Gth (%)                          331.7          85.1          105.6           64.2             expensive cars is not abating despite the overall slowdown of
 Diluted EPS (HK$)                     0.12          0.22           0.44           0.73             auto sales.
 DPS (HK$)                             0.00          0.00           0.00           0.00
 BV Per Share (HK$)                    0.36          0.50           2.41           2.85             Value not reflective of potential earnings upside. ZhengTong’s
 PE (X)                                77.0          41.6           20.2           12.3             share price has yet to reflect the company’s full earnings
 P/Cash Flow (X)                       63.0          36.9           18.8           11.6
 P/Free CF (X)                         55.3           nm              nm            nm
                                                                                                    potential. We project FY12 earnings to jump over four-fold
 EV/EBITDA (X)                         43.7          24.4           10.8             7.4            from last year’s level. On a DCF basis and applying 11%
 Net Div Yield (%)                      0.0           0.0            0.0            0.0             WACC and 3% terminal growth rate, we arrive at a TP of
 P/Book Value (X)                      25.3          18.1            3.7            3.1
                                                                                                    HK$10.9. Although ZhengTong is not a pure retail play, it
 Net Debt/Equity (X)                     0.4           0.5         CASH           CASH
 ROAE (%)                              54.6          51.3           31.9           27.7             deserves to trade at a premium to auto assemblers albeit a
                                                                                                    discount to the retail sector. Our TP translates into an implied
 Earnings Rev (%):                                                   New              New           FY12 PE of 14.9x, reasonable in view of its growth prospects
 Consensus EPS (RMB)                                                 0.38             0.63
 Other Broker Recs:                                     B: 5          S: 0            H: 1          and premium brand value. Initiate with BUY recommendation.
                                                                                                        At A Glance
ICB Industry: Consumer Services                                                                         Issued Capital (m shrs)                                                 2,000
ICB Sector: General Retailers                                                                                                                                          17,980 / 2,311
                                                                                                        Mkt. Cap (HK$m/US$m)
Principal Business: The 2nd largest BMW dealership group in
                                                                                                        Major Shareholders
China. ZhengTong sells European premium brands and other mid-
end automobiles.                                                                                             Grand Glory (%)                                                        72.7
Source of all data: Company, DBSV, Bloomberg, HKEX                                                      Free Float (%)                                                              27.3
                                                                                                        Avg. Daily Vol.(‘000)                                                      4,466


In Singapore, this research report or research analyses may only be distributed to Institutional    “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,   (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from
Chapter 289 of Singapore.                                                                           or in connection with this report.”
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- JW / sa- CW
                                                                                                           Company Focus
                                                                                                 China ZhengTong Auto



SWOT Analysis


Strengths                                                          Weakness

• Major exposure to European luxury auto brands, positions it      • Number of 4S shops below critical mass and continuous
  well to capture market share from affected Japanese auto           efforts required to accelerate network coverage
  brand dealers
                                                                   • Company has suffered from negative current assets in
• 2nd largest BMW auto dealership group in China poised to do        the past ; history may repeat itself
  well from new BMW models planned over the next few years
                                                                   • M&A skills needed to rapidly expand network coverage
• Luxury auto sales accounted for almost 70% of total revenues
  last year

• Although its network is smaller than certain peers, this also
  implies a higher growth tangent



Opportunities                                                      Threats

• Aggressive penetration by international luxury car brands into   • Loss of dealership qualification could hamper growth
  China provides ample new opportunities for premium brand
  auto dealers                                                     • Rapid expansion could lead to management errors due to
                                                                     lack of qualified staff manning the stores.
• Consumption shift to expensive vehicles, given rising
  disposable incomes fuelled by solid economic growth. A           • Rapid rise in gasoline prices could dent demand for large
  growing middle-class is the key driving force behind demand        cars
  for expensive vehicles
                                                                   • Store acquisition costs becoming more expensive due to
• Auto-related businesses such as after-sales services, auto         industry competition
  leasing/financing and auto insurance will complement
  automobile sales revenue




                                                                                                                       Page 31
Company Focus
China ZhengTong Auto



THE BUSINESS MODEL                                                REVENUE COMPOSITIONS

Second largest BMW dealership. China ZhengTong Auto               Sales of new automobiles
Services (ZhengTong) is the second largest BMW dealer and a
major 4S (sales, spare parts, service and survey) dealership      Revenue breakdown, FY10
group in China. It focuses on ultra premium and premium
brands such as BMW, MINI, Audi and Porsche. It also distributes
                                                                                                              Middle
middle market brands like Nissan, Buick, Hyundai, Honda and                                                  market
Chevrolet. The company has racked up ten years of experience                                                 brands
since opening its first dealership in Shanghai in 1999. Its                                                  27.5%
automobile dealership business has expanded to 24 4S outlets
nationwide last year, of which 10 were BMW stores.
                                                                                                                 After-sales
The company was listed on the HK Stock Exchange on 10                    Premium &                                services
                                                                            ultra                                   7.5%
December 2010.
                                                                          premium
                                                                           brands
Customer-focused business model. The dealership has gained                 59.8%                                 Logistics
recognition and awards for being a customer-focused business,                                                   services &
including operating one of the top 10 BMW dealership stores in                                                  Lubricant
China in 2010. Over the years, ZhengTong has generated a                                                        oil trading
                                                                                                                   5.3%
large customer base to support its after-sales business. The
company has also expanded into the automobile logistics
services and lubricant oil trading business in 2008. At end 2010, Source: Company, DBS Vickers
ZhengTong operated 24 dealership stores, of which 1 is ultra
premium, 13 premium and 10 middle market brands.

Segmental gross profit breakdown, FY10
                                                                  New automobile revenue by brands

                                              Logistics
                                             services &             RMB m
                                             Lubricant             8,000

               After-sales                   oil trading           7,000
                services                       11.6%               6,000
                 36.6%                                             5,000
                                                                   4,000
                                                                   3,000
                                                                   2,000
                             Premium &
                                                                   1,000
                                ultra
    Middle                    premium                                   0
   market                      brands                                         2007A        2008A       2009A       2010A
   brands                      44.3%                                                  Middle market brands
    7.6%
                                                                                      Premium & ultra premium brands

Source: Company, DBS Vickers
                                                                  Source: Company, DBS Vickers


                                                                  Bulk of revenue derives from new vehicle sales. Over 80% of
                                                                  ZhengTong revenue comes from sales of new automobiles.
                                                                  ZhengTong enjoyed strong growth largely by focussing on
                                                                  luxury and mid market brands, which generate better margins
                                                                  and are in high demand due to rising spending power in regions
                                                                  enjoying rapid GDP growth. Last year, almost 70% of new auto
                                                                  sales revenue was derived from premium and ultra premium




Page 32
                                                                                                            Company Focus
                                                                                                 China ZhengTong Auto



brands, up from c.42% in FY07. As a result, this segment         Segmental gross margin
generated about 44% of total gross profit for the group last
year, as overall gross margins were lifted by 1.8ppts from        %
FY09’s 4.9% level.                                                8
                                                                  7
Customers who buy premium and ultra premium branded
                                                                  6
automobiles are less price sensitive compared to purchasers of
                                                                  5
middle market branded automobiles. Target customers of
                                                                  4
premium brands are mainly individuals with annual household
income over RMB300K whereas the middle market target group        3
have a lower household income of RMB150K to RMB300K.              2
Such high end customers tend to purchase optional add-ons to      1
their automobiles and are more likely to utilize after-sales      0
services.                                                               2007A         2008A         2009A        2010A
                                                                                    Premium & ultra premium brands
Premium brands account for bigger portion of total vehicle sales.
                                                                                     Middle market brands
ZhengTong has been selling more premium cars since 2007,
lifting the percentage from 14% of total vehicle volume sold, to Source: Company
38% last year. Premium and ultra premium car sales generate
stronger gross margins of >8% compared to 4-6% for mid-
                                                                  Inventory management. Inventory of new automobiles, spare
high-end vehicles.
                                                                  parts and accessories at each of ZhengTong dealerships are
                                                                  managed real time and on a rolling monthly basis based on
Sales volume                                                      management’s sales expectations. Inventory is purchased using
                                                                  a combination of cash and bank notes which are generally
     unit                                                         secured by bank deposits and inventories.
 30,000
                                                                 Payment schedule. New automobiles are delivered to
 25,000
                                                                 ZhengTong based on orders placed by each dealership store.
 20,000                                                          The automobile manufacturers often require full payment of the
                                                                 purchase price before delivery of new automobiles is made.
 15,000
                                                                 Certain automobile manufacturers also require a deposit of a
 10,000                                                          fixed amount upon the placement of purchase order.
  5,000

      0
            2007A       2008A        2009A       2010A
                  Middle market brands
                  Premium & ultra premium brands

Source: Company




                                                                                                                         Page 33
Company Focus
China ZhengTong Auto




After-sales and other services                                      From 2007 to 2010, ZhengTong has sold close to c.76,000 cars,
                                                                    and the number is growing. With a large customer pool being
                                                                    built up over the years, it is an important driver of future after-
After-sales service revenue                                         sales and maintenance service revenue.

 RMB m                                                              Sales volume vs after-sales service revenue
 700
 600                                                                 unit                                                   RMB m
 500                                                                 30,000                                                   700
 400                                                                 25,000                                                   600
 300                                                                                                                          500
                                                                     20,000
 200                                                                                                                          400
                                                                     15,000
 100                                                                                                                          300
   0                                                                 10,000
                                                                                                                              200
          2007A        2008A        2009A          2010A              5,000                                                   100
                      Maintenance services
                                                                          0                                                   0
                      Sales of motor spare parts
                                                                                2007A       2008A      2009A      2010A

Source: Company, DBS Vickers                                                            Sales volume (LHS)
                                                                                        After-sales service revenue (RHS)

                                                                    Source: Company
After-sales services a good high margin source of recurring
income. Being a 4S auto dealer, ZhongTong provides a wide
                                                                    Automobile agency services. In line with sales of automobiles,
range of after-sales services, consisting of maintenance services
                                                                    ZhengTong also provides automobile agency services such as
and repairs under manufacturer’s warranty, other repair services
                                                                    automobile financing, insurance and registration agency services
and sales of spare parts and accessories. Primary customers for
                                                                    for customers. The firm’s leading market position allows it to
these after-sales services are customers who have previously
                                                                    establish strong relationships with financial institutions and
purchased new automobiles from ZhengTong. As part of these
                                                                    insurance companies so that their customers can be offered
maintenance and repair services, dealership stores also assist
                                                                    favourable financing rates. ZhengTong also receives commission
automobile manufacturers to coordinate recalls of automobiles.
                                                                    fees from these financial institutions as part of the brokered
These maintenance services involve ZhengTong providing oil          relationship with the dealership stores.
changes, replacement of spark plugs, air filters and tyre
rotations as well as routine inspection for vehicles which have Revenue composition
crossed the 5,000 and 10,000 kilometres mark for middle
market brand and premium brand automobiles respectively. The       100%
company sends periodic reminders to customers to schedule
upcoming maintenance and charges a fixed fee for all                 80%
maintenance services. As part of its arrangement with the auto
                                                                     60%
principals, ZhengTong supports them with the maintenance and
repair services under warranties provided by automobile              40%
manufacturers for any new automobiles sold through its
channel. Payments made by automobile manufacturers for such          20%
repairs or warranties are usually made within two months after
                                                                      0%
the repair is performed. In the event that the automobile
                                                                             2007A         2008A       2009A         2010A
manufacturers reject the claim for payment, ZhengTong may
have to absorb the cost of undertaking the repair. The company                  Logistics services & Lubricant oil trading
                                                                                After-sale services
also engages in the retail sale of spare parts, accessories,
                                                                                Middle market brands
automobile electronic devices, sound systems, automobile                        Premium & ultra premium brands
styling products, and branded merchandise such as key chains,
clothes and luggage.                                            Source: Company




Page 34
                                                                                                                   Company Focus
                                                                                                         China ZhengTong Auto



Logistics services & lubricant oil trading                            player). However, as the number of players in the premium
                                                                      segment is fewer, competition is less intense compared to the
                                                                      middle brand segment.
Logistics & Lubricant oil trading revenue
                                                                      Among the middle market brands, there are more players such
 450                                                       25         as the ‘volume’ Japanese, Korean, European and American
 400                                                                  players. Most of the foreign JV brands fall under this category.
 350                                                       20         Hence, in this segment, dealership structure is more fragmented
 300                                                                  compared to the ultra premium and premium category.
                                                           15
 250
 200
                                                           10         Based on April’s sedan mix, the market share of German auto
 150                                                                  brands increased, from 17.4% in Dec 2010 to 22.5% in April.
 100                                                       5          We believe this is attributable to the disruption at auto plants in
  50                                                                  Japan. Share of Japanese auto brands fell from 22.8% to
   0                                                       0
                                                                      18.9% over the same period.
          2007A        2008A           2009A     2010A
                      Sales of lubricant oil (LHS)
                                                                      Sedan sales by country mix
                      Logistics services (LHS)
                      Gross margin (RHS)
                                                                       '000 units
Source: Company, DBS Vickers                                           400
                                                                       350
                                                                       300
Automobile logistics and other services. The logistic business
                                                                       250
mostly supports the auto assemblers, which include Dongfeng
                                                                       200
Nissan, Beijing Hyundai and Shenlong, who require the
                                                                       150
transportation of finished goods, components and parts to end
                                                                       100
customers. ZhengTong serves clients in all provinces of China
                                                                        50
except Tibet and Qinghai through its four representative offices
                                                                         0
and a fleet of 104 trucks. The firm has additionally identified the
                                                                            Jun-08
                                                                            Aug-08
                                                                            Oct-08
                                                                            Dec-08
                                                                            Feb-09

                                                                            Jun-09
                                                                            Aug-09
                                                                            Oct-09
                                                                            Dec-09
                                                                            Feb-10

                                                                            Jun-10
                                                                            Aug-10
                                                                            Oct-10
                                                                            Dec-10
                                                                            Feb-11
                                                                            Apr-08




                                                                            Apr-09




                                                                            Apr-10




                                                                            Apr-11
sale of lubricant oil where it purchases, re-sells and distributes
‘Shell’-branded automobile lubricant oil through its 4S shops.
                                                                                    Self-owned Brands         Japanese Brands
Competition differs depending on the brand. According to                            German Brands             American Brands
ACMR, there were 11 ultra premium, 12 premium, 26 mid-end
and 49 low-end brands of automobiles sold in China in 2009.           Source: CAAM

Within the premium brand segment, the top three were Audi,
BMW and Mercedes Benz. ZhengTong’s premium brands face
competitions from Mercedes Benz and Lexus (albeit a smaller

Dealership stores distribution

  Number
  of stores                                                                                 Ultra premium
                                82                       2-8m                               Porsche, Bentley ,Rolls-Royce,
                                                                                            Lamborghini, Bugatti, Maserati, Ferrari
                                                                                            Premium
                                                     300k - 1m                              Audi, BMW, MINI, Lexus,
                               826
                                                                                            Mercedes Benz, Volvo
                                                                                            Middle market
                               6,454                 100-300k                               Honda, Toyota, Fiat, Peugeot Citroen,
                                                                                            Nissan, Volkswagen, Buick

                                                         <100k               Sale value     Low end
                           Numerous                                                         Geely, BYD, Chery, Hafei, Chang’an
                                                                              per car
                                                                               (RMB)
Source: DBS Vickers




                                                                                                                                 Page 35
Company Focus
China ZhengTong Auto



EARNINGS DRIVERS                                                                             Strategy to focus on luxury auto brands paying off. By the end
                                                                                             of Dec10, the Group had 24 4S stores covering coastal and
Stores in high GDP growth regions, crucial to drive sales.                                   emerging cities with strong economic growth, up from 11
ZhengTong’s stores are located in seven regions, including                                   stores in 2006. Among the 24 4S shops, 14 outlets sell ultra
Beijing, Shanghai, Guangdong, Hunan, Hubei, Jiangxi and Inner                                premium and premium brands. The business strategy will
Mongolia, and cover 14 cities across the nation. The latter four                             continue to focus on ultra premium and premium brands to
regions have the highest growth potential, with the fastest GDP                              drive profits.
per capita growth, still low auto penetration, as well as boasting
the highest consumer propensity towards discretionary goods . To illustrate, in April 2011, the company announced the
                                                                   acquisition of an Audi dealership – Lasa Hong Jin Auto Trading
                                                                   Company based in Nanchang for RMB167.2m. The purchase
Household automobile penetration in the PRC, 2010
                                                                   consideration valued the deal at 6.8xPBR and about 11xPE on
                                                                   FY10 performance. Future store expansions will largely be
  %                                                                organic, as competition to acquire existing dealerships has
                                                                   intensified and valuations risen. Average cost to set up a new
 40
         33.8                                                      store is RMB50-60m.Payback can take around 2-3 years for
 35
                26.6
                                                                   luxury brands and 3-4 years for middle market brands.
 30                                   26.4
 25
                                                                        National             ZhengTong is one of the few auto dealer groups to rapidly
 20                                                   16.8           average: 13.1%          expand its luxury network over the years. In fact, this strategy is
 15
                                                                                             paying off and it has become the second largest BMW
 10                                                                    8.6        5.5        dealership group in China. The company started with one BMW
  5
                                                                                             shop in 2004 and has since increased the number of outlets to
  0
                                                                                             ten last year. ZhengTong focuses on the most popular premium
                         Guangdong



                                       Zhejiang




                                                                       Sichuan
          Beijing




                                                       Shanghai




                                                                                  Hubei




                                                                                             brands like Porsche, BMW/MINI, and Audi to build its outlets.

                                                                                             Increasing focus on most popular premium brands

Source: CEIC                                                                                  30

                                                                                              25

                                                                                              20                                                  10
2005-2009 CAGR of per capita GDP in the PRC
                                                                                              15
                                                                                                                       9             9             3
 %                                                                                            10         9
 25.0                                                                                                                                1
                                                                                                         1             1                          10
                                                                                               5
           19.2          19.0                                          National                                        6             7
 20.0                                                                                                    5
                                                                     average: 16%              0                                                   1
 15.0                                 12.6            12.1                                             2007          2008          2009          2010
                                                                       8.8                           Porsche     BMW/MINI        Audi     Middle Market
 10.0                                                                             6.9

  5.0                                                                                        Source: Company
  0.0
                                                                                             ZhengTong’s focus on luxury brand strategy has helped the
               Sichuan




                                           Zhejiang



                                                         Guangdong



                                                                        Beijing
                              Hubei




                                                                                  Shanghai




                                                                                             company to derive 68.5% of new car sales revenue from ultra
                                                                                             premium and premium brands last year, one of the strongest
                                                                                             players in the industry.

Source: CEIC




Page 36
                                                                                                                             Company Focus
                                                                                                           China ZhengTong Auto




Sales breakdown by brand                                           No. of dealership stores in operation


                                             Buick                  12
               Audi                           8%                                     10
               10%       Nissan                                     10
                          14%                   Dongfeng
                                                 Honda               8
                                                  3%
                                                                     6                             5
                                                 Hyundai
                                                   3%                4                     3
                                                Chevrolet                                                   2
           BMW/MINI                                                  2      1                                       1            1         1
                                                  2%
             55%
                                                Others               0




                                                                           Porsche




                                                                                                           Buick
                                                                                     BMW




                                                                                                                               Dongfeng
                                                                                                  Nissan




                                                                                                                                          Chevrolet
                                                                                           Audi




                                                                                                                   Hyundai
                                                 2%




                                                                                                                                Honda
                                               Porsche
                                                 3%


Note: Contribution from premium and ultra-premium brands = 68.5%   Note: No. of dealership stores in operation as of 31 Dec 2010 = 24

Source: Company                                                    Source: Company




                                                                                                                                               Page 37
Company Focus
China ZhengTong Auto




Dealership stores as of 31 Dec 2010




Source: Company




                                                                    company in 2003. In addition, China became the third largest
Luxury auto segment to enhance overall gross margins. New
                                                                    market for BMW Group last year, compared to a #5 ranking in
auto sales within this segment provide higher gross margins. By
                                                                    2008. The total dealership network in China numbered 210
strengthening its brand portfolio there may be room for
                                                                    outlets in 2010, generating 1,057 BMW cars per outlet, up from
blended gross margins to rise. The inclusion of Porsche will have
                                                                    562 cars per outlet in 2005.
a long-term positive impact on earnings, as the brand was only
added last year. Porsche delivered 14,785 cars to customers in
                                                                    Based on ZhengTong’s earliest available data, BMW/MINI
China, HK and Macau, a c.63% increase over the previous year.
                                                                    contributions to its new vehicle sales revenue rose from 34% in
This year, demand for Porsche is expected to remain robust. We
                                                                    2007 to 55% in 2010.
believe ZhengTong will look for other premium brands to enrich
its brand image.                                                    If using BMW Group’s Chinese retail mix in 2010, the 5 series, 3
                                                                    series and 7 series accounted for c.25%, c.21% and c.16% of
Growing with BMW Group’s master plan in China. Since the
                                                                    total sales respectively.
company started its first BMW dealership in 2004, ZhengTong
has been riding on the growth of BMW Group’s expansion in
China. The German automaker has been enjoying robust
growth since it stepped foot into China with the first JV




Page 38
                                                                                                                            Company Focus
                                                                                                                  China ZhengTong Auto



BMW dealer network                                                        Impact of Beijing restriction on BMW sales

 250,000                                                          1,057                                 160,000
                                                                                                        140,000
 200,000                                                                                                120,000
                                                      763           210                                              149,278         -63%
                                 716                                                                    100,000
                                              712                         Beijing passenger car
 150,000             630                                                                                 80,000
              562                                                         market decreased by
                                                            150                                          60,000
 100,000                                        111                       63% YTD March.                 40,000                         55,553
                                       90                                                                20,000
                           68                             158,489                                             0
  50,000
                 45                         62,688 86,168                                                             3M10              3M11
                    35,300      49,388
            23,595
        0
            2005     2006       2007         2008     2009        2010                                  25%
                                                                                                                                     20.9%
                           BMW Retail (units)                                                           20%
                           Sales per dealership (units)                   However, premium              15%
                           Number of outlets*                             segment’s penetration                     10.4%
                                                                                                        10%
                                                                          ratio in Beijing
* Outlets refer to 4S, showroom, service centre, used car centre,
service only outlets, etc.                                                doubled                       5%

                                                                                                        0%
Source: BMW Group
                                                                                                                    3M10                3M11

Beijing auto restriction brings new opportunities for ZhengTong.                                        30%
The auto restriction in the capital has resulted in passenger                                                                     2,831 units
                                                                                                        25%
vehicle sales falling 63% YTD March. However, overall premium                                                     2,770 units
                                                                          Moreover, BMW’s               20%
car penetration rate rose during the same period to 20.9%,
compared to 10.4% the previous year. Sales of BMW cars in                 segment share in              15%
                                                                                                                                        24.4%
Beijing grew 2.2% to 2,831 units and accounted for 24.4% of               Beijing was further           10%
                                                                                                                    17.9%
the market.                                                               improved                      5%
                                                                                                        0%
This all helps to reaffirm our view that the auto restriction has
                                                                                                                    3M10                3M11
actually augured in new opportunities for luxury automakers.
                                                                          Source: BMW Group
Dealership penetration still has room to grow. Based on average
unit sales per store, we believe there is upside potential, as most
                                                                    Average sales volume per store
of these shops are relatively new and have yet to reach maturity.
Therefore the company’s continued rapid expansion of stores
                                                                     units
should sustain future sales growth despite a drop in unit sales      2,000                (44%)
per store.                                                           1,800
                                                                           1,600            (-11%)                     (-21%)
                                                                           1,400                         (40%)                           (26%)
                                                                           1,200
                                                                                                                                (35%) (8%)
                                                                           1,000
                                                                                                                  (-21%)        (-12%)
                                                                             800              (-12%)                        (-40%)
                                                                             600
                                                                                                           (48%) (12%)                  (-21%)
                                                                             400
                                                                             200                 (6%)
                                                                               0
                                                                                     2007       2008      2009      2010     2011F       2012F
                                                                                                  Premium & ultra premium brands
                                                                                                  Middle market brands
                                                                                                  Blended

                                                                          ( ): YoY growth
                                                                          Source: Company, DBS Vickers




                                                                                                                                               Page 39
Company Focus
China ZhengTong Auto



GROWTH PROSPECTS                                                      Total number of stores vs revenue

Growing spending power, building distribution network to 100                                                            RMB m
stores to capture growth. The rising consumption power in              80                                                   35,000
China is key driver for luxury car demand. To capture the new
                                                                       70                                                   30,000
spending dollars in the economy, ZhengTong is planning to
                                                                       60
double the number of outlets by end 2011 and to raise the                                                                   25,000
number of stores to 68 units by 2012. The mid-term plan is to          50
                                                                                                                            20,000
have 100 stores in about three years’ time. The focus will still be    40
on the ultra premium and premium segment, while the mid-end                                                                 15,000
                                                                       30
car sales will increase gradually in the next few years. The                                                                10,000
                                                                       20
premium to mid-end store split will be 60:40 eventually. Store
                                                                       10                                                   5,000
expansion will be largely driven by organic growth and partly by
acquisitions.                                                           0                                                   0
                                                                            2007A 2008A 2009A 2010A 2011F 2012F
New BMW car models in the pipeline. Being the second largest                 Number of stores (LHS)         Revenue (RHS)
BMW dealership in China, ZhengTong stands to benefit from
the BMW JV new model launches in coming 2 years. The BMW-             Source: Company, DBS Vickers
Brilliance JV plans to launch the X1 next year, followed by the
new 3-series and the fourth product by end 2013. All this
should boost luxury car sales. With ten BMW/MINI shops across
China and more being built, this single luxury brand expects to
remain a large revenue generator.

BMW products roadmap 2010 to 2013 in China under BMW Brilliance JV


                                                          Imported X1 into
                                                          China was about
                                                          2,600 units in
                                                          2009, rose to 9,000                 4th product
                          Since new 5                                                       (to be named)
                                                          units in 2010
                          series launch till
                          Apr-11, approx.
                          36,000 units                           X1
                          were sold                          New 3 series


                              New 5 series




                      4Q2010                         2012                            2013

Source: Company




Page 40
                                                                                                               Company Focus
                                                                                                    China ZhengTong Auto



                                                                   the provision of maintenance services and sales of spare parts
COMPETITIVE STRENGTHS                                              grew at a CAGR of 43% from 2007 to 2010.

Second largest BMW dealer. ZhengTong is the second largest         KEY RISKS
BMW dealer and a major 4S dealership group in China focused
on premium brand. Brands like BMW and Audi are among the
                                                                   Short term dealership agreements. Dealership authorization
most popular automobile brands in China and accounted for
                                                                   agreements are non-exclusive and typically have a term of one
62% of total newly registered premium automobiles in 2009.
                                                                   to three years, subject to renewal. The terms of each agreement
The large number of BMW outlets in addition to the new BMW
                                                                   also define the geographical coverage which dealerships can
products planned over the coming few years in China will
                                                                   operate, recommended price guidelines and means of
extend ZhengTong’s edge in the premium car segment.
                                                                   evaluating a dealership performance. Although no authorization
                                                                   agreement has been terminated by any automobile
Strategic network of 4S dealership stores. The company’s
                                                                   manufacturer, there is no guarantee that all agreements will be
network of dealership stores provides it with a strong presence
                                                                   renewed.
in both the large and developing regions of China. ZhengTong
aims to establish regional leadership in the premium automobile
                                                                   Major product recalls. Auto recalls could harm a dealership’s
market. It has stores in regions such as Inner Mongolia, Hunan,
                                                                   brand image and eventually lead to cancellation of orders from
Hubei and Jiangxi where GDP per capita is higher but where
                                                                   customers. Under the Regulations on Recall of Defective
household automobile penetration rates are lower than the
                                                                   Automotive Products promulgated by the State Administration
national average. ZhengTong’s growing presence in these
                                                                   of Quality Supervision, Inspection and Quarantine, NDRC,
developing regions will position it for continued growth in the
                                                                   Ministry of Commerce and the General Administration of
fast growing automobile market, especially within the luxury
                                                                   Customs, all auto dealership stores are required to report
segment.
                                                                   defects in automobiles and automobile-related products to both
                                                                   the relevant auto maker and the authorities. The financial
ZhengTong’s fast expansion and good relationships with
                                                                   impact would be loss of sales, higher inventory holding costs
industry players especially in the premium car segment is paying
                                                                   and reduction in profits, as customers’ confidence in the quality
off with remarkable results. From FY07-10, revenue from
                                                                   and safety of the products may be severely impaired.
premium and ultra premium branded automobiles grew at
                                                                   ZhengTong has encountered recalls of its Audi, BMW and
CAGR of 68%, compared to the overall revenue growth of
                                                                   Nissan cars in FY07-09, which accounted for less than 5% of
40% over the same period.
                                                                   revenue from new automobiles sales.
Structured and scalable operations. Through the use of
                                                                 Dependence on automobile manufacturers. There is a heavy
information technology, the company has a structured method
                                                                 reliance on automobile manufacturers to continue supplying
of reaching out to prospective and current customers. Its in-
                                                                 new automobiles and spare parts to ZhengTong for sales. Sale
house developed systems for customer relationship
                                                                 of new automobiles accounts for 87% of total revenue last year
management helps integrate and systematize the business in all
                                                                 and a decline in new automobile supplies due to the automobile
areas ranging from sales and after-sales services, management
                                                                 manufacturers delaying new product launches could have an
to treasury and human resources. The company has a strong
                                                                 adverse impact. Besides, annual sales performance is dependent
customer-centric business model and strives to provide timely
                                                                 on the quota allocation by each car principal at the beginning of
communication with customers. The ability to collect first-hand
                                                                 the year. Overall market demand, economic conditions, a
data and analyze it for decision making purposes puts
                                                                 decline in personal disposal income and interest rate hikes could
ZhengTong one step ahead of its competitors.
                                                                 also hamper the automobile manufacturer’s ability to design,
Strong relationship with principal and customers. The success of market or manufacture new automobiles. More specifically,
the ZhengTong dealership business is evident as one of the       BMW/MINI and Nissan accounted for 55% and 14% of the
eight dealership groups selected by BMW to sell a limited        Group’s total sales last year.
volume of the BMW “M” series model in China. ZhengTong’s
                                                                   Competitions. ZhengTong faces competition from a fragmented
customer focused business model also provides it with
                                                                   market. Competition at the mid-high end branded automobile
substantial recurring turnover from customers. Through
                                                                   segment is stronger compared to the ultra premium and
mediums such as providing the first maintenance service,
                                                                   premium categories. HK-listed Zhongsheng Group, Dah Chong
sending periodic reminders of upcoming scheduled
                                                                   Hong and Sparkle Roll operate in the ultra premium, premium
maintenance and inviting customers to exhibitions of new
                                                                   and mid-high end segments.
automobile models, customers have began to exhibit greater
loyalty towards ZhengTong. As a result, sales generated from



                                                                                                                            Page 41
Company Focus
China ZhengTong Auto



Reduction in advertising, marketing and promotions could              implication of the company’s sales ability but the scheme could
impact sales volume. The sales of automobiles at dealership           be abolished or amount reduced if ZhengTong is unable to
stores are directly influenced by the amount of promotional and       meet the sales quota set by the car principals.
marketing activities carried out by automobile manufacturers.
Automobile manufacturers have the ability to create large             Inability to obtain adequate financing. The dealership business
marketing campaigns to build brand awareness and offer                requires significant working capital for the purchase of
discounts or complimentary products to customers. As a result,        automobiles, spare parts and accessories. It also requires capital
any change in existing promotional and marketing activities by        for the organic expansion of the dealership through the
automobile manufactures may adversely affect the sales of             establishment of new dealership stores or through acquisition of
automobile at ZhengTong dealership stores.                            existing dealerships. As the business grows, ZhengTong may
                                                                      require additional financing to support a higher level of
                                                                      inventory and prepayments for new automobiles that are
Selling expense ratio to auto dealers’ revenue
                                                                      purchased from the automobile manufacturers. The company
                                                                      has generally relied on cash generated from operations as well
 RMB m                                                    %
                                                                      as bank loans to meet these needs. Credit tightening could
 70,000                                                   6.0
                                                                      affect the speed of expansion.
 60,000                                                   5.0
 50,000                                                               Funding of business expansion
                                                          4.0
 40,000
                                                          3.0
 30,000                                                                RMB m                                              RMB m
                                                          2.0           800                                                 950
 20,000                                                                 700
                                                                                                                             750
 10,000                                                   1.0           600
                                                                        500                                                  550
      0                                                   0.0           400                                                  350
             2007        2008       2009           2010                 300
                                                                        200                                                  150
          Total revenue of auto dealers (LHS)
                                                                        100                                                  (50)
          Avg selling exp ratio of auto manufacturers (RHS)               0
                                                                                                                             (250)
                                                                       (100)
Note: Auto dealers’ revenue from Dah Chong Hong, China                 (200)                                                 (450)
ZhengTong and ZhongSheng                                                         2007       2008        2009       2010
Selling expense ratios of Dongfeng Motor and GAC                                          Operating cashflow (LHS)
                                                                                          Inventory (RHS)
Source: Companies                                                                         Total debt (RHS)

Incentive rebates could be cut. Under the purchase                    Source: Company
arrangements with automobile manufactures, ZhengTong will
receive incentive rebates on sales exceeding targets set earlier in
the year. In the past three years, the company had received a
total of over RMB500m of incentive rebates. This is a strong




Page 42
                                                                                                                                          Company Focus
                                                                                                                                China ZhengTong Auto



                                                                                             Improving operating leverage and reduce operating costs.
STRATEGY
                                                                                             ZhengTong plans to focus on enhancing the efficiency of its
Increase capex to opening additional dealership stores. The                                  operations. It hopes to reduce operating costs by improving the
continued expansion of dealership stores is an effective way of                              accuracy of its sales forecasts, streamlining its procurement and
growing sales in premium brand automobiles. ZhengTong will                                   inventory management processes and negotiating favourable
take advantage of its strong presence in developing regions of                               volume rebates with automobile manufacturers. For instance, by
China. It plans to spend over RMB3bn to open 44 new                                          reducing the inventory turnover days, it will eventually reduce
dealership stores by 2012 in areas that provide strong growth                                the time required by a new dealership store to breakeven and
opportunities. Plans are in place to grow the middle market                                  will accelerate the expansion of its dealership network. The
brand network and to solidify ZhengTong’s leadership in the                                  average inventory per store in FY07-09 was RMB16-19m, but
automobile market. It also plans to establish more ultra                                     jumped to RMB31m in FY10. The company’s S,G&A expense
premium brand dealership stores to reach out to customers                                    ratio was 4.6% last year, but we believe the improvement could
interested in brands such as Porsche.                                                        reduce it to 4.2%.

Developing closer relationships with automobile manufacturers.                               Inventory vs number of stores
Close collaboration with automobile manufacturers is crucial for
any dealership. ZhengTong plans to seek closer ties by                                        RMB m                                        No. of stores
improving the integration of information systems, sales and                                   2,500                                                   80
marketing activities and other business processes with those of                                                                                       70
the automobile manufacturers. Other activities such as joint                                  2,000
                                                                                                                                                      60
training and frequent exchange of ideas on mutually beneficial                                1,500                                                   50
business opportunities will also be pursued. ZhengTong aims to                                                                                        40
become the dealership of choice for automobile manufacturers                                  1,000                                                   30
with their excellent local knowledge and experience.                                                                                                  20
                                                                                                500
                                                                                                                                                      10
Expanding into the second-hand automobile business. As                                             0                                                  0
demand for automobile vehicles in China increases, so too does                                          2008       2009     2010     2011F  2012F
the demand for pre-owned automobiles. The company is                                                         Middle Market Brands (RHS)
evaluating opportunities to enter the second-hand automobile
                                                                                                             Premium & Ultra Premium Brands (RHS)
market and plans to create an online sales platform to further
                                                                                                             Inventory (LHS)
enhance connectivity with customers.
                                                                                             Source: Company, DBS Vickers
Second hand automobile sales in China

                                                                                             Average inventory per store
 '000 units                                                                             %
 4,500                                                                                 100
 4,000                                                                                 90     RMB m                                                  %
 3,500                                                                                 80     35                                                     90
                                                                                       70                                                            80
 3,000                                                                                        30
                                                                                       60                                                            70
 2,500                                                                                        25                                                     60
                                                                                       50
 2,000                                                                                                                                               50
                                                                                       40     20
 1,500                                                                                                                                               40
                                                                                       30                                                            30
 1,000                                                                                        15
                                                                                       20                                                            20
   500                                                                                 10     10                                                     10
     0                                                                                 0                                                             0
                                                                                               5
                                                                                                                                                     (10)
          2000
                 2001
                        2002
                               2003
                                      2004
                                             2005
                                                    2006
                                                           2007
                                                                  2008
                                                                         2009
                                                                                2010




                                                                                               0                                                     (20)
                                                                                                   2007A 2008A 2009A         2010A   2011F   2012F
                   Sales (LHS)                       YoY growth (RHS)
                                                                                                               Average inventory per store (LHS)
Source: China Auto Dealers Association                                                                         YoY growth (RHS)

                                                                                             Source: Company, DBS Vickers




                                                                                                                                                      Page 43
Company Focus
China ZhengTong Auto



SEGMENTAL ANALYSIS                                                 beneficial to its servicing business in the future. After-sales
                                                                   services accounted for approx. 8% of total revenue last year. If
Store expansion crucial to drive new vehicle sales revenue.        no new stores were set up and new vehicle sales remained
ZhengTong derives over 80% of its total revenue from the sale      unchanged every year, then servicing revenue would account
of automobiles. The remaining revenue comes from sales of          for a larger portion of total revenue. However, because the
spare parts, maintenance services and other auto-related           company is still adding new stores, and existing stores have yet
activities.                                                        to reach maturity, the percentage of revenue from servicing is
                                                                   likely to remain <10% in the foreseeable future.
Revenue composition is expected to be maintained, as the
company continues to expand its 4S dealership stores in 2011       Steady margins from vehicle sales. The Porsche dealership
and 2012. With 44 new stores ready by end 2012, new auto           business should boost its ultra premium vehicle segment, lifting
sales revenue should continue to dominate the overall revenue      gross margins from the ultra premium and premium brand to
stream. Besides, the premium to mid-end store split will be        7.1-7.2% in 2011/12, compared to 6.7% last year. Greater
roughly 60:40, compared to 40:60 in FY07, as this is part of the   competition in the mid-end brand segment should cap gross
company’s strategy for future growth.                              margin between 3-3.5%.

As a result of continuous efforts to set up new stores, volume  Strong margins from sales of spares and maintenance services.
sales have been rising and are projected to increase further.   After-sales services generate the highest margins in excess of
From 2007 to 2010, total volume sales CAGR were 16%, with       40% last year and are expected to remain at similar level during
the ultra premium and premium segment recording stronger        the forecast period. New auto sales contributed about half of
annual growth of 60% during the same period.                    total gross profit while the after-sales service, though small in
                                                                revenue, accounted for about 40%. This split is expected to be
Recurring income from sales of spares and maintenance services. biased toward new auto sales as the operating leverage starts to
From 2007 to 2010, total accumulated volume sales amounted kick in from the new stores.
to nearly 76,000 units. The company’s growing customer pool is




Page 44
                                                                                   Company Focus
                                                                             China ZhengTong Auto



Segmental Breakdown


FY Dec (RMB m)                                2007A    2008A     2009A   2010A     2011F      2012F


Revenues
 Premium & ultra premium brands               1,109    1,328     2,240   4,801     14,620    26,843
 Middle market brands                         1,541    1,334     2,030   2,208      2,337     2,519
 After-sales services                           206      268       380     602      1,263     2,147
 Logistics services & lubricant oil trading      53      116       330     423        550       660
Total                                         2,909    3,046     4,981   8,034     18,771    32,170

Gross Profit
 Premium & ultra premium brands                  59       73       109     321      1,038      1,933
 Middle market brands                            32       31        89      55         82         83
 After-sales services                            73      100       149     266        568        966
 Logistics services & lubricant oil trading      12       17        67      84        110        119
Total                                           164      203       347     642      1,688      2,982

Gross Profit Margins (%)
 Premium & ultra premium brands                 5.3      5.5       4.9     6.7        7.1        7.2
 Middle market brands                           2.1      2.3       4.4     2.5        3.5        3.3
 After-sales services                           N/A     37.2      39.2    44.1       45.0       45.0
 Logistics services & lubricant oil trading    22.6     14.7      20.3    19.9       20.0       18.0
Total                                           5.6      6.7       7.0     8.0        9.0        9.3

Rev enue composition (%)
Premium & ultra premium brands                 38.1     43.6      45.0    59.8      77.9      83.4
Middle market brands                           53.0     43.8      40.8    27.5      12.4       7.8
After-sale services                             7.1      8.8       7.6     7.5       6.7       6.7
Logistics services & Lubricant oil trading      1.8      3.8       6.6     5.3       2.9       2.1
Total                                         100.0    100.0     100.0   100.0     100.0     100.0

Rev enue growth (%)
Premium & ultra premium brands                  n.a.     19.7     68.7   114.3     204.5       83.6
Middle market brands                            n.a.    (13.5)    52.2     8.8       5.8        7.8
After-sale services                             n.a.     30.1     42.0    58.1     110.0       70.0
Logistics services & Lubricant oil trading      n.a.   119.7     184.8    28.2      30.0       20.0
Total                                           n.a.      4.7     63.6    61.3     133.6       71.4


Source: Company, DBS Vickers




                                                                                            Page 45
Company Focus
China ZhengTong Auto




Key assumptions

FY Dec                                  2007A      2008A      2009A      2010A       2011F       2012F

Sales Volume
Premium & ultra premium brands          2,210      2,745       4,637     9,089      26,357      47,442
Middle market brands                   13,257     11,768      16,961    14,926      16,120      17,732
Total                                  15,467     14,513      21,598    24,014      42,476      65,174

Sales volume c omposition (%)
Premium & ultra premium brands              14         19         21         38         62          73
Middle market brands                        86         81         79         62         38          27
Total                                      100        100        100        100        100         100

Sales volume growth (%)
Premium & ultra premium brands             n.a.        24        69          96       190           80
Middle market brands                       n.a.       (11)       44         (12)        8           10
Total                                      n.a.        (6)       49          11        77           53

Average selling price (RM B per car)
Premium & ultra premium brands         510,919    483,894    483,120    528,299    554,714     565,808
Middle market brands                   116,270    113,319    119,700    147,931    144,972     142,073
Total                                  171,373    183,410    197,725    291,887    399,218     450,523

ASP growth (%)
Premium & ultra premium brands             n.a.      (5.3)      (0.2)       9.4         5.0         2.0
Middle market brands                       n.a.      (2.5)       5.6       23.6        (2.0)       (2.0)
Total                                      n.a.       7.0        7.8       47.6       36.8        12.9

Number of stores
Premium & ultra premium brands              6          7          8         14          30          43
Middle market brands                        9          9          9         10          18          25
Total stores                               15         16         17         24          48          68

Number of stores growth (%)
Premium & ultra premium brands             n.a.       17         14         75        114           43
Middle market brands                       n.a.        0          0         11         80           39
Total stores                               n.a.        7          6         41        100           42



Source: Company, DBS Vickers




Page 46
                                                                                                               Company Focus
                                                                                                    China ZhengTong Auto




FINANCIALS – INCOME STATEMENT                                     due to higher portion of revenue being derived from the ultra
                                                                  premium and premium segment.
Strong track record to be repeated. Between FY07-10, the
company chalked up a very strong performance, with revenue        Operating expenses unlikely to see major increases. Since
growth of 2.8x and net earnings close to 9 times to RMB8bn        national marketing and advertising activities are undertaken by
and RMB276m respectively.                                         the car manufactures, ZhengTong’s main operating expenditure
                                                                  will be costs incurred on managing the dealership stores, which
The solid performance is attributable to a well chosen strategy   include staff costs, certain localised advertising expenses, and
in the premium car market in China, where high consumption        other operating expenses. Therefore, this component will rise
has been driving demand for more expensive cars. Operating        with the number of stores being set up. Last year, administrative
leverage improvements lifted blended gross margins 3ppts over     expenses (largely due to staff costs) increased 39% because
the same period to 9% last year. We estimate blended gross        additional 582 staff were employed for business expansion as
margins will linger around 9.6% going forward.                    well as listing expenses.

Hence, projected revenue and net earnings, based on the           As a result, net margins will improve this year. This is largely due
number of new dealership stores to be opened in the coming        to higher operating efficiencies from running more stores.
years, will remain impressive. From FY10-12, revenue and net      Economies of scale will start to set in generating positive returns.
earnings CAGR is estimated at 100% and 110% respectively,




                                                                                                                            Page 47
Company Focus
China ZhengTong Auto




                              Sales Trend                                                     Operating Cost Trend                                                Profitability Trend
       RMB m                                                                                                                                         RMB
                                                                                      30000
          30,000                                                  140.0%                                                                            1200
                                                                                                                                                                                                           306%
                                                                  120.0%              25000
          25,000                                                                                                                                    1000
                                                                                                                                                                                                           256%
                                                                  100.0%              20000
          20,000                                                                                                                                     800
                                                                                                                                                                                                           206%
                                                                  80.0%
          15,000                                                                      15000
                                                                                                                                                     600                                                   156%
                                                                  60.0%
          10,000                                                                      10000                                                          400
                                                                  40.0%                                                                                                                                    106%
           5,000                                                  20.0%                5000                                                          200                                                   56%
               0                                                  0.0%                   0                                                             0                                                   6%
                     2008A    2009A   2010A   2011F   2012F                                   2008A   2009A     2010A         2011F    2012F               2008A 2009A 2010A 2011F               2012F
                                                                                                        Other Operating Expenses (-)                            Net Profit (After-extraordinaries) (LHS)
                   Total Revenue       Revenue Growth (%) (YoY)                                         Cost of Goods Sold (-)
                                                                                                                                                                Net Profit Growth (%) (YoY) (RHS)




FY Dec (RMB m)                                                             2007A                  2008A                                2009A      2010A                          2011F                            2012F


Turnover                                                                     2,909                  3,046                                4,981      8,034                      18,771                             32,170
Cost of Goods Sold                                                         (2,734)                (2,825)                              (4,567)    (7,308)                    (16,972)                           (29,069)
Gross Profit                                                                   176                    220                                  415        726                       1,798                              3,101
Other Opg (Exp)/Inc                                                          (102)                  (136)                                (195)      (330)                        (751)                           (1,371)
Operating Profit                                                                74                     84                                  220        396                       1,047                              1,730
Other Non Opg (Exp)/Inc                                                           0                      0                                    0        27                            0                                  0
Associates & JV Inc                                                               0                      0                                    5         14                          17                                 20
Net Interest (Exp)/Inc                                                         (21)                   (36)                                 (26)       (47)                        (38)                               (44)
Exceptional Gain/(Loss)                                                           0                      0                                    0          0                           0                                  0
Pre-tax Profit                                                                  52                     48                                  198        390                       1,025                              1,706
Tax                                                                            (21)                   (13)                                 (48)       (91)                       (246)                              (426)
Minority Interest                                                                 0                    (2)                                  (4)       (23)                        (39)                               (64)
Preference Dividend                                                               0                      0                                    0          0                           0                                  0
Net Profit                                                                      32                     34                                  146        276                         740                              1,215
Net profit before Except.                                                        32                     34                                 146        276                          740                             1,215
EBITDA                                                                         101                    116                                  261        486                       1,139                            1,845.1

Gross Margin (%)                                                              6.0                      7.2                                8.3        9.0                            9.6                              9.6
Sales Gth (%)                                                                 N/A                      4.7                               63.6       61.3                          133.6                             71.4
EBITDA Gth (%)                                                                N/A                     15.2                              125.4       85.8                          134.5                             62.1
Operating Profit Gth (%)                                                      N/A                     14.0                              161.9       80.3                          164.1                             65.2
Net Profit Gth (%)                                                            N/A                      6.7                              331.5       89.2                          168.2                             64.2
Gross Margins (%)                                                             6.0                      7.2                                8.3        9.0                            9.6                              9.6
Opg Margins (%)                                                               2.5                      2.8                                4.4        4.9                            5.6                              5.4
Net Profit Margins (%)                                                        1.1                      1.1                                2.9        3.4                            3.9                              3.8
% of Opg Expenses to Sales                                                    3.5                      4.5                                3.9        4.1                            4.0                              4.3
Effective Tax Rate (%)                                                       39.5                     26.7                               24.4       23.2                           24.0                             25.0
Source: Company, DBS Vickers




Page 48
                                                                                                                                                              Company Focus
                                                                                                                                    China ZhengTong Auto



FINANCIALS – BALANCE SHEET                                                          accounts payables are projected to increase. The company used
                                                                                    to suffer from negative current assets. After the IPO exercise,
Strengthened capital base to fund aggressive network roll-out.                      we expect its working capital balances to return to the black.
The company raised approx. HK$3.5bn late last year for
business expansion. Part of the proceeds will be used to finance                    Total debt doubled last year to finance its working capital,
44 new 4S dealership stores to reach 68 outlets by end 2012.                        especially to hold more inventory as the company opened 7
                                                                                    new stores last year. However, its debt level is still low and not
Working capital mainly from holding inventory. In tandem with                       an immediate concern yet.
higher business volume, inventories, accounts receivable and

               Breakdown of Assets                                      Breakdown of Capital                           Financial Leverage & Net Debt to Equity
                   Debtors -
                    29.3%                                                                                                   18                                                             14.3
                                        Net Fixed                                                                                 2008A       2009A          2010A   2011F       2012F
                                                                                                                         (482)                                                             12.3
                                         Assets -
                                         22.5%                                                                                                                                             10.3
                                             Bank, Cash                                                                  (982)
                                             and Liquid                                              ST Debt -                                                                             8.3
                                                                   Common                                               (1,482)
                                               Assets -                                               44.0%                                                                                6.3
                                                 6.6%             Shareholder
                                                                   s' Equity -                                          (1,982)
                                                                                                                                                                                           4.3
                                                                     56.0%
                                                                                         LT Debt -                      (2,482)
                                                                                           0.0%                                                                                            2.3
                          Inventory -
                            41.6%                                                                                       (2,982)                                                            0.3
                                                                                                                            Net Debt/(Cash)                      Net Debt to Equity (X) (R.H.S)
                                                                                                                            Financial Leverage (X) (R.H.S)




FY Dec (RMB m)                                            2007A                  2008A                    2009A         2010A                                 2011F                               2012F


Net Fixed Assets                                            313                    309                        351          414                                404.4                               2,183
Invts in Assocs & JVs                                         0                      0                         39          114                                  120                                 137
Other LT Assets                                             135                    135                        153          240                                  197                                 191
Cash & ST Invts                                              50                     55                        177          121                                3,432                               2,098
Inventory                                                   237                    310                        295          765                                  749                               1,348
Debtors                                                     248                    399                        599          540                                  868                               1,118
Other Current Assets                                        188                    235                        895        1,024                                  961                                 961
Total Assets                                              1,172                  1,442                      2,509        3,218                                6,732                               8,036

ST Debt                                                     398                    338                        349          465                                  721                                 721
Other Current Liab                                          705                    999                      1,695        2,059                                1,920                               2,445
LT Debt                                                       0                      0                          0            0                                    0                                   0
Other LT Liabilities                                          4                      5                          6           21                                   18                                  18
Shareholder’s Equity                                         65                     91                        444          632                                4,015                               4,755
Minority Interests                                            0                      9                         16           40                                   58                                  97
Total Cap. & Liab.                                        1,172                  1,442                      2,509        3,218                                6,732                               8,036

 Leverage Analysis (x)
 Net Interest Cover                                         3.5                    2.4                       8.4          8.4                                 27.2                            39.2
 EBITDA Gross Interest Cover                                4.3                    3.0                       8.3          8.6                                 16.9                            23.5
 Total Debt to EBITDA                                       4.0                    2.9                       1.3          1.0                                   0.6                             0.4
 Total Debt to Total Assets                                 0.3                    0.2                       0.1          0.1                                   0.1                             0.1
 Total Debt to Capital                                      6.1                    3.4                       0.8          0.7                                   0.2                             0.1
 Net Debt to Equity                                         5.3                    2.8                       0.4          0.5                                CASH                            CASH
 Capex to Debt                                              0.1                    0.1                       0.2          0.4                                   2.6                             2.1
 Net Cash / (Debt)                                        (348)                  (283)                     (172)        (345)                                2,711                           1,377

 Liquidity Analysis (x)
 Cash Ratio                                                0.0                    0.0                            0.1        0.0                                  1.3                               0.7
 Current Ratio                                             0.7                    0.7                            1.0        1.0                                  2.3                               1.7
 Quick Ratio                                               0.3                    0.3                            0.4        0.3                                  1.6                               1.0
Source: Company, DBS Vickers




                                                                                                                                                                                         Page 49
Company Focus
China ZhengTong Auto



FINANCIALS – CASH FLOW                                          We project the company to generate positive operating cash
                                                                flows of around RMB1.9bn combined for FY11/12 to part
Sufficient funding sources. Cash generation from operations are finance its business growth.
projected to improve, but still insufficient to finance the
combined capex of over RMB3bn in FY11 and FY12. This huge
capex will largely be financed from its recent IPO proceeds.


                     Cash Flow Trend                                              Free Cash Flow Per Share                                                    Free Cash Flow As At Year End
                                                                         0.87                                                                      RMB m

                                                                         0.67                                                                         400
        2,967                                                                                                                                         200
                                                                         0.47
        1,967                                                                                                                                            0
                                                                         0.27
                                                                                                                                                     (200)
          967                                                            0.07
                                                                                                                                                     (400)
                                                                        (0.13)
          -33                                                                                                                                        (600)
                                                                        (0.33)                                                                       (800)
        -1,033
                                                                        (0.53)                                                                      (1,000)
        -2,033                                                          (0.73)                                                                      (1,200)
                 2008A    2009A     2010A     2011F        2012F                  2008A       2009A          2010A      2011F        2012F          (1,400)
                 CF from Op   CF from Invt   CF from Fin                          Free Cash Flow Per Share    Free Operating Cash Flow Per Share
                                                                                                                                                    (1,600)
                                                                                                                                                               2008   2009       2010   2011   2012




FY Dec (RMB m)                                             2007A             2008A                                    2009A                        2010A                     2011F               2012F


Pre-Tax Profit                                                   52                 48                                      198                       390                     1,025              1,706
Dep. & Amort.                                                   27                  32                                       37                         48                        75                  95
Tax Paid                                                       (11)                 (9)                                      (6)                      (85)                       (91)             (246)
Assoc. & JV Inc/(loss)                                            0                  0                                       (5)                      (14)                      (17)                (20)
Chg in Wkg.Cap.                                                (31)              (128)                                       29                     (483)                      (479)              (182)
Other Operating CF                                               18                 32                                       20                        19                          1                 (4)
Net Operating CF                                                57                (24)                                      273                     (124)                       515              1,349

Capital Exp.(net)                                              (58)               (21)                                     (70)                     (177)                    (1,847)            (1,480)
Other Invts.(net)                                                 0                  0                                        0                         0                          0                  0
Invts in Assoc. & JV                                              0                  0                                        0                         0                          0                  0
Div from Assoc & JV                                               0                  0                                        0                         0                          0                  0
Other Investing CF                                             (14)               (20)                                     (79)                         4                         29                 34
Net Investing CF                                               (72)               (41)                                   (149)                      (173)                    (1,818)            (1,446)

Div Paid                                                          0                 (9)                                        0                       0                           0                     0
Chg in Gross Debt                                                92               118                                         10                     462                           0                     0
Capital Issues                                                    0                   0                                        0                   3,016                           0                     0
Other Financing CF                                             (60)               (39)                                      (11)                      74                        (30)                  (30)
Net Financing CF                                                32                 70                                        (2)                   3,552                        (30)                  (30)

Net Cashflow                                                       16                   5                                   122                    3,255                     (1,334)              (127)
Opg CFPS (RMB)                                                 0.06               0.07                                     0.16                     0.23                       0.50                0.77
Free CFPS (RMB)                                                0.00              (0.03)                                    0.14                    (0.20)                     (0.67)              (0.07)

Source: Company, DBS Vickers




Page 50
                                                                                                                  Company Focus
                                                                                                       China ZhengTong Auto



VALUATION                                                            General retailers are trading FY11 18.2x PE while consumer
                                                                     discretionary plays like the auto sector is valued at 11.6x PE.
Trading history not representative of earnings potential.            Therefore, it is reasonable the value of auto dealership sector
ZhengTong has a short trading history, as it was only listed in      trades at between auto assemblers and general retailers.
Dec10. Since the shares were priced at HK$7.3/pc at IPO, trading
has been volatile. At current level, the stock is valued at FY11PE   DCF more applicable to value intrinsic worth. We prefer to apply
20.2x.                                                               DCF to calculate the worth of the company, as it is still
                                                                     undergoing rapid expansion and future earnings have yet to be
Pale compared to peer until recently. Comparing its share price      reflected fully in FY11/12. Hence, DCF methodology will better
performance with listed peer ZhongSheng (881 HK), ZhengTong          capture the intrinsic value of the stock.
used to trail the latter. This can be put down to a short track
record (financially) and its ability to embark on an acquisition     We have applied WACC of 11% and terminal growth of 3%.
path to expand its outlets.                                          We also applied free cash flow growth of 5-15% from FY16-20,
                                                                     prudent in our view. We believe a discount factor of 11% is
However, the explosion of luxury car consumption in China            reasonable, as the sector average WACC is also about 10-11%.
drove ZhengTong’s valuation to top the list of auto dealers in HK,
as the company has the highest exposure to the premium car           Our DCF calculation shows value per share of HK$10.9. However,
segment.                                                             our sensitivity analysis shows DCF/share values vary according to
                                                                     the different discount rates and terminal growth used.
Generally, we believe the auto dealership sector is starting to
trade like a consumer play, due to their direct contacts with end    Based on the above analysis and various parameters to value the
consumers as well as certain after-sales services which they         company, we believe the stock is attractively priced at current
provide to their customers. However a discount is warranted as       levels. We initiate with BUY rating.
auto consumption is more discretionary compared to other
general retailers.




                                                                                                                               Page 51
Company Focus
China ZhengTong Auto




Valuation computation and assumptions

(%)                                       FY11F      FY12F     FY13F     FY14F    FY15F
Sales volume growth
Premium & ultra prem ium brands           190.0       80.0      30.0      20.0     15.0
Middle market brands                        8.0       10.0       8.0       8.0      8.0
Total                                      76.9       53.4      24.0      17.2     13.5

ASP grow th
Premium & ultra prem ium brands                5.0      2.0       2.0      2.0      2.0
Middle market brands                       (2.0)       (2.0)      0.0      1.0      1.0

Stores growth
Premium & Ultra Premium Brands            114.3       43.3      44.2       8.1      7.5
Middle Market Brands                       80.0       38.9      44.0       8.3      7.7
Total s tores                             100.0       41.7      44.1       8.2      7.5

FCF annual growth                    FY16-17           15%
                                     FY18-20            5%

Risk free rate                             3.5%
Beta                                             1
Cost of Equity                            13.5%
Cost of Debt                                 7%
Debt-equity ratio                          30%
WACC                                       11%

Source: DBS Vickers




Discounted Cash Flow Computation

FY Dec (RMB m)                            FY11F      FY12F     FY13F     FY14F    FY15F
EBIT                                      1,064      1,750     2,317     3,154    3,731
Add Depreciation and Am ortisation             75       95       112      123      120
Less Tax Provision                         (246)       (426)     (566)    (773)   (914)
Less Capex                               (1,847)     (1,480)   (1,895)    (595)   (595)
Add changes in Working Capital             (479)      (182)     (406)     (565)   (775)
Total FCF to the Firm                    (1,434)      (243)     (438)    1,345    1,566
Discounted FCF                           (1,292)      (197)     (320)     886      929

Source: DBS Vickers




Page 52
                                                                                                                                     Company Focus
                                                                                                                        China ZhengTong Auto




Present value of discounted cash flows                                    DCF analysis – WACC/Terminal growth equity value matrix


PV of FCF                                4,647                                                                  Terminal growth
PV of Terminal Value                     9,795                                                      1%          2%           3%             4%                5%
Enterprise Value                        14,442                                       9%         12.6           13.7          15.1           17.2          20.2
Add : Net Cash/(Debt)                    3,672                                       10%        10.9           11.7          12.7           14.0          15.9




                                                                             WA CC
Equity Value (RMB m)                    18,114                                       11%         9.6           10.2          10.9           11.8          13.0
                                                                                     12%            8.6         9.0           9.5           10.2          11.0

Value Per Share (RMB)                      9.1                                       13%            7.8         8.1           8.5            8.9              9.5

Value Per Share (HK$)                     10.9

Source: DBS Vickers                                                       Source: DBS Vickers




Peers valuation

                                                  Mkt                PE      PE       PEG    PEG Yield Yield P/Bk P/Bk EV/EBITDA                       ROE      ROE
                             Currency    Price    Cap     Fiscal    11F     12F       11F    12F      11F     12F     11F    12F     11F      12F       11F     12F
Company Name              Code          Local$   US$m        Yr       x        x        x      x          %    %        x      x       x           x     %          %

Hong Kong
Dah Chong Hong*        1828 HK    HKD     8.27   1,934   Dec-10 10.8       8.9       (4.3)   0.4      2.8     3.4     1.9    1.7     7.8      6.8      19.1    20.2
Zhongsheng*             881 HK    HKD    14.84   3,641   Dec-10 15.5 10.2             0.4    0.2      0.0     0.0     3.2    2.5     9.4      6.7      23.0    27.8
China ZhengTong*       1728 HK    HKD     8.99   2,311   Dec-10 20.2 12.3             0.2    0.2      0.0     0.0     3.7    3.1    10.8      7.4      31.9    27.7
Sparkle Roll^*          970 HK    HKD     1.47    562    Mar-10 15.8 12.0             0.3    0.4      1.3     1.7     3.3    2.7    12.0      7.9      23.4    24.6
WO KEE Hong             720 HK    HKD    0.198     59    Dec-10    n.a.    n.a.       n.a.   n.a.     n.a.    n.a.    n.a.   n.a.    n.a.     n.a.      n.a.    n.a.
New Focus Auto          360 HK    HKD      2.5    183    Dec-10 13.9       9.9        0.1    0.2      n.a.    n.a.    n.a.   n.a.    n.a.     n.a.      n.a.    n.a.
Average                                                            15.3 10.7         (0.7)   0.3      1.0     1.3     3.1    2.5    10.0      7.2      24.3    25.1


Other Asia
Jardine C&C             JCNC SP   SGD    39.26 11,359    Dec-10 12.0 10.7            20.9    0.9      2.1     3.4     n.a.   n.a.    6.8      6.0       n.a.    n.a.
Zhejiang Zhongda 600704 CH        CNY    17.08   1,158   Dec-10 12.0       9.9        0.5    0.5      n.a.    n.a.    1.5    1.3     n.a.     n.a.      n.a.    n.a.
Pang Da Auto          601258 CH   CNY    33.29   5,389   Dec-10 19.7 15.3             0.8    0.5      1.0     1.3     3.6    3.0     n.a.     n.a. 20.1        21.3
Hotai Motor             2207 TT   TWD     95.3   1,814   Dec-10 10.9 11.8            (6.9) (1.6)      5.5     5.2     n.a.   n.a.    n.a.     n.a.      n.a.    n.a.
Average                                                            13.6 11.9          3.8    0.1      2.9     3.3     2.6    2.2     6.8      6.0      20.1    21.3


US
AutoNation               AN US    USD    33.79   4,997   Dec-10 18.3 15.8             0.6    1.0      0.0     n.a.    2.3    2.0    12.8     11.6      13.1    12.6
Group 1 Auto             GPI US   USD    36.46    876    Dec-10 11.7       9.8        0.3    0.5      0.9     0.9     1.0    0.9    10.2      9.2       8.7     9.5
Asbury Auto             ABG US    USD    15.53    511    Dec-10    9.8     7.7        0.3    0.3      n.a.    n.a.    1.4    1.2     8.9      7.7      16.7    17.4
CarMax^                 KMX US    USD    27.37   6,183   Feb-11 15.1 13.5             2.2    1.1      n.a.    n.a.    2.3    1.9    13.5     12.3      16.5    15.1
Lentuo Int'l             LAS US   USD     4.98    147    Dec-10    5.0     3.4        0.1    0.1     12.0 17.7        1.2    1.1     2.2      1.4      26.3    34.1
Average                                                            13.7 11.7          0.9    0.7      0.4     0.9     1.7    1.5    11.4     10.2      13.8    13.7

^FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




                                                                                                                                                         Page 53
Company Focus
China ZhengTong Auto




Peers valuation - Luxury general retailers

                                                           Mkt                                      11F                                                                          12F
                                               Price        Cap     Fiscal     PE P/Sales           P/Bk Yield                  ROE                PE P/Sales                   P/Bk Yield    ROE
Company Name                         Code      HK$       HK$m          Yr       x       x                 x             %             %             x              x               x     %      %


Chow Sang Sang                      116 HK 25.15         17,025      Dec 19.1        1.2             2.7               1.9    14.6            16.0               1.0            2.4    2.3    15.6
Em peror Watch                      887 HK     1.32       8,868      Dec 18.4        1.5             2.6               1.6    16.4            15.2               1.2            2.3    2.0    16.2
Hengdeli Holdings*                 3389 HK     4.42      19,440      Dec 22.3        1.3             3.1               1.6    14.8            18.2               1.1            2.6    1.9    15.6
Luk Fook Holdings^#*                590 HK     32.7      17,740      Mar 18.8        1.9             4.6               2.2    26.6            15.2               1.5            3.9    2.8    27.8
Oriental Watch*^                    398 HK     5.01       2,352      Mar 12.2        0.9             1.3               1.8        8.3         10.0               0.5            1.1    1.9    11.7
                                                                             18.2    1.4             2.9               1.8    16.1            14.9               1.1            2.5    2.2    17.4

# Fully Diluted EPS

^ FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




PE band chart                                                                       PB band chart


 Share Price (HK$)                                                                   Share Price (HK$)
 11.0                                                                                9.5
                                                                                                                                                                                       3.5x
                                                                      18x            9.0
 10.0
                                                                       17x           8.5                                                                                               3.3x
  9.0                                                                  15x           8.0                                                                                               3.0x
                                                                      14x            7.5
  8.0                                                                                                                                                                                  2.8x
                                                                      13x            7.0
  7.0                                                                                6.5                                                                                               2.5x
                                                                                     6.0
  6.0
                                                                                     5.5
  5.0                                                                                5.0
        Dec-10




                          Feb-11


                                      Mar-11




                                                                                           Dec-10
                 Jan-11




                                                           May-11




                                                                                                                             Feb-11


                                                                                                                                          Mar-11




                                                                                                                                                                       May-11
                                                Apr-11




                                                                                                              Jan-11




                                                                                                                                                        Apr-11




Source: Bloomberg, DBS Vickers                                                      Source: Bloomberg, DBS Vickers




 Page 54
                                                                                                                          Company Focus
                                                                                                              China ZhengTong Auto




PE chart                                                        PB chart


 x                                                               x
 19                                                              3.6
 18                                                              3.4                           +1SD: 3.3x

 17                        +1SD: 16.3x                           3.2                     Avg: 3.1x
 16                     Avg: 15.4x                               3.0
 15                                                              2.8
                                                                                                                -1SD: 2.8x
 14                                           -1SD: 14.6x        2.6
 13                                                              2.4
 12                                                              2.2
                           Feb-11




                                                       May-11




                                                                                           Feb-11




                                                                                                                             May-11
               Jan-11




                                     Mar-11




                                                                                Jan-11
      Dec-10




                                                                       Dec-10




                                                                                                     Mar-11
                                              Apr-11




                                                                                                                 Apr-11
Source: Bloomberg, DBS Vickers                                  Source: Bloomberg, DBS Vickers




                                                                                                                                      Page 55
Company Focus
China ZhengTong Auto




Corporate structure


                         Grand Glory

                               100%

                         Joy Capital                    Public

                                                           27.3%
                               72.7%

                      China Zhengtong
                         (1728 HK)
                               100%

                          Big Glory

                               100%

                         Rising Wave


            100%                               100%

    Tongda Group
                                        Wuhan Jietong
       (China)

Source: Company




Page 56
                                                                                                                      Company Focus
                                                                                                             China ZhengTong Auto




Contractual arrangements


                                                       Wuhan Jietong



                                                                 Contractual
                                                                 Arrangements



       100%         100%         100%        100%        100%          100%          100%        80%          75%        100%        100%

                 Inner
  Zhuhai                    Hubei        Hubei      Changsha   Beijing         Wuhan         Shantou   Dongguan      Shanghai   Chenzhou
               Mongolia
  Baoze                     Dingjie      Xinrui      Ruibao  Baozehang         Baoze        Hongxiang Jieyunhang      Shenxie    Ruibao
                Dingjie

                                                                                                              100%       100%        100%


                                 100%        100%                                                       Shenxie      Shanghai   Shanghai
                                                                                                       Shentong        Luda      Aohui
                            Wuhan         Shiyan
                                                                                                                         100%
                            Kaitai       Shenxie
                                                                                                                      Hubei
                    30%                                                                                              Bocheng
                 Inner                                           80%           60%           100%       100%
                           70%                                                                                           100%
               Mongolia                               20%
                Dingze                                      Nanchang Guangzhou         Yichang      Huhhot
                                                             Baoze     Baoze            Baoze       Qibao             Hubei
                                                                                                                      Jierui
                                                                         40%                            70%

                                                                                                    Baotou
                                                                                                    Baoze


Source: Company


Business milestone

Year          Milestone

1999          Established first dealership store, which was also the first Nissan dealership and the first dealership store in Shanghai
2002          Established the first Audi dealership store and the first dealership store in Hubei province
2003          Established the first dealership store (Dongfeng Nissan dealership store) in Inner Mongolia
2004          Established the first BMW dealership store (Wuhan)
              Established the first Hyundai dealership store (Wuhan)
2005          Established the first Chevrolet dealership store (Wuhan)
              Established the first dealership store in Hunan Province (BMW/MINI dealership store)
2008          Established the first dealership store in Guangdong province (BMW/MINI dealership store)
              Established the first dealership store (BMW) in Jiangxi Province
2009          Established the first dealership store in Beijing (BMW dealership store)
              Established the first Porsche dealership store in Dongguan

Source: Company




                                                                                                                                   Page 57
Company Focus
China ZhengTong Auto



Details of 4S dealership stores

Segment                                                                 City         Province            Date of     Expiry date of
    Brand/Dealership                                                                             com mencem ent         dealers hip
                                                                                                    of operation        agreement
Ultra prem ium
      Porsche
      Dongguan Jieyunhang Autom obile Sales Services Co., Ltd.   Dongguan         Guangdong             May-10     In the process of
                                                                                                                           entering
                                                                                                                          dealership
                                                                                                                      authorization
                                                                                                                         agreement
Premium
     BMW
     Beijing Baozehang Automobile Sales Services Co., Ltd.           Beijing           Beijing           Jun-10          31-Dec-11
     Baotou Baoze Automobile Sales Services Co., Ltd.                Baotou    Inner Mongolia            Feb-10          31-Dec-13
     Nanchang Baoze Automobile Sales Services Co., Ltd.           Nanchang             Jiangxi           Oct-08          31-Dec-12
     Chenzhou Ruibao Automobile Sales Services Co., Ltd.          Chenzhou              Hunan             Jul-07         31-Dec-12
     Yichang Baoze Automobile Sales Services Co., Ltd.              Yichang             Hubei            Jun-07          31-Dec-12
     Hohhot Qibao Automobile Sales Services Co., Ltd.               Hohhot     Inner Mongolia            Jan-07          31-Dec-11

     BMW/MINI
     Zhuhai Baoze Automobile Sales Services Co., Ltd.                Zhuhai       Guangdong              Mar-09          31-Dec-12
     Changsha Ruibao Automobile Sales Services Co., Ltd.          Changsha            Hunan              Jan-06          31-Dec-12
     Wuhan Baoze Automobile Sales Services Co., Ltd.                Wuhan             Hubei              Mar-05          31-Dec-11
     Guangzhou Baoze Automobile Sales Co., Ltd.                  Guangzhou        Guangdong              Dec-10          31-Dec-13

     Audi
     Shantou Hongxiang Materials Co., Ltd.                         Shantou        Guangdong          Acquired in         03-Aug-12
                                                                                                         Jun-10
     Hubei Dingjie Automobile Sales Co., Ltd.                       Wuhan               Hubei            Aug-03           01-Jan-12
     Shanghai Aohui Automobile Sales Co., Ltd.                    Shanghai           Shanghai            Dec-10           17-Jan-12

Middle market
     Dongfeng Nissan
     Inner Mongolia Dingze Automobile Sales Co., Ltd.               Hohhot     Inner Mongolia            Mar-10    In the process of
                                                                                                                    being renewed
     Shanghai Shenxie Shentong Automobile Sales Co., Ltd.         Shanghai           Shanghai           May-07            01-Mar-12
     Wuhan Kaitai Automobile Sales Co., Ltd.                        Wuhan               Hubei           Aug-04            01-Mar-12
     Inner Mongolia Dingjie Automobile Sales Co., Ltd.             Hohhot      Inner Mongolia           Dec-03     In the process of
                                                                                                                    being renewed
     Shanghai Shenxie Automobile Trading Co., Ltd.                Shanghai           Shanghai            Jun-00           01-Mar-12

     Dongfeng Honda
     Shanghai Luda Automobile Sales Services Co., Ltd.            Shanghai           Shanghai            Jan-05          Indefinite

     Buick
     Shiyan Shenxie Automobile Trading Co., Ltd.                     Shiyan             Hubei            Mar-05    In the process of
                                                                                                                    being renewed
     Hubei Bocheng Automobile Sales Services Co., Ltd.              Wuhan               Hubei            Jan-04    In the process of
                                                                                                                    being renewed

     Chevrolet
     Hubei Jierui Autom obile Sales Services Ltd.                   Wuhan               Hubei            Mar-06          15-Feb-12

     Beijing Hyundai
     Hubei Xinrui Autom obile Sales Services Co., Ltd.              Wuhan               Hubei            Aug-04           31-Dec-12

Source: Company




Page 58
                                                                                                                  Company Focus
                                                                                                       China ZhengTong Auto



                                                                    including being the vice chairman of the China Auto Dealers
MANAGEMENT                                                          Chambers of Commerce.

Management Composition. ZhengTong’s management team                 The business was founded by Mr Wang Muqing in 1996 when
comprises of industry veterans with extensive experience in the     he first started trading trucks in the central and North Eastern
automobile dealership business. CEO Mr Wang Kunpeng has             part of China. In 1999, he established the first Nissan dealership
over 13 years of experience in the PRC automobile industry and      store in Shanghai and by 2005, discontinued the truck
CIO Mr Liu has over 10 years of experience in the industry,         operations. Since then, the founder has focussed on building its
                                                                    passenger vehicle dealership business in China.

Key management team

Manager      Current            Previous Experience                                                                                 Age
             Appointment
Wang         Chief Executive    Joined since 2006, Mr. Wang is an executive director appointed on 20 July 2010 and has               39
Kunpeng      Officer            served as the chief executive officer since 1 May 2010. Mr. Wang is also the Chairm an of the
                                Operation and Management Committee and a mem ber of the Remuneration Committee of
                                the Company. Prior to the Group, Mr. Wang held several positions in FAW-Volkswagen Sales
                                Com pany including General Manager of the central-south China region from 2002 to 2006
                                and chief executive m anager of Liaoning and Shandong region from 2000 to 2002.

Li Zhubo     Chief Financial    Joined the group in 1999, Mr. Li is an executive director appointed on 20 July 2010 and has          41
             Officer            served as the chief financial officer since 1 May 2010 with primary responsibilities for overall
                                financial management of the Group. He is also a member of the Operation and Management
                                Com mittee of the Company. Mr. Li has 18 years of experience in financial management in the
                                automobile industry and served as an accounting officer at Hubei Shenying Automobile prior
                                to joining the Group.
Cao Lim in   Senior Vice        Joined in 1998, Mr. Cao is now an executive director since 7 August 2010 and a senior vice           41
             President          president since 1 August 2010.. Mr. Cao has over 20 years of experience in the automobile
                                industry. Prior to joining the Group in 1998, Mr. Cao was an assistant engineer in the
                                m anufacture design institute of Dongfeng Motor Corporation from 1991 to 1996.


Liu Dongli Chief Investment     Mr. Liu has been an executive director since 7 August 2010 and the chief investment officer          40
           Officer              of the Group since 1 May 2010 and is responsible for strategic investments and the
                                development of dealership network, including the establishment and acquisition of
                                dealership stores. Mr. Liu has over 10 years of experience in the automobile industry. Mr. Liu
                                is the vice chairman of the China Auto Dealers Chambers of Commerce and an executive
                                m ember of China Automobile Dealers Association. Prior to joining the group, he was CEO of
                                China Grand Automotive Services, a major automobile dealership group in China.

Mok Kwok Chief Operating        Mr. Mok has served as the chief operating officer since 16 July 2010 and oversees the                41
Choi Peter Officer              m anagem ent and operation of all of the Group dealership stores. Mr. Mok has over 8 years
                                of experience in the operation of automobile dealership stores. Prior to joining the Group,
                                Mr. Mok held various positions at Northern China German Auto Co. Limited and its
                                subsidiaries, a BMW dealership company in northern China.
Wang         Chief Human        Ms. Wang has served as the chief human resource officer since 17 June 2010 and oversees the          45
Guoqing      Resource Officer   Group human resources. Ms. Wang has over 10 years of experience in human resources
                                m anagem ent.Graduated with a Bachelor degree from Fudan University in 1986.
                                Subsequently, she obtained a Masters degree from ESSEC Business School of France in 1996.
                                She has over 10 years of experience in human resources management.
Liang Tien Financial            Mr. Liang has served as the financial controller and company secretary of the Com pany since         54
Tzu        Controller &         4 September 2010 and 17 Novem ber 2010 respectively. He has over 27 years of experience in
           Company              accounting, finance and corporate financ e. Prior to his joining the Group, he worked in
           Secretary            Guocoland Limited (stock code: F17) as the group financial controller for its China division.

Source: Company




                                                                                                                                 Page 59
China / Hong Kong Company Focus
Zhongsheng Group
Bloomberg: 881 HK            |   Reuters: 0881.HK


DBS Group Research . Equity                                                                         9 June 2011

BUY HK$14.84 HSI : 22,869                                                                           Dealing in must-haves
(Initiate Coverage)
                                                                                                    •       One of the largest auto dealerships in China with an
Price Target: 12-Month HK$18.60                                                                             enviable stable of leading Japanese auto brands
Reason for Report: Initiation
                                                                                                    •       Adding new stores to drive the business forward with the
Potential Catalyst: Dealership network expansion and M&A deals
                                                                                                            focus on luxury and mid-high end auto brands
Analyst                                                                                             •       Valuation already reflects short-term concerns. Upside from
Rachel MIU +852 2863 8843
rachel_miu@hk.dbsvickers.com
                                                                                                            future network expansion. Initiate with BUY rating, TP at
                                                                                                            HK$18.6 based on DCF
                                                                                                    Large exposure to Japanese auto brands. Zhongsheng is one of
Price Relative
                                                                                                    the largest 4S auto dealerships in China, selling mid-high end
        HK$                                                          Relative Index
                                                                                                    and luxury cars in major cities across the country. It carries
     23.70                                                                      219                 Toyota, Honda, Nissan, Audi, Mercedes Benz, Porsche and
     21.70                                                                                          Lamborghini auto brands. The company was the 7th largest auto
     19.70                                                                      169
     17.70
                                                                                                    dealer in terms of revenue in 2009, according to the China
     15.70                                                                      119                 Auto Distribution Association. The shift from low to mid-high
     13.70
     11.70                                                                      69
                                                                                                    end and luxury cars is supporting the company’s upward trend
      9.70                                                                                          in auto sales. China’s auto sales are estimated at 19.5m units
      7.70
        Mar-10                   Aug-10               Jan-11
                                                                                19                  this year, and will reach 24.8m units by 2015, underpinned by
        Zhongsheng Group (LHS)                      Relative HSI INDEX (RHS)
                                                                                                    low auto penetration and a growing middle class with strong
                                                                                                    purchasing power.
Forecasts and Valuation                                                                             Margins expected to rise. Zhongsheng has been enjoying gross
                                                                                                    margin growth averaging 0.9ppt between FY06-10 largely due
 FY Dec (RMB m)                     2009A          2010A           2011F          2012F             to economies of scale and a focus on mid-high end and luxury
 Turnover                           13,722         24,043         42,469         59,970             cars. This segment faces less competition, and is less affected
 EBITDA                                825          1,737          2,768          3,981
                                                                                                    by price wars and margin squeezes. Margins could further
 Pre-tax Profit                        667          1,384          2,236          3,359
 Net Profit                            471          1,031          1,521          2,305             improve, as sales continue to rise from newly acquired stores as
 Net Pft (Pre Ex.)                     471          1,031          1,521          2,305             well as growing demand for after-sales services, (which
 EPS (RMB)                            0.30           0.56           0.80           1.21             command higher margins). The Group plans to open 40 new
 EPS (HK$)                            0.36           0.68           0.96           1.45             stores via organic and acquisitions each year during FY11-12, in
 EPS Gth (%)                         115.3           86.9           41.3           51.5
 Diluted EPS (HK$)                    0.36           0.68           0.96           1.45             new regions and alongside its existing areas.
 DPS (HK$)                            0.00           0.00           0.00           0.00             Valuation does not reflect growing demand for luxury
 BV Per Share (HK$)                   1.62           3.90           4.57           5.88
 PE (X)                               41.0           21.9           15.5           10.2             discretionary goods. The discretionary consumer market is an
 P/Cash Flow (X)                      34.9           19.2           13.2             9.0            important earnings and valuation driver for Zhongsheng. Listed
 P/Free CF (X)                          nm             nm             nm          466.7             luxury retailers trade on FY11 PE 18.2x, while its auto dealer
 EV/EBITDA (X)                        23.8           13.9             9.4            6.7            peers’ average 11.6x. The company’s current valuation does
 Net Div Yield (%)                     0.0            0.0            0.0            0.0
 P/Book Value (X)                       9.1           3.8            3.2            2.5             not therefore reflect the full earnings potential from its
 Net Debt/Equity (X)                    0.2            0.1            0.2            0.2            expansion into this segment as well as positive operating
 ROAE (%)                             25.2           25.6           23.0           27.8             leverage. We applied DCF using 11% WACC and 3% terminal
                                                                                                    growth to arrive at TP of HK$18.6. Initiate with BUY rating.
  Earnings Rev (%):                              New        New
  Consensus EPS (HK$)::                          0.82       1.20                                         At A Glance
  Other Broker Recs:                   B: 8       S: 0       H: 4                                        Issued Capital (m shrs)                                                  1,908
ICB Industry: Consumer Goods                                                                             Mkt. Cap (HK$m/US$m)                                            28,322 / 3,641
ICB Sector: Automobiles & Parts
                                                                                                         Major Shareholders
Principal Business: A leading automobile dealership group in
China                                                                                                         Blue Natural Development (%)                                            65.3
                                                                                                              Gap (Bermuda) Limited (%)                                                 7.5
Source of all data: Company, DBSV, Bloomberg, HKEX                                                            General Atlantic Partners (Dalian) (%)                                   6.1
                                                                                                         Free Float (%)                                                               21.1
                                                                                                         Avg. Daily Vol.(‘000)                                                       3,645


In Singapore, this research report or research analyses may only be distributed to Institutional        “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,       (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from
Chapter 289 of Singapore.                                                                               or in connection with this report.”
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- JW / sa- CW
                                                                                                                Company Focus
                                                                                                         Zhongsheng Group



SWOT Analysis


 Strengths                                                           Weakness


 • A diversified vehicle portfolio of both luxury and mid-high end   • Short history in managing Mercedes Benz dealership since
 vehicle brands targetting different segments of the auto market     the commencement in 2009

 • The first dealership group authorised to sell Toyota and one of   • Execution risk post merger and acquisition in integrating
 the first authorised dealerships for Audi and Lexus in China.       operations into the Group as the company rapidly expands
 Zhongsheng is one of the largest auto dealers for both Toyota       its dealership network
 and Lexus, by sales volume, and by number of 4S outlets
                                                                     • Heavy reliance on a single Japanese brand – Toyota - for
 • Rapid expansion of 4S dealerships via organic growth and          both Toyota sedans and Lexus. Total Japanese brand car
 acquisitions to capture new sales especially in the context of      sales actually accounted for 70% of total revenue last year.
 rising purchasing power in China                                    Production disruptions at Japanese auto plants due to the
                                                                     natural disaster there could affect short-term sales
 • Dealership network spread across key affluent cities              performance



 Opportunities                                                       Threats


 • International luxury and mid-high end car manufacturers           • Loss of dealership status could hamper growth
 aggressive push into China
                                                                     • Rapid expansion could lead to management mishaps due
 • Consumption shift to expensive vehicles, given a steady rise in   to lack of qualified staff to man the stores.
 disposable income and solid economic growth. A growing
 middle-class is the key driving force behind take up of expensive   • Rapid rise in gasoline prices could affect car purchases
 vehicles
                                                                     • The Japanese natural disaster could affect imports of
 • Auto-related business such as  after-sales services, auto         premium brand cars, denting sales.
 leasing/financing, and auto insurance will complement
 automobile sales revenues

 • Growing need for quick service shops from customers for
 minor repairs and services




Source: DBS Vickers




                                                                                                                           Page 61
Company Focus
Zhongsheng Group




THE BUSINESS MODEL
                                                                    Revenue vs dealership stores
Leading automobile dealer group. Established in 1998,
Zhongsheng Group was among the first wave of automobile              RMB m
dealers in China. Today, it is one of the biggest 4S auto            30,000                                                120
dealerships, focusing on the luxury and mid-high end segment.
                                                                     25,000                                                100
Its 4S (sales, spare parts, services and survey) dealership
positioning, according to data from the China Automobile Deal        20,000                                                80
Association (CADA)’s, was ranked 7th in terms of revenue in
2009. Listed on the Hong Kong Stock Exchange on 26 March             15,000                                                60
2010, Zhongsheng was the first publicly traded mainland auto         10,000                                                40
dealer.
                                                                      5,000                                                20
Revenue Breakdown
                                                                          0                                                0
                                                                                 FY06    FY07    FY08     FY09     FY10
  RMB m
                                                                              Revenue (LHS)       No. of dealership store (RHS)
 30,000

 25,000                                                             Source: Company
                                                      9%
 20,000
                                                                    Zhongsheng’s 4S stores retail both imported automobiles and
 15,000                                                             automobiles produced domestically by the foreign brand JVs.
                                           9%                       Japanese brands – principally Toyota (both the sedan and Lexus)
 10,000                           8%                 91%
                       5%                                           are a significant contributor and last year, total Japanese auto
            4%                             91%                      sales accounted for 70% of total revenue.
  5,000               95%        92%
            96%
      0                                                             Focus on mid-high end and luxury auto sales. Zhongsheng
            FY06      FY07       FY08      FY09      FY10           offers ultra premium, premium and mid-to-high end
                                                                    automobiles. Its ultra premium brands are Lamborghini and
    New car sales (after sales tax)     After-sales business
                                                                    Porsche (newly acquired in 2010). Luxury brands include
                                                                    Mercedes Benz, Lexus and Audi dealerships. In the mid-high
Source: Company
                                                                    end segment, the company sells Toyota, Nissan and Honda
                                                                    automobiles. The Group was the first company to be granted
1. New car sales – bread and butter business, dominated by
                                                                    dealership rights by Toyota and one of the first authorized
   Japanese brands
                                                                    dealerships for Lexus and Audi in China.
New automobile sales generates >90% of turnover.
                                                                    Strong growth on the back of a bright China auto market. In
Zhongsheng’s new car sales accounted for over 90% of total
                                                                    FY10, Zhongsheng sold over 83,000 units of mid-high end cars
revenue between FY06 to FY10. After-sales services have also
                                                                    and over 17,000 units of luxury cars, up 56% and 112% from
been ramping up as the customer base has expanded in recent
                                                                    the previous year respectively. CAGR for FY06-10 period was
years. Nevertheless, new car sales will continue to be the major
                                                                    48% in terms of total volume sold. China’s total auto volume
revenue contributor in the foreseeable future, due to rapid store
                                                                    sales are expected to reach 19.5m units this year on the back of
expansion.
                                                                    a stellar performance in 2010 and will further expand to 24.8m
                                                                    by end of 2015. Thus, Zhongsheng should continue to benefit
The company’s revenue from new car sales has been rising at
                                                                    from China’s booming auto market, especially with consumers’
annual rate of 37% from FY06 to FY10, in tandem with its
                                                                    purchasing power (and thus preferences) shifting to more
expansion in dealerships over the same period.
                                                                    expensive vehicles.




Page 62
                                                                                                          Company Focus
                                                                                                    Zhongsheng Group




Revenue split, FY10                                          Gross margin trend

                                                              %
                                                   Luxury     60
                                                  revenue
                                                   37.4%      50

                                                              40

                                                              30

                                                              20

                                                              10

                                                               0
  Mid-high
                                                                     FY06       FY07         FY08    FY09       FY10
    end
  revenue                                                                New car sales              After-sales business
   62.6%                                                                 Blended

Source: Company                                              Source: Company


                                                             Majority of brands carried are Japanese. About 84% of volume
                                                             sales are derived from Japanese brands, which include Lexus,
Dealership Stores by brand FY06-10                           Toyota, Nissan and Honda. Its luxury brands are Audi and
                                                             Mercedes Benz (started in 2009) and Lexus. Among the total 4S
                                                             outlets, premium brand outlets accounted for about 30% of
  Number of dealership store
                                                             last year’s total.
 120

 100                                                         Brands and outlets
  80
                                                               Number of dealership store             New:
  60                                                    71
                                                              120                                     Lamborghini,
  40                                                                                                  Porsche
                                                                       Existing:
                                                              100
                                           37                          Mid:
  20                 21         23                                     Nissan,           New:
          16                                            27     80                        Mercedes
           5          6         7          10                          Honda,
   0                                                                                     Benz
                                                                       Toyota
        FY06        FY07       FY08       FY09      FY10       60      Luxury:
                  Luxury              Mid-to-high end                  Lexus, Audi
                                                               40

Source: Company                                                20

                                                                0
                                                                         FY08               FY09        FY10

                                                             Source: Company, DBS Vickers




                                                                                                                     Page 63
Company Focus
Zhongsheng Group



                                                                         This arrangement will not only lower the operating costs of the
2. After-sales services – a high margin business
                                                                         after-sales service business, but also attract a new group of
Repair and maintenance services an important future source of            customers who are more price-sensitive.
profits. Services provided to customers who bought cars from
                                                                         3. Other auto related businesses – although small at present,
the company’s 4S shops generate good gross margins for the
                                                                            has long-term potential
Group, at over 40% on average during the past four years.
Although this business accounted for <10% of total revenue, it
                                                                         Tapping the used car market. The aim here is to facilitate
contributed 45% of Group gross profit last year.
                                                                         existing customers who want to trade-in their old cars for a new
                                                                         automobile. The used car centre will be an avenue for the
The after-sales segment has been growing rapidly in recent
                                                                         consumers to dispose of their used cars and at the same time,
years, at a CAGR of 68% (FY06-10). We think this robust
                                                                         to promote new vehicle sales.
growth stems from a growing need for luxury car maintenance
services. The enlarging community of 4S customers will support
                                                                         Car leasing and other related services. Car leasing, auto
growth in this segment over the longer term.
                                                                         financing, and auto insurance are ancillary services, as a one-
                                                                         stop service platform to its customers. These operations have a
Based on total new vehicles sold between FY06-10, the
                                                                         limited impact on revenue and earnings as the company merely
company’s total customer base has reached 255,000. The
                                                                         collects fees. New car sales still account for the lion share of the
company can tap into this large pool for potential after-sales
                                                                         company’s total business.
business. As more 4S shops are set up, this customer pool will
only get larger.
                                                                         Revenue breakdown, FY10
After sales service revenue and gross margin FY06-FY09

                                                                                                                           After-sales
 RMB m                                                       %
                                                                                                                            business
 2,500                                                       60
                                                                                                                              9%

 2,000                                                       50

                                                             40
 1,500
                                                             30
 1,000
                                                             20
   500                                                       10
                                                                               New car
     0                                                       0               sales (after
           FY06      FY07      FY08       FY09      FY10                      sales tax)
                                                                                91%
                       After-sales business (LHS)
                       Gross margin (RHS)
                                                                         Source: Company

Source: Company, DBS Vickers


Setting up quick auto repair service shops. Zhongsheng has tied
up with Japan’s ‘Tacti’ to set up a 50-50 JV company to
establish quick auto repair shops in China. Tacti has a proven
track record in operating quick auto repair services in Japan and
also offers high end brands of auto accessories.

The initial plan is to set up outlets in the vicinity of its 4S shops.
This will free up the capacity of the 4S shops to undertake more
complicated repair services, leaving the simpler and more
regular repairs to the quick service shops.




Page 64
                                                                                                                   Company Focus
                                                                                                            Zhongsheng Group



                                                                   Aggressive network expansion via acquisition deals. Last year
Gross profit breakdown, FY10                                       was a fruitful year for Zhongsheng in terms of acquiring new
                                                                   dealerships to widen its market coverage. The company made
                                               After-sales         three major acquisitions involving a total outlay of c.RMB1.56bn
                                                business           and 29 stores. The newly acquired stores will generate higher
                                                  45%              sales volume and also shortened the gestation period as these
                                                                   stores are already profitable.




   New car
 sales (after
  sales tax)
    55%


Source: Company


MERGER AND ACQUISITION KEY TO GROWTH


Major M&A deals in 2010

                                                                                                                    Price paid
Date            Stake       Name of acquiree                                         Auto brands     # of stores        RMBm
10-Jul-10       100%        Fuzhou Huarui Auto                                          DF Nissan             6            197
                            Fuzhou Grand Rich Da Trade
                                                                   Porsche, Mercedes Benz, Audi,
                                                                        Lam borghini, GZ Toyota.
29-Sep-10       50%         B&L Motor Hldg                                                                    8          1,100
                                                                   Operates mainly in Beijing and
                                                                                           Tianjin

22-Dec-10       55%         New Wing Enterprise                 DF Nissan; GAC Toyota; DF Honda              15            260

Total                                                                                                        29          1,557

Source: Company


Besides the above major acquisitions, there were also some         It seems acquiring single dealerships is easier compared to
smaller single store acquisitions during the year, which brought   acquiring a chain of dealership stores, as the asking price from
total stores acquired to 35 units.                                 vendors of chain stores tends to be higher because the
                                                                   embedded values are also higher.
At the end of 2010, the number of 4S shops totalled 98 units,
of which over 50% came from acquisitions in the past two           Growing experience in M&A. Zhongsheng’s massive acquisitions
years.                                                             have put the company on the forefront in future M&A deals,
                                                                   execution and integration with the group’s existing operations.
As most major dealership operators are also looking at             One of the key concerns with M&A is integration, as the
acquisitions to expand their networks quickly, such acquisitions   acquired companies have different operating cultures and
are getting pricier. Depending on the brands and locations of      systems. In order to maximize returns, integration becomes
the stores, forward PEs are hitting 10x, up from about 6-8x        crucial. Besides this, as some of these acquisitions do not involve
previously. Based on deals struck by Zhongsheng last year, the     a full 100% stake, a strong working relationship with the
average purchase price of mid-end brands dealerships was           original owners is also important in driving future business.
about RMB32-33m per store.


                                                                                                                             Page 65
Company Focus
Zhongsheng Group



Extensive sales network. The Group owns a comprehensive 4S           group to strengthen local penetration by enjoying regional
dealership network nationwide, covering affluent cities and          competitive advantages due to the relatively affluent
regions in China. Its 4S dealerships are located in coastal cities   populations in these regions. By end 2010, the group had 27
in north eastern, eastern and southern part of China as well as      premium shops and 71 mid-high end outlets, all of which are 4S
selected inland regions, covering 11 provincial regions and 45       standard. The plan is to add another 40 stores each year in
cities including Liaoning, Shandong, Yunnan, Guangdong,              2011 and 2012 to bring total outlets to 178 units.
Zhejiang and Fujian, etc. The strategic network enables the


4S shops distribution, Dec 10




Source: Company




Page 66
                                                                                                                 Company Focus
                                                                                                           Zhongsheng Group



Competitive Strengths                                               China auto dealer gross margin comparison

Track record in expanding dealership network through                 %
acquisition. Zhongsheng has demonstrated its capabilities in         14
acquiring and integrating the acquired companies into the            12
Group. Successful integration is crucial in maximising benefits      10
for shareholders. As a result of its wide dealership network, the
                                                                      8
company’s market share has been maintained at over 1% in
term of dealership revenue, despite the highly fragmented             6
market structure.                                                     4
                                                                      2
Large network offers economies of scale. Zhengsheng has
                                                                      0
greater clout in negotiating better terms with auto makers due
                                                                                    FY09                      FY10
to its large sales volume and extensive network. The company
benefits from volume rebates for new vehicles and spare parts          Pangda              Zhengtong           Zhongsheng
from auto makers, better allocation of quota etc. Such benefits        Dah Chong Hong      Lentuo
also allow Zhongsheng to adjust its product mix to achieve the
highest return for the company.                                     Note: DCH is operating margins; Pangda based on PRC GAAP; Lentuo
                                                                    based on US GAAP
Big pool of customers. Zhongsheng has sold in excess of
                                                                    Source: Companies, DBS Vickers
255,000 cars according the past five years’ data. Their customer
base will continue to widen with new outlets, creating a stable
recurring income source from servicing and maintenance.             Growth Strategies
Additionally, this customer pool will eventually choose to trade-
in their vehicles and upgrade to more expensive cars, thus          New brands. Zhongsheng added Mercedes Benz to its auto
offering more potential revenue for the Group.                      portfolio in 2009 and there are plans to add more luxury brands
                                                                    to its stable. This strategy tallies with the development of the
Sales volume                                                        luxury market in China. Through the acquisition of B&L last year,
                                                                    the company added Porsche and Lamborghini under its ultra
                                                                    premium brand portfolio.
 unit
 250,000
                                                                    Network expansion to drive sales and profitability. The company
                                                                    plans to boost sales via more 4S shops, by adding 40 new stores
 200,000
                                                       19%          each year in 2011 and 2012 either by acquisition or organic
                                           17%                      growth, bringing the total to 178 units, up from 98 outlets last
 150,000
                                 17%                                year. The future brand mix for the new outlets will be 30:70
 100,000                                                            split between ultra premium and premium brands and the mid-
                                                       81%
                       13%                                          high end brands.
                                           83%
  50,000     16%                 83%
                       87%                                          In fact, even without this, there is plenty of potential within
             84%
        0                                                           existing shops to increase sales. Based on sales volume of
             FY08      FY09      FY10     FY11F     FY12F
                                                                    existing shops at IPO in 2010 (excluding newly acquired shops),
                                                                    the average volume sales per shop was only 1,700 cars per year,
                        Mid-high end          Luxury                still far from maturity.

Source: Company, DBS Vickers


Stronger gross margin compared to peers. Comparing
Zhongsheng’s dealership operations with other listed
dealerships, the company has relatively high blended gross
margins. We attribute this to its operating leverage resulting
from network expansion and positive economies of scale.
Operating leverage from its network expansion will be a positive
driver on margins in future years.



                                                                                                                             Page 67
Company Focus
Zhongsheng Group



                                                                                                 Captures growing demand for quick service trend. Zhongsheng
2010 new car sales contribution                                                                  is building more quick service shops for customers who require
                                                                                                 simple repairs and maintenance. This entails a relatively low-cost
 units                                                                                           set up, good profit margins, and is rather similar to its existing
 90,000                                                                                          after sales services. The business is relatively new and hence
 80,000                                                                                          needs time to be nurtured.
 70,000
 60,000
 50,000                                                                                          Key Risks
 40,000
 30,000
                                                                                                 Rising acquisition costs due to rapid expansion. The company
 20,000
 10,000                                                                                          has spent some RMB1.6bn last year in acquiring existing
       0                                                                                         dealerships. As other auto dealers have also been looking at
                   47 stores




                                                          Nissan stores


                                                         Acquired New




                                                                                                 acquisitions to build their networks, competition in this space is
                                                                                built/acquired
                                          Acquired B&L




                                                                                 Other newly
                    At IPO




                                                          15 stores**
                                                           in Fuzhou
                                                            Acquired


                                                            6 stores*
                                            8 stores*




                                                                                  22 stores



                                                                                                 driving up acquisition costs. Zhongsheng may thus over-pay to
                                                             Wing




                                                                                                 buy new dealerships in order to rapidly expandnetwork.

                                                                                                 Aside from this, the company may also face execution risk in
                                                                                                 integrating the acquired entities into its existing network which
* B&L Group and Fuzhou 6 Nissan stores' operating results started to                             may have already outgrown itself, mitigating any intended
be consolidated into Zhongsheng group since Sep 29, 2010
                                                                                                 benefits from the M&A deal.
** New Wing 15 stores' operating results are going to be
consolidated into Zhongsheng group since Jan 01, 2011                                            Japanese brands accounted for approx. 70% of total vehicle
                                                                                                 sales. The company carries the three major Japanese auto
Source: Company
                                                                                                 brands plus the luxury marque - Lexus. The recent natural
                                                                                                 disaster in Japan has caused some short-term disruption to
In addition, there are operating leverage benefits to be derived
                                                                                                 Japanese’ automakers’ plants, given the temporary production
from shop expansion. ZhongSheng’s own S,G&A expense ratio
                                                                                                 halts at the upstream parts and components plants. The
was 3.6% from its 47 shops, but its blended expense ratio
                                                                                                 disruption could affect imports of the high end Japanese cars.
(including newly acquired shops) surged to 4.2%, as newly
acquired shops were less efficient before the acquisition.                                       Major product recalls. Auto recalls could harm a dealership’s
                                                                                                 brand image and eventually lead to cancellation of orders from
2010 SG&A as % of revenue                                                                        customers. Under the Regulations on Recall of Defective
                                                                                                 Automotive Products promulgated by the State Administration
 %                                                                                               of Quality Supervision, Inspection and Quarantine, NDRC,
                                                                                     Group
 7                                                                                               Ministry of Commerce and the General Administration of
                                                                                  blended:
 6                                                                                    4.2%
                                                                                                 Customs, all auto dealership stores are required to report
 5                                                                                               defects in automobiles and automobile-related products to both
 4                                                                                               the relevant auto maker and the authorities. The financial
 3                                                                                               impact would be loss of sales, higher inventory holding costs
 2                                                                                               and reduction in profits, as customers’ confidence in the quality
 1
                                                                                                 and safety of the products may be severely impaired. The two
                                                                 n.a.
                                                                                                 major recalls involved the global recall of Toyota cars and Lexus
 0
                                                                                                 in recent year.
       47 stores




                                                Nissan stores



                                               Acquired New




                                                                        built/acquired
                           Acquired B&L




                                                                         Other newly
        At IPO




                                                15 stores**
                                                 in Fuzhou
                                                  Acquired


                                                  6 stores*
                             8 stores*




                                                                          22 stores
                                                   Wing




                                                                                                 Need to beef up luxury brands portfolio. Existing brands include
                                                                                                 Mercedes Benz (added in 2009), Lexus, Audi, Porsche and
                                                                                                 Lamborghini. The Chinese auto market is gradually evolving
                                                                                                 with an increasing focus on the luxury segment. To tap the
* B&L Group and Fuzhou 6 Nissan stores' operating results started to                             growth potential of this segment, the company needs to
be consolidated into Zhongsheng group since Sep 29, 2010                                         increase its portfolio to stay ahead of the curve. To mitigate this
** New Wing 15 stores' operating results are going to be
                                                                                                 risk, the company is widening its luxury brands portfolio with
consolidated into Zhongsheng group since Jan 01, 2011                                            acquisitions.

Source: Company




Page 68
                                                                                                                  Company Focus
                                                                                                           Zhongsheng Group



Segmental Analysis                                               Earnings growth robust, disruption of Japanese automakers
                                                                 should be temporary. The planned expansion in 4S dealerships
Revenue and profit largely driven by new car sales. The setting  will continue to boost volume sales. We estimate FY11 and
up of new 4S shops is the key revenue driver. The number of 4S FY12 new auto sales volume growth of 74% and 33%
shops increased sharply from 21 units in 2006 to 98 outlets last respectively, and boosting new car sales revenue to RMB39bn
year, which explains why new car sales revenue grew 37% per      and RMB54bn. This business will continue to dominate total
annum from FY06-10 and volume sales posted 48% CAGR over revenue, because a lot of these shops have yet to reach maturity.
the same period.                                                 Based on 2010 total volume sales, its existing stores (excluding
                                                                 new acquisitions during the year) produced approx. 1,700
New car sales gross margin was 5% in FY06, improving to          vehicles, still low in our opinion. Therefore there is still plenty of
5.8% in FY10 on product mix change and benefits of operating room for these shops to increase sales, apart from via the new
leverage on higher volume sales. This was despite overall ASP    shops planned for 2011 and 2012.
falling by 1-13% over the historical period. Premium cars
generally command higher gross margins of high-single digit      Coming off a low base, the company’s after-sales business will
levels compared to 5-6% for mid-high end cars.                   benefit from an expanded car ownership pool, as more cars are
                                                                 sold, Hence, after-sales services will continue to form a
Although c.90% of total revenue came from new car sales, it      significant share of gross profit, since margins here are higher
contributed about 55% of total gross profit. The balance was     compared to new car sales. However, its mid-term contribution
derived from the company’s after-sales business, where gross     is expected to remain at <10% of total revenue in the next few
margins averaged over 40%, even though it accounted for          years, as the opening of new stores should generate a larger
c.10% of total revenue. Overall, total gross profit recorded     portion of revenue during this period.
CAGR of 55%, faster than revenue growth of 39% per annum
over the same period.

Segmental Breakdown

FY Dec                                 2007A             2008A             2009A            2010A              2011F            2012F

Revenues (RMB m)
 New car sales (after sales tax)        8,616             9,695           12,466            21,937            38,678           53,904
 After-sales business                     487               853            1,256             2,106             3,791            6,065
Total                                   9,103            10,549           13,722            24,043            42,469           59,970

Gross Profit (RMB m)
 New car sales (after sales tax)          551               434               623            1,263             2,287             3,164
 After-sales business                     170               343               556            1,030             1,895             3,033
Total                                     721               777             1,179            2,293             4,182             6,196

Gross Profit Margins (%)
 New car sales (after sales tax)           6.4              4.5               5.0               5.8              5.9               5.9
 After-sales business                     34.9             40.3              44.3              48.9             50.0              50.0
Total                                      7.9              7.4               8.6               9.5              9.8              10.3


Rev enue composition (%)
New car sales to total                    94.7            91.9              90.8             91.2              91.1             89.9
After sales                                5.3             8.1               9.2              8.8               8.9             10.1
Total                                    100.0           100.0             100.0            100.0             100.0            100.0

Rev enue growth (%)
New car sales                             38.8             12.5             28.6              76.0             76.3              39.4
After-sales businesss                     85.3             75.2             47.2              67.7             80.0              60.0
Total                                     40.7             15.9             30.1              75.2             76.6              41.2

Source: Company, DBS Vickers




                                                                                                                             Page 69
Company Focus
Zhongsheng Group




Segmental Breakdown (continued)

FY Dec                                 2007A     2008A      2009A      2010A     2011F     2012F
New car sales volume
Mid-high end                          25,290    34,688     53,419     83,155   145,522   189,178
Lux ury                                6,687     6,661      8,044     17,032    28,954    43,431
Total                                 31,977    41,349     61,463    100,187   174,476   232,609

New car volume composition (%)
Mid-high end                            79.1      83.9       86.9       83.0      83.4     81.3
Lux ury                                 20.9      16.1       13.1       17.0      16.6     18.7
Total                                  100.0     100.0      100.0      100.0     100.0    100.0

New car volume growth (%)
Mid-high end                            57.7      37.2       54.0       55.7      75.0      30.0
Lux ury                                 38.0       (0.4)     20.8      111.7      70.0      50.0
Total                                   53.2      29.3       48.6       63.0      74.2      33.3

Average selling price (RM B'000)
Mid-high end                            199       184        162        165       167       169
Lux ury                                 535       498        473        482       497       506
Blended                                 269       234        203        219       222       232

ASP growth (%)
Mid-high end                            (7.0)      (7.7)     (2.2)       1.8       1.0       1.0
Lux ury                                 (6.6)      (7.0)      5.9        2.0       3.0       2.0
Blended                                 (9.4)    (13.0)      (1.2)       8.0       1.2       4.5

Number of 4S dealerships
Lux ury                                   6          7        10         27        40        55
Mid-to-high end                          21         23        37         71        98       123
Total                                    27         30        47         98       138       178

Number of 4S dealerships growth (%)
Lux ury                                  20         17        43        170        48        38
Mid-to-high end                          31         10        61         92        38        26
Total                                    29         11        57        109        41        29




Source: Company, DBS Vickers




Page 70
                                                                                                                                                                                          Company Focus
                                                                                                                                                                             Zhongsheng Group



Financials – Income Statement                                                                                  after-sales business; and operating leverage from its newly
                                                                                                               acquired shops last year.
Strong revenue CAGR from FY06-10. Zhongsheng achieved total
revenue CAGR of 39% for FY07-10, fuelled mainly by new car                                                     S,G&A expense to rise during forecast period on larger business
sales. Top line surged from RMB6.5bn in FY06 to RMB24bn in                                                     scale. Zhongsheng has kept expense ratios relatively stable over
FY10. Zhongsheng’s strategy of focussing on developing its                                                     the past few years, except for FY10 due to 4S stores acquisitions
premium and ultra premium brands, with the mid-high end the                                                    in 2H. Selling and distribution costs accounted for 2.4%-2.6%
main volume driver is key to its medium to long-term                                                           during 2006-2009 but jumped to 2.9% in FY09, as the new
performance.                                                                                                   stores acquired have yet to contribute to earnings.
                                                                                                               Administrative costs were within the range of 1.0%-1.3%.
Hence, we expect volume growth of the luxury brands to expand
by double the rate of the mid-high end segment. Revenue is         Sustainable earnings momentum. Bottom line grew at annual
forecast to reach RMB60bn by FY12, as new car sales coupled        rate of 63% from FY06-10 and we expect this strong
with after-sales services will support revenue expansion.          momentum to continue, given the company’s dealership
                                                                   expansion plans. Despite the global financial crisis, the company
Further improvements in overall gross margins expected. We         maintained its earnings at above RMB200m in FY08, though
have projected a small increase in overall gross margins for three 23% lower than FY07. In our opinion, despite the larger
reasons: strong demand for luxury cars; <40% margins from its earnings base, FY10-12 CAGR of 50% is very attractive.

Sales Trend                                                             Operating Cost Trend                                                     Profitability Trend


      RMB m                                                                                                                                              RMB
         60,000                                                 90.0%
                                                                                                                                                                                                               115%
                                                                80.0%              50000
         50,000                                                                                                                                         2000                                                   95%
                                                                70.0%
                                                                                   40000
         40,000                                                                                                                                                                                                75%
                                                                60.0%                                                                                   1500
         30,000                                                 50.0%              30000                                                                                                                       55%

                                                                40.0%                                                                                   1000                                                   35%
         20,000                                                                    20000
                                                                30.0%                                                                                                                                          15%
         10,000                                                                    10000                                                                500
                                                                20.0%                                                                                                                                          -5%
              0                                                 10.0%                 0                                                                   0                                                    -25%
                   2008A    2009A   2010A   2011F    2012F                                 2008A    2009A     2010A         2011F    2012F                     2008A 2009A 2010A 2011F               2012F
                                                                                                      Other Operating Expenses (-)                                  Net Profit (After-extraordinaries) (LHS)
                  Total Revenue      Revenue Growth (%) (YoY)                                         Cost of Goods Sold (-)
                                                                                                                                                                    Net Profit Growth (%) (YoY) (RHS)



FY Dec                                                                  2007A                      2008A                              2009A          2010A                           2011F                             2012F

Turnover                                                                  9,103                    10,549                              13,722         24,043                       42,469                              59,970
Cost of Goods Sold                                                      (8,382)                    (9,771)                           (12,543)       (21,750)                     (38,287)                            (53,774)
Gross Profit                                                                721                       777                               1,179          2,293                        4,182                               6,196
Other Opg (Exp)/Inc                                                       (302)                      (393)                               (508)        (1,012)                     (1,869)                             (2,759)
Operating Profit                                                            419                       384                                 671          1,281                        2,314                               3,438
Other Non Opg (Exp)/Inc                                                       21                        25                                  59            295                          176                                208
Associates & JV Inc                                                            7                          5                                  7               8                           9                                  10
Net Interest (Exp)/Inc                                                      (45)                      (96)                                (71)          (200)                        (262)                               (296)
Exceptional Gain/(Loss)                                                        0                          0                                  0               0                           0                                   0
Pre-tax Profit                                                              402                       318                                 667          1,384                        2,236                               3,359
Tax                                                                         (99)                       (83)                              (174)           (302)                       (537)                               (840)
Minority Interest                                                           (19)                      (16)                                (22)            (51)                       (178)                               (214)
Preference Dividend                                                            0                         0                                   0              0                            0                                   0
Net Profit                                                                  284                       219                                 471          1,031                        1,521                               2,305
Net profit before Except.                                                   284                        219                                 471          1,031                       1,521                               2,305
EBITDA                                                                      496                        474                                825           1,737                       2,768                             3,980.7
Gross Margin (%)                                                           7.9                        7.4                                 8.6            9.5                              9.8                            10.3
Sales Gth (%)                                                             40.7                       15.9                                30.1           75.2                             76.6                            41.2
EBITDA Gth (%)                                                           112.2                       (4.3)                               74.1          110.4                             59.3                            43.8
Operating Profit Gth (%)                                                 134.8                       (8.3)                               74.6           90.9                             80.6                            48.6
Net Profit Gth (%)                                                        92.6                      (23.1)                              115.3          119.0                             47.5                            51.5
Effective Tax Rate (%)                                                    24.6                       26.2                                26.1           21.8                             24.0                            25.0

Source: Company, DBS Vickers




                                                                                                                                                                                                                Page 71
Company Focus
Zhongsheng Group



Financials – Balance Sheet                                                     over the same period. Thus, its cash conversion cycle was 6 days
                                                                               last year, compared to about 4 days in 2007.
Short cash conversion cycle. Zhongsheng has managed its
inventory level well despite rising demand for new cars, auto                  Healthy balance sheet, poised for future expansion. Net gearing
parts and accessories. Inventory turnover days were 38 in FY10,                was low last year, at 11%, despite total debt increasing 174%
compared to 25 in 2007, despite revenue growing at an annual                   y-o-y to RMB4.9bn. Hence, the company has scope to gear up
rate of 51% over the same period. The company wants to keep                    its balance sheet to support more M&A activity. In April 2011,
inventory turnover days at 35-40 days. Meanwhile, the                          the company raised RMB1.25bn worth of senior debt (due 2014
company also managed to prolong payable days by 11 days                        at interest cost of 4.75%) to fund its business expansion.

Breakdown of Assets                                  Breakdown of Capital                                      Financial Leverage & Net Debt to Equity


                                                                                                                    1,948
                                                                                                                                                                                        2.6
                                      Net Fixed
                          Debtors -    Assets -                                                                     1,448                                                               2.1
         Inventory -       3.3%        21.0%
           40.5%
                                                                                                                                                                                        1.6
                                                                                                                     948
                                                              Common                       ST Debt -
                                                             Shareholder                    46.0%                                                                                       1.1
                                                              s' Equity -                                            448
                                        Bank, Cash
                                                                54.0%                                                                                                                   0.6
                                        and Liquid                             LT Debt -
                                         Assets -                                0.0%
                                          35.1%                                                                      (52)                                                               0.1
                                                                                                                             2008A      2009A       2010A        2011F       2012F
                                                                                                                       Net Debt/(Cash)                      Net Debt to Equity (X) (R.H.S)
                                                                                                                       Financial Leverage (X) (R.H.S)




FY Dec                                                  2007A               2008A                      2009A         2010A                               2011F                               2012F

Net Fixed Assets                                           460                549                        838         1,789                              2,866.3                           3,892
Invts in Assocs & JVs                                       17                 21                         39            47                                   56                              66
Other LT Assets                                            370                476                        944         3,765                                4,157                           4,385
Cash & ST Invts                                            635              1,205                      1,458         4,161                                4,768                           4,315
Inventory                                                  706              1,133                      1,024         3,453                                4,752                           6,681
Debtors                                                     55                 61                         87           285                                  503                             711
Other Current Assets                                       706                725                      1,114         2,701                                4,648                           6,499
Total Assets                                             2,949              4,171                      5,504        16,200                              21,751                           26,549

ST Debt                                                    646              1,158                      1,797         4,924                               4,924                            4,924
Other Current Liab                                       1,476              1,293                      1,455         4,138                               6,932                            9,440
LT Debt                                                      0                  0                          0             0                               1,250                            1,250
Other LT Liabilities                                        21                 34                        105           423                                 423                              423
Shareholder’s Equity                                       757              1,633                      2,111         5,936                               7,264                            9,341
Minority Interests                                          49                 53                         37           779                                 957                            1,172
Total Cap. & Liab.                                       2,949              4,171                      5,504        16,200                              21,751                           26,549

 Leverage Analysis (x)
 Net Interest Cover                                       9.4                 4.0                        9.5           6.4                              8.8                               11.6
 EBITDA Gross Interest Cover                              9.8                 4.5                       10.2           7.7                              9.7                               12.4
 Total Debt to EBITDA                                     1.3                 2.4                        2.2           2.8                              2.2                                1.6
 Total Debt to Total Assets                               0.2                 0.3                        0.3           0.3                              0.3                                0.2
 Total Debt to Capital                                    0.8                 0.7                        0.8           0.7                              0.8                                0.6
 Net Debt to Equity                                       0.0               CASH                         0.2           0.1                              0.2                                0.2
 Capex to Debt                                            0.2                 0.1                        0.1           0.1                              0.2                                0.2
 Net Cash / (Debt)                                       (11)                  47                      (339)         (764)                          (1,406)                            (1,859)

 Liquidity Analysis (x)
 Cash Ratio                                               0.3                 0.5                       0.4                 0.5                             0.4                               0.3
 Current Ratio                                            1.0                 1.3                       1.1                 1.2                             1.2                               1.3
 Quick Ratio                                              0.3                 0.5                       0.5                 0.5                             0.4                               0.3


Source: Company, DBS Vickers




Page 72
                                                                                                                                                                               Company Focus
                                                                                                                                                                     Zhongsheng Group



Financials – Cash Flow                                            High capex to fund new distribution channels. After making
                                                                  several acquisitions last year, Zhongsheng will continue to
Deep pockets needed for working capital. The company has          expand its distribution network to reach new customers. We
been investing heavily in inventory to meet growing demand for projected total capex and related items to amount RMB1.5-
new cars, resulting in high working capital charges over the past 1.6bn each year for FY11/12 to grow its business. With a war
few years. The surge in business in FY10 has resulted in          chest of over RMB4bn end last year, and RMB1.25bn new debts
negative cash flows from operating activities last year. We       in 2011, capex funding is not an issue.
expect operating cash flow to improve with better cash
management controls.

Cash Flow Trend                                                       Free Cash Flow Per Share                                                  Free Cash Flow As At Year End


                                                                       2.11                                                                     RMB m
  5,528
                                                                                                                                                  400
  4,528                                                                1.61
                                                                                                                                                  200
  3,528
                                                                       1.11                                                                          0
  2,528
                                                                                                                                                 (200)
  1,528                                                                0.61                                                                      (400)
   528
                                                                                                                                                 (600)
   -472                                                                0.11
                                                                                                                                                 (800)
 -1,472                                                                                                                                         (1,000)
                                                                      (0.39)
 -2,472                                                                                                                                         (1,200)
 -3,472                                                               (0.89)
                                                                                                                                                (1,400)
          2008A    2009A     2010A     2011F        2012F                      2008A       2009A          2010A      2011F        2012F
                                                                                                                                                (1,600)
          CF from Op   CF from Invt   CF from Fin                              Free Cash Flow Per Share    Free Operating Cash Flow Per Share              2008   2009     2010      2011   2012




FY Dec                                                      2007A                          2008A                                   2009A        2010A                     2011F                    2012F

Pre-Tax Profit                                                 402                               318                                    667       1,384                    2,236                     3,359
Dep. & Amort.                                                   49                                61                                     88         153                      269                       325
Tax Paid                                                       (65)                              (95)                                 (120)        (171)                    (188)                     (537)
Assoc. & JV Inc/(loss)                                          (7)                               (5)                                    (7)         (8)                       (9)                     (10)
Chg in Wkg.Cap.                                              (269)                               (52)                                 (505)     (2,284)                  (1,518)                   (2,084)
Other Operating CF                                               42                              101                                     67           70                      262                      296
Net Operating CF                                              153                                328                                   189        (856)                   1,052                     1,351

Capital Exp.(net)                                            (116)                            (137)                                   (219)       (627)                  (1,300)                   (1,300)
Other Invts.(net)                                                 4                               9                                       11          0                        0                         0
Invts in Assoc. & JV                                           (65)                           (181)                                   (196)       (980)                    (160)                         0
Div from Assoc & JV                                               0                               0                                        0          0                        0                         0
Other Investing CF                                             (62)                           (237)                                     (32)      (693)                    (255)                     (254)
Net Investing CF                                             (239)                            (546)                                   (436)     (2,300)                  (1,715)                   (1,554)

Div Paid                                                         0                                 0                                      0           0                       0                          0
Chg in Gross Debt                                             141                                109                                    604      2,480                    1,250                          0
Capital Issues                                                   0                                 0                                      0      2,910                        0                          0
Other Financing CF                                            (90)                               728                                  (290)       (275)                   (286)                      (321)
Net Financing CF                                               51                                837                                   313       5,115                      964                      (321)
Net Cashflow                                                  (36)                               619                                     67      1,959                      302                      (525)
Opg CFPS (RMB)                                                0.27                              0.24                                   0.45       0.78                      1.35                      1.80
Free CFPS (RMB)                                               0.02                              0.12                                  (0.02)     (0.81)                    (0.13)                     0.03

Source: Company, DBS Vickers




                                                                                                                                                                                             Page 73
Company Focus
Zhongsheng Group



Financials – ROE Drivers                                                                                   ROE improving post IPO dilution. ROE is projected to hover at
                                                                                                           the mid-20s level in 2011/12, post the dilution effect from the
Margins on an upward tend. Both gross and net margins are                                                  IPO exercise, after taking into account the larger equity base.
improving steadily despite a minor retreat in 2008, due to the
global financial crisis. We expect further margin improvement
driven by better product mix and operating efficiency.

ROAE / ROAA Trend (%)                                                Margin Trend (%)                                                   Total Debt & Gross Interest Cover


      30.0%                                                                  10%
                                                                             9%                                                                                                                                 11.1x
                                                                                                                                             6000
      25.0%                                                                  8%                                                                                                                                 10.1x
                                                                             7%                                                              5000
                                                                                                                                                                                                                9.1x
      20.0%                                                                  6%                                                              4000                                                               8.1x
                                                                             5%
                                                                                                                                             3000                                                               7.1x
      15.0%                                                                  4%
                                                                                                                                                                                                                6.1x
                                                                             3%                                                              2000
                                                                                                                                                                                                                5.1x
      10.0%                                                                  2%
                                                                                                                                             1000
                                                                                                                                                                                                                4.1x
                                                                             1%
      5.0%                                                                                                                                     0                                                                3.1x
                                                                             0%
                                                                                                                                                    2008A      2009A         2010A        2011F       2012F
               2008A      2009A       2010A    2011F      2012F                    2008A        2009A    2010A     2011F     2012F
                                                                                                                                                            Total Debt (+)           Gross Interest Cover (X) (YoY)
         Ret on Avg Equity (ROAE) %     Ret on Avg Assets (ROAA) %            EBITDA Margin %     EBIT Margin %   Net Income Margin %




FY Dec                                                               2007A                  2008A                          2009A            2010A                              2011F                                   2012F

Profitability Ratios
Sales Growth (%)                                                      40.7                        15.9                         30.1           75.2                                   76.6                               41.2
Gross Margin (%)                                                       7.9                         7.4                          8.6            9.5                                    9.8                               10.3
Operating Margin (%)                                                   4.6                         3.6                          4.9            5.3                                    5.4                                5.7
Net Profit Margin (%)                                                  3.1                         2.1                          3.4            4.3                                    3.6                                3.8
ROAE (%)                                                              45.3                        18.3                         25.2           25.6                                   23.0                               27.8
ROA (%)                                                               11.1                         6.1                          9.7            9.5                                    8.0                                9.5
ROCE (%)                                                              26.0                        13.0                         14.3           12.4                                   13.1                               16.2

Activity Ratios
Debtors Turn (average days)                                            1.9                         2.0                          2.0            2.8                                    3.4                                3.7
Creditors Turn (average days)                                          8.9                        19.8                         28.3           34.5                                   40.4                               44.6
Inventory Turn (average days)                                         24.8                        34.6                         31.6           37.8                                   39.4                               39.0
Total Asset Turnover (x)                                               3.5                         3.0                          2.8            2.2                                    2.2                                2.5
Fixed Asset Turnover (x)                                              22.4                        20.9                         19.8           18.3                                   18.2                               17.7

Source: Company, DBS Vickers




 Page 74
                                                                                                                          Company Focus
                                                                                                                   Zhongsheng Group



Valuation                                                                    we do believe Zhiongsheng deserves to trade at a premium to
                                                                             other automakers.
Still attractive at current level. The share price of Zhongsheng
doubled to a high in Nov 2010 from its IPO price. It is now                  TP arrived at using DCF. Although forward valuation multiples
trading at 15.5x FY11 PE. We expect Zhongsheng to maintain                   remain the favoured approach to valuing companies, we
its high growth track record in FY11/12. In our view, the high               prefer DCF, as this methodology better reflects Zhongsheng’s
end and luxury foreign brand segment, where Zhongsheng’s                     longer term underlying earnings potential. Using WACC of
strengths lie,should outperform the domestic brand market in                 11% and a terminal growth rate of 3%, we arrived at TP of
2011. Thus we think the counter is still attractive at this level.           HK$18.6, or impliied FY12 PE of 12.8x.

Deserves a premium over other automakers. Zhongsheng is                      Our DCF assumptions are reasonable in view of the
the first mainland dealership operator to go public. Its mid-                development of the auto industry, the brand profile of the
high end/luxury strategy has generated strong margins and a                  company and the quality of the management. Given our
growing customer base. With the addition of ultra premium                    positive view on the auto dealership industry, (particularly for
brands such as Porsche and Lamborghini (after acquiring B&L                  companies with strong luxury brands), Zhongsheng is well
in 2H10), the brand profile of the group has taken a further                 positioned to ride on the upside within the dealership sector
step up. Although auto dealerships are not pure retail plays,                and on consumers’ increasing preference for high end cars.

Assumptions

(%)                                                 FY11F            FY12F          FY13F         FY14F         FY15F
Sales volume growth
Mid-high end                                         75.0            30.0             8.0           8.0           8.0
Luxury                                               70.0            50.0            18.0          15.0          12.0
Total                                                74.2            33.3             9.9           9.4           8.8

ASP grow th
Mid-high end                                           1.0            1.0             (2.0)         (1.0)        (1.0)
Luxury                                                 3.0            2.0             0.0           0.0           0.0
Blended                                                1.2            4.5             0.9           0.9           0.3

Stores growth
Luxury                                               48.1            37.5             0.0           0.0           0.0
Mid-to-high end                                      38.0            25.5             0.0           0.0           0.0
Total                                                40.8            29.0             5.6           5.3           5.1


FCF annual growth                            FY16-18                  10%
                                             FY19-20                   5%


Risk free rate                                       3.5%
Beta                                                     1
Cost of Equity                                     13.5%
Cost of Debt                                           7%
Debt-equity ratio                                    30%
WACC                                                 11%
Terminal growth rate                                   3%

Source: DBS Vickers




                                                                                                                                      Page 75
Company Focus
Zhongsheng Group




Discounted cashflows projections

FYE Dec (RMB m)                                 FY11F     FY12F              FY13F            FY14F       FY15F

EBIT                                            2,513     3,670              4,282            5,094       5,644
Add Deprec iation and Am ortisation               269       325                  367            394            421
Less Tax Provision                               (537)     (840)              (993)           (1,196)    (1,334)
Less Capex                                      (1,580)   (1,580)             (750)            (750)       (750)
Add changes in Working Capital                  (1,518)   (2,084)           (1,401)            (841)       (785)
Total FCF to the Firm                            (852)     (508)             1,505            2,700       3,196
Dis counted FCF                                  (768)     (412)             1,100            1,779       1,896



Source: DBS Vickers




Present value of discounted cash flow (RMBm)                  WACC/Terminal growth equity value matrix


PV of FCF                             12,342                                                     Terminal growth
PV of Terminal Value                  18,285                                           1%        2%      3%          4%     5%
Enterprise Value                      30,626                               9%          21.9     24.1    26.9         30.8   36.7
                                                                    WACC




Add : Net Cash/(Debt)                   (764)                              10%         18.7     20.2    22.1         24.7   28.3
Equity Value (RMB m)                  29,862                               11%         16.2     17.3    18.6         20.4   22.7
                                                                           12%         14.1     14.9    15.9         17.2   18.8
Value Per Share (RMB)                   15.6                               13%         12.4     13.1    13.8         14.7   15.9
Value Per Share (HK$)                   18.6

Source: DBS Vickers                                           Source: DBS Vickers




Page 76
                                                                                                                                                            Company Focus
                                                                                                                                                Zhongsheng Group




Peers valuation – Auto dealers

                                                          Mkt                    PE     PE    PEG         PEG Yield Yield P/Bk P/Bk EV/EBITDA                               ROE     ROE
                               Currency     Price         Cap     Fiscal       11F     12F     11F        12F        11F         12F    11F    12F        11F      12F       11F     12F
Company Name              Code             Local$       US$m             Yr        x     x       x          x         %           %       x      x          x           x     %       %

Hong Kong
Dah Chong Hong*        1828 HK     HKD      8.27        1,934    Dec-10 10.8           8.9    (4.3)       0.4        2.8         3.4    1.9    1.7        7.8      6.8      19.1    20.2
Zhongsheng*             881 HK     HKD     14.84        3,641    Dec-10 15.5 10.2              0.4        0.2        0.0         0.0    3.2    2.5        9.4      6.7      23.0    27.8
China ZhengTong*       1728 HK     HKD      8.99        2,311    Dec-10 20.2 12.3              0.2        0.2        0.0         0.0    3.7    3.1     10.8        7.4      31.9    27.7
Sparkle Roll^*          970 HK     HKD      1.47          562    Mar-10 15.8 12.0              0.3        0.4        1.3         1.7    3.3    2.7     12.0        7.9      23.4    24.6
WO KEE Hong             720 HK     HKD     0.198           59    Dec-10       n.a.     n.a.    n.a.       n.a.       n.a.    n.a.       n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
New Focus Auto          360 HK     HKD           2.5      183    Dec-10 13.9           9.9     0.1        0.2        n.a.    n.a.       n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
Average                                                                       15.3 10.7       (0.7)       0.3        1.0         1.3    3.1    2.5     10.0        7.2      24.3    25.1


Other Asia
Jardine C&C             JCNC SP    SGD     39.26 11,359          Dec-10 12.0 10.7             20.9        0.9        2.1         3.4    n.a.   n.a.       6.8      6.0       n.a.    n.a.
Zhejiang Zhongda 600704 CH         CNY     17.08        1,158    Dec-10 12.0           9.9     0.5        0.5        n.a.    n.a.       1.5    1.3        n.a.     n.a.      n.a.    n.a.
Pang Da Auto          601258 CH    CNY     33.29        5,389    Dec-10 19.7 15.3              0.8        0.5        1.0         1.3    3.6    3.0        n.a.     n.a. 20.1        21.3
Hotai Motor             2207 TT   TWD       95.3        1,814    Dec-10 10.9 11.8             (6.9) (1.6)            5.5         5.2    n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
Average                                                                       13.6 11.9        3.8        0.1        2.9         3.3    2.6    2.2        6.8      6.0      20.1    21.3


US
AutoNation               AN US     USD     33.79        4,997    Dec-10 18.3 15.8              0.6        1.0        0.0     n.a.       2.3    2.0     12.8       11.6      13.1    12.6
Group 1 Auto             GPI US    USD     36.46          876    Dec-10 11.7           9.8     0.3        0.5        0.9         0.9    1.0    0.9     10.2        9.2       8.7     9.5
Asbury Auto             ABG US     USD     15.53          511    Dec-10       9.8      7.7     0.3        0.3        n.a.    n.a.       1.4    1.2        8.9      7.7      16.7    17.4
CarMax^                 KMX US     USD     27.37        6,183    Feb-11 15.1 13.5              2.2        1.1        n.a.    n.a.       2.3    1.9     13.5       12.3      16.5    15.1
Lentuo Int'l             LAS US    USD      4.98          147    Dec-10       5.0      3.4     0.1        0.1    12.0 17.7              1.2    1.1        2.2      1.4      26.3    34.1
Average                                                                       13.7 11.7        0.9        0.7        0.4         0.9    1.7    1.5     11.4       10.2      13.8    13.7

^FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers



Peers valuation - Luxury general retailers

                                                        Mkt                                   11F                                                                 12F
                                       Price            Cap     Fiscal        PE P/Sales       P/Bk Yield              ROE               PE P/Sales              P/Bk Yield         ROE
Company Name                   Code       HK$          HK$m        Yr          x         x            x          %          %             x           x             x        %        %


Chow Sang Sang                116 HK 25.15         17,025        Dec 19.1              1.2      2.7         1.9        14.6            16.0      1.0             2.4        2.3     15.6
Em peror Watch                887 HK      1.32         8,868     Dec 18.4              1.5      2.6         1.6        16.4            15.2      1.2             2.3        2.0     16.2
Hengdeli Holdings*           3389 HK      4.42     19,440        Dec 22.3              1.3      3.1         1.6        14.8            18.2      1.1             2.6        1.9     15.6
Luk Fook Holdings^#*          590 HK      32.7     17,740        Mar 18.8              1.9      4.6         2.2        26.6            15.2      1.5             3.9        2.8     27.8
Oriental Watch*^              398 HK      5.01         2,352     Mar 12.2              0.9      1.3         1.8            8.3         10.0      0.5             1.1        1.9     11.7
                                                                          18.2         1.4      2.9         1.8        16.1            14.9      1.1             2.5        2.2     17.4

# Fully Diluted EPS

^ FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




                                                                                                                                                                              Page 77
Company Focus
Zhongsheng Group




PE band chart                                                                                                                PB band chart


 Share Price (HK$)                                                                   24x                                      Share Price (HK$)
 25                                                                                                                           30
                                                                                                                    21x
 23                                                                                                                                                                                                                                                       5.0x
 21                                                                                                                 18x       25
 19                                                                                                                                                                                                                                                       4.2x
 17                                                                                                                 14x       20
                                                                                                                                                                                                                                                          3.5x
 15
 13                                                                                                                 11x       15                                                                                                                          2.8x
 11
  9                                                                                                                           10                                                                                                                          2.1x
  7
  5                                                                                                                            5
      Mar-10


               May-10




                                       Sep-10


                                                     Nov-10




                                                                                         Mar-11


                                                                                                           May-11
                                                                       Jan-11




                                                                                                                                    Mar-10


                                                                                                                                               May-10




                                                                                                                                                                         Sep-10


                                                                                                                                                                                           Nov-10




                                                                                                                                                                                                                               Mar-11


                                                                                                                                                                                                                                                 May-11
                                                                                                                                                                                                             Jan-11
                           Jul-10




                                                                                                                                                           Jul-10
Source: Bloomberg, DBS Vickers                                                                                               Source: Bloomberg, DBS Vickers




PE chart                                                                                                                     PB chart


 x                                                                                                                            x
 26                                                                                                                           5.5
 24                                                                                                                           5.0
 22
                                                                                                                              4.5
 20                      +1SD: 18.5x
 18                                                                                                                           4.0                       +1SD: 3.8x
 16            Avg: 15.5x
                                                                                                                              3.5                   Avg: 3.2x
 14                                              -1SD: 12.5x                                                                  3.0
 12                                                                                                                                                                                        -1SD: 2.6x
 10                                                                                                                           2.5
  8                                                                                                                           2.0
                May-10




                                            Sep-10




                                                                                                                    May-11




                                                                                                                                                  May-10




                                                                                                                                                                                  Sep-10




                                                                                                                                                                                                                                                           May-11
      Mar-10




                                                              Nov-10


                                                                                Jan-11


                                                                                                  Mar-11




                                                                                                                                      Mar-10




                                                                                                                                                                                                    Nov-10


                                                                                                                                                                                                                      Jan-11


                                                                                                                                                                                                                                        Mar-11
                              Jul-10




                                                                                                                                                                Jul-10




Source: Bloomberg, DBS Vickers                                                                                               Source: Bloomberg, DBS Vickers




Page 78
                                                                                                                Company Focus
                                                                                                            Zhongsheng Group




Key milestone

Year              Event

1998              First 3S dealership in Dalian City
                  First Toyota dealership*
                  First Nissan dealership*
1999              First Audi dealership*
2000              First 3S dealership in Yunnan Province
2001              First 3S dealership in Fujian Province
2002              First 3S dealership in Shanghai
2003              First 3S dealership in Nanjing City
2005              First 4S dealership in Shenzhen
                  First 4S dealership in Guangzhou City
                  First Lexus dealership*
                  First Honda dealership*
2007              First 4S dealership in Sichuan Province
                  Acquisition of Xinshengrong group of 4S dealerships
2008              Acquisition of one Nissan dealership* in Kunming City, Yunnan Province
                  Acquisition of First Toyota dealership* in Shandong Province
2009              Acquisition of 15 4S dealerships in Shandong Province, Zhejiang Province,
                  Liaoning Province, Jilin Province and Heilongjiang Province
                  First GM dealership*
                  First Mercedes-Benz dealership* in Dalian City

*The term refers to a 3S/4S dealership and specifies the brand of automobiles it operated.

Source: Company




Shareholder structure


                                   Gap (Bermuda)                 General Atlantic               Public
       Blue Natural
                                      Limited                  Partners (Dalian), LP.        Shareholders


              65.29%                         7.51%                          6.10%                   21.1%




                                              Zhongsheng Group


Source: Company




                                                                                                                       Page 79
Company Focus
Zhongsheng Group



Management                                                            SOEs and various auto OEMs before setting up Zhongsheng.
                                                                      Beside these two key founders, the other senior managers also
Experienced management team. Zhongsheng has a team of                 have extensive industry knowledge which can help drive the
experienced senior managers, led by the two founders, Mr              growth of the business.
Huang and Mr Li. Both founders have served in local automobile

Key management team

Manager           Current              Previous Experience                                                                         Age
                  Appointm ent

Huang Yi          Chairman and         Mr. Huang is one of the two founders, and has been chairm an of Zhongsheng Group             48
                  executive director   since its inception in 1998. He is responsible for strategic planning and formulating the
                                       overall corporate direction and focus. Prior to founding the company, Mr. Huang was a
                                       director and deputy general m anager at China Resources Machinery Co., Ltd., a state-
                                       owned enterprise engaged in importing and exporting of automobiles and other
                                       machinery.
Li Guoqiang       Vice-chairman,                                                                                                    47
                  executive director Mr Li is the other founder and has served as Chief Exec utive Officer and vice-chairman
                  and chief executive since 1998. He is responsible for the overall management and operations of the
                  officer             company. Mr. Li has served as deputy chairman and a m ember of standing committee
                                      for China Automobile Dealers Association since Decem ber 2009. In 1995, Mr. Li
                                      founded Dalian Aotong Automobile Repair & Assembly Factory ( otong Repair &
                                      Assembly? , a company engaged in autom obile repair and maintenance services.
Du Qingshan       Executive director   Mr Du has served as deputy general manager of the company since 2007. He is in               48
                                       charge of the financial planning, strategy and management and also oversees all the
                                       accountancy and financial aspects of the Group. Prior to joining Zhongsheng in 2007,
                                       Mr. Du was appointed by State-owned Assets Supervision and Administration
                                       Commission of Dalian Municipal Government to serve as the chief financial officer of a
                                       large PRC corporation, Dalian DHI.DCW Group Co., Ltd.
Yu                Executive director   Mr Yu has served as deputy general manager of the group since 2004. He is responsible        53
Guangm ing                             for the strategic business development as well as selecting and training middle-to-
                                       senior level managers of 4S dealerships of our Group. Mr. Yu has more than 9 years?of
                                       relevant experience in the PRC automobile industry.
Wu Hailong        Vice-president of    Mr. Wu joined Zhongsheng at its inception in 1998 and currently serves as vice-              46
                  new autom obile      president of our new automobile sales business. Prior to joining Zhongsheng, Mr. Wu
                  sales business       worked in the Dalian City representative office of Toyota Tsusho Corporation, a
                                       company listed on the Tokyo Stock Exchange (stoc k code: 8015) and the sole trading
                                       company of the Toyota group, between 1990 and 1996, and his work was closely
                                       related to the PRC autom obile industry. Mr. Wu has over 18 years?of relevant
                                       experience and in-depth expertise in automobile sales.
Zhang             Vice-president of    Mr. Zhang currently oversees the sales and management of luxury brand automobile             38
Zhicheng          luxury brand         sales business. Mr. Zhang has over 6 years? of relevant experience and in-depth
                  autom obile sales    expertise in the PRC autom obile industry. Mr. Zhang received a master degree in
                  business             Business Administration from Dongbei University of Finance and Ec onom ics in 2003.

Liu Geng          Vice-president of    Mr. Liu joined Zhongsheng in 2000 and c urrently serves as vice-president of group           41
                  after-sales and      after-sales and accessories businesses.Mr. Liu joined the PRC automobile industry since
                  accessories          1993 and has m uch experience and in-depth understanding of the PRC automobile
                  businesses           industry. Mr. Liu earned a bachelor degree in the automobile department of Harbin
                                       Institute of Tec hnology in 1991.


Source: Company




Page 80
China / Hong Kong Company Focus
Dah Chong Hong
Bloomberg: 1828 HK Equity                 |   Reuters: 1828.HK



DBS Group Research . Equity                                                                         9 June 2011


BUY HK$8.27 HSI : 22,869                                                                            Products for the discerning
(Initiate Coverage)
Price Target : 12-month HK$9.90
                                                                                                    consumer
Reason for Report : Initiation
Potential Catalyst : Strong auto sales on dealership network expansion
                                                                                                    •      Diversified consumer group spanning autos, food and
                                                                                                           consumer products
Analyst
Rachel MIU +852 2863 8843                                                                           •      Direct play on increasing purchasing power of the Chinese
rachel_miu@hk.dbsvickers.com                                                                               consumers and rising demand for premium cars, higher
                                                                                                           quality food and consumer products
                                                                                                    •      Premium brands, exclusive distributorships and long track
                                                                                                           record in autos to fuel long term growth. Initiate with
                                                                                                           BUY rating. TP at HK$9.90 on DCF
Price Relative
        HK$                                                          Relative Index                 Fulfilling the Chinese consumers’ desire. Dah Chong Hong
     10.80
                                                                                219                 (DCH) has two consumer related businesses, auto retailing and
      8.80
                                                                                169
                                                                                                    food & consumer products. The emergence of a new
      6.80

                                                                                119
                                                                                                    generation of wealthy Chinese with strong purchasing power
      4.80
                                                                                                    will support growth in the luxury car market and demand for
                                                                                69
      2.80
                                                                                                    quality food products over the coming years. DCH is
      0.80
         2007               2008              2009              2010
                                                                                19
                                                                                                    channelling more resources into the mainland to tap future
         Dah Chong Hong (LHS)                      Relative HSI INDEX (RHS)                         growth in these areas.

Forecasts and Valuation
                                                                                                    Exclusive auto distributorships, unique business models. DCH
 FY Dec (HK$ m)         2009A                      2010A           2011F          2012F             holds the national distributorships for Bentley and Isuzu. This
 Turnover               22,209                     32,211         40,373         48,209             enables it to reap the maximum benefits from surging
 EBITDA                  1,028                      1,444          2,038          2,454             demand for premium cars. Aside from this, as consumer
 Pre-tax Profit            989                      1,797          1,906          2,313             preferences shift towards more up-market autos, the mid-high
 Net Profit                710                      1,411          1,388          1,696
 Net Pft (Pre Ex.)         649                        958          1,388          1,696
                                                                                                    end auto market should fare better than low-end brands.
 EPS (HK$)                0.39                       0.78           0.76           0.93             DCH’s long history in the Chinese market and in-depth
 EPS Gth (%)              26.3                       98.3           (2.5)          22.2             industry knowledge will place the company ahead of its rivals
 Diluted EPS (HK$)        0.39                       0.78           0.76           0.93             in offering the right product range in a highly competitive
 DPS (HK$)                0.16                       0.23           0.23           0.28
 BV Per Share (HK$)       3.04                       3.78           4.27           4.97             industry. Although the company’s auto business is expected to
 PE (X)                   20.9                       10.6           10.8             8.9            experience slight bumps this year due to supply shortages of
 P/Cash Flow (X)          24.4                       11.2           11.5             9.3            Japanese cars, the mid-term trend remains positive.
 P/Free CF (X)            19.7                        nm            11.8             nm
 EV/EBITDA (X)            15.3                       11.5             7.8            6.8            Valuation discount to peers warranted. DCH trades at a
 Net Div Yield (%)         1.9                        2.8            2.8            3.4             discount to its peers, as it is not viewed a pure auto dealership
 P/Book Value (X)          2.7                        2.2            1.9            1.7
 Net Debt/Equity (X)        0.1                        0.2            0.1            0.1            play. We view this as reasonable especially also, given
 ROAE (%)                 13.8                       23.0           19.1           20.2             concerns regarding the ongoing impact from Japan. With the
                                                                                                    bulk of the earnings coming from autos, this should support
 Earnings Rev (%):                                                     New            New
 Consensus EPS (HK$):
                    :                                                  0.74           0.94
                                                                                                    FY10-12 normalised earnings CAGR of 26%. Our DCF
 Other Broker Recs:                                     B: 9            S: 0          H: 0          valuation arrives at a TP of HK$9.90, using a 11% WACC and
                                                                                                    2% terminal growth rate. Initiate with BUY rating.
                                                                                                        At A Glance
ICB Industry: Consumer Services
ICB Sector: General Retailers                                                                           Issued Capital (m shrs)                                                  1,819
Principal Business: A diversified conglomerate engaged in auto                                          Mkt. Cap (HK$m/US$m)                                            15,046 / 1,934
retailing, food & consumer product distribution and logistic service                                    Major Shareholders
                                                                                                             CITIC Group (%)                                                         57.0
Source of all data: Company, DBSV, Bloomberg, HKEX
                                                                                                        Free Float (%)                                                               43.0
                                                                                                        Avg. Daily Vol.(‘000)                                                       4,309


In Singapore, this research report or research analyses may only be distributed to Institutional     “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,    (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from
Chapter 289 of Singapore.                                                                            or in connection with this report.”
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- JW / sa- CW
Company Focus
Dah Chong Hong



SWOT Analysis

 Strengths                                                     Weakness


 •    Diversified consumer business covering auto retailing,   •   Slower expansion of dealership network in the PRC
      food and consumer products                                   compared to its peers
 •    Long track record in the Chinese auto market             •   Significant dependence on Japanese auto brands at
                                                                   around 50% of total sales
 •    Synergies from its logistic operations supporting
      expansion in the food and consumer business              •   Asset heavy logistics business requires heavy capex
 •    Carries strong auto brands currently in high demand


 Opportunities                                                 Threats


 •    Mainland luxury car market continues to grow despite     •   Japanese auto plant shutdown could affect earnings
      overall auto market slowing, due to consumption shift        worse than expected
      towards high-end cars
                                                               •   Production recall could result in loss of sales, higher
 •    Growing trend for quick service shops from customers         inventory holding costs and reduction in profits, as
      who opt for minor repairs and services                       customers’ confidence in the quality and safety of the
                                                                   products may be severely impaired
 •    Food safety issues in the Mainland present new
      opportunities for DCH’s food business                    •   Volatility in gasoline prices could affect car purchases
                                                               •   Termination of distributorship or dealership agreements
                                                                   could impact future earnings
                                                               •   Acquisition costs of other dealerships getting more
                                                                   expensive, as competition heats up from other auto dealer
                                                                   groups
                                                               •   Government restrictions in major cities to cap vehicle
                                                                   growth could impact future sales (as occurred in Beijing)



Source: DBS Vickers




Page 82
                                                                                                                Company Focus
                                                                                                            Dah Chong Hong



Long established operations with major Chinese backing             and is one of the largest dealer groups there, with the largest
                                                                   number of brands. It sells 11 vehicle brands at its 13 showrooms
                                                                   in HK. The company entered into the Chinese auto market in
Company Background
                                                                   1979, and adopted a unique strategy, by being the national
                                                                   distributor and dealer of Bentley and Isuzu in China. Its multi-
Over 50 years of history. The Group was established in 1949.
                                                                   brand strategy has helped DCH to penetrate into 19 key cities in
CITIC Pacific bought the shares in 1992 and subsequently listed
                                                                   China. It carries 20 vehicle brands and has 55 ‘4S’ (sales, spare
the company in Oct 2007. Dah Chong Hong (DCH) has three
                                                                   parts, service and survey) shops. Besides Bentley and Isuzu, the
key businesses; motor and motor related business, food and
                                                                   other brands under its dealership network include Audi,
consumer products and, lastly, logistic operations.
                                                                   Mercedes Benz, Volkswagen, Toyota, Nissan, Honda, Lexus,
                                                                   Mazda, and etc. Apart from new vehicle sales, the company
DCH’s operations are spread across many countries, including
                                                                   also provides repair and maintenance services for its customers.
HK, Macau, China, Japan, Singapore, Canada and Taiwan.
                                                                   This operation has high gross margins of over 40%, via the
Motor and motor related business the largest segment. DCH          company’s 4S shops.
has been in the motor retailing business for over 40 years in HK

Auto brand portfolio in Hong Kong                                  Auto brand portfolio in Mainland China




Source: Company                                                    Source: Company




                                                                                                                           Page 83
Company Focus
Dah Chong Hong


This business accounted for 76.5% of total revenue last year,
                                                                      Motor and motor related business segment results
and sold 58,000 vehicles in China, up 46% y-o-y, which is             breakdown, FY10
higher than the national average growth of 32%. In HK, it sold
9,214 vehicles, capturing a market share of 23%.

The other motor related operations involve parts trading, motor
leasing, used car trading, lubricant oil production, and
independent service outlets (under the MotorMech brand). The                                                           HK &
first quick service shop was opened in Dongguan in 4Q10.                                                               Macau
                                                                                 Mainland                               25%
Motor and motor related business revenue breakdown,                               China
FY10                                                                              73%




                                                                                                                     Other
                                                                                                                    markets
                                                                                                                      2%

                                                HK &
           Mainland                             Macau                 Source: Company
            China                                17%
            79%
                                                                      Fast expansion of consumer food demand. The food trading
                                                                      and distribution operation started over 50 years ago, and it has
                                                                      spread across the manufacturing, processing, distribution and
                                              Other                   retail value chain. Although the food business accounted for
                                             markets                  22.4% of total revenue last year, the company sees great
                                               4%
                                                                      potential and is making great progress at widening its range of
                                                                      activities to further grow the business.

Source: Company




Food business value chain


                                                    Food Business




                Food
                                                           Food                               Food Retail
           Manufacturing /
                                                       Distribution                             Chain
             Processing




      Food                                                      Fast Moving
                       Pocari Sweat
   processing                                                    Consumer               DCH Food       DCH Food
                      manufacturing        Commodities
  centre: Hong                                                     Goods                  Mart        Mart Deluxe
                      plant: Xinhui
 Kong & Jiangxu                                                  (“FMCG”)

Source: Company




Page 84
                                                                                                                   Company Focus
                                                                                                               Dah Chong Hong


Food distribution activities- HK and Macau                        Broad customer base - serving over 10,000 customers


Food commodities                                                   Fast Food &            Caf? de Coral, Fairwood, Tao Heung
- Distributes over 500 food products sourced from 39 countries     Restaurant             Holding Limited, Pizza Hut, Maxim's
                                                                   Hotel                  The Peninsular Hong Kong, Shangri-La
-   Frozen m eat                                                                          Hotels and Resorts, The Venetian, Four
-   Frozen seafood                                                                        Seasons, Hotel Nikko Hong Kong
-   Edible oils
                                                                   Food Manufacturer      Vitasoy, Garden
-   Grocery products
                                                                   Retail Chain           Wellcome, Vanguard, City Super, Jusco,
-   Frozen Poultry
                                                                                          Park'N Shop
-   Chilled meat
-   Agricultural products                                          Drug Store             Mannings
                                                                   Convenienc e Store     7-Eleven, OK Convenience Store
Fast Moving Consumer Goods ("FMCG")                                Airline / Cruise       Cathay Pacific, Lufthansa, Star Cruises
- Distributes about 70 brands of FMCG covering over 800 pre-       Caterer
packaged food, beverages, w ines and healthcare produc ts
sourc ed from 29 countries
- Pocari Sweat manufacturing JV at Xinhui, Guangdong
Brands inc lude:
Pocari Sweat, Tabasc o, Twinings, Brands, Starbucks Coffee,
Campbell's, Ovaltine, Mr. Brown Coffee, Barilla, Heinz, CP,
Alm ond Roca

Source: Company                                                   Source: Company


DCH’s food business in HK is much bigger compared to China.
                                                                   Consumer products - Electrical appliances
Last year, about 47% of food revenue was derived from HK,
with the PRC accounting for 40%. However, DCH intends to           Hong Kong & Macau
grow its China food business as demand for quality food rises,     - Distributor of 20 internationally-renowned electrical
especially with a high disposable income in major cities.          appliance brands and all are exclusive
                                                                   - Also offers pre-sales and after-sales services, including
DCH also distributes electrical appliances and at the same time    appliance installation, repair and maintenance services
provides after-sale services to customers of the following brands.
                                                                   Brands inc lude:
                                                                   Accuphase, Cyrus, Esaar, Princess, Ac rolink, Martin Audio,
                                                                   AEG Electrolux, Dantax, Esoteric, Polkaudio, Tannoy, Chario,
                                                                   Electrolux, Zanussi Electrolux, TEAC, Haier, Soul Note,
                                                                   Cabasse, Monster Cable, Definitive Technology


                                                                   Mainland China
                                                                   - Distributor of 17 international and dom estic brands, of
                                                                   which 16 are exclusive
                                                                   - 4 repair and maintenance service centres


                                                                   Brands inc lude:
                                                                   Accuphase, Dantax, Esoteric, Acrolink, Polkaudio, Chario,
                                                                   Tannoy, Monster Cable, Cabasse, Martin A udio, Shure, Cyrus,
                                                                   TEAC, Soul Note, Rega, Zanussi, Definitive Technology

                                                                   Source: Company




                                                                                                                                 Page 85
Company Focus
Dah Chong Hong


Food & consumer products business revenue                             Food & consumer products business segment results
breakdown, FY10                                                       breakdown, FY10




                           HK &                                                                    HK &
                           Macau                                                                   Macau
                            47%                                                                     67%




                                                    Other                               Mainland
                  Mainland                         markets                               China
                   China                            13%                                  33%
                   40%



                                                                                                      Other markets: HK$32m loss
Source: Company
                                                                      Source: Company


                                                                      Synergies from logistic operations to boost its food business.
                                                                      DCH’s new logistics facilities in HK, Macau and China provide
                                                                      3rd party logistics services as well as supports its food
                                                                      distribution business. In HK, it has over 85,500 sqm of
                                                                      warehousing space in Fotan, Kwai Chung and Yuen Long.
                                                                      These logistic centres have cold room facilities and an 8,000
                                                                      sqm food processing facility has also commenced operation in
                                                                      1Q2010. In China, DCH set up a logistics hub in Xinhui, West
                                                                      Pearl River Delta region, with 75,200 sqm of warehousing space
                                                                      to serve the Mainland, HK and Macau customers

Logistics – Fully integrated total supply chain solutions

                                                             Mainland China


                                                            Fully Integrated                           Macau
                          Hong Kong
                                                     Total Supply Chain Solutions



                                                                                                     Product repackaging
                     Warehouse              International freight
                                                                         Food safety testing            & value added
                    management                   forwarding
                                                                                                           services



                    Nationwide &                                                                       Vendor managed
                                                                           Food processing
                  intercity deliveries                                                                    inventory



                                         One-stop logistics services provider in Pearl River Delta

Source: Company




Page 86
                                                                                                                Company Focus
                                                                                                            Dah Chong Hong


Aggressive Strategy for motor and related business               More aggressive Bentley strategy in China. In 2010, DCH sold
                                                                 c.59K vehicles in China (+46% yoy). Bentley, in particular,
Opening new dealerships in China. The group derived c.76.5% enjoyed a 94% increase in sales to 815 units. DCH’s commercial
of revenue from its motor and motor related operations last      vehicle volumes also doubled to c.7K units. Overall, DCH’s sales
year, up from 63% in FY07. We expect auto revenues to remain performance was above the industry average of 32% growth
high as the company continues to expand its auto sales outlets   last year. This implies that the mid-high end and luxury car
in China. The plan is to open 10-15 new stores this year to      demand momentum was stronger than the mass market
boost its presence in China. With 55 4S shops we project it will segment, due to higher consumer spending power in this
add at least 10 new shops, since seven stores are currently      segment and consumers’ desire to upgrade.
under construction. The new shops will focus on selling Audi (1
shop), Honda (1), Toyota (2) and Lexus (3).                      Disposable incomes in China are rising and the desire for luxury
                                                                 goods/cars is not abating, even under the tighter credit
                                                                 environment. DCH is tapping into this demand for luxury goods
Revenue trend
                                                                 by adding five Bentley independent dealerships under its control
                                                                 to bring the total number to18 by end 2011 (of which four are
  HK$m                                                           operated by DCH). Bentley is targeting volume growth of at
  60,000
                                                                 least 50% this year.
 50,000
                            CAGR: 25%
 40,000                                                          Expansion of motor related business. The company is setting up
                                                                 more independent quick service auto shops to cater to car
 30,000
                                                                 owners seeking no-frills affordable repair services. The plan is to
 20,000                                                          open 10 independent service outlets in southern China. Quick
 10,000                                                          service shops have relative low operating costs and high gross
      0
                                                                 margins of 30-40%. To capture growth in the motor leasing
           FY07     FY08       FY09    FY10   FY11F   FY12F
                                                                 market, a market which is gaining more recognition and
                                                                 acceptance, DCH intends to set up 4-5 motor leasing outlets in
                    Others
                                                                 five major cities (Shanghai, Beijing, Tianjin, Chongqing and
                    Logistics Business
                    Food & Consumer Products                     Shunde).To move further up the value chain, the Group intends
                    Motor & Motor-related Business               to pursue some upstream motor accessories manufacturing
                                                                 business. However, nothing has been firmed up at this point on
Source: Company, DBS Vickers                                     accessories manufacturing.

                                                                 Bringing in new motor brands. Although DCH has 20 brands in
4S auto-shops in PRC
                                                                 China, the company is looking at introducing Mercedes Benz
                                                                 brand and models from Shanghai-General Motor’s JV. This
 80                                                              should add depth to its range of luxury and mid-high autos in
                                                                 China.
 70
                         CAGR: 20%
 60                                                              Tapping demand for quality food in China

 50
                                                                 Introducing new products and setting up new stores to boost
 40                                                              food and consumer operations. Since HK and China are the
 30                                                              company’s two most important markets, the strategy is to
                                                                 introduce new quality food items (sourced from external
 20                                                              suppliers or to develop its own private labels) especially for the
 10                                                              FMCG segment. To achieve the goal, DCH is leveraging on the
                                                                 support of its food processing network. Since the food
  0
                                                                 processing facilities in HK and Guangdong are relatively new,
       FY07       FY08     FY09       FY10    FY11F   FY12F
                                                                 the initial aim is to raise their utilisation rate and improve
                                                                 operating efficiency.
Source: Company, DBS Vickers
                                                                 DCH also plans to open 10 new retail stores in HK to tap the
                                                                 growing food market there. Food retail sales in HK has been
                                                                 growing at 5% over the past five years.




                                                                                                                            Page 87
Company Focus
Dah Chong Hong

                                                                                               Three more logistics hubs in the future. The new facilities will be
HK Retail sales on food                                                                        located in Guangdong, Fujian and Shanghai to widen the
                                                                                               company’s catchment areas into the high economic growth
 HK$m                                                                                    %     zones in China. It will also assist its food distribution business in
 29,000                                                                                  10    the Mainland. The recent spate of food quality issues in China
 27,000                                                                                  8     will provide new opportunities for DCH to bring in more foreign
                                                                                         6     food items to take advantage of this window of opportunity.
 25,000
                                                                                         4
 23,000                                                                                        Revenue breakdown by business, FY10
                                                                                         2
 21,000
                                                                                         0
 19,000                                                                                  (2)                                                      Food &
 17,000                                                                                  (4)                                                    Consumer
                                                                                                                                                 Products
 15,000                                                                                  (6)
                                                                                                                                                  22.4%
            2000
                   2001
                          2002
                                 2003
                                        2004
                                               2005
                                                      2006
                                                             2007
                                                                    2008
                                                                           2009
                                                                                  2010




          Retail sales: Food (LHS)                             YoY growth (RHS)                            Motor &
                                                                                                           Motor-
Source: CEIC                                                                                               related                                  Logistics
                                                                                                           Business                                 Business
                                                                                                            76.5%                                    0.8%
The company launched the following new projects in recent
months to broaden its food business:-
                                                                                                                                                 Others
    1.    Setting up a manufacturing JV with CJ CheiJedang                                                                                       0.3%
          Corp (097950 KS), to be located at DCH’s Xinhui
          logistics centre in China. When the centre is ready in
                                                                                               Source: Company
          2Q12, DCH will be the distributor for the CJ frozen
          and processed food in HK, Macau, Guangzhou,
          Shanghai, Zhejiang and Fujian provinces;

    2.    Acquisition of a coffee supplier in Hong Kong, Tai                                   Operating profit breakdown by business, FY10
          Luen Coffee Company. The deal will add Golden
          Trophy coffee and Celyon tea to its existing 700
          brands of FMCG portfolio;                                                                                                                Food &
                                                                                                                                                 Consumer
    3.    Expanding its food trading and logistic operations into                                                                                 Products
          Xiamen, via a JV with Xiamen Xiangyu Group Corp,                                                                                         11.5%
          taking advantage of the Economic Cooperation                                                     Motor &                                  Logistics
          Framework Agreement between China and Taiwan.                                                    Motor-                                   Business
          DCH will import Taiwanese food into Fujian and                                                   related                                   1.4%
          distribute to regional cities;                                                                   Business
                                                                                                            82.8%
    4.    Acquiring a multi-temperature cold chain logistics
          facility in Shanghai and related consultancy services for                                                                                Others
                                                                                                                                                   4.3%
          RMB200m from Iglo. The facility is 22,109sqm in GFA
          and has 25,000 pallets/tonnage cold-storage capacity;
          and
                                                                                               Source: Company
    5.    Singed a letter of intent with Brasil Foods S.A., one of
          the world’s largest food conglomerates specialising in
          frozen and chilled food, to set up production and
          processing business to develop a food supply chain
          operations within the China/Macao/HK regions.




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                                                                                                                    Company Focus
                                                                                                                Dah Chong Hong



Competitive Strengths                                                  Key Risks


Long operating track records. The company has extensive motor          Worsening Japan situation could hurt profitability. DCH imports
retailing expertise to help it thrive in the highly competitive auto   certain auto models from Japan. The current shortage of parts
market in China. Motor related revenue grew at annual rate of          and components could extend and continue to affect car
c.34% over the past five years. Its strategy to set up more 4S         imports. Several of its auto brands are Japanese related and
shops and bring in new auto brands will reinforce this already         some are even wholly imported units. Hence, further delay in
competitive position. The company has won the trust of major           the resumption of production at the Japanese auto plants could
auto principals, which will help secure increasing quota               affect the company’s overall auto sales in 2H this year. About
allocations.                                                           50% of sales are from Japanese brands.

Strategic logistic centres to support food and consumer                Major product recalls. Auto recalls could harm a dealership’s
products division. The logistics centres in northern HK and            brand image and eventually lead to cancellation of orders from
southern part of China currently support its food and consumer         customers. The financial impact would be loss of sales, higher
as well as 3rd party logistic services. The integrated value chain     inventory holding costs and reduction in profits, as customers’
proposition gives DCH an added advantage in growing its food           confidence in the quality and safety of the products may be
business, leveraging on its logistic network to penetrate into         severely impaired. The two major recalls involved the global
more cities in China.                                                  recall of Toyota cars and Lexus in recent year.

Well thought out strategy for food trading and distribution.           Terminations of distributorship or dealership arrangements.
DCH has implemented several new projects under its food                DCH holds the distributorships of Bentley and Isuzu as well as
trading and distribution stable. This will lay a stronger base for     numerous dealerships from several automakers. Any
future growth. Some of these new projects will start to have           termination of agreements could impact future earnings.
small contributions this year and should gradually build
momentum moving forward.                                               Expensive acquisitions may not be earnings accretive.
                                                                       Competition from other dealer groups is pushing purchase costs
                                                                       higher, up from 6-8x previously to 8-10x on future earnings.

                                                                       Margin compression. The further weakening of the HK dollar
                                                                       could increase the company’s cost of imports and compress
                                                                       margins, if DCH prefers to keep prices stable to remain
                                                                       competitive instead of passing on the higher cost.




                                                                                                                               Page 89
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Segmental Analysis                                                   Auto volume growth through more dealership outlets. In view
                                                                     of the disruption in production and shipments from Japanese
Majority of revenue and profits from motor business. DCH             auto makers, although the company plans to add 10-15 new
generated 76.5% of its business from auto retailing and related      dealerships this year, we believe a more reasonable target
services last year. Revenue growth from FY06-10 was driven           would be 10 stores. DCH has already more than doubled its 4S
mainly by this segment.                                              shops in China since 2006 to 55 units last year. The new
                                                                     dealerships should support our revenue and earnings growth
In terms of geographical split, China accounted for about 70%        projections.
of total revenue last year, up from 50% in FY08. The Chinese
market has posted the strongest growth, with revenue CAGR of         Blended gross margin declined due to expanded operations in
23% over the same period. We attribute the strong                    China. Since China accounted for a large portion of its total
performance largely to the rapid expansion of the Chinese auto       business, (of which autos were the main revenue driver), the
dealership business. DCH’s auto volume sales in China have           lower gross profit margin from motor retailing has resulted in
been on an uptrend and last year’s performance was                   lower blended gross margins. We view this as a product mix
exceptionally strong, surging 46% y-o-y to 58,800 units, and         issue instead of deteriorating business outlook.
accounting for 84.5% of total volume.

Segmental Breakdown


FY Dec (HK$ m)                            2007A            2008A              2009A           2010A            2011F           2012F


Revenues
 Motor & Motor-related Business           10,175          12,790              15,650          24,640          30,552           35,975
 Food & Consumer Products                  5,626           6,428               6,238           7,203           9,297           11,654
 Logistics Business                          176             194                 233             263             413              464
 Others                                       73              84                  88             105             110              116
Total                                     16,050          19,496              22,209          32,211          40,373           48,209

Rev enue composition (%)
Motor & M otor-related Business             63.4            65.6                70.5            76.5            75.7            74.6
Food & Consumer Products                    35.1            33.0                28.1            22.4            23.0            24.2
Logistics Business                           1.1             1.0                 1.0             0.8             1.0             1.0
Others                                       0.5             0.4                 0.4             0.3             0.3             0.2
Total                                      100.0           100.0               100.0           100.0           100.0           100.0

Rev enue growth (%)
Motor & M otor-related Business             32.4            25.7                22.4            57.4            24.0            17.7
Food & Consumer Products                    11.5            14.3                 (3.0)          15.5            29.1            25.4
Logistics Business                          22.2            10.2                20.1            12.9            57.0            12.3
Others                                      43.1            15.1                  4.8           19.3             5.0             5.0
Total                                       24.2            21.5                13.9            45.0            25.3            19.4

Total vehicle volume (units)               34,070          37,314             48,946          69,641          82,832          94,837
YoY growth (%)                              24.7              9.5              31.2             42.3            18.9           14.5

No. of 4S auto-shops in PRC                   723             589              1,008           1,070           1,086            1,083
YoY growth (%)                               (5.1)          (18.6)             71.2              6.1             1.5             (0.3)

No. of auto showrooms in HK                    14              13                  12             13              13              13
YoY growth (%)                                0.0            (7.1)               (7.7)           8.3             0.0             0.0

Blended ASP (HK$)                         298,650         342,767            319,740         353,815         368,846         379,332
YoY growth (%)                                6.2           14.8                (6.7)           10.7             4.2             2.8


Source: Company, DBS Vickers




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                                                                                                                                                                                           Company Focus
                                                                                                                                                                                   Dah Chong Hong



Financials – Income Statement                                                                                     from its China operations. Despite the high base effect, we
                                                                                                                  estimate top line to remain robust in the next few years. Besides,
                                                                                                                  synergies from its vertical integration of food & consumer
FY10 performance partly boosted by exceptional gains. Last
                                                                                                                  products with greater support from its logistic network should
year’s net earnings were boosted by exceptional gains from the
                                                                                                                  also be positive factors to its outlook.
divestment of certain assets and non-core operations,
generating pre-tax exceptional gains of HK$453m. Excluding                                                        Expect some margins improvement. We project blended gross
these gains from its core operations, adjusted net profit would                                                   margins to remain relatively stable, at 12-13%, coming from
be HK$1.07bn, an increase of 57% from FY09 (also adjusted                                                         operating efficiency enhancement of its other markets and
for exceptional items).                                                                                           logistic markets, although margins in its key markets’ are
                                                                                                                  expected to remain stable.
From FY06-10, revenue has been steadily rising, at annual rate
of 26%. This was largely due to the strong revenue contribution

Sales Trend                                                         Operating Cost Trend                                                     Profitability Trend


HK$ m                                                                                                                                          HK$
                                                           50.0%       45000
    45,000                                                                                                                                                                                           98%
                                                           45.0%       40000                                                                  1600
    40,000
                                                           40.0%       35000                                                                  1400                                                   78%
    35,000
                                                                       30000                                                                  1200
    30,000                                                 35.0%
                                                                       25000                                                                  1000                                                   58%
    25,000                                                 30.0%
    20,000                                                             20000                                                                  800
                                                           25.0%                                                                                                                                     38%
    15,000                                                             15000                                                                  600
                                                           20.0%       10000
    10,000                                                                                                                                    400                                                    18%
     5,000                                                 15.0%        5000                                                                  200
         0                                                 10.0%          0                                                                     0                                                    -2%
              2008A    2009A   2010A   2011F    2012F                           2008A   2009A     2010A         2011F    2012F                       2008A 2009A 2010A 2011F               2012F
                                                                                          Other Operating Expenses (-)                                    Net Profit (After-extraordinaries) (LHS)
             Total Revenue      Revenue Growth (%) (YoY)                                  Cost of Goods Sold (-)
                                                                                                                                                          Net Profit Growth (%) (YoY) (RHS)




FY Dec                                                              2007A                         2008A                           2009A              2010A                            2011F                  2012F

Turnover                                                             16,050                       19,496                           22,209          32,211                           40,373                  48,209
Cost of Goods Sold                                                 (13,705)                     (16,785)                         (19,295)        (28,269)                         (35,286)                 (42,086)
Gross Profit                                                          2,345                        2,711                            2,914           3,942                            5,087                    6,122
Other Opg (Exp)/Inc                                                  (1,687)                     (1,887)                          (1,973)         (2,463)                          (3,125)                  (3,748)
Operating Profit                                                        658                          824                              941           1,479                            1,962                    2,375
Other Non Opg (Exp)/Inc                                                     0                           0                             (14)           (106)                                0                         0
Associates & JV Inc                                                       55                           53                              101              71                               75                        80
Net Interest (Exp)/Inc                                                    (8)                       (105)                            (100)           (100)                            (132)                    (141)
Exceptional Gain/(Loss)                                                     0                           0                               61             453                                0                         0
Pre-tax Profit                                                          705                          772                              989           1,797                            1,906                    2,313
Tax                                                                    (165)                        (190)                            (239)           (352)                            (467)                    (555)
Minority Interest                                                         (7)                        (19)                             (40)            (34)                             (50)                      (62)
Preference Dividend                                                         0                           0                                0               0                                0                         0
Net Profit                                                              533                          563                              710           1,411                            1,388                    1,696
Net profit before Except.                                                533                          563                              649             958                           1,388                    1,696
EBITDA                                                                   713                          877                           1,028           1,444                            2,038                  2,454.2

Gross Margin (%)                                                       14.6                            13.9                          13.1               12.2                             12.6                  12.7
Sales Gth (%)                                                          24.2                            21.5                          13.9               45.0                             25.3                  19.4
EBITDA Gth (%)                                                         43.5                            23.0                          17.2               40.5                             41.1                  20.4
Operating Profit Gth (%)                                               42.1                            25.2                          14.2               57.2                             32.7                  21.0
Net Profit Gth (%)                                                     46.4                             5.6                          26.1               98.7                             (1.6)                 22.2
Effective Tax Rate (%)                                                 23.4                            24.6                          24.2               19.6                             24.5                  24.0


Source: Company, DBS Vickers




                                                                                                                                                                                                           Page 91
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Financials – Balance Sheet                                                      Current and quick ratios remain steady. With an improving
                                                                                business outlook, DCH’s current and quick ratios show resilience
Healthy balance sheet. DCH has low net gearing level of 12%                     at 1.5 - 1.6x and 1x respectively. The exceptionally high
last year. We view its balance sheet as healthy with room to                    inventory level last year was a result of new 4S shops added to
gear up for future business expansion. Total debt is forecast to                its network in China.
remain relatively stable.

Breakdown of Assets                                     Breakdown of Capital                              Financial Leverage & Net Debt to Equity



          Debtors -                                                                                       1,386
           37.4%                                                                                                                                                              2.1
                                    Net Fixed                                                             1,286
                                     Assets -                                                             1,186
                                     17.1%                                      ST Debt -                 1,086                                                               1.6
                                           Bank, Cash                            25.9%                     986
                                           and Liquid                                                                                                                         1.1
                                                                                                           886
                                            Assets -
                                             16.1%                                                         786
                                                             Common                  LT Debt -             686                                                                0.6
                                                            Shareholder                5.0%
                                                             s' Equity -                                   586
                                                               69.1%                                       486                                                                0.1
                      Inventory -
                        29.4%                                                                                     2008A       2009A       2010A        2011F       2012F
                                                                                                             Net Debt/(Cash)                      Net Debt to Equity (X) (R.H.S)
                                                                                                             Financial Leverage (X) (R.H.S)




FY Dec                                                     2007A            2008A                2009A                2010A                               2011F                      2012F

Net Fixed Assets                                              810            1,634                1,763               2,115                            3,029.6                        3,608
Invts in Assocs & JVs                                         303              382                  388                 559                                634                          714
Other LT Assets                                             1,221            1,766                1,718               1,587                              1,556                        1,528
Cash & ST Invts                                             1,653            1,643                1,895               1,991                              2,708                        2,110
Inventory                                                   1,947            2,691                2,621               3,642                              3,278                        4,097
Debtors                                                     2,871            3,047                3,075               4,634                              5,097                        6,117
Other Current Assets                                            6               14                   15                 216                                216                          216
Total Assets                                                8,811           11,177               11,475              14,744                            16,520                        18,390

ST Debt                                                     1,395            2,389                2,041               2,577                              2,577                        2,577
Other Current Liab                                          2,277            2,908                3,079               4,108                              4,871                        5,400
LT Debt                                                       552              520                  395                 725                                725                          725
Other LT Liabilities                                          196              200                  204                 223                                223                          223
Shareholder’s Equity                                        4,282            4,865                5,457               6,804                              7,766                        9,046
Minority Interests                                            109              295                  299                 307                                357                          419
Total Cap. & Liab.                                          8,811           11,177               11,475              14,744                             16,520                       18,390

 Leverage Analysis (x)
 Net Interest Cover                                         82.3               7.8                 9.4               14.8                                  14.9                        16.8
 EBITDA Gross Interest Cover                                11.7               6.6                 9.2               12.6                                  13.7                        14.9
 Total Debt to EBITDA                                        2.7               3.3                 2.4                2.3                                   1.6                         1.3
 Total Debt to Total Assets                                  0.2               0.3                 0.2                0.2                                   0.2                         0.2
 Total Debt to Capital                                       0.4               0.6                 0.4                0.5                                   0.4                         0.3
 Net Debt to Equity                                          0.1               0.2                 0.1                0.2                                   0.1                         0.1
 Capex to Debt                                               0.2               0.2                 0.2                0.2                                   0.4                         0.3
 Net Cash / (Debt)                                         (294)           (1,266)               (541)            (1,311)                                 (594)                     (1,192)

 Liquidity Analysis (x)
 Cash Ratio                                                  0.5              0.3                  0.4                    0.3                                  0.4                     0.3
 Current Ratio                                               1.8              1.4                  1.5                    1.6                                  1.5                     1.6
 Quick Ratio                                                 1.2              0.9                  1.0                    1.0                                  1.0                     1.0

Source: Company, DBS Vickers




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                                                                                                                                                                                Company Focus
                                                                                                                                                                         Dah Chong Hong



Financials – Cash Flow                                                                                              Expect a sharp increase in capex this year. Capex is expected to
                                                                                                                    surge this year, largely due to the opening of new auto outlets
Operating cash flow sufficient for capex. DCH has been                                                              as well as expansion of its food business in China, as
generating strong operating cash flows to finance its capex in                                                      management believes food consumption will continue to
the past few years, except for FY10 where working capital of                                                        increase there. Total capex for FY11 is estimated at HK$1.2bn,
almost HK$1.5bn had eaten into its operating cash. However,                                                         compared to HK$654m last year.
we project cash flows from operations to improve, and
sufficient to cover its capex this year.

Cash Flow Trend                                                      Free Cash Flow Per Share                                                   Free Cash Flow As At Year End


                                                                                                                                                HK$m
  2,566                                                               1.36                                                                       1,500
  2,066                                                               1.16

  1,566                                                               0.96                                                                       1,000
  1,066                                                               0.76

   566                                                                0.56                                                                        500
    66                                                                0.36

   -434                                                               0.16                                                                           0

   -934                                                              (0.04)
                                                                                                                                                 (500)
 -1,434                                                              (0.24)
 -1,934                                                              (0.44)
                                                                              2008A       2009A          2010A      2011F        2012F          (1,000)
          2008A    2009A     2010A     2011F        2012F
                                                                                                                                                           2008   2009   2010      2011   2012
          CF from Op   CF from Invt   CF from Fin                             Free Cash Flow Per Share    Free Operating Cash Flow Per Share




FY Dec                                                      2007A                         2008A                                   2009A         2010A                    2011F                     2012F

Pre-Tax Profit                                                 705                             772                                     989        1,797                   1,906                     2,313
Dep. & Amort.                                                 166                             189                                      250          276                     316                       400
Tax Paid                                                     (101)                           (227)                                   (223)         (340)                   (104)                     (467)
Assoc. & JV Inc/(loss)                                           0                               0                                   (101)          (71)                    (75)                      (80)
Chg in Wkg.Cap.                                              (452)                           (437)                                     209      (1,453)                     301                   (1,398)
Other Operating CF                                           (145)                              96                                      66         (284)                    132                       141
Net Operating CF                                              173                             393                                   1,190           (75)                  2,476                       909

Capital Exp.(net)                                            (298)                           (466)                                   (435)        (654)                  (1,200)                    (950)
Other Invts.(net)                                             381                              (97)                                    263          535                        0                        0
Invts in Assoc. & JV                                             0                               0                                       0            0                        0                        0
Div from Assoc & JV                                             59                              24                                      34           55                        0                        0
Other Investing CF                                            (81)                           (132)                                   (132)        (269)                       17                       24
Net Investing CF                                               61                            (671)                                   (270)        (333)                  (1,183)                    (926)

Div Paid                                                     (900)                           (155)                                   (134)        (415)                   (426)                     (417)
Chg in Gross Debt                                           1,028                             368                                    (489)         795                        0                         0
Capital Issues                                              1,037                                 0                                      0            0                       0                         0
Other Financing CF                                          (542)                             (25)                                   (114)          53                    (149)                     (165)
Net Financing CF                                              623                             188                                    (737)         433                    (575)                     (582)
Net Cashflow                                                   857                             (90)                                    183           25                     717                     (599)
Opg CFPS (HK$)                                               0.38                             0.46                                       0.55      0.76                    1.20                      1.27
Free CFPS (HK$)                                             (0.08)                           (0.04)                                      0.42     (0.40)                   0.70                     (0.02)

Source: Company, DBS Vickers




                                                                                                                                                                                                 Page 93
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Financials – ROE Drivers                                                                              4ppts higher from FY09. Growing profitability should continue
                                                                                                      to enhance its ROE.

Improving profitability. The higher profitability over the years                                      Better operating efficiency. The company has tightened cash
has contributed to a steady rise in ROE. Excluding the                                                management controls to improve asset turnover, beneficial to
exceptional gains in FY10, the adjusted ROE was 18%, about                                            its ROE and ROA.


ROAE / ROAA Trend (%)                                         Margin Trend (%)                                                   Total Debt & Gross Interest Cover


25.0%                                                          10%
23.0%                                                          9%                                                                3500                                                               15.3x
21.0%                                                          8%                                                                3000
19.0%                                                                                                                                                                                               13.3x
                                                               7%                                                                2500
17.0%                                                          6%
                                                                                                                                 2000                                                               11.3x
15.0%                                                          5%
13.0%                                                          4%                                                                1500
                                                                                                                                                                                                    9.3x
11.0%                                                          3%                                                                1000
 9.0%                                                          2%                                                                                                                                   7.3x
                                                                                                                                 500
 7.0%                                                          1%
 5.0%                                                                                                                              0                                                                5.3x
                                                               0%
                                                                                                                                        2008A      2009A         2010A        2011F       2012F
        2008A      2009A       2010A    2011F      2012F             2008A        2009A    2010A     2011F     2012F
                                                                                                                                                Total Debt (+)           Gross Interest Cover (X) (YoY)
  Ret on Avg Equity (ROAE) %     Ret on Avg Assets (ROAA) %     EBITDA Margin %     EBIT Margin %   Net Income Margin %




FY Dec                                                        2007A                       2008A                        2009A            2010A                                   2011F                       2012F

Profitability Ratios
Sales Growth (%)                                               24.2                          21.5                         13.9              45.0                                      25.3                   19.4
Gross Margin (%)                                               14.6                          13.9                         13.1              12.2                                      12.6                   12.7
Operating Margin (%)                                            4.1                           4.2                          4.2               4.6                                       4.9                    4.9
Net Profit Margin (%)                                           3.3                           2.9                          3.2               4.4                                       3.4                    3.5
ROAE (%)                                                       13.4                          12.3                         13.8              23.0                                      19.1                   20.2
ROA (%)                                                         6.7                           5.6                          6.3              10.8                                       8.9                    9.7
ROCE (%)                                                        8.9                           8.4                          8.6              12.5                                      13.3                   14.6

Activity Ratios
Debtors Turn (average days)                                    62.3                          55.4                         50.3              43.7                                      44.0                   42.5
Creditors Turn (average days)                                  58.7                          54.6                         55.1              45.2                                      43.5                   40.1
Inventory Turn (average days)                                  46.3                          50.4                         50.2              40.4                                      35.8                   32.0
Total Asset Turnover (x)                                        2.0                           2.0                          2.0               2.5                                       2.6                    2.8
Fixed Asset Turnover (x)                                       21.8                          16.0                         13.1              16.6                                      15.7                   14.5

Source: Company, DBS Vickers




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                                                                                                                            Company Focus
                                                                                                                        Dah Chong Hong


Valuation                                                                     With earnings CAGR of 26% for FY10-12 (adjusted for
                                                                              exceptional items in FY10), it should support slightly better
Valuation discount due to non pure auto dealer play. The                      earnings multiples, narrowing the discount to valuation.
steady increase in earnings over the years has lifted the
company’s valuation multiples. However, DCH is still valued at                Prefer discounted cash flow method to value the company.
a discount to its auto retailing peers, because the company is                Our fair value is based on DCF method, since the company is
not seen as a pure auto dealer group. We concur and feel that                 still expanding its business and these new businesses have yet
the current discount is warranted. Based on our FY11 earnings                 to contribute to FY11/12 earnings. Hence, DCF would better
projections, DCH’s PE is 10.8x, lower than other listed peers                 capture future growth to reflect in its valuation. Using 11%
like China ZhengTong (1728 HK) and ZhongSheng (881 HK).                       WACC and 2% terminal growth rate, we arrive at fair value of
                                                                              HK$9.90.

PE comparison – Auto dealers                                                  Given the luxury auto market’s positive outlook, DCH is one of
                                                                              our favourite dealership operators in the sector. We initiate
 x                                                                            with a BUY rating.
 30
 25
 20
 15
 10
  5
  0
                                                   Jan-11
                        Jul-10




                                          Nov-10
                                 Sep-10




                                                                     May-11
      Mar-10


               May-10




                                                            Mar-11




               Dah Chong Hong                      ZhongSheng
               ZhengTong

Source: Bloomberg, DBS Vickers




                                                                                                                                       Page 95
Company Focus
Dah Chong Hong


Assumptions

(%)                                    FY11F     FY12F      FY13F          FY14F        FY15F
Sales volume growth
Mainland China                           20.0     15.0        12.0          10.0          8.0
Hong Kong                                12.0     10.0         8.0           5.0          5.0
Macao                                    20.0     20.0        10.0          10.0         10.0
Total                                    18.9     14.5        11.5           9.4          7.7

ASP growth                                4.2      2.8             1.9       1.9           2.0

Stores growth
4S auto-shops in PRC                     18.2     15.4             6.7       6.3           5.9

FCF annual growth                     FY16-17      8%
                                      FY18-20      5%

Risk free rate                          3.9%
Beta                                     1.07
Cost of Equity                         11.8%
Cost of Debt                              7%
Debt-equity ratio                        30%
WACC                                     11%
Terminal growth rate                      2%

Source: DBS Vickers




Discounted cashflows projections

FYE Dec (HK$ m)                                   FY11F      FY12F         FY13F         FY14F        FY15F
EBIT                                               2,054      2,478         2,790         3,116       3,405
Add Deprec iation and Am ortisation                  316        400           462           512          563
Less Tax Provision                                 (467)      (555)         (630)         (708)        (777)
Less Capex                                       (1,200)      (950)         (650)         (650)        (650)
Add changes in Working Capital                       301    (1,398)         (742)         (800)        (906)
Total FCF to the Firm                              1,005        (26)        1,230         1,470       1,634
Discounted FCF                                      905            (21)          900       968            970

Source: DBS Vickers




Present value of discounted cash flow (HK$m)               DCF analysis – WACC/Terminal growth equity value matrix


PV of FCF                                8,050                                           Terminal growth
PV of Terminal Value                     7,933                                   1%    1.5%        2%           2.5%    3%
Enterprise Value                        15,984                      9.0%    $12.0      $12.4      $12.9     $13.4      $14.1
                                                            WACC




Add: net c ash                           1,991                     10.0%    $10.5      $10.8      $11.2     $11.6      $12.0
Equity Value (HK$ m)                    17,975                     11.0%     $9.4       $9.6       $9.9     $10.2      $10.5
                                                                   12.0%     $8.5       $8.7       $8.9         $9.1    $9.3
Value Per Share (HK$)                      9.9                     13.0%     $7.8       $7.9       $8.0         $8.2    $8.3

Source: DBS Vickers                                        Source: DBS Vickers




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                                                                                                                                                                                                                                                                                         Company Focus
                                                                                                                                                                                                                                                                               Dah Chong Hong



PE band chart                                                                                                                                             PB band chart


 Share Price (HK$)                                                                                                                                         Share Price (HK$)
  18                                                                                                                                                        12
  16                                                                                                                                                                                                                                                                                                          2.4x
                                                                                                                                             19x            10
  14
                                                                                                                                                                                                                                                                                                               1.9x
  12                                                                                                                                             15x           8
  10                                                                                                                                                                                                                                                                                                               1.4x
                                                                                                                                                 10x           6
   8
   6                                                                                                                                                           4                                                                                                                                               0.8x
                                                                                                                                                 6x
   4
                                                                                                                                                               2                                                                                                                                               0.3x
   2                                                                                                                                             2x
   0                                                                                                                                                           0
       Oct-07

                 Feb-08

                             Jun-08

                                           Oct-08

                                                        Feb-09

                                                                   Jun-09

                                                                              Oct-09

                                                                                            Feb-10

                                                                                                          Jun-10

                                                                                                                     Oct-10

                                                                                                                               Feb-11




                                                                                                                                                                   Oct-07

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                                                                                                                                                                                                                                                                      Jun-10

                                                                                                                                                                                                                                                                                    Oct-10

                                                                                                                                                                                                                                                                                                Feb-11
Source: Bloomberg, DBS Vickers                                                                                                                            Source: Bloomberg, DBS Vickers




PE chart                                                                                                                                                  PB chart


 x                                                                                                                                                         x
  20
                                                                                                                                                            3.0
  18
  16                                                                                                                                                        2.5
  14
  12                                                                                                                                                        2.0                                                                  +1SD: 1.7x
                                                                      +1SD: 10.2x
  10                                                                                                                                                        1.5
   8                                                               Avg: 6.9x                                                                                                                               Avg: 1.1x
   6                                                                                                                                                        1.0
   4                                                                                                                     -1SD: 3.6x                                                                                                                                                          -1SD: 0.6x
                                                                                                                                                            0.5
   2
   0                                                                                                                                                        0.0
                Jan-08




                                                          Jan-09




                                                                                                 Jan-10




                                                                                                                                        Jan-11




                                                                                                                                                                              Jan-08




                                                                                                                                                                                                                           Jan-09




                                                                                                                                                                                                                                                                  Jan-10




                                                                                                                                                                                                                                                                                                          Jan-11
                                      Jul-08




                                                                            Jul-09




                                                                                                                     Jul-10
       Oct-07


                          Apr-08


                                               Oct-08


                                                                   Apr-09




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                                                                                                                                                 Apr-11




                                                                                                                                                                     Oct-07


                                                                                                                                                                                       Apr-08
                                                                                                                                                                                                  Jul-08
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                                                                                                                              Oct-10




                                                                                                                                                                                                               Oct-08


                                                                                                                                                                                                                                     Apr-09
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                                                                                                                                                                                                                                                                           Apr-10
                                                                                                                                                                                                                                                                                       Jul-10
                                                                                                                                                                                                                                                                                                 Oct-10


                                                                                                                                                                                                                                                                                                                    Apr-11




Source: Bloomberg, DBS Vickers                                                                                                                            Source: Bloomberg, DBS Vickers




                                                                                                                                                                                                                                                                                                                       Page 97
Company Focus
Dah Chong Hong


Peers valuation – Auto dealers

                                                          Mkt                    PE     PE    PEG         PEG Yield Yield P/Bk P/Bk EV/EBITDA                               ROE     ROE
                               Currency     Price         Cap     Fiscal       11F     12F     11F        12F        11F         12F    11F    12F        11F      12F       11F     12F
Company Name              Code             Local$       US$m             Yr        x     x       x          x         %           %       x      x          x           x     %       %

Hong Kong
Dah Chong Hong*        1828 HK     HKD      8.27        1,934    Dec-10 10.8           8.9    (4.3)       0.4        2.8         3.4    1.9    1.7        7.8      6.8      19.1    20.2
Zhongsheng*             881 HK     HKD     14.84        3,641    Dec-10 15.5 10.2              0.4        0.2        0.0         0.0    3.2    2.5        9.4      6.7      23.0    27.8
China ZhengTong*       1728 HK     HKD      8.99        2,311    Dec-10 20.2 12.3              0.2        0.2        0.0         0.0    3.7    3.1     10.8        7.4      31.9    27.7
Sparkle Roll^*          970 HK     HKD      1.47          562    Mar-10 15.8 12.0              0.3        0.4        1.3         1.7    3.3    2.7     12.0        7.9      23.4    24.6
WO KEE Hong             720 HK     HKD     0.198           59    Dec-10       n.a.     n.a.    n.a.       n.a.       n.a.    n.a.       n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
New Focus Auto          360 HK     HKD           2.5      183    Dec-10 13.9           9.9     0.1        0.2        n.a.    n.a.       n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
Average                                                                       15.3 10.7       (0.7)       0.3        1.0         1.3    3.1    2.5     10.0        7.2      24.3    25.1


Other Asia
Jardine C&C             JCNC SP    SGD     39.26 11,359          Dec-10 12.0 10.7             20.9        0.9        2.1         3.4    n.a.   n.a.       6.8      6.0       n.a.    n.a.
Zhejiang Zhongda 600704 CH         CNY     17.08        1,158    Dec-10 12.0           9.9     0.5        0.5        n.a.    n.a.       1.5    1.3        n.a.     n.a.      n.a.    n.a.
Pang Da Auto          601258 CH    CNY     33.29        5,389    Dec-10 19.7 15.3              0.8        0.5        1.0         1.3    3.6    3.0        n.a.     n.a. 20.1        21.3
Hotai Motor             2207 TT   TWD       95.3        1,814    Dec-10 10.9 11.8             (6.9) (1.6)            5.5         5.2    n.a.   n.a.       n.a.     n.a.      n.a.    n.a.
Average                                                                       13.6 11.9        3.8        0.1        2.9         3.3    2.6    2.2        6.8      6.0      20.1    21.3


US
AutoNation               AN US     USD     33.79        4,997    Dec-10 18.3 15.8              0.6        1.0        0.0     n.a.       2.3    2.0     12.8       11.6      13.1    12.6
Group 1 Auto             GPI US    USD     36.46          876    Dec-10 11.7           9.8     0.3        0.5        0.9         0.9    1.0    0.9     10.2        9.2       8.7     9.5
Asbury Auto             ABG US     USD     15.53          511    Dec-10       9.8      7.7     0.3        0.3        n.a.    n.a.       1.4    1.2        8.9      7.7      16.7    17.4
CarMax^                 KMX US     USD     27.37        6,183    Feb-11 15.1 13.5              2.2        1.1        n.a.    n.a.       2.3    1.9     13.5       12.3      16.5    15.1
Lentuo Int'l             LAS US    USD      4.98          147    Dec-10       5.0      3.4     0.1        0.1    12.0 17.7              1.2    1.1        2.2      1.4      26.3    34.1
Average                                                                       13.7 11.7        0.9        0.7        0.4         0.9    1.7    1.5     11.4       10.2      13.8    13.7

^FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




Peers valuation - Luxury general retailers

                                                        Mkt                                   11F                                                                 12F
                                       Price            Cap     Fiscal        PE P/Sales       P/Bk Yield              ROE               PE P/Sales              P/Bk Yield         ROE
Company Name                   Code       HK$          HK$m        Yr          x         x            x          %          %             x           x             x        %        %


Chow Sang Sang                116 HK 25.15         17,025        Dec 19.1              1.2      2.7         1.9        14.6            16.0      1.0             2.4        2.3     15.6
Em peror Watch                887 HK      1.32         8,868     Dec 18.4              1.5      2.6         1.6        16.4            15.2      1.2             2.3        2.0     16.2
Hengdeli Holdings*           3389 HK      4.42     19,440        Dec 22.3              1.3      3.1         1.6        14.8            18.2      1.1             2.6        1.9     15.6
Luk Fook Holdings^#*          590 HK      32.7     17,740        Mar 18.8              1.9      4.6         2.2        26.6            15.2      1.5             3.9        2.8     27.8
Oriental Watch*^              398 HK      5.01         2,352     Mar 12.2              0.9      1.3         1.8            8.3         10.0      0.5             1.1        1.9     11.7
                                                                          18.2         1.4      2.9         1.8        16.1            14.9      1.1             2.5        2.2     17.4

# Fully Diluted EPS

^ FY11: FY12F; FY12: FY13F

Source: Bloomberg, *DBS Vickers




 Page 98
                                                                                             Company Focus
                                                                                           Dah Chong Hong


Appendix


Corporate structure


                                                                Public
                  CITIC Group
                                                             shareholders

               56.98%                                               43.02%



                           Dah Chong Hong Holdings Limited




   Food and consumer                      Motor and motor           Logistics business &
        products                          related business                 others


( ) Revenue contributions to the Group’s total in FY2010

Source: Company




                                                                                                    Page 99
Company Focus
Dah Chong Hong

                                                                   consumer market. Their hands on approach to business
Management Composition. The current management team
                                                                   management have enabled the company to be more proactive
consists of many industry veterans with many years of
                                                                   in meeting the rapidly industry condition changes.
experience especially in the Chinese auto discretionary and

Key management team

Manager           Current       Previous Experience                                                                               Age
                  Appointment
Hui Ying Bun      Chairman &    Mr Hui joined in February 1966. Mr Hui has m ore than 40 years experience with the Group in        64
                  Executive     motor vehicle businesses and corporate management.Prior to his appointment as the
                  director      Chairman of the Company in July 2007, he was the Group Chief Exec utive since January 2003.
Chu Hon Fai       Deputy        Mr Chu joined in August 1964. He has over 40 years experience in the trading and logistics         65
                  chairman &    businesses. During his tenure, he has led the developm ent of the food trading businesses in
                  Executive     Hong Kong and the PRC. Prior to his appointm ent as the Deputy Chairman of the Company in
                  director      July 2007, he was the Chief Executive of Trading since January 2001.
Yip Moon          CEO and       Mr Yip joined in June 1992. He was serving in the Electric al and Mechanical Servic e              58
Tong              Executive     Departm ent of the Hong Kong Governm ent for 16 years. Prior to his appointment as the Chief
                  director      Executive Officer in July 2007, he was the Managing Director for both Dah Chong Hong
                                (Motor Service Centre) Limited and Honest Motors, Limited. Mr Yip has over 30 years
                                experience, in both public and private sectors, in engineering
                                and motor vehicle businesses.
Mak Kwing         Executive     Mr Mak is the Executive-in-charge of a num ber of distributorship business of renowned motor       62
Tim               director      brands such as Acura, Audi, Bentley, Honda, MAN and UD Nissan Diesel in Hong Kong. He is
                                also responsible for managing the distributorship business of Bentley vehicles in the PRC.

Lau Sei Keung Executive         Mr Lau is the Executive-in-charge of the motor dealership developm ent and operation in the        57
              director          PRC, c urrently managing over 50 motor dealerships in the country, both passenger car and
                                commercial vehicle. He is also responsible for managing the Isuzu distributorship business in
                                the PRC, Hong Kong and Macao. He joined the Group in February 1973. He has over 30 years
                                experience in the motor vehicle businesses of Hong Kong and the PRC.
Tsoi Tai Kwan, Executive        Mr Tsoi is the Executive-in-charge of the trading, import / export, wholesale and retail of        62
Arthur         director         frozen and non-frozen food products in the PRC, Hong Kong and Macao. He joined the Group
                                in June 1976 and was appointed as a Director of Dah Chong Hong in January 2003. Mr Tsoi has
                                over 30 years experience in food trading in Hong Kong.
Glenn Robert Executive          Mr Smith is the Chief Executive looking after the marketing and distribution business for fast     58
Sturrock Sm ith director        moving consum er goods in the PRC, Hong Kong and Mac ao. He was transferred from CITIC
                                Pacific to the Group when Sims Trading becam e part of the Group in 2004. Prior to joining
                                CITIC Pacific and the Group, he had over 20 years experience with the Dairy Farm Group. In
                                total, Mr Smith has over 30 years experience in the m arketing and distribution of fast moving
                                consumer goods.
Wai King Fai,     Executive     Mr Wai is the Chief Financial Officer of the Group and is primarily responsible for the overall    51
Franc is          director      management of the accounting and financial management functions of the Group. He joined
                                the Company in June 2008. Mr Wai has over 25 years of experience in the financ e and
                                accounting profession before joining the Company. Between 1992 to 2006, Mr Wai was
                                appointed as the Chief Financial Officer of Hong Kong Dragon Airlines Limited and prior to
                                that Mr Wai worked for Cathay Pacific Airways Limited.
Kuk Tai Wai,  Managing          Mr Kuk is primarily responsible for the overall management and performance of the logistic s       59
David         director of       business of the Group. He has over 30 years of experience in logistics operations.
              DCH Logistics
              Co. Ltd.
Wong Siu Fat, Director,         Mr Wong is primarily responsible for managing the elec trical appliances m anufacturing            48
Ringo         manufacturing     facilities in Shunde. He joined the Group in October 2008. Mr Wong has m ore than 20 years
                                experience in marketing and sales as well as general m anagem ent in a m anufac turing
                                environm ent.

Source: Company




Page 100
Small-Mid Cap Research



                                                China / Hong Kong Equity Explorer
                                                Sparkle Roll
                                                Bloomberg: 970 HK Equity                   |   Reuters: 0970.HK


     DBS Group Research . Equity                                                                            9 June 2011

      NOT RATED HK$1.47 HSI : 22,869                                                                         Selling to the über rich
      Return*: 1.3
      Risk : Moderate
                                                                                                             •     A play on China’s huge appetite for ultra premium autos
      Potential Tgt: HK$1.70 (16% upside)                                                                          and other luxury goods
                                                                                                             •     Unique business strategy of cross-selling luxury
      Analyst
      Rachel MIU +852 2863 8843
                                                                                                                   consumer goods to super rich
      rachel_miu@hk.dbsvickers.com                                                                           •     Premium warranted. Shares valued at FY12 PE of 15.8x
      Nicole WU +86 21 6888 3321
                                                                                                             Manages ultra premium brands. Sparkle Roll is a premium
      nicole_wu@hk.dbsvickers.com
                                                                                                             brands management company. It sells super luxury cars,
                                                                                                             watches, jewellery and fine wine in China. It has auto outlets
      Price Relative                                                                                         of Bentley, Rolls-Royce and Lamborghini in Beijing and plans
              HK$                                                          Relative Index                    to open new stores in Dalian and Tianjin this year. To
           1.70
                                                                                      221
                                                                                      201
                                                                                                             compliment its auto retailing business, the company has
           1.50                                                                       181                    added other luxury brands to broaden its brand portfolio.
           1.30                                                                       161
           1.10                                                                       141
                                                                                                             Auto sales accounted for over 90% of total revenues and the
           0.90
                                                                                      121                    company plans to increase sales of the non-auto segment to
                                                                                      101
           0.70
                                                                                      81                     10-20% over the medium term.
           0.50                                                                       61
           0.30                                                                     41                       Cross selling synergy from other luxury goods. The
              2007              2008            2009              2010           2011
                                                                                                             Group has a unique business model of cross-selling boutique
                  Sparkle Roll (LHS)                    Relative HSI INDEX (RHS)
                                                                                                             watches, jewellery and wine to its automobile clients. Sparkle
      Forecasts and Valuation                                                                                Roll chooses its non-auto stores locations carefully, focussing
                                                                                                             on major cities where they can promote non-auto luxury
       FY Mar (HK$ m)                          2010A             2011F       2012F             2013F         goods to existing auto customers. This strategy enhances
       Turnover                                  1,219           3,101       4,438             6,141         overall profit margins as non-auto sales command gross
       EBITDA                                      141             208         344               489         margins of 40-50% compared to new car sales margins of 9%.
       Pre-tax Profit                              118             189         325               465
       Net Profit                                  113             178         277               364         Golden opportunity from wealthy Chinese. Rapid
       Net Pft (Pre Ex.)                           113             178         277               364         economic development in recent years has bred a group of
       EPS (HK$)                                  0.04            0.06        0.09              0.12
       EPS Gth (%)                             (130.1)            57.2        55.7              31.4         super rich Chinese with a growing desire for luxury goods. We
       Diluted EPS (HK$)                          0.04            0.06        0.09              0.12         expect the ultra premium car market in China to outperform
       DPS (HK$)                                  0.01            0.01        0.02              0.02         the overall auto market in 2011 and 2012.
       BV Per Share (HK$)                         0.29            0.35        0.44              0.55
       PE (X)                                     38.7            24.6        15.8              12.0         Valuation underpinned by strong outlook. Sparkle Roll’s
       P/Cash Flow (X)                            35.5            23.5        15.2              11.5         high FY12 valuation of 15.8x is a reflection of its ultra
       P/Free CF (X)                              70.2            76.9        27.3              15.3
       EV/EBITDA (X)                              30.4            20.5        12.0                7.9
                                                                                                             premium brands management business model. Relative to
       Net Div Yield (%)                           0.5             0.8         1.3               1.7         other auto dealers, general retailers and luxury goods counters,
       P/Book Value (X)                             5.0            4.2         3.3               2.7         Sparkle Roll’s ability to cross-sell luxury brands to the wealthy
       Net Debt/Equity (X)                       CASH            CASH        CASH              CASH          Chinese set will continue to support a rich valuation multiple.
       ROAE (%)                                   15.6            18.5        23.4              24.6
                                                                                                             We peg FY12PE at 18x to arrive at a potential value of
                                                                                                             HK$1.70 which translates to 0.3x PEG. We estimate earnings
       Consensus EPS (HK$)                                        0.06          0.10            0.13         CAGR of 43% for FY11-13.
       Other Broker Recs:                                          B: 5          S: 0            H:1
                                                                                                                 At A Glance
      ICB Industry: Consumer Services                                                                            Issued Capital (m shrs)                                                  2,976
      ICB Sector: General Retailers                                                                              Mkt. Cap (HK$m/US$m)                                                4,375 / 562
      Principal Business: A luxury group offering ultra premium                                                  Major Shareholders
      automobiles, jewellery, watches and fine wine                                                                   Qi Jian Hong (%)                                                       28.1
      Source of all data: Company, DBSV, Bloomberg, HKEX                                                              Morgan Stanley (%)                                                     10.6
                                                                                                                      Sequoia Capital China (%)                                              10.6
                                                                                                                 Free Float (%)                                                              45.7
                                                                                                                 Avg. Daily Vol.(‘000)                                                     10,862
      In Singapore, this research report or research analyses may only be distributed to Institutional    “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
      Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,   (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from
      Chapter 289 of Singapore.                                                                           or in connection with this report.”
      *This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not
      commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.
      www.dbsvickers.com
      Refer to important disclosures at the end of this report
      Ed -JW/ sa- CW
Equity Explorer
Sparkle Roll




                                                                  Revenue breakdown FY10
Company Background

A luxury brand management company

Strong prospect in luxury business. Sparkle Roll was previously                                                       Watches
known as ‘Jade Dynasty’, a comic book publisher and                                                                    8.6%
animation producer. It transformed itself into a luxury goods                                                           Jewellery
distributor after acquiring the auto dealerships from Mr. Qi                Auto sales,                                   0.2%
                                                                             parts &
Jian Hong in 2008. The company bought the Bentley, Rolls-                                                                Wine
                                                                           maintenance
Royce and Lamborghini dealership business for an aggregate                                                               3.3%
                                                                              76.6%
consideration of HK$402m. In the same year, it also acquired
the watch and jewellery licensing operations from Mr Qi,
further expanding its presence in the Chinese luxury market.                                                              Comics
By end 2010, the company divested both the comics and                                                                     11.4%
animation business. Sparkle Roll is now a pure luxury brand
management company, focusing on auto, watches, jewellery
and fine wine retailing.
                                                                  Source: Company

Segmental Profit breakdown FY10

                                             Watches
                                              23.8%               Sales revenue trend FY07-FY12 (FYE Mar)

                                                                   HK$m                                                         %
                                                                   7,000                                                       350
                                                                   6,000                                                       300
         Auto sales,                             Wine              5,000                                                       250
          parts &                                9.7%
                                                                   4,000                                                       200
        maintenance
           61.8%                                                   3,000                                                       150
                                               Comics
                                                4.7%               2,000                                                       100
                                                                   1,000                                                       50

                                     Jewellery: HKD0.2m loss           0                                                       0
                                                                             FY08


                                                                                     FY09


                                                                                             FY10


                                                                                                    FY11F


                                                                                                              FY12F


                                                                                                                       FY13F




Source: Company
                                                                             Turnover (LHS)                 YoY growth (RHS)
After the restructuring exercise, the auto and related business
contributed the bulk of group revenue and segmental profits.      Source: Company


                                                                  Revenue dominated by ultra premium auto sales. Luxury
                                                                  brands under management include ultra premium cars,
                                                                  watches, jewellery, and fine wine. For FY10, autos accounted
                                                                  for 77% of the top line with watches and wine each taking
                                                                  up 9% and 3% respectively. The jewellery division’s
                                                                  contribution is still marginal. Auto retailing will continue to
                                                                  account for a large portion of revenue given the booming
                                                                  sales trend for luxury cars in China.




Page 102
                                                                                                             Equity Explorer
                                                                                                                    Sparkle Roll




Revenue breakdown                                                 Sales volume of auto (units)


   100%                                1%   1%          1%         unit
                               11%     4%1% 4%          4%         600
    90%              25%        3%
    80%                        9%
                        4%                                         500
    70%
    60%                                                            400
    50%     100%                      93%      94%     94%
    40%                        77%                                 300
                     71%
    30%
    20%                                                            200
    10%
                                                                   100
     0%
            FY08     FY09      FY10   FY11F   FY12F    FY13F         0
                                                                           FY09        FY10      FY11F      FY12F      FY13F
   Auto, parts &     Watches     Jewellery    Wine    Comics
   maintenance                                                               Bentley          Lamborghini       Rolls-Royce

Source: Company, DBSV                                             Source: Company, DBSV


Luxury auto – key earning driver                                  Rolls-Royce aims to sell 55% more cars in China this year.
                                                                  Rolls-Royce entered China in 2001and its sales volume was
Ultra premium auto brands targeting the super rich. Sparkle
                                                                  about 100 units back in 2007. Over the years, Rolls-Royce
Roll focuses solely on ultra premium auto brands: Bentley,
                                                                  gained acceptance among Chinese customers and sales
Rolls-Royce and Lamborghini. The Group operates stores in
                                                                  volume surged to 687 units in 2010, with the introduction of
Beijing for these three brands. Apart from Beijing residents,
                                                                  the ‘Ghost’ model. Rolls-Royce aims to sell 1,065 cars in China
Sparkle Roll also sells to high net worth people in surrounding
                                                                  this year. The Ghost is targeted at a younger crowd compared
cities. The company is seeking approval to bring in another
                                                                  to the more expensive ‘Phantom’ and is priced at around
ultra premium auto brand – Bugatti to further enhance its
                                                                  RMB5m per car. The Rolls-Royce cars are retailed at RMB4.6-
brand portfolio.
                                                                  8m per vehicle. The company sold 95 units of Rolls-Royce
                                                                  1H11, a sharp jump from 27 units in FY10. 1H11 sales
Auto dealership terms. Sparkle Roll has signed dealership
                                                                  comprised of 72 units Ghost and 23 units Phantom.
agreement with Rolls-Royce for 3 years starting from 2009.
The Lamborghini dealership is renewed annually while Bentley
                                                                  Major driver in Bentley sales. Sparkle Roll negotiates with Dah
is on an open contract basis but subject to 12 months’ notice
                                                                  Chong Hong (1828 HK), the national distributor of Bentley
to either party on termination. With the exception of
                                                                  cars in China, based on its sales performance and sales
Lamborghini, Rolls-Royce and Bentley require Sparkle Roll to
                                                                  projections. The company has chalked up spectacular sales of
make deposits of 6-8% to secure delivery of the cars.
                                                                  Bentley. It sold 178 cars in FY10, up 75% y-o-y and has
                                                                  achieved sales of 123 cars in 1H11. The Bentley distributor
                                                                  targets to sell some 1,500 cars this year. Sparkle Roll is
                                                                  retailing them at an ASP of RMB3-6.5m per vehicle.

                                                                  Despite being a late entrant, Lamborghini has strong
                                                                  prospects. Despite entering China only in 2004, Lamborghini
                                                                  has made a quantum leap in sales, soaring from 28 units in
                                                                  2007 to 80 in 2009. Last year saw a sharp jump of 158% y-o-
                                                                  y to 206 units. Sparkle Roll’s Lamborghini sales shared the
                                                                  same pattern. It registered 43 units Lamborghini sales during
                                                                  1H11 compared to 33 units in the full year of FY10. Sparkle
                                                                  Roll is selling the Lamborghini at an ASP of RMB3-5m. The
                                                                  major competing brand to Lamborghini is Ferrari.




                                                                                                                        Page 103
Equity Explorer
Sparkle Roll



Expanding dealership stores into new cities. The company is            in these emerging cities whose consumers enjoy high
expanding into Dalian (Lamborghini) and Tianjin (Rolls-Royce           purchasing power.
and Bentley) this year. The new stores aim to capture revenues

Retail network in PRC - Auto Dealership

                                Roll Royce                         Bentley                 Lamborghini                          Bugatti




Beijing                                   Y                             Y                              Y                             Y*
Tianjin                                   P                             P
Dalian                                                                                                 P

                      The Regent Beijing          Scitech Plaza, Beijing     The Jinbao Street, Beijing     The Jinbao Street, Beijing
                  Total construction cost:                  Size: 450sm        Total construction cost:       Total construction cost:
                            over RMB2m                                                 over RMB1.3m                     over RMB1m
                              Size: 268sm                                                  Size: 280sm                    Size: 250sm
            Jinmen Jinta Complex, Tianjin           The Regent, Beijing       Xing Hai Square, Dalian
                      (next to Bentley TJ)      Total construction cost:                   Size: 250sm
              (to be opened in Aug 2011)                over RMB0.98m
                               Size: 370sm                  Size: 180sm
                                                       Sanlitun, Beijing
                                               (to be opened in 3Q11)
                                                          Size: 1,300sm
                                                Heping District, Tianjin
                                                            Size: 350sm

Y=existing, P= planning

* Bugatti dealership pending

Source: Company

Ultra premium auto brands sales depend on personal contacts            Bugatti to enhance brand image. The Group recently opened
and services. Personal service is the key for top-end luxury           a Bugatti showroom in Beijing and is expected to sell Veyron
auto sales. Mr Qi, the major shareholder and president of the          models soon after securing government approval. Bugatti is
car dealership business, started luxury auto dealing back in           one of the most expensive super deluxe race cars, at an
2001, one of only few trend setters then to catch the luxury           average price of RMB36m in China. We believe Bugatti will
market wave. Armed with 10 years of experience and                     increase the Group’s profile but will not have a big impact on
networking in this business, Sparkle Roll can leverage off his         volume sales, given the high retail price.
expertise in the service industry as well as reputation to drive
future auto business growth.                                           Strong luxury appetite from wealthy younger buyers. Sparkle
                                                                       Roll’s clients are a diversified group including mining, real
Low inventory, long lead time on delivery. Generally,                  estate, government, financial services, and some industrialists.
customers have to make deposits of 11-13% to purchase                  The average age of sports car buyers is early 30s while
Bentleys and Rolls-Royces. These advance payments help in              limousine clients are in their 40s, relatively younger than
funding the cost of inventory. It takes about 6 months for the         Western wealthy car buyers.
cars to be delivered to customers. Generally, several million
Yuan are required to keep 2-3 vehicles at each showroom.               After-sales revenue still low contribution. Besides the auto
Customers are required to make full payment upon delivery of           dealership, Sparkle Roll also provides after-sales service, at one
the cars. Sparkle Roll will place monthly orders with auto             of its largest car maintenance and repair centres in Northern
makers or distributors. Based on the orders received, sales for        China. After-sales service contribution to the top line is not
the next six months are secured.                                       significant as new car sales are relatively young and
                                                                       maintenance services low. However, customers usually opt to



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send their cars to the original dealers where they bought their    subsequently won the global exclusive distributorship of
vehicles for servicing, hence customer loyalty is driving after-   deLaCour for its deluxe Bitourbillon watches.
sales revenue. This segment has higher gross margin of c.60%.
                                                                   The contract terms for Richard Mille, DeWitt and Parmigiani
Watches and jewelleries – highly prized by the wealthy             are for five years plus a three year extension option. For
                                                                   deLaCour, Sparkle Roll signed a 10 year agreement with the
Eyeing consumer luxury goods brands. Sparkle Roll ventured         brand owner. We think the long term contracts not only show
into luxury watch retailing shortly after it acquired the auto     strong confidence in Sparkle Roll to nurture the watch
dealership in 2008. It sealed exclusive agreements for Richard     business, but also a demonstration of its expertise in luxury
Mille, DeWitt and Parmigiani for the Chinese market and            goods management.

Luxury brand portfolio - Watches

Richard Mille
5 years term from July 2008 to July 2013
Average price: RMB0.4m to 6m

Location: 5-star Legendale Hotel in Beijing, Jinbao Street
Total Investment: over RMB5m; Size: 260sm
World's largest Richard Mille flagship store
1 complimentary store was established in January 2011 in 3/F of Sparkle Roll Luxury World in Beijing
Size: 100sm; Construction cost at RMB10,000 per sm
1 complimentary store was established in December 2010 in Lippo Centre in Shanghai
Size: 55sm; Rental cost at RMB1,500 per sm
1 complimentary store (shop in shop) was established in May 2010 in Dalian
Size: 25sm

DeWitt
5 years term from April 2009 to April 2013
Average price: RMB0.2m to 5m

1 flagship was opened in June 2010 in Legendale Hotel in Beijing as the world's largest DeWitt boutique
Total investment: over RMB1.2m; Size: 190sm
1 complimentary store was established in January 2011 in 3/F of Sparkle Roll Luxury World in Beijing
Size: 120sm; Construction cost at RMB10,000 per sm
1 complimentary store was established in December 2010 in Lippo Centre in Shanghai
Size: 55sm; Rental cost at RMB1,500 per sm
1 complimentary store (shop in shop) was established in May 2010 in Dalian
Size: 25sm

Source: Company




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Retail network in PRC – Watches (continued)

Parmigiani
5 years term contract plus an option to renew 5 years
Average price: RMB0.06m to 7m



1 flagship was opened in January 2011 in Legendale Hotel in Beijing as the world's largest Parmigiani Boutique
Size: 297sm
1 complimentary store was established in January 2011 in 1/F of Sparkle Roll Luxury World in Beijing
Size: 260sm; Construction cost at RMB10,000 per sm
1 complimentary store was established in January 2011 in Lippo Centre in Shanghai
Size: 90sm; Rental cost at RMB1,500 per sm

deLaCour BiTourbillon
10 years term contract, commenced on 1 Jan 2010
Average price: HKD4m to 6m


deLaCour is now present in over 35 countries with more than 70 points of sale
The BiTourbillon is available at 3/F of Sparkle Roll Luxury World in Beijing with a size of 30sm and also available in the
worldwide online shopping network

Source: Company

                                                                   Italian jewellery brands Buccellati in early 2010 as a first step
Also ventured into fine jewellery High-end jewellery is all part
                                                                   to foray into the jewellery market. In Mar 2011, the Group
of the company’s strategy to strengthen the product mix and
                                                                   struck a deal with prestigious diamond brand Royal Asscher
enhance cross-selling synergies. It has partnered with
                                                                   for exclusive dealership in the PRC for five years.
renowned French jewellery house Boucheron in late 2009 and
signed an exclusive distributorship contract with boutique




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Luxury brand portfolio - Jewellery

Boucheron




A cohesive partnership with Boucheron in Mainland China over the next 5 years
Average price: RMB0.01m to 25m

1 complimentary store was established in January 2011 in 2/F of Sparkle Roll Luxury World in Beijing
Size: 180sm; Construction cost at RMB10,000 per sm
1 complimentary store was established in August 2010 in HK Plaza in Shanghai
Size: 130sm; Rental cost at RMB1,260 per sm
1 complimentary store (shop in shop) was established in May 2010 in Dalian
Size: 25sm
1 complimentary store in Plaza 66 in Shanghai was being taken over in October 2009
Size: 80sm

Federico Buccellati




Appointed as Exclusive Distributor of Federico Buccellati in the PRC over the next 5 years, commenced on 1 Jan 2010
Average price: RMB0.01m to 10m

1 flagship store was established in January 2011 in 2/F of Sparkle Roll Luxury World in Beijing
Size: 80sm; Construction cost at RMB10,000 per sm

Source: Company


Focus on key affluent cities for expansion. Sparkle Roll has        Wine – China becoming a major wine consuming country
expanded its retail network by setting up exclusive stores in
Shanghai and Dalian and opening complementary stores in its         Premium wine brands. Sparkle Roll has secured several wine
newly opened Sparkle Roll Plaza in Beijing. Watch retailing         distributorships in PRC since 2009, including Groupe Duclot
enjoys higher gross margins of c.45%. Average selling prices        (Duclot Export), Chateau Margaux , Domaine d'Eugénie,
for time pieces from Richard Mille, DeWitt and Parmigiani is in     Maison Joanne Boreaux and Ulysse Cazabonne. However,
the range of RMB0.2 - 7m while deLaCour Bitourbillon, a             sales of wines comprise two parts: actual wine sales and wine
high-end watch brand is retailed at c.RMB4 - 6m. Although           futures (En Primeur).
this business is relatively young, revenue composition rose
from 4% in FY09 to 9% in FY10.                                      The ASP of the fine wines sold by Sparkle Roll can range from
                                                                    RMB3K to as high as RMB100K per bottle. They recently
It currently operates 2 Boucheron stores in Shanghai, 1 in          launched their own private label called Ex Chateau, priced at
Dalian and 1 in Beijing Sparkle Roll plaza. Sparkle Roll will       RMB350 – 420 per bottle depending on the vintage.
build four Royal Asscher flagship stores over the next 2 years
and the first f one is due to open in a prime location in Beijing   Although fine wine produces gross margins of 40-50% for the
by end of 2011. The long term plan is to set up a                   company, revenue contribution is small. However, as China is
distributorship network throughout the country.                     growing to become the largest wine consuming country in the
                                                                    world, prospect are bright over the coming years.
The reason behind this build-out of new stores is to capture
the anticipated strong demand for luxury watches and                Launched Sparkle Roll Luxury World, the retail luxury hub in
jewellery over the next few years. Aside from this, luxury          Beijing. Sparkle Roll Plaza consists of three floors housing the
goods command high gross margins of 40-45%,                         Group’s watch and jewellery stores, and a large-scale wine
underpinning the company’s future profitability.                    cellar and wine centre to display Bordeaux wines. Sparkle
                                                                    Roll’s ‘Luxury World’ is in line with the company’s aggressive
                                                                    strategy to establish itself as a major player in fine watches,
                                                                    jewellery and luxury products.




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GROWTH PROSPECTS                                                    licensing restriction in Beijing should impact more mass-market
                                                                    car models.
Huge luxury market. According to the World Luxury
Association’s latest figures, China has replaced the US to          RISKS
become the world’s second largest luxury goods consumer,
second only to Japan. The Ministry of Commerce has also put         Execution risk during expansion. The Group has several
China’s luxury market at US$9.4bn (end 2009), compared with         businesses involving different product categories. Hence, to
US$8.6b in 2008. This includes jewellery US$2.76bn; leather         fully derive the maximum benefits, there could be execution
goods US$2.01bn; cars US$1.83bn; watches US$1.14bn;                 risks. Different business strategies are required to grow the
clothing US$1.01bn; and cosmetics US$690m. McKinsey                 operations and which may over-stretch the company’s
expects China’s luxury spending to more than double by 2015,        resources and man-power.
surpassing Japan to become the world's largest market,
equivalent to a 20% global share.                                   Quota allocation and termination of dealership contracts.
                                                                    Future growth depends on quota allocation from individual
                                                                    automakers and national distributors. There are risks that
Booming wealth underpinning luxury demand. China boasts
                                                                    quota allocations could be cut or dealership contracts
960,000 millionaires with personal wealth of at least RMB10m,
                                                                    terminated, thus affecting growth prospects.
according to the latest ‘Hurun Rich List’, (the Chinese
equivalent of the Forbes list). Of the 960,000 millionaires,        Economic hard-landing. Global luxury markets were hit during
60,000 have been identified as China's super rich with over         the financial crisis while China was not affected much, thanks
RMB100m in wealth. The upper middle class is also expanding,        to the stimulus package and strong economic growth.
according to McKinsey’s survey, at 20% annually to reach one        However, credit tightening, may result in a major slowdown
million households by 2015. Rich and wealthy consumers are          of the Chinese economy, deterring people from buying luxury
the main driving force behind the boom in luxury consumption.       goods, including automobiles.

Status symbol effect drives luxury demand. Hurun research on
Chinese tycoons shows more than three quarters of them are
male and their preference is for autos and watches. Owning
status symbols is behind the main driving force behind
purchases by wealthy Chinese. Hence, China is emerging as
the top nation for luxury watches in Asia and most of the
luxury watch brands have set up presence in China.

Super luxury automakers setting up new dealerships and
raising sales targets for China. Ultra premium auto brands are
seeing strong growth in China and are raising their sales
targets for this year. Lamborghini sales advanced 150% in
2010 and the automaker is targeting 300 units for 2011. Rolls-
Royce delivered 687 units in 2010 and expects sales to sell
1,065 cars in 2011. Bentley is also raising sales target to
approx. 1,500 units. Other luxury auto brands also estimated
rapid growth in the coming 2-3 years.

To reach out to a wider audience, Bentley and Lamborghini are
planning to set up more dealerships in the mainland. Bentley
plans to add five dealerships this year and to reach 30 stores
by 2014, up from 13 units last year. Lamborghini is setting its
target at 20 stores by the end of 2011, doubling from last year.

No dampening effect from the Beijing auto restrictions. The
license restriction measure in Beijing will not be an issue to
super luxury auto buyers as they may already have several
license plates available. It is much easier for them to change or
upgrade their vehicles with existing licensing plates. The auto




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                                                                     The chart below shows wealth distribution in China, based on
Growth Strategy
                                                                     Hurun’s Rich report. Costal cities host hundreds of millionaires
                 nd
Expansion into 2 tier cities. Beijing is the wealthiest city in      while the hinterland is catching up fast.
China and an important market for Sparkle Roll. For instance,
                                                                     Strengthen product cross-selling. Sparkle Roll is trying to
about 50% of Rolls-Royce and Lamborghini buyers are Beijing
                                                                     build up its non-auto business in order to diversify and boost
residents. To tap the buying interests in cities around Beijing
                                                                     margins. The non-auto business is relatively new and more
(since 50% of sales are from non-Beijing residents), Sparkle
                                                                     efforts are required to build it up. The Group aims to push the
Roll is setting up new dealership stores this year for Bentley (in
                                                                     non-auto business to around 10-20% of total sales over the
Tianjin), Rolls-Royce (Tianjin) and Lamborghini (Dalian) to tap
                                                                     mid-term. The company will open around 6 to 10 stores for
new potential outside of Beijing.
                                                                     each watch brand across China in the long run. For fine wines,
                                                                     the Group has recently launched its own private label wine
                                                                     called “Ex Chateau" to complement its current wine portfolio.

High net wealth Chinese distribution




Source: Hurun Wealth Report, China daily




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MANAGEMENT                                                             retailing veterans. Moreover, major shareholder Mr Qi as
                                                                       president of the auto and watch distribution divisions, charts
Experienced management team. Sparkle Roll’s management                 the company’s future strategy in capturing a slice of the luxury
team consists of capital market experts and luxury good                market.

Key Management Team
Manager           Current Appointment                                                                     Previous Experience     Age

TONG Kai Lap            Chairman, Chief         Mr Tong graduated from The Chinese University of Hong Kong in 1982 with a           50
(Ivan)                  Strategy Officer     Bachelor’s Degree in Business Administration. Since graduation, he has worked in
                                           various international banks in the commercial, corporate and investment divisions.
                                               Mr. Tong is a licensed representative for Type 6 (advising on corporate finance)
                                            regulated activity under the Securities and Future Ordinance, an associate director
                                             of Oriental Patron Asia Limited and the past president of the Rotary Club of Tsim
                                           Sha Tsui. Mr. Tong is a fellow member of the Hong Kong Institute of Directors and
                                           a founding member of Hong Kong Professionals and Senior Executives Association.
                                                   Mr. Tong is brother-in-law of Mr. Wong Chun Keung, the ex-director of the
                                                Company and Dr. Wong Chun Loong, the Chief Creative Officer of comics and
                                              animations division of the Company. Mr. Tong joined the Group in August 2002.

ZHENG Hao         Deputy Chairmen, CEO Mr Zheng graduated with a law degree from Beijing University in 1990. Mr. Zheng              42
Jiang                                     has over 12 years experience in Beijing in equity portfolio management, capital
                                             market analysis management and financial advisory. Mr. Zheng is a Standing
                                        Director of China Automobile Dealers’ Association. Mr. Zheng is a fellow member
                                        of the Hong Kong Institute of Directors. He is a founding member of Hong Kong
                                           Professionals and Senior Executives Association. Mr. Zheng joined the Group in
                                                                                                           October 2006.

QI Jian Hong          President of the car Mr Qi is the President of the car distributorship division and watch distributorship     43
                  distributorship division division of the Group. Mr. Qi has over 15 years experience in wholesale and retail
                               and watch management of luxury goods in China. Mr. Qi joined the Group in June 2008. He is
                  distributorship division      a director of Beijing Shou Ying Tong Shang Trading and Commercial Limited
                                            (formerly known as Beijing Bin Li Group imited). Mr. Qi is a Standing Director of
                                           China Automobile Dealers’ Association. He is also a substantial shareholder of the
                                                                                                    company with 28.1% stake.


ZHAO Xiao             Deputy Chairmen,          Mr Zhao graduated from the Information Technology Department of Beijing             41
Dong                              COO       University of Chemical Technology in 1990. He has over 12 years experience in the
                                              areas of wholesale and retail management of luxury goods in Beijing. Mr. Zhao
                                                                                        joined the Group in September 2008.

Source: Company




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                                                                    After-sales will see growth of 70-100% in 1-2 years, supported
SEGMENTAL ANALYSIS
                                                                    by the expanding customer pool over the years.
Double-digit CAGR for auto retailing from FY11-FY13. Auto &
                                                                    Non-auto sales accounts for <10% of total revenues. Since the
after sales services accounted for 77% of total turnover in FY10
                                                                    non-auto business is relatively new, revenue contribution is
(Mar 10).This proportion increased to 93% in 1H11 (Sep 10)
                                                                    expected to gradually increase in the next few years. New stores
fuelled by strong auto sales. We expect this robust growth to
                                                                    and cross selling strategy may start to take effect in FY12/13.
continue for auto retailing in the next 2 years, coming from a
                                                                    Overall, it is not a surprise to see revenue doubling given its low
higher allocation of car quotas from the three auto brands
                                                                    base last year.
manufacturers. We estimate units sold under Bentley, Rolls-
Royce and Lamborghini will continue to grow at double digits
                                                                    In terms of gross margins of different product segments, these
for FY11-FY13. Currently, the group has received orders for the
                                                                    should be relatively stable. New auto sales should command
next six months’ delivery. Overall, auto revenue is projected to
                                                                    gross margins of 9%, after-sales services 60-65%, and other
grow 45% in FY12.
                                                                    luxury goods at 45-55%.

Segmental breakdown

FY Mar     (HK$ m)                         2008A           2009A              2010A            2011F            2012F            2013F


Revenues
 Auto                                           0             436               934             2,897            4,193            5,786
 Watches                                        0              24               104               134              195              271
 Jewelry                                        0               0                 2                 9               10               12
 Wine                                           0               0                40                20               40               72
 Others                                       157             152               139                42                0                0
Total                                         157             612             1,219             3,101            4,438            6,141

R ev en u e c o mp o sit io n ( % )
A uto, parts & maintenance                    0.0            71.2              76.6             93.4             94.5             94.2
Watches                                       0.0             3.8               8.6              4.3              4.4              4.4
J ew ellery                                   0.0             0.0               0.2              0.3              0.2              0.2
Wine                                          0.0             0.0               3.3              0.6              0.9              1.2
Comics                                      100.0            24.9              11.4              1.3              0.0              0.0
T o t al                                   100.0           100.0             100.0            100.0            100.0            100.0

R ev en u e g ro w t h ( % )
A uto, parts & maintenance                   n.a.            n.a.            114.3            210.3              44.7             38.0
Watches                                      n.a.            n.a.            343.1             28.5              45.6             39.0
J ew ellery                                  n.a.            n.a.               n.a.          318.8              12.2             21.2
Wine                                         n.a.            n.a.               n.a.          (50.0)            100.0             80.0
Comics                                      53.5            (2.8)              (8.7)          (70.0)              n.a.             n.a.
T o t al                                   53.5           290.2              99.4            154.4              43.1             38.4


Source: Company, DBS Vickers




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Segmental breakdown (continued)

                                   2009A      2010A     2011F    2012F    2013F

Sales v o lu me ( c ars )
Bentley                              102        178       303      424      563
Lamborghini                           26         33        79      111      144
Rolls-Roy ce                          31         27       230      321      434
T o t al                             159        238       611      856    1,141

Sales v o lu me g ro w t h ( % )
Bentley                               n.a.       74.5     70.0     40.0     33.0
Lamborghini                           n.a.       26.9    140.0     40.0     30.0
Rolls-Roy ce                          n.a.     (12.9)    750.0     40.0     35.0
T o t al                             n . a.     49.7    156.8     40.0     33.4

A SP ( H K $ ' 0 0 0 )
Bentley                             2,500      3,400     3,600    3,708    3,819
Lamborghini                         2,600      3,900     4,095    4,218    4,344
Rolls-Roy ce blended                3,300      5,900     6,195    6,381    6,572
T o t al b len d ed A SP           2,669      3,750     4,638    4,778    4,932

A SP g ro w t h ( % )
Bentley                               n.a.      36.0      5.9      3.0      3.0
Lamborghini                           n.a.      50.0      5.0      3.0      3.0
Rolls-Roy ce blended                  n.a.      78.8      5.0      3.0      3.0
T o t al b len d ed A SP              n.a.     40.5      23.7      3.0      3.2

Source: Company, DBS Vickers




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FINANCIALS - INTERIM PERFORMANCE
                                                               Auto and related business accounted for c. 93% of total interim
                                                               revenue, and rose 73% from same period in 2009. Operating
Growth intact despite one-off charges. Sparkle Roll’s 2011
                                                               profit more than doubled compared to same period last year to
interim earnings (Apr-Sep10) dipped 8.6% y-o-y to HK$32.6m,
                                                               HK$79m, translating to operating margins of 6.8%.
due to a one-off charge of HK$19m on share option expenses,
HK$5.2m fair value loss, HK$3.7m option cost on convertible    Expect stronger 2H. We expect 2H earning will come in strong,
notes and HK$13m on comic business loss. Total exceptional     underpinned by buoyant auto sales. Disposal of the comic unit
items amounted to c.HK$41m.                                    has removed the uncertainty of further losses. Net margin
                                                               should recover from 1H’s 2.6%.
Interim Income Statement

FY Mar (HK$ m)                      1H2009              2H2009                1H2010              2H2010               1H2011

Turnover                               224.7               386.8                465.1                754.0              1,264.1
Cost of Goods Sold                   (237.4)             (390.3)              (382.7)              (625.2)            (1,122.4)
Gross Profit                          (12.7)                (3.5)                82.4               128.8                 141.7
Other Oper. (Exp)/Inc                 (88.8)             (112.7)                (47.5)              (61.6)              (110.8)
Operating Profit                     (101.5)             (116.2)                 34.9                67.2                 30.9
Other Non Opg (Exp)/Inc                 35.4                13.1                 13.3                15.1                 12.3
Associates & JV Inc                       0.0                 0.0                  0.0                 0.0                  0.0
Net Interest (Exp)/Inc                  (6.1)              (10.4)                (9.8)               (2.4)                (5.8)
Exceptional Gain/(Loss)                  0.0                 0.0                  0.0                 0.0                  0.0
Pre-tax Profit                        (72.2)             (113.5)                 38.4                79.9                 37.4
Tax                                     (6.3)                 0.3                (2.2)               (2.4)                (5.2)
Minority Interest                        0.0                 1.8                 (0.5)               (0.1)                  0.4
Net Profit                            (78.5)             (111.4)                 35.7                77.4                 32.6
Net profit bef Except.                 (78.5)            (111.4)                 35.7                77.4                 32.6
EBITDA                                 (66.1)            (103.1)                 54.6                82.3                 54.1

Sales Gth (%)                           N/A                 N/A                   107                   95                 172
EBITDA Gth (%)                          N/A                 N/A                 (183)                (180)                   (1)
Opg Profit Gth                          N/A                 N/A                 (134)                (158)                 (11)
Net Profit Gth (%)                      N/A                 N/A               (145.4)              (169.4)                (8.6)
Gross Margins (%)                      (5.6)               (0.9)                 17.7                 17.1                11.2
Opg Profit Margins (%)                (45.2)              (30.0)                   7.5                 8.9                  2.4
Net Profit Margins (%)                (34.9)              (28.8)                   7.7                10.3                  2.6




Source: Company, DBS Vickers




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FINANCIALS – INCOME STATEMENT                                                                                 several private equity investors and issued stock options and
                                                                                                              convertible notes during FY09-FY11. Losses from its comics unit
Successful turnaround in FY10. Following the transformation of                                                are also stemmed since the divestment in 2H11. Hence, we
the business, Sparkle Roll returned to the black with net profit                                              suggest looking beyond FY11 when the full sweep of the
of HK$113m in FY10 compared to losses of HK$190m in FY09.                                                     company’s s luxury brand management business and the
The deficit in FY09 was largely attributable to impairments from                                              growth potential in this segment will become more apparent.
its comics and animation business and goodwill.
                                                                                                              EPS dilution overhang removed. All outstanding
Look beyond FY11. To support its business restructuring,                                                      convertible notes have been converted into shares and this
expansion and working capital needs, Sparkle Roll secured                                                     will remove the share overhang relating to dilution.

                              Sales Trend                                                   Operating Cost Trend                                                    Profitability Trend
       HK$ m                                                                                                                                         HK$
           6,000
                                                                                                                                                                                                              -135%
                                                                 280.0%             5000                                                            350
           5,000                                                                                                                                                                                              -635%
                                                                                                                                                    300
                                                                 230.0%             4000
           4,000                                                                                                                                    250                                                       -1135%
                                                                 180.0%             3000                                                            200
           3,000                                                                                                                                                                                              -1635%
                                                                 130.0%             2000                                                            150
           2,000                                                                                                                                                                                              -2135%
                                                                                                                                                    100
           1,000                                                 80.0%              1000                                                                                                                      -2635%
                                                                                                                                                    50
               0                                                 30.0%                0                                                              0                                                        -3135%
                    2009A    2010A   2011F   2012F    2013F                                 2009A    2010A      2011F        2012F    2013F                2009A     2010A 2011F         2012F    2013F
                                                                                                       Other Operating Expenses (-)                                Net Profit (After-extraordinaries) (LHS)
                   Total Revenue      Revenue Growth (%) (YoY)                                         Cost of Goods Sold (-)
                                                                                                                                                                   Net Profit Growth (%) (YoY) (RHS)




FY Mar (HK$ m)                                                       2008A             2009A                                   2010A          2011F                              2012F                                 2013F


Turnover                                                                    157              612                                1,219           3,101                            4,438                                   6,141
Cost of Goods Sold                                                        (128)            (628)                              (1,008)         (2,735)                          (3,865)                                 (5,327)
Gross Profit                                                                 29             (16)                                  211             366                              573                                     814
Other Opg (Exp)/Inc                                                         (24)           (202)                                (109)           (195)                            (269)                                   (372)
Operating Profit                                                               5           (218)                                  102             171                              303                                     443
Other Non Opg (Exp)/Inc                                                        3              48                                   28              28                               29                                      30
Associates & JV Inc                                                             0                0                                    0              0                                0                                       0
Net Interest (Exp)/Inc                                                         0             (16)                                 (12)            (10)                              (7)                                     (7)
Exceptional Gain/(Loss)                                                         0                0                                    0              0                                0                                       0
Pre-tax Profit                                                                 8           (186)                                  118             189                              325                                     465
Tax                                                                           (2)              (6)                                  (5)           (11)                             (49)                                  (102)
Minority Interest                                                              0                2                                   (1)              0                                1                                       1
Preference Dividend                                                            0                0                                    0               0                                0                                       0
Net Profit                                                                     7           (190)                                  113             178                              277                                     364
Net profit before Except.                                                       7          (190)                                  113             178                              277                                     364
EBITDA                                                                        13           (160)                                  141             208                              344                                   489.3

Gross Margin (%)                                                          18.3           (2.6)                                   17.3           11.8                                12.9                                 13.3
Sales Gth (%)                                                              53.5         290.2                                    99.4          154.4                                43.1                                 38.4
EBITDA Gth (%)                                                              6.8     (1,285.1)                                 (188.0)           47.6                                65.9                                 42.1
Operating Profit Gth (%)                                                 (50.7)     (4,433.8)                                 (146.9)           67.6                                77.2                                 45.9
Net Profit Gth (%)                                                       (42.0)     (2,984.9)                                 (159.5)           57.2                                55.7                                 31.4
Gross Margins (%)                                                         18.3           (2.6)                                   17.3           11.8                                12.9                                 13.3
Opg Margins (%)                                                             3.2         (35.6)                                    8.4            5.5                                 6.8                                  7.2
Net Profit Margins (%)                                                      4.2         (31.1)                                    9.3            5.7                                 6.2                                  5.9
% of Opg Expenses to Sales                                                 15.1           33.0                                    8.9            6.3                                 6.1                                  6.1
Effective Tax Rate (%)                                                     24.8            N/A                                    3.9            6.0                                15.0                                 22.0


Source: Company, DBS Vickers




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FINANCIALS – ROE DRIVERS

Decent ROE. The corporate transformation helped the                                                     Full conversion of convertible notes. All outstanding
Group to deliver 11% ROE in FY10. We expect the                                                         convertible notes have been converted into shares and this
double-digit ROE to continue for the coming years on the                                                will impact the ROE performance in the short-term.
strong earnings outlook.

                ROAE / ROAA Trend (%)                                                    Margin Trend (%)                                   Total Debt & Gross Interest Cover
       26.0%                                                                 20%
                                                                                                                                                                                                           65.5x
                                                                             15%                                                          250
       16.0%                                                                                                                                                                                               55.5x
                                                                             10%
                                                                                                                                          200                                                              45.5x
        6.0%                                                                  5%
                                                                                                                                                                                                           35.5x
        -4.0%                                                                 0%                                                          150
                2009A     2010A       2011F    2012F      2013F                                                                                                                                            25.5x
                                                                             -5%    2009A       2010A    2011F     2012F     2013F
       -14.0%                                                                                                                             100                                                              15.5x
                                                                             -10%
                                                                                                                                                                                                           5.5x
       -24.0%                                                                -15%                                                          50
                                                                             -20%                                                                                                                          (4.5x)
       -34.0%
                                                                             -25%                                                           0                                                              (14.5x)
                                                                                                                                                2009A     2010A          2011F       2012F       2013F
       -44.0%                                                                -30%
                                                                                                                                                        Total Debt (+)           Gross Interest Cover (X) (YoY)
         Ret on Avg Equity (ROAE) %     Ret on Avg Assets (ROAA) %            EBITDA Margin %     EBIT Margin %   Net Income Margin %




FY Mar (HK$ m)                                                    2008A             2009A                           2010A               2011F                             2012F                                      2013F


Profitability Ratios
Sales Growth (%)                                                      53.5          290.2                              99.4             154.4                                43.1                                     38.4
Gross Margin (%)                                                      18.3           (2.6)                             17.3              11.8                                12.9                                     13.3
Operating Margin (%)                                                   3.2          (35.6)                              8.4               5.5                                 6.8                                      7.2
Net Profit Margin (%)                                                  4.2          (31.1)                              9.3               5.7                                 6.2                                      5.9
Financial Leverage (x)                                                 1.1             1.5                              1.4               1.5                                 1.4                                      1.4
Tax Retention Rate (%)                                                75.2            N/A                              96.1              94.0                                85.0                                     78.0
Sustainable Growth (%)                                                 1.5            N/A                              12.7              14.8                                18.7                                     19.7
ROAE (%)                                                               2.2          (41.0)                             15.6              18.5                                23.4                                     24.6
ROA (%)                                                                1.9          (29.4)                             11.0              12.8                                16.0                                     17.4
ROCE (%)                                                               1.2          (37.4)                             11.0              14.0                                18.2                                     20.6

Activity Ratios
Debtors Turn (average days)                                           59.4            12.5                             16.4              10.3                                 8.4                                      8.3
Creditors Turn (average days)                                         29.1             6.8                              6.2               6.0                                 7.8                                      7.9
Inventory Turn (average days)                                        185.6            43.3                             39.9              27.0                                28.1                                     24.1
Total Asset Turnover (x)                                               0.5             0.9                              1.2               2.2                                 2.6                                      2.9
Fixed Asset Turnover (x)                                              14.6            37.8                             56.5              67.7                                38.0                                     31.7
Asset Replacement Ratio (X)                                            0.5             2.2                              2.2               7.1                                10.1                                      4.5

Source: Company, DBS Vickers




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FINANCIALS – BALANCE SHEET
                                                                                        Working capital requirement. Inventory is rising fast, due to the
                                                                                        expansion of its auto retailing and non-auto business, as the
Clean balance sheet. Sparkle Roll’s balance sheet has low debt
                                                                                        company opens more dealership stores, and to a certain extent,
level and is in a net cash position of HK$128m (end Sep10).
                                                                                        more inventories of luxury goods. As the total business is still
Management has also indicated it will not raise equity financing
                                                                                        small compared to other larger auto dealer groups in China,
in the near term, and will rely more external resources to
                                                                                        Sparkle Roll does not have a negative current asset problem.
finance its business expansion.

                   Breakdown of Assets                                 Breakdown of Capital                        Financial Leverage & Net Debt to Equity
                                                                                                                     149
                                                                                                                                                                                         1.6
                          Debtors -
                                      Net Fixed                                                                       49
                           11.4%                                                        ST Debt -                                                                                        1.4
                                       Assets -
                                        8.7%                                              1.9% LT Debt -             (51)    2009A        2010A      2011F        2012F       2013F
                                                                                                  6.8%                                                                                   1.2
                                                                                                                    (151)                                                                1.0
          Inventory -                             Bank, Cash
            35.2%                                                                                                   (251)                                                                0.8
                                                  and Liquid
                                                   Assets -                                                         (351)                                                                0.6
                                                    44.7%                 Common
                                                                         Shareholder                                (451)                                                                0.4
                                                                          s' Equity -
                                                                            91.3%                                   (551)                                                                0.2
                                                                                                                        Net Debt/(Cash)                      Net Debt to Equity (X) (R.H.S)
                                                                                                                        Financial Leverage (X) (R.H.S)




FY Mar (HK$ m)                                                 2008A    2009A                              2010A   2011F                             2012F                                    2013F


Net Fixed Assets                                                  14         19                               24      67                                 166.4                                  221
Invts in Assocs & JVs                                              0          0                                0       0                                     0                                    0
Other LT Assets                                                  214        607                              603     637                                   636                                  635
Cash & ST Invts                                                   34         78                              186     358                                   431                                  672
Inventory                                                         60         87                              131     273                                   321                                  379
Debtors                                                           20         22                               87      89                                   117                                  162
Other Current Assets                                              70         67                              153     170                                   204                                  244
Total Assets                                                     412        879                            1,185   1,594                                 1,875                                2,313

ST Debt                                                            1         33                               18      72                                    72                                   72
Other Current Liab                                                49         79                              205     275                                   360                                  472
LT Debt                                                            0        184                               65     165                                   100                                  100
Other LT Liabilities                                               3          4                               24      24                                    24                                   24
Shareholder’s Equity                                             351        575                              870   1,054                                 1,315                                1,640
Minority Interests                                                 7          3                                4       4                                     5                                    5
Total Cap. & Liab.                                               412        879                            1,185   1,594                                 1,875                                2,313

 Leverage Analysis (x)
 Net Interest Cover                                             22.2    (13.2)                               8.4    16.6                             41.1                                 59.6
 EBITDA Gross Interest Cover                                    59.7      (9.7)                             11.5    20.2                             46.7                                 65.9
 Total Debt to EBITDA                                            0.1      (1.4)                              0.6     1.1                               0.5                                  0.4
 Total Debt to Total Assets                                      0.0        0.2                              0.1     0.1                               0.1                                  0.1
 Total Debt to Capital                                           0.0        0.4                              0.1     0.2                               0.1                                  0.1
 Net Debt to Equity                                            CASH         0.2                            CASH    CASH                             CASH                                 CASH
 Capex to Debt                                                   0.8        0.1                              0.1     0.2                               0.6                                  0.4
 Net Cash / (Debt)                                               33      (139)                              103     121                               259                                  500

 Liquidity Analysis (x)
 Cash Ratio                                                      0.7       0.7                               0.8     1.0                                  1.0                                  1.2
 Current Ratio                                                   3.7       2.2                               2.5     2.6                                  2.5                                  2.7
 Quick Ratio                                                     1.1       0.9                               1.2     1.3                                  1.3                                  1.5
Source: Company, DBS Vickers




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FINANCIALS – CASH FLOW                                                                              continue to focus on its existing three auto brands. Hence, M&A
                                                                                                    possibility is reduced.
Prudent capex . Sparkle Roll will open three more auto
dealerships under the various brands. The estimated cost of                                         Expect positive operating cash flow in FY12. Due to growing
each store is about HK$5m in the tier 2 cities. In addition to the                                  profitability, operating cash flows are forecast to rise. The
inventory required for the new auto shops, and factoring in                                         divestment of its comics business is another plus factor on cash
other investment in the non-auto segment, total capex should                                        flow, as future loss is stemmed. The strong operating cash flow
not exceed HK$50m this financial year. The company will                                             is sufficient to fund its business expansion, hence little
                                                                                                    requirement of fresh capital.


                       Cash Flow Trend                                       Free Cash Flow Per Share                                                  Free Cash Flow As At Year End
                                                                  0.18                                                                              149
        383                                                                                                                                                                                                             1.6
                                                                  0.16
                                                                                                                                                     49
        283                                                                                                                                                                                                             1.4
                                                                  0.14
                                                                                                                                                    (51)    2009A       2010A       2011F        2012F       2013F      1.2
        183                                                       0.12
                                                                                                                                                   (151)                                                                1.0
                                                                  0.10
         83
                                                                                                                                                   (251)                                                                0.8
                                                                  0.08
         -17
                                                                  0.06                                                                             (351)                                                                0.6
        -117                                                      0.04                                                                             (451)                                                                0.4

        -217                                                      0.02                                                                             (551)                                                                0.2
               2009A     2010A    2011F      2012F       2013F           2009A       2010A          2011F       2012F        2013F
                                                                                                                                                       Net Debt/(Cash)                      Net Debt to Equity (X) (R.H.S)
               CF from Op   CF from Invt   CF from Fin                   Free Cash Flow Per Share    Free Operating Cash Flow Per Share
                                                                                                                                                       Financial Leverage (X) (R.H.S)




FY Mar (HK$ m)                                  2008A            2009A                                2010A                               2011F                             2012F                                     2013F


Pre-Tax Profit                                             8      (186)                                     118                            189                                   325                                         465
Dep. & Amort.                                              7         12                                      16                               9                                    12                                          16
Tax Paid                                                 (1)          0                                      (1)                            (6)                                  (11)                                        (49)
Assoc. & JV
                                                          0              0                                       0                            0                                         0                                       0
Inc/(loss)
Chg in Wkg.Cap.                                      (55)            25                                     (75)                           (95)                                  (62)                                        (85)
Other Operating CF                                      1           207                                      16                             10                                     7                                           7
Net Operating CF                                     (40)            57                                      74                            107                                   270                                         355

Capital Exp.(net)                                        (1)        (12)                                    (12)                           (50)                               (110)                                          (70)
Other Invts.(net)                                          0          (1)                                     (6)                             0                                   0                                             0
Invts in Assoc. & JV                                     (2)        (40)                                        0                             0                                   0                                             0
Div from Assoc &                                           0            0                                       0                             0                                   0                                             0
Other Investing CF                                       (4)          32                                      (1)                          (21)                                  21                                            18
Net Investing CF                                         (7)        (21)                                    (19)                           (71)                                (89)                                          (52)

Div Paid                                                 (4)        (18)                                    (13)                             (8)                                (36)                                         (55)
Chg in Gross Debt                                        (1)          33                                      67                           154                                  (65)                                             0
Capital Issues                                           74            0                                       0                               0                                   0                                             0
Other Financing CF                                        2          (6)                                     (5)                           (10)                                  (7)                                           (7)
Net Financing CF                                         70            9                                     48                            136                                (108)                                          (63)

Net Cashflow                                         23              44                                     103                            172                                    73                                      241
Opg CFPS (HK$)                                     0.01            0.02                                     0.05                           0.07                                 0.11                                     0.15
Free CFPS (HK$)                                   (0.04)           0.03                                     0.02                           0.02                                 0.05                                     0.10

Source: Company, DBS Vickers




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VALUATION                                                           Potential earnings risk would be a sharp slowdown of the
                                                                    domestic economy, reducing the appetite for luxury cars and
Potential value at HK$1.70, based on 18x FY12 PE. Sparkle           consumer items. However, we believe the risk of this is
Roll’s high FY12 valuation of 15.8x is a reflection of its ultra    relatively low.
premium brands management business model. Relative to
other auto dealers, general retailers and luxury goods counters,    Financials. Sparkle Roll has a healthy balance sheet with net
Sparkle Roll’s ability to cross-sell luxury brands to the wealthy   cash of about HK$128m at end Sep10. Strong projected
Chinese will continue to support a rich valuation multiple. We      operating cash flows and manageable capex will further
peg FY12PE to 18x, benchmarking to the average of auto              enhance its financial position.
dealers, general retailers and luxury goods sector. We arrive at
a potential value of HK$1.70 which translates to 0.3x PEG.          Shareholdings. Major shareholder Mr Qi has been in the luxury
                                                                    goods business for more than 10 years and strategic investors
Still room to grow. Following the business restructuring in late    like Morgan Stanley PE Asia and Sequoia Capital are testament
2008, Sparkle Roll’s share price more than tripled from HK$0.4      to Sparkle Roll’s robust business outlook. Management has
in early 2009 to a high of HK$1.51 on 31 May 2011. We               hinted at no further equity raising and to increase its gearing to
believe the rally is supported by its engagement in the             fund business expansion.
promising luxury auto sector and anticipation of a strong
Chinese luxury market. We estimate earnings CAGR of 43%             Qualitative Risk Assessment: Moderate
for FY11-13. FY11 earnings growth might seem low, due               Category              Risk Rating       Wgt       Wgtd Score
largely to exceptional non-cash items. Therefore, we suggest
that the FY12 valuation multiple would be a better gauge.                              1 (Low) - 3 (High)

                                                                    Earnings                 1.5            40%           0.6
Risk Assessment                                                     Financials               1.5            20%           0.3

                                                                    Shareholdings             1             40%           0.4
Visibility of earnings. Considering China’s buoyant luxury
market and fervent demand from high spending consumers,             Overall                                               1.3
we believe Sparkle Roll’s earnings outlook is bright. Due to the
low quota available while demand is rising, visibility is clear.




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PE band chart                                                                                                                                                 PB band chart


 Share Price (HK$)                                                                                                                         25x                 Share Price (HK$)
 2.0                                                                                                                                                   20x     2.0
                                                                                                                                                                                                                                                                                                            4.0x
 1.8                                                                                                                                                           1.8
 1.6                                                                                                                                                           1.6
                                                                                                                                                       15x                                                                                                                                                    3.2x
 1.4                                                                                                                                                           1.4
 1.2                                                                                                                                                           1.2                                                                                                                                            2.5x
 1.0                                                                                                                                                  11x      1.0
 0.8                                                                                                                                                           0.8                                                                                                                                          1.7x
 0.6                                                                                                                                                           0.6
                                                                                                                                                        6x                                                                                                                                                  0.9x
 0.4                                                                                                                                                           0.4
 0.2                                                                                                                                                           0.2
 0.0                                                                                                                                                           0.0
                   Jul-05


                                          Jul-06


                                                                Jul-07


                                                                                       Jul-08


                                                                                                              Jul-09


                                                                                                                                   Jul-10




                                                                                                                                                                              Jul-05


                                                                                                                                                                                                  Jul-06


                                                                                                                                                                                                                          Jul-07


                                                                                                                                                                                                                                                Jul-08


                                                                                                                                                                                                                                                                      Jul-09


                                                                                                                                                                                                                                                                                         Jul-10
         Jan-05


                              Jan-06


                                                      Jan-07


                                                                          Jan-08


                                                                                                   Jan-09


                                                                                                                         Jan-10


                                                                                                                                            Jan-11




                                                                                                                                                                     Jan-05


                                                                                                                                                                                       Jan-06


                                                                                                                                                                                                              Jan-07


                                                                                                                                                                                                                                    Jan-08


                                                                                                                                                                                                                                                            Jan-09


                                                                                                                                                                                                                                                                                Jan-10


                                                                                                                                                                                                                                                                                                  Jan-11
Source: Bloomberg, DBS Vickers                                                                                                                                Source: Bloomberg, DBS Vickers




PE chart                                                                                                                                                      PB chart


 x                                                                                                                                                             x

 120                                                                                                                                                           4.5
                                                                                                                                                               4.0
 100
                                                                                                                                                               3.5
  80                                                                                                                                                           3.0                                                                                       +1SD: 2.6x
                                                                                            +1SD: 58.2x
                                                                                                                                                               2.5
  60                                                                                                                                                                                                                                                        Avg: 1.9x
                                                                                                                                                               2.0
                                                                               Avg: 32x
  40                                                                                                                                                           1.5
                                                                                                                                                               1.0
  20                                                                                                                                                                                                       -1SD: 1.3x
                                                      -1SD: 5.7x                                                                                               0.5
     0                                                                                                                                                         0.0
                     Jul-05


                                             Jul-06




                                                                                                                                                                              Jul-05


                                                                                                                                                                                                     Jul-06


                                                                                                                                                                                                                               Jul-07


                                                                                                                                                                                                                                                         Jul-08


                                                                                                                                                                                                                                                                               Jul-09


                                                                                                                                                                                                                                                                                                   Jul-10
          Jan-05


                                 Jan-06


                                                           Jan-07
                                                                     Jul-07
                                                                                   Jan-08
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                                                                                                            Jan-09
                                                                                                                       Jul-09
                                                                                                                                  Jan-10
                                                                                                                                            Jul-10
                                                                                                                                                     Jan-11




                                                                                                                                                                     Jan-05


                                                                                                                                                                                         Jan-06


                                                                                                                                                                                                                 Jan-07


                                                                                                                                                                                                                                             Jan-08


                                                                                                                                                                                                                                                                     Jan-09


                                                                                                                                                                                                                                                                                         Jan-10


                                                                                                                                                                                                                                                                                                            Jan-11




Source: Bloomberg, DBS Vickers                                                                                                                                Source: Bloomberg, DBS Vickers




                                                                                                                                                                                                                                                                                                                     Page 119
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Peers valuation – Auto dealers

                                                  Mkt               PE     PE    PEG     PEG Yield Yield P/Bk P/Bk EV/EBITDA ROE ROE
                            Currency Price        Cap    Fiscal    11F    12F    11F     12F 11F 12F 11F 12F 11F 12F 11F 12F
Company Name             Code       Local$       US$m        Yr      x      x      x       x    %     %     x    x    x    x  %   %

Hong Kong
Dah Chong Hong*       1828 HK     HKD 8.27       1,934 Dec-10 10.8        8.9    (4.3)   0.4     2.8    3.4     1.9    1.7 7.8         6.8    19.1    20.2
Zhongsheng*            881 HK     HKD 14.84      3,641 Dec-10 15.5       10.2     0.4    0.2     0.0    0.0     3.2    2.5 9.4         6.7    23.0    27.8
China ZhengTong*      1728 HK     HKD 8.99       2,311 Dec-10 20.2       12.3     0.2    0.2     0.0    0.0     3.7    3.1 10.8        7.4    31.9    27.7
Sparkle Roll^*         970 HK     HKD 1.47         562 Mar-10 15.8       12.0     0.3    0.4     1.3    1.7     3.3    2.7 12.0        7.9    23.4    24.6
WO KEE Hong            720 HK     HKD 0.198         59 Dec-10 n.a.        n.a.    n.a.   n.a.    n.a.   n.a.    n.a.   n.a. n.a.       n.a.    n.a.    n.a.
New Focus Auto         360 HK     HKD   2.5        183 Dec-10 13.9        9.9     0.1    0.2     n.a.   n.a.    n.a.   n.a. n.a.       n.a.    n.a.    n.a.
Average                                                       15.3       10.7    (0.7)   0.3     1.0    1.3     3.1    2.5 10.0        7.2    24.3    25.1

Other Asia
Jardine C&C        JCNC SP        SGD 39.26 11,359      Dec-10    12.0   10.7    20.9 0.9        2.1    3.4     n.a.   n.a.    6.8     6.0 n.a. n.a.
Zhejiang Zhongda 600704 CH        CNY 17.08 1,158       Dec-10    12.0    9.9     0.5 0.5        n.a.   n.a.    1.5    1.3     n.a.    n.a. n.a. n.a.
Pang Da Auto     601258 CH        CNY 33.29 5,389       Dec-10    19.7   15.3     0.8 0.5        1.0    1.3     3.6    3.0     n.a.    n.a. 20.1 21.3
Hotai Motor         2207 TT       TWD 95.3 1,814        Dec-10    10.9   11.8    (6.9) (1.6)     5.5    5.2     n.a.   n.a.    n.a.    n.a. n.a. n.a.
Average                                                           13.6   11.9     3.8 0.1        2.9    3.3     2.6    2.2     6.8     6.0 20.1 21.3

US
AutoNation              AN US     USD   33.79    4,997 Dec-10 18.3 15.8           0.6    1.0 0.0 n.a.           2.3    2.0    12.8 11.6 13.1 12.6
Group 1 Auto           GPI US     USD   36.46      876 Dec-10 11.7 9.8            0.3    0.5 0.9 0.9            1.0    0.9    10.2 9.2 8.7 9.5
Asbury Auto           ABG US      USD   15.53      511 Dec-10 9.8 7.7             0.3    0.3 n.a. n.a.          1.4    1.2     8.9 7.7 16.7 17.4
CarMax^               KMX US      USD   27.37    6,183 Feb-11 15.1 13.5           2.2    1.1 n.a. n.a.          2.3    1.9    13.5 12.3 16.5 15.1
Lentuo Int'l           LAS US     USD    4.98      147 Dec-10 5.0 3.4             0.1    0.1 12.0 17.7          1.2    1.1     2.2 1.4 26.3 34.1
Average                                                       13.7 11.7           0.9    0.7 0.4 0.9            1.7    1.5    11.4 10.2 13.8 13.7

^FY11: FY12F; FY12: FY13F
Source: Bloomberg, *DBS Vickers


Peers valuation - Luxury general retailers

                                                 Mkt                             11F                                                   12F
                                      Price      Cap Fiscal       PE P/Sales      P/Bk Yield       ROE           PE P/Sales           P/Bk Yield      ROE
Company Name                   Code    HK$      HK$m     Yr        x       x         x    %         %             x       x              x    %        %

Chow Sang Sang                116 HK 25.15    17,025    Dec   19.1        1.2      2.7     1.9     14.6        16.0      1.0          2.4     2.3     15.6
Emperor Watch                 887 HK 1.32      8,868    Dec   18.4        1.5      2.6     1.6     16.4        15.2      1.2          2.3     2.0     16.2
Hengdeli Holdings*           3389 HK 4.42     19,440    Dec   22.3        1.3      3.1     1.6     14.8        18.2      1.1          2.6     1.9     15.6
Luk Fook Holdings^#*          590 HK 32.7     17,740    Mar   18.8        1.9      4.6     2.2     26.6        15.2      1.5          3.9     2.8     27.8
Oriental Watch*^              398 HK 5.01      2,352    Mar   12.2        0.9      1.3     1.8      8.3        10.0      0.5          1.1     1.9     11.7
                                                              18.2        1.4      2.9     1.8     16.1        14.9      1.1          2.5     2.2     17.4

# Fully Diluted EPS
^ FY11: FY12F; FY12: FY13F
Source: Bloomberg, *DBS Vickers




 Page 120
                                                                                             Equity Explorer
                                                                                                 Sparkle Roll

Appendix – Sparkle Roll products

Luxury auto

                  Bentley                         Lamborghini                          Rolls-Royce




Watches

        Richard Mille              Parmigiani                deLaCour BiTourbillon            DeWitt




Jewellery

               Boucheron                        Federico Buccellati                   Royal Asscher




Wines

              Duclot Export               Maison Joanne Bordeaux                     Domaine D’Eugénie




Source: Company




                                                                                                         Page 121
Automobile Sector
Pang Da Automobile
Bloomberg: 601258 CH | Reuters: 601258.CH




NOT RATED RMB33.29                                                                                      Benefitting from scale leverage
Shanghai Composite Index : 2,744
                                                                                                        •     The largest auto dealership group in China
Price Target : n.a.
Potential Catalyst: Dealership network expansion                                                        •     Well positioned for future growth with RMB 6bn raised
                                                                                                              from IPO
Analyst
Rachel MIU +852 2863 8843                                                                               •     Profit drivers from penetration into 2nd tier cities and
rachel_miu@hk.dbsvickers.com                                                                                  high-end brand dealerships breakthrough
Nicole Wu +8621 6888 3321                                                                               •     Valuation looks fair at 25x FY10 PE
nicole_wu@hk.dbsvickers.com
                                                                                                        Economies of scale is Pangda’s key strength. Pangda is
                                                                                                        the biggest domestic auto dealer group in terms of sales
                                                                                                        revenue. It carries 83 auto brands and operates 926 sales
Price Relative
     RM B                                                                R e la t iv e
                                                                                                        points in 23 provinces and regions in China and Mongolia.
   4 8 .6 0
                                                                           In d e x
                                                                                         102            Its well established sales network and economies of scale are
                                                                                         97
                                                                                                        the most valuable strengths for Pangda as it is difficult for
   4 3 .6 0                                                                              92
                                                                                         87
                                                                                                        competitors to achieve the same scale. The large business
   3 8 .6 0
                                                                                         82             scale also equips the group with better bargaining power
   3 3 .6 0
                                                                                         77
                                                                                                        with automakers on dealership terms.
                                                                                         72
   2 8 .6 0
      2 7 -A p r -1 1        1 0 -M a y -1 1   2 3 -M a y -1 1        0 5 -J u n -1 1
                                                                                         67
                                                                                                        Sedan and truck sales boosting earnings. Sedan and
                                                                                                        truck sales contributed c. 53% and 30% of 2010 turnover
     P a n g D a A u t o m o b ile (L H S )    R e la t iv e S H C O M P IN D E X (R H S )
                                                                                                        respectively and we believe these two segments will continue
Forecasts and Valuation                                                                                 to drive future earnings. After-sales service is a long-term
FY Dec (RMB m)                                  2008A                  2009A                   2010A
                                                                                                        catalyst, supported by its vast network across the country.
Turnover                                        24,044                 35,135                  53,704   Impact from Saab deal remains to be seen. We believe
EBITDA                                           1,175                  1,702                   2,788
Pre-tax Profit                                     840                  1,408                   1,732   the recent Saab deal will not have a material impact on its
Net Profit                                         602                  1,011                   1,236   bottom line in the short term. Pangda’s purchase of Saab
Net Pft (Pre Ex.)                                  602                  1,011                   1,236   cars amounts to less than 1% of its 2010 car sales volume.
EPS (RMB)                                         0.66                   1.11                    1.36
EPS Gth (%)                                        N/A                   68.0                    22.2
                                                                                                        The manufacturing JV plan, which will need government
Diluted EPS (RMB)                                 0.66                   1.11                    1.18   approval, should not have an immediate material impact as
DPS (RMB)                                         0.00                   0.00                    0.00   well.
BV Per Share (RMB)                                1.39                   2.34                    3.60
PE (X)                                            50.3                   29.9                    24.5   Trading at fair valuation. Pangda is trading at 24.5x FY10
P/Cash Flow (X)                                   42.8                   26.0                    20.7   PE after correcting 20% from IPO price of RMB45. We think
P/Free CF (X)                                     46.4                   28.2                    26.5   the valuation is fair, considering its scale of operation and HK
EV/EBITDA (X)                                     24.9                   16.7                    10.0
Net Div Yield (%)                                  0.0                    0.0                     0.0   listed Chinese auto dealer groups’ 10.6x-41.6x FY10 PE.
P/Book Value (X)                                  24.0                   14.2                     9.2
Net Debt/Equity (X)                              CASH                   CASH                    CASH
ROAE (%)                                           N/A                   59.7                    45.8       At A Glance
                                                                                                            Issued Capital (m shrs)                             1,049
                                                                                                            Mkt. Cap (RMBm/US$m)                       34,908 / 5,389
                                                                                                            Major Shareholders
                                                                                                                 Pang Qinghua (%)                               26.0
                                                                                                                 TS Shengcheng (%)                              20.9
ICB Industry: Consumer Services                                                                                                                                  9.5
                                                                                                                 BJ Yingweite Auto (%)
ICB Sector: General Retailers
                                                                                                                 Lianhexin (%)                                   4.3
Principal Business: A leading auto dealer with portfolio covering
PV, CV, agricultural and engineering vehicles                                                                    Other shareholders (%)                         25.9
                                                                                                            Free Float (%)                                      13.4
Source of all data: Company, DBSV, Bloomberg, HKEX                                                          Avg. Daily Vol.(‘000)                              2,469




Page 122
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- JS / sa- CW
                                                                                                       Automobile Sector
                                                                                                  Pang Da Automobile
Company background
                                                                It has 83 authorised dealerships from 69 automakers,
                                                                including 52 sedan brands which are sold through 409
The largest auto dealer headquartered in Hebei. Established
                                                                sedan sales points (307 if excl. Subaru sales points). These
in 2003, Pangda Automotive Trade is the largest auto dealer
                                                                brands include Subaru, Volkswagen, Honda, Toyota,
group based in Tangshan (near Beijing), Hebei province. It
                                                                Mercedes Benz, Audi, Hyundai, etc. Truck segment is
was ranked 1st among all auto dealers in terms of sales
                                                                composed of 16 brands, covering Auman, FAW-Jiefang,
revenue according to China Auto Dealers’ Association
                                                                Sinotruck and Shaanxi Auto.
(CADA) 2009 report.
                                                                Dealership terms. Most of Pangda’s dealership terms range
Pangda made its debut on the A share market in Apr 2011.
                                                                from 1- 3 years, and are automatically renewed if both
It offered 140m shares at IPO price of RMB 45/sh, raising a
                                                                parties agree on the terms. According to Pangda, none of its
total of RMB6bn. It plans to use the proceeds for sales
                                                                dealership contract has been terminated since it started
network expansion and working capital replenishment.
                                                                operations. The group is currently renewing those
                                                                dealerships that expired in 2010.
Extensive distribution network with focus on Northern
China. Pangda operates 926 sales points in 23 provinces in
                                                                Central purchase & channel distribution. Pangda adopts
China and Mongolia. The 926 sales points are made up of
                                                                central purchasing and channel distribution policies to lower
699 auto 4S shops, 216 multi-brand sales centres and 11
                                                                purchase cost, which is not common in the industry.
specialized vehicle outlets. Among the 699 4S shops, the
                                                                Pangda’s large wholesale scale brings better bargaining
number of sales points for sedans, trucks and minivans are
                                                                power on vehicle prices. The centralized model also lowers
409, 125 and 165 respectively. Pangda has a significant
                                                                related administrative cost, which will help to lift margins.
presence in Northern China with 545 4S shops and 152
multi-brand sales centres.                                      Pangda imports two brands, Subaru and Audi. Subaru
                                                                sedans imported from Fuji Heavy constituted c. 16% of total
Business model                                                  2010 purchase while imported Audi accounted for a small
                                                                portion.
Major revenue source from vehicle sales. Pangda derives its
revenue mainly from vehicle sales and after-sales service. It   Top 5 suppliers in 2010 (RMB m)
achieved RMB54bn sales in 2010, where new vehicle sales
accounted for c.94% of total turnover and after-sales                                                               as of % in
                                                                                                      Purchasing
service made up c.5%.                                           Auto maker             Brands                       total 2010
                                                                                                       amount
                                                                                                                     purchase
                                                                Fuji Heavy (FHI)       Subaru           7,555          16%
Revenue breakdown 2008-2010
                                                                BAIC Foton             Auman            3,364          9%
                                                                Sinotruck Jinan        Various          2,364          7%
                  1%              1%                1%          Shaanxi Heavy Truck    Shaanxi Auto     2,699          7%
   100%
                  6%              6%                5%          SAIC-GM Wuling         Wuling           2,650          6%

                                                                Source: Company Prospectus
    75%

                                                                Robust sales and steady market share. Volume sales have
    50%          93%              93%               94%         been on the rise, representing FY08-10 CAGR of 45.5%.
                                                                New car sales revenue CAGR was 49.8%. Its market share
    25%                                                         hovered between 2.4-2.6%, implying the auto dealership
                                                                market is highly fragmented. Sales volume of the top ten
                                                                largest auto dealer groups was less then 10% of China’s
      0%                                                        total sales, according to 2009 data from CADA.
                 2008            2009               2010
            Vehicle sales     After-sales Service     Others


Source: Company Prospectus


Offering a wide range of sedan & truck vehicles. Pangda’s
new vehicle sales include sedans, trucks, minivans,
agricultural vehicles and engineering vehicles. Sedan and
truck sales have been the best performing segments in
recent years, making up c. 53% and 30% of total turnover
in 2010 respectively.

                                                                                                                     Page 123
  Automobile Sector
  Pang Da Automobile

Pangda vehicle sales volume & market share 2008-2010           Sedan sales breakdown by brands 2010

 units                                                   %                                           BJ Hyundai
 500,000                                                 3.0                                             6%
                                                                                  Volkswagen
                                                                                                             DF Yueda Kia
                                                                                     18%
 400,000                                                                                                         6%
                                                         2.8
                                                                                                                   Toyota
 300,000                                                                                                            5%
                                                         2.6             Subaru
 200,000                                                                  30%                                    GAC Honda
                                                                                                                    5%
                                                         2.4
 100,000                                                                                                          Nissan
                                                                                                                   4%
         0                                               2.2                        Others
                                                                                     20%                          Chery
                  2008            2009        2010
                                                                                                         Mazda     3%
             Sales volume (LHS)          Market share (RHS)                                               3%

Source: Company Prospectus
                                                               Source: Company Prospectus

Segmental analysis
                                                               Imported Subaru. In 2004, Pangda was granted the
                                                               exclusive Subaru dealership for 8 Northern provinces. In
Sedans                                                         2010, Pangda registered 35K units of Subaru sales,
                                                               accounting for 61% of total Subaru China sales. It now
Strong sedan sales. Sedans was the main revenue driver         operates 102 Subaru 4S shops in China. Subaru contributed
from 2008-2010. Revenue surged to c.RMB28bn in FY10,           16% of Pangda’s sales revenue in 2010 and 27.5% of total
up from RMB12bn, at a 3-year CAGR of 54.3%. Subaru             gross profit.
topped with 30% share of total sedan sales in 2010,
followed by Volkswagen’s 18% and Beijing Hyundai’s 6%.         Subaru sales volume trend
Other Japanese brands shares were relatively small.
                                                               (Units)                           2008         2009          2010
Sedan sales & growth 2008-2010                                 Purchase volume                  14,429      26,921         38,744
                                                               Sales volume                     12,970      25,153         35,268
 RMB bn                                                  %     Sales volume gth (%)               n.a.        93.9          40.2
 40                                                      70    Sales/Purchase rate (%)           89.9         93.4          91.0


                                                               Total Subaru sales in China     20,835       37,187     58,054
 30                                                      60
                                                               Pangda Subaru share (%)           62.3         67.6          60.8

                                                               Source: Company Prospectus
 20                                                      50

                                                               Trucks
 10                                                      40
                                                               Truck sales closely linked to macro health. Truck sales were
                                                               also strong with turnover increasing from RMB7.6bn (FY08)
  0                                                      30
                                                               to RMB16bn (FY10), a 3-year CAGR of 46%. Truck sales
              2008            2009            2010
                                                               growth was low in 2008 due to the financial crisis, but
         Car sales revenue (LHS)          YoY growth (RHS)     recovered in 2009, helped by the RMB4trn stimulus package.
                                                               The top 5 brands in 2010 in terms of total revenue were
Source: Company Prospectus                                     BAIC Foton (23.3%), FAW Jiefang (20.5%), Shaanxi Heavy
                                                               Truck (16.4%), Sinotruck (14.8%) and Dongfeng (13.1%).




Page 124
                                                                                                        Automobile Sector
                                                                                                   Pang Da Automobile

Truck sales & growth 2008-2010                                   New sales points to be opened

                                                                 New sales points                           Type     Es t. annual
 RMB bn                                                   %
                                                                                                                             sales
 30                                                      80                                                             (RMB m)
                                                                 Tangshan city                     Sales center              576
                                                         60      Chengde city                      Sales center              996
 20                                                              Zhangjiakou city                  Sales center              664
                                                                 Hengshui city                     Sales center              656
                                                         40
                                                                 Zunhua city                       Sales center              737
 10                                                              Tanghai county                    Sales center              767
                                                         20      Qian'an city                      Sales center              465
                                                                 Baoding city                      Sales center              722
                                                                 Xinmin c ity                      Sales center              391
  0                                                      0
                                                                 Hulunber city                     Sales center              536
           2008             2009             2010                Yuanping city                     Sales center              237
        Truck sales revenue (LHS)        YoY growth (RHS)        Benxi City                     Honda 4S shop                172
                                                                 Yanji city               Honda/Subaru 4S shop               297
                                                                 Baicheng city            Honda/Subaru 4S shop               229
Source: Company Prospectus
                                                                 Total                                                     7,447

Pangda sells its trucks through auto sales centres with the      Source: Company Prospectus
exception of some branded trucks. As at end of 2010,
Pangda has signed contracts with 16 truck brands, and            Cooperation with Saab. Pangda group recently inked
operates 216 sales centres and 125 branded truck sales           agreements with the troubled Spyker Group which owns
shops. Branded truck sales shop operates the same way as         the Saab brand. Pangda paid Euro 30m for vehicle
the sedan 4S shop.                                               purchases to help Saab restart production in May and paid
                                                                 an additional Euro 15m for more Saab cars in early Jun. The
After-sales service. After-sales service increased 40% y-o-y     2 parties also plan to set up a 50:50 distribution JV within 3
in 2010 to RMB2.8bn. Auto parts and maintenance service          months and a manufacturing JV in a year’s time, pending
has been growing at a slower pace than new vehicle sales         government approval. Pangda and another 3rd party will
but enjoys higher margin. Gross margin for auto parts and        hold at least a 50% stake. Pangda will also invest another
maintenance service was 28% and 47% respectively in              Euro 65m for a 24% stake in Spyker. Pangda is ambitious
2010. Going forward, both should continue to generate            regarding Saab’s future direction in China. It plans to build
double digit growth as the car user base is growing rapidly.     50 Saab 4S dealerships in 2011. These would constitute half
                                                                 of Saab dealers in China, all independent dealerships.
Growth Strategy & Expansion plan
                                                                 However, we believe earnings impact from the Saab deal to
Going beyond North China to hit 5% market share. With            be minimal in the short-term as the Euro45m purchase cost
RMB6bn raised from the IPO, the proceeds will be used to         only translates into c.1,930 cars, which is <1% of Pangda’s
expand its presence to the Northeast and Northwest regions       2010 new car sales volume.
as well as surrounding provinces like Henan and Shandong.
It plans to achieve 5% market share for PV market and 10%        Financials
for CV market by 2020.
                                                                 Rapid revenue growth. FY10 revenue advanced 53% y-o-y
Further penetration into 2nd and 3rd tier cities. Pangda plans   to RMB54bn, helped mainly by new vehicle sales. Gross
to set up 14 new sales points in 2nd and 3rd tier cities,        margin improved from 10.3% in 2009 to 10.7%. SG&A
including 3 sales shops and 11 sales centres through organic     ratio was stable at c.6% in the past three years. However,
growth & restructuring. These 2nd and 3rd tier cities are just   net margin was down 0.6ppt to 2.3% in 2010, because
entering into the golden growth period. Construction takes       financial cost soared over 5 times to RMB833m from
4-5months and the 14 new sales outlets are expected to           RMB143m in 2009.
generate RMB7.4bn revenue annually. Uu8
                                                                 Addressing high working capital and gearing ratio issues.
                                                                 Huge working capital requirement and high gearing ratios
                                                                 are not uncommon to auto dealers, especially during fast
                                                                 expansion phase. The IPO exercise should improve its
                                                                 financial position. Its total debt position increased 5-fold


                                                                                                                      Page 125
  Automobile Sector
  Pang Da Automobile
from c. RMB2.2bn to c.RMB11.3bn at end 2010. The IPO
proceeds of RMB6bn is so far the largest for an auto dealer,   Key management
which should pave the way for Pangda’s future expansion.
                                                               Nam e                 Position                            Direct
                                                                                                                     Stake (%)
Shareholder/Management                                         Pang Qinghua*         Founder, Chairman, GM               25.99
                                                               Yang Jiaqing          Vice Chairman, Deputy GM              2.28
Interest alignment is a good sign. Founder and Chairman Mr.    Wang Yusheng          Director, Deputy GM                   2.22
Pang Qinghua holds c. 25.99% stake post A share IPO. He        He Jingyun            Director, Deputy GM                   1.27
remains the controlling shareholder of the group if we take    Li Jinyong            Director, Deputy GM                   1.36
into account the 20.93% stake held by Shengcheng (a            Wu Cheng              Director, Deputy GM, CFO              1.15
company owned by the senior management) whose voting           Sun Zhixin            Director, Deputy GM                   0.91
rights belongs to Mr. Pang. Other 18 senior managers are       Zhao Chengman         Director                              2.19
entitled to a total stake of 25.86%. All key management        Yang Xiaoguang        Director                              2.20
shares are subject to 36 months lock-up period.
                                                               * Mr. Pang owns total voting right of Shengcheng who holds
                                                               20.93% of Pangda

                                                               Source: Company Prospectus


                                                               Valuation

                                                               Trailing valuation looks reasonable after correction.
                                                               Pangda’s share price plunged 20% on it debut as IPO price
                                                               RMB45 was premised on 39.64x FY10 PE as per prospectus.
                                                               The share price is now hovering around RMB35 level, which
                                                               translates into 29x FY10 PE (enlarged capital base). HK listed
                                                               auto dealers are now trading in the range of 10.6x-41.6x
                                                               FY10 PE or 10.8x-20.2x FY11 earnings.

Pangda distribution network




Source: Company

Notes: Red are covered, grey are not covered areas



Page 126
                                                                                                                    Automobile Sector
                                                                                                              Pang Da Automobile
Income Statement (RMB m)                                                    Balance Sheet (RMB m)
FY Dec                              2008A          2009A         2010A      FY Dec                        2008A       2009A     2010A
Turnover                          24,044         35,135        53,704       Net Fixed Assets               1,185       1,903     3,276
Cost of Goods Sold               (21,571)       (31,500)      (47,966)      Invts in Assocs & JVs              0           0         0
Gross Profit                         2,473          3,636         5,738     Other LT Assets                  981       2,114     4,148
Other Opng (Exp)/Inc               (1,411)        (2,080)       (3,230)     Cash & ST Invts                3,219       6,464    13,740
Operating Profit                     1,062          1,556         2,508     Inventory                      3,968       3,637     6,226
Other Non Opg (Exp)/Inc                   8             (5)           56    Debtors                        2,445       4,851     7,379
Associates & JV Inc                       0              0             0    Other Current Assets              16          67       223
Net Interest (Exp)/Inc                (230)          (143)         (833)    Total Assets                  11,814      19,036    34,994
Exceptional Gain/(Loss)                   0              0             0
Pre-tax Profit                         840          1,408         1,732     ST Debt                        2,241       4,333     9,809
Tax                                   (239)          (393)         (489)    Other Current Liab             8,295      12,208    20,254
Minority Interest                         1             (3)           (6)   LT Debt                            1         350     1,625
Preference Dividend                       0              0             0    Other LT Liabilities               0           0         0
Net Profit                             602          1,011         1,236     Shareholder’s Equity           1,261       2,126     3,272
Net Profit before Except.               602         1,011         1,236     Minority Interests                16          19        34
EBITDA                               1,175          1,702         2,788     Total Cap. & Liab.            11,814      19,036    34,994

Sales Gth (%)                         N/A            46.1          52.8     Non-Cash Wkg. Cap             (1,866)     (3,652)    (6,425)
EBITDA Gth (%)                        N/A            44.9          63.8     Net Cash/(Debt)                  977       1,781      2,307
Opg Profit Gth (%)                    N/A            46.5          61.2
Net Profit Gth (%)                    N/A            68.0          22.2
Effective Tax Rate (%)               28.5            27.9          28.2
Cash Flow Statement (RMB m)                                                 Rates & Ratio
FY Dec                              2008A          2009A        2010A       FY Dec                        2008A       2009A      2010A
Pre-Tax Profit                          840         1,408        1,732      Gross Margins (%)               10.3        10.3       10.7
Dep. & Amort.                           105            151         224      Opg Profit Margin (%)            4.4         4.4        4.7
Tax Paid                             (734)           (897)     (1,087)      Net Profit Margin (%)            2.5         2.9        2.3
Assoc. & JV Inc/(loss)                    0              0           0      ROAE (%)                         N/A        59.7       45.8
(Pft)/ Loss on disposal of FAs            0              0           0      ROA (%)                          N/A         6.6        4.6
Chg in Wkg.Cap.                         975         1,633        2,455      ROCE (%)                         N/A        21.7       16.7
Other Operating CF                      368            668       1,340      Div Payout Ratio (%)             0.0         0.0        0.0
Net Operating CF                     1,553          2,963        4,663      Net Interest Cover (x)           4.6        10.9        3.0
Capital Exp.(net)                     (917)       (1,914)      (3,548)      Asset Turnover (x)               NM          2.3        2.0
Other Invts.(net)                        (9)           (89)         68      Debtors Turn (avg days)          N/A        37.9       41.6
Invts in Assoc. & JV                  (478)              0           0      Creditors Turn (avg days)        N/A        26.6       19.6
Div from Assoc & JV                        0             0            0     Inventory Turn (avg days)        N/A        44.3       37.7
Other Investing CF                       51             40         116      Current Ratio (x)                0.9         0.9        0.9
Net Investing CF                   (1,354)        (1,964)      (3,364)      Quick Ratio (x)                  0.5         0.7        0.7
Div Paid                                  0              0           0      Net Debt/Equity (X)            CASH        CASH       CASH
Chg in Gross Debt                      856          2,418        6,533      Capex to Debt (%)               40.9        40.9       31.0
Capital Issues                            0              0           0      Z-Score (X)                      N/A         N/A        N/A
Other Financing CF                    (150)          (241)     (2,714)      N.Cash/(Debt)PS (RMB)           1.08        1.96       2.54
Net Financing CF                       706          2,177        3,819      Opg CFPS (RMB)                  1.71        3.26       5.13
Currency Adjustments                    (12)            30         (68)     Free CFPS (RMB)                 0.70        1.15       1.23
Chg in Cash                            894          3,207        5,050
IPO Data                                                                    Segmental Breakdown (RMB m)
                                                                            FY Dec                        2008A       2009A      2010A
IPO listing date                        Apr 27 2011                         Revenues (RMB m)
                                                                             Vehicle sales                22,472      32,890    50,434
A share offering:                       140 m n shares                       Aftersales service            1,387       1,979     2,769
IPO price:                              RMB 45                               Others                          232         322       572
                                                                             Sales tax elimination           (47)        (56)      (70)
Gross proceeds                          RMB 6.3 bn
Net proc eeds:                          RMB 6.0 bn                          Total                         24,044      35,135    53,704
PE (based on enlarged c apital)         39.6x                               Gross Profit (RMB m)
                                                                             Vehicle sales                 1,872       2,819      4,401
PB (based on enlarged capital)          5.1x                                 Aftersales service              422         564        877
Use of proceeds                         c. 23% to expand dealer              Others                          225         309        530
                                        shops                                Sales tax elimination           (47)        (56)       (70)

                                        c. 6% for working capital           Total                          2,473       3,636      5,738
                                                                            Gross Profit Margins (%)
                                                                             Vehicle sales                   8.3         8.6        8.7
                                                                             Aftersales service             30.5        28.5       31.7
                                                                             Others                         97.1        96.0       92.7
                                                                             Sales tax elimination         100.0       100.0      100.0

                                                                            Total                           10.3        10.3       10.7

Source: Company, DBS Vickers




                                                                                                                                Page 127
Automobile Sector
Lentuo Int’l Inc
Bloomberg: LAS US | Reuters: LAS.US




NOT RATED US$4.98 CCMP: 2,702                                                       Only in Beijing
Price Target : n.a.
Potential Catalyst: Business expansion outside of Beijing
                                                                                    •     Beijing focused auto dealer group
                                                                                    •     Earnings prospects hit by restriction policy
Analyst
Rachel MIU +852 2863 8843                                                           •     Valuation at deep discount to peers reflecting the weak
rachel_miu@hk.dbsvickers.com
                                                                                          outlook
Nicole Wu +8621 6888 3321
nicole_wu@hk.dbsvickers.com
                                                                                    Beijing focused private auto dealer. Lentuo is the largest
                                                                                    non state-owned auto dealer group in Beijing. It has six
Price Relative
        US$
                                                                                    franchised dealerships, ten automobile showrooms and an
                                                                Relative Index
                                                                         219        independent auto repair shop. It offers over 30 different
     8.50

     7.50                                                                169
                                                                                    models, ranging from sedans, sports cars, SUVs to mini-vans
     6.50                                                                           from FAW-VW, Audi, FAW-Mazda, Shanghai-VW, Toyota and
                                                                         119
     5.50
                                                                                    Chang An-Mazda.
     4.50
                                                                         69
     3.50                                                                           Adverse policy to stem 2011 new car sales growth.
     2.50
        Dec-10                           Mar-11
                                                                         19
                                                                                    Beijing government’s license plate restriction has started to
         Lentuo Int'l Inc (LHS)                 Relative CCMP INDEX (RHS)           take a heavy toll on new car sales, based on 1Q11 sales
                                                                                    volume which plunged 65% y-o-y. CADA estimates full year
Forecasts and Valuation                                                             sales in Beijing to decline 30-50% in 2011. Historically,
 FY Dec (RMB m)                       2007A         2008A     2009A         2010A   Lentuo’s passenger vehicle (PV) sales growth has been slower
 Turnover                             1,657         1,879     2,341         3,364   than industry PV segment. We believe 2011 outlook will be
 EBITDA                                   93          147       222           322   challenging, since its focus is solely in Beijing. However, the
 Pre-tax Profit                           64          104       179           224
 Net Profit                               35            77      129           161
                                                                                    outlook for its repair and maintenance segment should
 Net Pft (Pre Ex.)                        35            77      129           161   remain healthy.
 EPS (RMB)                             0.87          1.92      3.23          3.77
 EPS Gth (%)                             n.a.       121.5      68.2          16.9
                                                                                    Future expansion may be slow. Lentuo plans to expand its
 Diluted EPS (RMB)                     0.87          1.92      3.23          3.77   dealership through both organic growth and acquisitions,
 DPS (RMB)                                  -             -        -            -   adding new models, entering new geographic regions and
 BV Per Share (RMB)                    1.93          3.85      7.08         17.21   developing vehicle leasing to make up for the lost sales. But
 PE (X)                                18.6            8.4      5.0           4.3
 P/Cash Flow (X)                         8.7           5.5      4.0           2.5
                                                                                    with limited IPO funds raised, its financials may not support a
 EV/EBITDA (X)                           8.2           5.1       4.0          0.4   rapid expansion plan compared to its peers.
 Net Div Yield (%)                          -             -        -            -
 P/Book Value (X)                        8.4           4.2       2.3          0.9
                                                                                    Valuation at deep discount justified. Lentuo is now
 Net Debt/Equity (X)                     1.6           0.7       0.9         Cash   trading at 4.3x FY10 PE (on enlarged capital base). This is
 ROAE (%)                               n.m.          n.m.     59.0          31.7   way below 10.6x-41.6x FY10 PE for HK-listed peers. The
                                                                                    sharp discount is due to several factors: 1) limited network
                                                                                    coverage; 2) uncertain earnings outlook due to restriction in
                                                                                    Beijing; and 3) limited product offerings.

                                                                                        At A Glance
                                                                                        Issued Capital (m shrs)                          29 (ADSs)
ICB Industry: Consumer Services                                                         Mkt. Cap (US$m)                                       147
ICB Sector: General Retailers                                                           Major Shareholders
Principal Business: a mid-high end Beijing auto dealer
                                                                                           Guo Hetong (%)                                    50.8
                                                                                           Newman Investments Ltd (%)                        10.2
Source of all data: Company, DBSV, Bloomberg, HKEX                                         Other shareholders (%)                            16.9
                                                                                        Free Float (%)                                       22.1
                                                                                        Avg. Daily Vol.(‘000)                                 77




Page 128
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- JS / sa- CW
                                                                                                      Automobile Sector
                                                                                                        Lentuo Int’l Inc
Company background
                                                                Sales revenue & growth 2007-2010
Operates only in Beijing. Lentuo International is the largest
non state-owned auto dealer in Beijing, as measured by new       RMB m                                                        %
car sales revenue. According to China Automobile Dealers         5,000                                                        60
Association (CADA) statistics, Lentuo has c.3% market share                                                                   50
                                                                 4,000
of sales volume in Beijing’s PV market. Beijing is the single
largest city for auto sales in China but the auto restriction                                                                 40
                                                                 3,000
policy has negatively impacted its outlook in 2011.                                                                           30
                                                                 2,000
Lentuo has six franchised dealerships and ten automobile                                                                      20
showrooms as well as an independent auto repair shop in          1,000                                                        10
Beijing.
                                                                     0                                                        0
Mr. Guo (Chairman) founded the group in 1994 which was                       2007         2008      2009         2010
involved in the retail of Chinese domestic automobiles. In               Car sales revenue (LHS)      Total revenue (LHS)
1997, the company opened its first authorized dealership                 Car sales gth (RHS)          Total sales gth (RHS)
under the FAW-Volkswagen franchise. Subsequently, it
added five more dealerships.                                    Source: Company


Dealership brands
                                                                Car sales breakdown 2009
Franchise D ealership              Date of Initial Operation

FAW-Volkswagen                                      Dec/1997
Audi                                                Mar/2003                               FAW-                 Toyota
FAW-Mazda                                           Mar/2003                               Mazda                10.0%
SH-Volkswagen                                      May/2004                                16.8%
Toyota                                              Apr/2005
Chang An-Mazda                                      Apr/2008               FAW-VW
                                                                            27.5%                                 Chang An-
Source: Company                                                                                                    Mazda
                                                                                                                    7.4%

Business model                                                                                                     SH-VW
                                                                                         Audi                       7.0%
New car sales                                                                           31.2%
                                                                                                                  Other
                                                                                                                  0.2%
Bulk of turnover from sales of mid-high end new cars. New
car sales supported turnover growth of 43.7% to RMB3.4bn
                                                                Source: Company
in 2010. New vehicle sales accounted for c.91% of total
turnover while automobile repair and maintenance service
operations contributed c. 8%. The balance came from auto        PV sales growth lower than sector average. In 2010, Lentuo
insurance and finance-related services.                                                                          .
                                                                sold 18,176 new vehicles, up 20.8% from 2009. However,
                                                                growth was slower than the industry PV growth of 33.2%.
Lentuo sells domestically made vehicles by Sino-foreign joint   Historically it has underperformed the market, due to its
ventures or imported vehicles. The Group offers over 30         focus in Beijing only and limited auto brand offerings. Unit
different models of passenger vehicles ranging from sedans,     sales per store last year was approx. 3,000 vehicles.
sports cars, SUVs to mini-vans.




                                                                                                                    Page 129
  Automobile Sector
  Lentuo Int’l Inc

  .                                                             Sufficient capacity to further fuel maintenance service.
Sales volume growth rate comparison 2008-2010                   Lentuo operates a total of 187 services bays to service
                                                                customers. It is capable of processing 584 cars per day.
  %                                                             Service revenue per vehicle was RMB2,080 in FY10, +4%
  60                                                            from RMB1,999 in FY09. Serviced car volume jumped 30%
                                                                y-o-y to c. 132K units, just c.62% of total capacity. Given
      40                                                        Beijing’s traffic and weather conditions plus increasing
                                                                number of vehicles, we believe prospects for the repair and
      20                                                        maintenance business remains bright.


       0                                                        Repair service capacity by brands

                                                                Repair service                 Number of         Daily Capacity
  (20)                                                                                        Service Bays         (Number of
              2008              2009               2010                                                               Vehicles)
                        Lentuo sale volume Gth (%)              Audi                                    35                     95
                        PV sector Gth (%)                       FAW-Volkswagen                          25                     80
                                                                SH-Volkswagen                           17                     50
Source: Company, CAAM                                           Toyota                                  28                     90
                                                                FAW-Mazda                               28                     90
Buying from OEMs or distributors. Lentuo sources new            Chang An-Mazda                          21                     80
vehicles from automakers (JVs) and their exclusive              Other                                   33                     99
distributors in China. Purchases from top three suppliers,      Total                                  187                     584
FAW-Volkswagen, Audi and FAW-Mazda, accounted for
                                                                Source: Company
approximately 80.7%, 77.6% and 75.8% of total purchases
in 2007, 2008 and 2009 respectively.
                                                                Repair & maintenance center is recognized by district
                                                                government. In 2003, the group’s Tuozhan repair centre
Repair & maintenance service
                                                                became one of the seven qualified companies offering
                                                                government public transportation vehicle maintenance
High growth & high margin. Lentuo’s repair and maintenance
                                                                services for the procurement centre of Beijing Chaoyang
service has been growing rapidly in recent years. Segmental
                                                                district Government. In 2004 Lentuo was also awarded the
revenue more than tripled from RM75m in FY07 to RMB274m
                                                                certification as a fixed maintenance support unit of public-
in FY10. Gross margins topped 60% last year, another plus
                                                                purpose by the same government agency.
factor. Thus, after-sales service constituted c. 44% of total
gross profit though it only made up 8% of top line in 2010.
                                                                Policy

After sales service sales & margin trend 2007-2010
                                                                Beijing auto restriction. The Beijing government announced
                                                                the strictest rule so far in Dec 2010 to control the city’s
 RMB m                                                     %    notorious traffic congestion. It will only issue 240K new
 300                                                      80
                                                                license plates in 2011, where 88% is allocated for new
                                                                private car purchases. Car buyers in Beijing will have to draw
                                                          60    lots to obtain a vehicle license plate.
 200

                                                          40    That policy resulted in a sharp 65% y-o-y decline in 1Q sales
                                                                to 61K units. CADA estimates car sales volume in 2011 to
 100                                                            fall c.30%-50% from last year’s 890K units.
                                                          20

                                                                Growth Strategy & Expansion plans
      0                                                   0
           2007        2008        2009        2010
                                                                Increase in dealership stores. The group plans to add at least
                  After-sales Service Revenue (RHS)
                                                                10 new stores in 2011, of which three dealerships will be in
                  After-sales Gross Margin (LHS)                Beijing and seven outside of Beijing, after the government
                                                                implemented the auto restriction.
Source: Company Prospectus
                                                                Lentuo entered into an agreement with a Honda dealership
                                                                in Tianjin to acquire 60% stake in early 2011. The

Page 130
                                                                                                       Automobile Sector
                                                                                                          Lentuo Int’l Inc
transaction is expected to be finalised in 2Q11. Lentuo has     IPO funding not as high as peers. Lentuo’s ADSs began
also started the construction of a FAW-VW dealership store      trading on the NYSE on Dec 9 2010. The group issued 6.5m
in central area of eastern Beijing. Construction will be        ADSs, each representing two ordinary shares, at US$8/ADS.
completed by June 2011.                                         Total proceeds amounted to US$52m, or approx. RMB346m.
                                                                The total funds raised is c. 6% of Pangda’s IPO size and
Developing a new business unit for fleet leasing and used       c.15% of Zhongsheng IPO size. Given a smaller war chest,
car operations. Lentuo plans to enter the fleet car leasing     Lentuo’s expansion may lag behind its peers.
business by placing a large order of vehicles from
automobile manufacturers, which will help lower per vehicle     Shareholder/Management
purchase costs. The group will lease these vehicles to retail
car rental companies for one to two years before re-selling     Experienced management team with significant stake.
these vehicles to customers.                                    Lentuo has a management team with extensive experience
                                                                and expertise in the automobile retail sector in China. Mr.
Financials                                                      Hetong Guo, founder and Chairman, has served in the
                                                                automobile industry for more than 20 years and holds a
COGS grew faster than revenue in 2010. Sales increased          50.8% controlling stake in the group. Mr. Jing Yang, CEO,
43.7% y-o-y to RMB3.4bn, but COGS rose faster at 45.3%,         has approximately 13 years of experience in the automobile
which was mainly due to the group’s small scale and hence       retail industry and owns 4.1% of the group.
less bargaining power. Overall gross margin dipped 1ppt to
10.9% in 2010 from 11.9% in 2009. The main culprit was          Valuation
new car sales margin erosion, down from 7.3% to 6.2%.
Repair and maintenance gross margin improved from               At deep discount to H & A share peers. Lentuo’s share price
57.4% to 59.7%.                                                 has fallen since its debut in Dec 2010. Share price fell from
                                                                its issue price of US$8 to current price of US$4.98. HK-listed
Stringent operating cost control. Selling & marketing
                                                                auto dealers are trading on FY10 PE of 10.6x-41.6x while
expense/sales ratio was 2.0% and 1.7% in FY08 and FY09
                                                                Pangda (601258 CH) is valued on 24.5x PE.The sharp
respectively, declining further to 1.6% in FY10 even after
                                                                discount is due to a combination of factors: 1) limited
factoring in higher performance-based bonus to sales
                                                                network coverage; 2) uncertain earnings outlook due to
persons in FY10. Admin expense was also well managed,
                                                                restriction in Beijing; and 3) limited product offerings.
accounting for 1.1% of total revenue in 2010.




                                                                                                                     Page 131
 Automobile Sector
 Lentuo Int’l Inc
 Income Statement (RMB m)                                                          Balance Sheet (RMB m)
 FY Dec                            2007A         2008A        2009A      2010A     FY Dec                        2007A     2008A     2009A     2010A
 Turnover                           1,657         1,879        2,341      3,364    Net Fixed Assets                263        270       268       223
 Cost of Goods Sold               (1,518)       (1,684)      (2,062)    (2,996)    Invts in Assocs & JVs             0          0         0         0
 Gross Profit                         139           195          279        368    Other LT Assets                  10         10        13         7
 Other Opng (Exp)/Inc                 (56)          (61)         (71)       (90)   Cash & ST Invts                 124        104        72       806
 Operating Profit                      83           134          209        278    Inventory                       118        245       290       276
 Other Non Opg (Exp)/Inc                0             1            1         (1)   Debtors                         323        290       268       438
 Associates & JV Inc                    0             0            0          0    Other Current Assets            116        446       496       460
 Net Interest (Exp)/Inc               (19)          (31)         (31)       (53)   Total Assets                    953      1,365     1,407     2,210
 Exceptional Gain/(Loss)                0             0            0           0
 Pre-tax Profit                        64           104          179        224    ST Debt                         244       209       325       241
 Tax                                  (30)          (28)         (50)       (63)   Other Current Liab              633     1,003       799     1,233
 Minority Interest                       0             0            0          0   LT Debt                           0         0         0         0
 Preference Dividend                    0             0            0           0   Other LT Liabilities              0         0         0         0
 Net Profit                            35            77          129        161    Shareholder’s Equity             77       154       282       736
 Net Profit before Except.             35            77          129        161    Minority Interests                0         0         0         0
 EBITDA                                93           147          222        322    Total Cap. & Liab.              953     1,365     1,407     2,210

 Sales Gth (%)                         N/A        13.4         24.6       43.7     Non-Cash Wkg. Cap               (76)      (22)       255      (59)
 EBITDA Gth (%)                        N/A        57.7         51.0       44.7     Net Cash/(Debt)                (120)     (105)     (253)      565
 Opg Profit Gth (%)                    N/A        61.9         55.4       33.2
 Net Profit Gth (%)                    N/A       121.5         68.2       25.4
 Effective Tax Rate (%)               46.2        26.7         28.0       28.1
 Cash Flow Statement (RMB m)                                                       Rates & Ratio
 FY Dec                            2007A         2008A       2009A      2010E      FY Dec                        2007A     2008A     2009A     2010A
 Pre-Tax Profit                        64           104        179        224      Gross Margins (%)                 8.4      10.4      11.9     10.9
 Dep. & Amort.                         10            12          12         44     Opg Profit Margin (%)             5.0       7.1       8.9      8.3
 Tax Paid                            (30)           (28)        (50)       (63)    Net Profit Margin (%)             2.1       4.1       5.5      4.8
 Assoc. & JV Inc/(loss)                 0              0          0          0     ROAE (%)                          N/A       N/A      59.0     31.7
 (Pft)/ Loss on disposal of FAs         0              0          0          0     ROA (%)                           N/A       N/A       9.3      8.9
 Chg in Wkg.Cap.                    (119)           282       (234)        546     ROCE (%)                          N/A       N/A      31.0     25.2
 Other Operating CF                    29            29          20         69     Div Payout Ratio (%)              0.0       0.0       0.0      0.0
 Net Operating CF                    (45)           399        (72)       821      Net Interest Cover (x)            4.4       4.3       6.8      5.3
 Capital Exp.(net)                   (16)           (20)        (11)     (294)     Asset Turnover (x)                NM        NM        1.7      1.9
 Other Invts.(net)                       0            (1)          1          0    Debtors Turn (avg days)           N/A       N/A      43.4     38.3
 Invts in Assoc. & JV                    0             0           0          0    Creditors Turn (avg days)         N/A       N/A    106.4      68.6
 Div from Assoc & JV                     0             0           0          0    Inventory Turn (avg days)         N/A       N/A      47.6     35.0
 Other Investing CF                    (4)        (182)       (121)           0    Current Ratio (x)                 0.8       0.9       1.0      1.3
 Net Investing CF                    (19)         (204)       (131)      (294)     Quick Ratio (x)                   0.5       0.3       0.3      0.8
 Div Paid                               0              0          0          0     Net Debt/Equity (X)               1.6       0.7       0.9    CASH
 Chg in Gross Debt                     63         (186)         198        (84)    Capex to Debt (%)                 6.5       9.7       3.5    122.1
 Capital Issues                         0              0          0       346      Z-Score (X)                       N/A       N/A       N/A      N/A
 Other Financing CF                   (25)          (30)        (25)       (54)    N.Cash/(Debt)PS (RMB)          (0.46)    (0.41)    (0.98)     2.04
 Net Financing CF                      38         (216)        173        208      Opg CFPS (RMB)                   0.29      0.45      0.62     0.99
 Currency Adjustments                    0             0           0          0    Free CFPS (RMB)                (0.24)      1.46    (0.32)     1.90
 Chg in Cash                          (27)          (20)        (31)       734

 IPO Data                                                                          Segmental Breakdown (RMB m)
  IPO listing date                           D ec 9 2010                           FY Dec                        2007A     2008A     2009A     2010A
  Offering                                   6 .5 m n ADSs                         Revenues (RMB m)
                                                                                    Vehicle sales                1,576     1,745     2,131     3,075
  IPO price                                  U S$8                                  Aftersales service              75       126       203       274
  Gross proceeds                             U S$52 m n                             Others                           6         9         7        15
                                                                                   Total                         1,657     1,879     2,341     3,364
  PE (based on enla rged c apita l)          9 .7x
  PB (based on enlarged capital)             2 .3x
  Use of proceeds                            c .85% ?to expand                     Gross Profit (RMB m)
                                                                                    Vehicle sales                  111       132       156       191
                                             dealership netw ork                    Aftersales service              22        55       117       164
                                             c .5% to e nha nce e xisting           Others                           6         8         7        13
                                             dealerships                           Total                           139       195       279       368

                                             c .10% working c apital
                                                                                   Gross Profit Margins (%)
                                                                                    Vehicle sales                   7.1       7.6       7.3      6.2
                                                                                    Aftersales service             29.6      43.6      57.4     59.7
                                                                                    Others                         94.1      94.0      96.6     91.9
                                                                                   Total                            8.4      10.4      11.9     10.9




 Source: Company, DBS Vickers




Page 132
                                              Automobile Sector
                                                Lentuo Int’l Inc




This page has been left blank intentionally




                                                        Page 133
Automobile Sector
Dongfeng Motor Group
Bloomberg: 489 HK | Reuters: 0489.HK



                                                                                   To capitalise on market upturn by
BUY HK$13.16 HSI : 22,869
                                                                                   end 3Q
Price Target : 12-month HK$15.60 (Prev. HK$15.9)
Potential Catalyst: Successful launch of co-brand with Nissan                      •    Parts supplies from Japan almost normal, positive on JV
                                                                                        operations. Expect market inflection in August
Analyst
Rachel MIU +852 2863 8843                                                          •    Nissan JV further strengthened; to launch co- developed
rachel_miu@hk.dbsvickers.com                                                            brand in 1H12
                                                                                   •    Cheap underlying valuations relative to its operating
                                                                                        leverage. Maintain BUY, HK$15.60 TP
                                                                                   5M11 auto sales rose 10% y-o-y. Despite weaker industry
Price Relative                                                                     sales trend, Dongfeng posted positive growth. Sales
        HK$                                                       Relative Index

     19.20
                                                                                   momentum expected to pick up from August, boosting its 4Q
     17.20
                                                                           405
                                                                           355
                                                                                   outlook. YTD, the company has achieved 894K units or 41% of
     15.20
     13.20                                                                 305     our full year forecast of 2.16m units, which remains unchanged.
     11.20
       9.20
                                                                           255
                                                                           205
                                                                                   Although the high-end segment is important, Dongfeng will
       7.20
       5.20
                                                                           155     continue to strengthen its presence in the 1.6-2.0L space, the
       3.20
       1.20
                                                                           105
                                                                          55
                                                                                   main volume driver. However, we trimmed gross margin by
          2007             2008            2009            2010        2011
                                                                                   0.3ppt to 20.2% for FY11, resulting in 3% lower earnings,
       Dongfeng Motor Group (LHS)                    Relative HSI INDEX (RHS)
                                                                                   translating to revised TP of HK$15.6.
Forecasts and Valuation                                                            Co-brand with Nissan to be launched next year. The Nissan
                                                                                   JV is important to Dongfeng as it accounted for over 50% of
FY Dec (RMB m)                         2009A   2010A    2011F   2012F              total JV business in FY10. The future strategy is to spread its
Turnover                               91,758 122,395 135,354 152,399
EBITDA                                 12,470 18,797 17,885 20,062
                                                                                   production bases across the country, launch 2-3 new models
Pre-tax Profit                          8,409 14,583 15,140 17,103                 every year, introduce the co-brand in 1H12 as well as initiatives
Net Profit                              6,250 10,981 11,160 12,486                 on new-energy vehicle development. Preparation is underway
Net Pft (Pre Ex.)                       6,250 10,981 11,160 12,486                 in Zhengzhou factory, the production base for the new model.
EPS (RMB)                                0.73    1.27    1.30    1.45
EPS (HK$)                                0.87    1.53    1.56    1.74
                                                                                   The competitively priced Qicheng (        ) will be a strong
EPS Gth (%)                              58.0    75.7     1.6    11.9              contender for the Chinese self-brands, especially for consumers
Diluted EPS (HK$)                        0.87    1.53    1.56    1.74              in the 3rd and 4th tier cities who are more price-sensitive.
DPS (HK$)                                0.11    0.22    0.16    0.17
BV Per Share (HK$)                       3.81    5.23    6.57    8.16              Mid-term strategy. The 5-year plan is to have 20% of
PE (X)                                   15.1      8.6    8.5     7.6              production capacity devoted to each of self-brand and
P/Cash Flow (X)                            9.6    6.4      7.1     6.4             alternative energy vehicles, which implies the company is
P/Free CF (X)                             5.6     7.7    67.6    77.7
EV/EBITDA (X)                              6.1     3.4     3.6     3.2             eyeing new markets for growth. Despite the rising cost pressure,
Net Div Yield (%)                         0.8     1.6     1.2     1.3              Dongfeng has maintained a stable gross margin trend,
P/Book Value (X)                           3.5    2.5     2.0     1.6              attributable to strong management quality. We maintain our
Net Debt/Equity (X)                     CASH    CASH    CASH    CASH
                                                                                   BUY call for its relatively undemanding valuations compared to
ROAE (%)                                 25.3    33.9    26.4    23.7
                                                                                   other listed automakers.
Earnings Rev (%):                                      (3)     Nil
                                                                                   At A Glance
Consensus EPS (RMB):   :                             1.29    1.46
                                                                                   Issued Capital - H shares (m shs)                    2,856
Other Broker Recs:                       B: 21        S: 0   H: 7
                                                                                                    - Non H shrs (m shs)                5,760
ICB Industry: Consumer Goods                                                       H shs as a % of Total                                   33
ICB Sector: Automobiles & Parts                                                    H Mkt. Cap (HK$m/US$m)                      37,625 / 4,835
Principal Business: A leading automaker with strong foreign                        Major Shareholders
partnerships in the passenger and commercial vehicle segment                            Dongfeng Motor Corp. (%)                        66.9
                                                                                   Major H Shareholders (%)
Source of all data: Company, DBSV, Bloomberg, HKEX
                                                                                        UBS AG (%)                                        7.5
                                                                                        JPMorgan Chase & Co. (%)                          5.5
                                                                                   H Shares-Free Float (%)                              87.0
                                                                                   Avg. Daily Vol.(‘000)                              29,387



Page 134
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- MY & JS / sa- CW
                                                                                                                          Automobile sector
                                                                                                                Dongfeng Motor Group
Income Statement (RMB m)                                                        Balance Sheet (RMB m)
FY Dec                           2009A        2010A    2011F     2012F          FY Dec                        2009A      2010A       2011F      2012F
Turnover                        91,758     122,395 135,354 152,399              Net Fixed Assets              18,703     18,551     30,365     43,964
Cost of Goods Sold             (74,274)    (96,033) (108,047) (121,214)         Invts in Assocs & JVs            896      1,148      1,488      1,880
Gross Profit                    17,484      26,362    27,307    31,185          Other LT Assets                6,326      8,586      8,304      8,022
Other Opng (Exp)/Inc            (9,025)    (11,846) (12,231) (14,197)           Cash & ST Invts               33,430     44,250     44,459     44,921
Operating Profit                  8,459     14,516    15,076    16,988          Inventory                      8,741     13,935     15,329     16,861
Other Non Opg (Exp)/Inc               0           0        0         0          Debtors                       17,001     22,557     26,602     31,410
Associates & JV Inc                 195         296      340       391          Other Current Assets             592      1,595      1,595      1,595
Net Interest (Exp)/Inc             (245)       (229)    (276)     (276)         Total Assets                  85,689    110,622    128,142    148,653
Exceptional Gain/(Loss)                0           0       0         0
Pre-tax Profit                    8,409     14,583    15,140    17,103          ST Debt                        7,217      3,271      3,271      3,271
Tax                             (1,671)      (3,006)  (3,331)   (3,848)         Other Current Liab            43,219     59,385     66,646     75,019
Minority Interest                  (488)       (596)    (650)     (769)         LT Debt                        4,424      6,289      6,289      6,289
Preference Dividend                    0           0        0         0         Other LT Liabilities             274        341        341        341
Net Profit                        6,250     10,981    11,160    12,486          Shareholder’s Equity          27,284     37,494     47,103     58,473
Net Profit before Except.         6,250      10,981   11,160    12,486          Minority Interests             3,271      3,842      4,492      5,260
EBITDA                          12,470       18,797   17,885    20,062          Total Cap. & Liab.            85,689    110,622    128,142    148,653

Sales Gth (%)                      30.0       33.4         10.6        12.6     Non-Cash Wkg. Cap            (16,885)   (21,298)   (23,120)   (25,153)
EBITDA Gth (%)                     66.8       50.7         (4.9)       12.2     Net Cash/(Debt)                21,789     34,690     34,899     35,361
Opg Profit Gth (%)                 65.7       71.6           3.9       12.7
Net Profit Gth (%)                 58.0       75.7          1.6        11.9
Effective Tax Rate (%)             19.9       20.6         22.0        22.5
Cash Flow Statement (RMB m)                                                     Rates & Ratio
FY Dec                             2009A     2010A        2011F       2012F     FY Dec                         2009A     2010A       2011F      2012F
Pre-Tax Profit                      8,409   14,583       15,140     17,103      Gross Margins (%)                19.1      21.5       20.2       20.5
Dep. & Amort.                       2,971     2,454       2,469       2,683     Opg Profit Margin (%)             9.2      11.9       11.1       11.1
Tax Paid                          (1,373)   (1,671)      (3,006)     (3,331)    Net Profit Margin (%)             6.8       9.0        8.2        8.2
Assoc. & JV Inc/(loss)               (195)     (296)       (340)        (391)   ROAE (%)                         25.3      33.9       26.4       23.7
(Pft)/ Loss on disposal of FAs       (109)     (450)       (345)       (348)    ROA (%)                           8.6      11.2        9.3        9.0
Chg in Wkg.Cap.                   11,167      3,010       1,498        1,515    ROCE (%)                         17.7      24.6       20.9       19.5
Other Operating CF                    (46)      273            0           0    Div Payout Ratio (%)             12.4      14.1       10.0       10.0
Net Operating CF                  20,824    17,903      15,415      17,230      Net Interest Cover (x)           34.5      63.4       54.6       61.5
Capital Exp.(net)                 (3,624)   (5,500)    (14,000)    (16,000)     Asset Turnover (x)                1.3       1.2        1.1        1.1
Other Invts.(net)                 (1,110)          0           0            0   Debtors Turn (avg days)          58.5      59.0       66.3       69.5
Invts in Assoc. & JV                     0         0           0           0    Creditors Turn (avg days)       168.5     185.9      197.2      198.4
Div from Assoc & JV                      0        0            0           0    Inventory Turn (avg days)        46.9      45.0       50.6       49.6
Other Investing CF                (8,260)      (578)         621         624    Current Ratio (x)                 1.2       1.3        1.3        1.2
Net Investing CF                (12,994)    (6,078)    (13,379)    (15,376)     Quick Ratio (x)                   1.0       1.1        1.0        1.0
Div Paid                             (388)     (776)     (1,551)     (1,116)    Net Debt/Equity (X)             CASH      CASH       CASH       CASH
Chg in Gross Debt                   2,941   (1,500)            0            0   Capex to Debt (%)                31.1      57.5      146.4      167.4
Capital Issues                           0        0            0           0    Z-Score (X)                       2.9       3.0        2.8        2.7
Other Financing CF                  6,465     2,576        (276)        (276)   N.Cash/(Debt)PS (RMB)            2.53      4.03       4.05       4.10
Net Financing CF                    9,018       300     (1,827)     (1,392)     Opg CFPS (RMB)                   1.12      1.73       1.62       1.82
Currency Adjustments                     0         0           0           0    Free CFPS (RMB)                  2.00      1.44       0.16       0.14
Chg in Cash                       16,848    12,125           209         462
Interim Income Statement (RMB m)                                                Segmental Breakdown (RMB m) / Key Assumptions
FY Dec                          1H2009 2H2009           1H2010      2H2010      FY Dec                         2009A      2010A      2011F      2012F
Turnover                         39,046    52,712        61,853      60,542     Revenues (RMB m)
Cost of Goods Sold             (32,071) (42,203)       (47,796)    (48,237)      Commercial vehicles           21,982    33,418     32,892     36,229
Gross Profit                       6,975   10,509        14,057      12,305      Passenger vehicles            68,864    88,143    101,544    115,160
Other Oper. (Exp)/Inc            (3,498)   (5,527)       (5,464)     (6,382)     Corporate and others             912       834        917      1,009
Operating Profit                   3,477     4,982        8,593        5,923     Others                           N/A       N/A        N/A        N/A
Other Non Opg (Exp)/Inc                 0         0            0            0   Total                          91,758 122,395      135,354    152,399
Associates & JV Inc                    77       118          149         147
Net Interest (Exp)/Inc              (143)     (102)        (110)        (119)   Key Assumptions
Exceptional Gain/(Loss)                 0         0            0            0    Vol sales - CV (units)       371,900 527,865 510,445 561,490
Pre-tax Profit                     3,411     4,998        8,632        5,951     Vol sales - PV (units)     1,058,800 1,418,091 1,650,658 1,886,702
Tax                                 (643)  (1,028)       (1,750)     (1,256)     GP margin - CV (%)             14.1       14.1       13.0       14.0
Minority Interest                   (209)     (279)        (353)       (243)     GP margin - PV (%)             20.6       24.4       22.5       22.5
Net Profit                         2,559     3,691         6,529       4,452
Net profit bef Except.             2,559     3,691         6,529       4,452
EBITDA                             3,554     5,100        8,742       `6,070

Sales Gth (%)                       3.0       61.3        58.4         14.9
EBITDA Gth (%)                     10.7      156.4       146.0         19.0
Opg Profit Gth (%)                  9.4      158.5       147.1          18.9
Net Profit Gth (%)                 72.6       44.2        76.9        (31.8)
Gross Margins (%)                  17.9       19.9        22.7          20.3
Opg Profit Margins (%)              8.9        9.5        13.9           9.8
Net Profit Margins (%)              6.6        7.0        10.6           7.4


Source: Company, DBS Vickers




                                                                                                                                         Page 135
Automobile Sector
Brilliance China
Bloomberg: 1114 HK | Reuters: 1114.HK



                                                                                            BMW JV continues to drive sales
BUY HK$6.97 HSI : 22,869
Price Target : 12-Month HK$9.10 (Prev HK$9.2)                                               •     BMW JV posted strong volume sales in April and 4M11
Potential Catalyst: New BMW auto vehicles in FY12
                                                                                            •     Expect new strategy for minibus to have long-term
Analyst                                                                                           benefits
Rachel MIU +852 2863 8843
rachel_miu@hk.dbsvickers.com                                                                •     Recent pullback in share price presents buying
                                                                                                  opportunities. Trimmed TP slightly to HK$9.1
                                                                                            BMW JV posted 61% increase in sales. April 2011 sales
                                                                                            of 3 and 5 series continued to surge, with total sales
                                                                                            recording 61% increase, bringing 4M11 volume to 36.5K,
Price Relative                                                                              or 66% higher than last year. We are confident that the JV
        HK$                                                       Relative Index
     9.20                                                                     420
                                                                                            will meet or even exceed our full year forecast of 100K
     8.20
     7.20
                                                                              370           units this year. The product pipeline for 2012 is rich, with
                                                                              320
     6.20
     5.20
                                                                              270           the launch of the new 3 series as well as X1 cars. Therefore
     4.20
                                                                              220
                                                                              170
                                                                                            investors should start looking at 2012 performance as sales
     3.20
     2.20                                                                     120           in 2011 will remain robust. From 2013, the BMW unit’s
     1.20                                                                     70
     0.20                                                                 20
                                                                                            outlook will be more exciting with new products and a new
        2007              2008            2009             2010        2011
                                                                                            production platform. Hence, this business will remain the
         Brilliance China (LHS)                    Relative HSI INDEX (RHS)
                                                                                            group’s cash cow for the next two years.
Forecasts and Valuation                                                                     4M11 minibus sales respectable but cut full year
                                                                                            estimates. Minibus April sales was reasonable, with
FY Dec (RMB m)                        2009A          2010A         2011F           2012F
                                                                                            growth of c.6% vs industry’s 4%. 4M11 volume was
Turnover                                6,149          8,949      10,126           8,598
EBITDA                                    263          1,697       2,332           2,641    approx. 35K, or 31% of our full year estimate. However, in
Pre-tax Profit                        (2,703)          1,465       2,108           2,411    view of weaker sales in 2Q till late July, we trimmed our full
Net Profit                            (1,640)          1,271       1,757           2,076    year volume forecast to 13% growth vs 17% previously.
Net Pft (Pre Ex.)                       1,058          1,271       1,757           2,076
EPS (RMB)                               (0.37)          0.25        0.35            0.42    However, the minibus’ impact on earnings is marginal,
EPS (HK$)                               (0.44)          0.31        0.42            0.50    unlike the BMW JV.
EPS Gth (%)                         (1,759.8)        (169.5)        38.2            18.1
Diluted EPS (HK$)                      (0.44)           0.30        0.42            0.50    Industry slow down has no impact on luxury car
DPS (HK$)                                 0.00          0.00        0.00            0.00    segment. The 4M11 strong BMW sales clearly highlight
BV Per Share (HK$)                        1.21          1.52        1.94            2.44    that luxury cars are still in strong demand, despite the
PE (X)                                    n.m.          22.8        16.5            14.0
P/Cash Flow (X)                         (14.3)          84.2        95.7            95.6
                                                                                            overall industry slowdown. The recent share price pullback
P/Free CF (X)                            86.1           38.9        35.9            93.1    could probably be attributable to equity raisings to finance
EV/EBITDA (X)                             93.7          18.1        13.1            11.6    its BMW JV project. FY11 earnings have yet to reflect the
Net Div Yield (%)                          0.0           0.0         0.0             0.0    full potential of its BMW JV and future revamp of its
P/Book Value (X)                           5.8           4.6         3.6             2.9
Net Debt/Equity (X)                     CASH              0.5         0.3             0.2   minibus operations. New product launches in FY12 is a
ROAE (%)                                (29.6)          22.4        24.4            22.8    strong share price catalyst. Maintain BUY rating.
Earnings Rev (%):                                 (0.4)     (0.5)
Consensus EPS (RMB): :                            0.34      0.46                                At A Glance
Other Broker Recs:                      B: 7       S: 3      H: 6                               Issued Capital (m shrs)                          4,997
ICB Industry: Consumer Goods                                                                    Mkt. Cap (HK$m/US$m)                    34,792 / 4,477
ICB Sector: Automobiles & Parts
                                                                                                Major Shareholders
Principal Business: The company produces and sells minibus as
                                                                                                     Huachen Auto (%)                            45.4
well as BMW vehicles through a 50% joint-venture
                                                                                                     Templeton Asset Management (%)              16.1
Source of all data: Company, DBSV, Bloomberg, HKEX                                                   Value Partners (%)                          12.0
                                                                                                Free Float (%)                                   26.6
                                                                                                Avg. Daily Vol.(‘000)                          10,092




Page 136
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- MY / sa- CW
                                                                                                                                Automobile Sector
                                                                                                                                  Brilliance China
Income Statement (RMB m)                                                          Balance Sheet (RMB m)
FY Dec                            2009A        2010A        2011F       2012F     FY Dec                           2009A      2010A      2011F     2012F
Turnover                           6,149        8,949      10,126       8,598     Net Fixed Assets                  1,263      1,377     1,501     1,611
Cost of Goods Sold               (5,294)      (7,725)      (8,658)     (7,308)    Invts in Assocs & JVs             2,256      3,106     4,329     6,187
Gross Profit                         855        1,224       1,468       1,290     Other LT Assets                   1,375      1,639     1,707     1,774
Other Opng (Exp)/Inc             (1,173)         (733)       (765)       (629)    Cash & ST Invts                   1,822        549     1,457     1,581
Operating Profit                   (318)          491         703         660     Inventory                         1,350        791       870       957
Other Non Opg (Exp)/Inc                 0            0           0           0    Debtors                             927      1,473     1,593     1,723
Associates & JV Inc                  376        1,066       1,542       1,877     Other Current Assets              2,471      4,286     4,343     4,402
Net Interest (Exp)/Inc               (63)         (92)       (137)       (126)    Total Assets                     11,465     13,220    15,800    18,234
Exceptional Gain/(Loss)          (2,698)            0           0           0
Pre-tax Profit                   (2,703)        1,465       2,108       2,411     ST Debt                           1,816      3,437     3,765     3,693
Tax                                  (41)          54         (53)        (51)    Other Current Liab                5,496      4,524     4,721     4,867
Minority Interest                  1,104         (248)       (298)       (285)    LT Debt                                0          0         0         0
Preference Dividend                     0           0            0           0    Other LT Liabilities                 425          2         2         2
Net Profit                       (1,640)        1,271       1,757       2,076     Shareholder’s Equity              5,022      6,325     8,082    10,158
Net Profit before Except.          1,058        1,271       1,757       2,076     Minority Interests               (1,293)    (1,069)     (770)     (485)
EBITDA                               263        1,697       2,332       2,641     Total Cap. & Liab.               11,465     13,220    15,800    18,234

Sales Gth (%)                       12.4        45.5         13.2       (15.1)    Non-Cash Wkg. Cap                 (747)      2,025     2,085     2,215
EBITDA Gth (%)                     (72.8)      544.1         37.5         13.3    Net Cash/(Debt)                       7     (2,889)   (2,308)   (2,112)
Opg Profit Gth (%)                (240.6)     (254.2)        43.3        (6.1)
Net Profit Gth (%)              (2,126.3)     (177.5)        38.2        18.1
Effective Tax Rate (%)               N/A         N/A          2.5          2.1
Cash Flow Statement (RMB m)                                                       Rates & Ratio
FY Dec                            2009A        2010A        2011F       2012F     FY Dec                           2009A      2010A     2011F     2012F
Pre-Tax Profit                   (2,703)        1,465       2,108       2,411     Gross Margins (%)                   13.9      13.7     14.5      15.0
Dep. & Amort.                         461         139           87         104    Opg Profit Margin (%)               (5.2)       5.5      6.9       7.7
Tax Paid                              (29)         (49)         27         (26)   Net Profit Margin (%)             (26.7)      14.2     17.4      24.1
Assoc. & JV Inc/(loss)              (376)     (1,066)      (1,542)     (1,877)    ROAE (%)                          (29.6)      22.4     24.4      22.8
(Pft)/ Loss on disposal of FAs           0           0           0           0    ROA (%)                           (11.4)      10.3     12.1      12.2
Chg in Wkg.Cap.                    1,662          531          188       (227)    ROCE (%)                            (3.4)       6.7      6.9       5.3
Other Operating CF                 1,918           102         137         126    Div Payout Ratio (%)                 N/A        0.0      0.0       0.0
Net Operating CF                      932       1,122       1,006         511     Net Interest Cover (x)             (5.0)        5.3      5.1       5.3
Capital Exp.(net)                   (631)        (378)       (200)       (200)    Asset Turnover (x)                   0.4        0.7      0.7       0.5
Other Invts.(net)                        0           0           0           0    Debtors Turn (avg days)            55.2       48.9     55.2      70.4
Invts in Assoc. & JV                     0           0            0           0   Creditors Turn (avg days)         189.0      123.4    120.5     147.7
Div from Assoc & JV                     21          19         319          19    Inventory Turn (avg days)         115.5       51.5     35.4      46.3
Other Investing CF                  (619)     (1,044)          (70)        (53)   Current Ratio (x)                    0.9        0.9      1.0       1.0
Net Investing CF                 (1,229)      (1,403)           49       (234)    Quick Ratio (x)                      0.4        0.3      0.4       0.4
Div Paid                                 0           0           0           0    Net Debt/Equity (X)               CASH          0.5      0.3       0.2
Chg in Gross Debt                (1,201)           345            0           0   Capex to Debt (%)                   34.7      11.0       5.3       5.4
Capital Issues                        495            3           0           0    Z-Score (X)                          2.7        3.5      3.6       3.5
Other Financing CF                 1,369      (1,248)        (147)       (152)    N.Cash/(Debt)PS (RMB)               0.00     (0.58)   (0.46)    (0.42)
Net Financing CF                      662       (900)        (147)       (152)    Opg CFPS (RMB)                    (0.16)      0.12     0.16      0.15
Currency Adjustments                     0           0           0            0   Free CFPS (RMB)                     0.07      0.15     0.16      0.06
Chg in Cash                           366     (1,181)          907         124
Interim Income Statement (RMB m)                                                  Segmental Breakdown (RMB m) / Key Assumptions
FY Dec                         1H2009        2H2009       1H2010      2H2010      FY Dec                         2009A    2010A         2011F     2012F
Turnover                          2,776        3,373        5,119       3,829     Revenues (RMB m)
Cost of Goods Sold              (2,381)       (2,913)      (4,517)     (3,208)     Minibuses and auto             6,149    8,949        10,126     8,598
Gross Profit                         394         461          602          621    components
Other Oper. (Exp)/Inc              (295)        (878)        (254)       (479)     BMW - Brilliance share             0         0            0         0
Operating Profit                       99       (417)         348          142    Total                           6,149    8,949        10,126     8,598
Other Non Opg (Exp)/Inc              123          253          372         694
Associates & JV Inc                     0           0            0           0
Net Interest (Exp)/Inc               (47)         (16)         (56)        (36)   JCE profit contributions (RMB
Exceptional Gain/(Loss)            (932)      (1,767)            0           0     Minibuses and auto                  10         78        79        81
Pre-tax Profit                     (757)      (1,946)          664         801    components
Tax                                  (30)         (11)         (28)         82     BMW - Brilliance share             355        896     1,367     1,698
Minority Interest                    401          703        (126)       (122)    Total                               365        974     1,446     1,779
Net Profit                         (386)      (1,254)         509          761
Net profit bef Except.               546          513         509          761
EBITDA                               222        (164)         720         `837    JCE profit contributions Margins (%)
                                                                                   Minibuses and auto                  0.2       0.9       0.8       0.9
Sales Gth (%)                      (48.6)      (51.7)        84.4         13.5    components
EBITDA Gth (%)                    (133.0)     (102.3)       224.5      (610.8)     BMW - Brilliance share              N/A       N/A       N/A       N/A
Opg Profit Gth (%)                (112.4)     (106.0)       252.0      (134.1)    Total                                5.9      10.9      14.3      20.7
Net Profit Gth (%)                    0.0     (117.9)      (232.0)     (160.7)
Gross Margins (%)                    14.2        13.7        11.8         16.2
Opg Profit Margins (%)                3.6      (12.4)         6.8          3.7    Key Assumptions
Net Profit Margins (%)             (13.9)      (37.2)        10.0        19.9      Sales volume ('000)
                                                                                   Minibuses - Jinbei                79.0       95.2     107.6     118.3
                                                                                   BMW                               44.9       70.5     100.1     135.1

Source: Company, DBS Vickers



                                                                                                                                              Page 137
Automobile Sector
Geely Automobile Holdings
Bloomberg: 175 HK | Reuters: 0175.HK




HOLD HK$2.88 HSI : 22,869                                                              Neutral outlook
Price Target : 12-Month HK$3.30
Potential Catalyst: Recovery of overall auto saless
                                                                                       •     4M11 auto sales momentum slowed
                                                                                       •     Export sales recovering but majority of sales are
Analyst
Rachel MIU +852 2863 8843
                                                                                             domestic-based
rachel_miu@hk.dbsvickers.com                                                           •     Lack near-term catalyst. Maintain HOLD. Share price
                                                                                             has factored in slower growth


Price Relative
                                                                                       Slower mid-end cars sales due to removal of subsidy
        HK$                                                       Relative Index
                                                                                       program. The termination of the subsidy scheme has
     5.20                                                                              resulted in lower monthly sales of mid-priced cars since
                                                                            324
     4.20
                                                                            274
                                                                                       Dec10. The newer and larger capacity cars showed some
     3.20                                                                   224        strength for 4M11. We are keeping our full year forecast
     2.20
                                                                            174
                                                                                       of 480K, of which Geely has already achieved 32% by
                                                                            124
     1.20
                                                                            74         end Apr11.
     0.20                                                                 24
        2007              2008            2009             2010        2011            Export markets recovering, but impact still small.
      Geely Automobile Holdings (LHS)                 Relative HSI INDEX (RHS)         We expect export sales to account for 8-10% of total
                                                                                       sales this year, down from 20% previously. For 4M11,
Forecasts and Valuation                                                                export volume grew 88% from same period last year, on
FY Dec (RMB m)                         2009A         2010A         2011F      2012F
                                                                                       a small base in 2010.
Turnover                               14,069        20,099       24,229     27,857    Overall slow down of domestic auto market impact
EBITDA                                  1,948         2,617        3,115      3,537
Pre-tax Profit                          1,550         1,900        2,462      2,807    Chinese automaker more. The Chinese auto market
Net Profit                              1,183         1,368        1,753      1,981    growth is moderating due to the removal of subsidy. In
Net Pft (Pre Ex.)                       1,183         1,368        1,753      1,981    our view, the impact was greater on Chinese automaker
EPS (RMB)                                0.17          0.19         0.24       0.27
EPS (HK$)                                0.20          0.22         0.29       0.32
                                                                                       compared with foreign JV brands. In addition, Chinese
EPS Gth (%)                              13.5           8.8         28.1       13.0    automakers are also faced with increasing competition
Diluted EPS (HK$)                        0.20          0.21         0.25       0.28    from self-brands launched by foreign JVs. With no
DPS (HK$)                                0.02          0.03         0.04       0.05    catalyst in sight, we maintain our HOLD rating and TP of
BV Per Share (HK$)                       1.05          1.31         1.57       1.85
PE (X)                                   14.0          12.9         10.1         8.9   HK$3.30.
P/Cash Flow (X)                          10.7            9.3          7.8        6.9
P/Free CF (X)                            71.5          39.0           nm         1.6
EV/EBITDA (X)                              8.3           7.0          6.8        3.0
Net Div Yield (%)                         0.8           1.0          1.5        1.7
P/Book Value (X)                           2.8          2.2          1.8        1.6
Net Debt/Equity (X)                     CASH          CASH            0.2     CASH
ROAE (%)                                 22.4          19.0         19.9       18.9        At A Glance
                                                                                           Issued Capital (m shrs)                           7,451
Earnings Rev (%):                                   Nil       Nil
Consensus EPS (RMB): :                            0.22      0.26                           Mkt. Cap (HK$m/US$m)                     21,460 / 2,759
Other Broker Recs:                       B: 8      S: 5     H: 9                           Major Shareholders
ICB Industry: Consumer Goods                                                                    Li Shu Fu (%)                                51.0
ICB Sector: Automobiles & Parts                                                            Free Float (%)                                    49.0
Principal Business: Geely Auto manufactures its own brands of                              Avg. Daily Vol.(‘000)                           38,431
sedans for the domestic and export markets
Source of all data: Company, DBSV, Bloomberg, HKEX




Page 138
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- MY / sa- CW
                                                                                                                                Automobile Sector
                                                                                                                   Geely Automobile Holdings
Income Statement (RMB m)                                                           Balance Sheet (RMB m)
FY Dec                            2009A         2010A         2011F       2012F    FY Dec                            2009A     2010A     2011F     2012F
Turnover                         14,069       20,099        24,229      27,857     Net Fixed Assets                   4,328     5,797    6,359     6,858
Cost of Goods Sold              (11,528)     (16,400)      (19,674)    (22,536)    Invts in Assocs & JVs                  7         0        2         3
Gross Profit                       2,541         3,700        4,555       5,321    Other LT Assets                    2,241     2,823    2,770     2,717
Other Opng (Exp)/Inc                (947)      (1,600)       (1,922)     (2,329)   Cash & ST Invts                    5,392     4,636    1,741    12,313
Operating Profit                   1,594         2,100        2,633       2,992    Inventory                            641       987    1,541     1,546
Other Non Opg (Exp)/Inc                  0            0            0           0   Debtors                              738     1,450    7,843     2,842
Associates & JV Inc                   (10)          (7)          (8)         (9)   Other Current Assets               5,448     8,612    2,538     2,538
Net Interest (Exp)/Inc                (33)        (192)        (163)       (176)   Total Assets                      18,802    24,304   22,795    28,817
Exceptional Gain/(Loss)                 0             0           0            0
Pre-tax Profit                     1,550         1,900        2,462       2,807    ST Debt                            1,510     1,097    1,097     1,097
Tax                                 (231)         (351)        (470)       (556)   Other Current Liab                 7,398    10,717    7,686    12,020
Minority Interest                   (136)         (181)        (239)       (270)   LT Debt                            2,760     3,045    2,745     2,445
Preference Dividend                      0            0            0           0   Other LT Liabilities                  38       367      367       367
Net Profit                         1,183         1,368        1,753       1,981    Shareholder’s Equity               6,376     8,022    9,604    11,323
Net Profit before Except.          1,183         1,368        1,753       1,981    Minority Interests                   721     1,056    1,295     1,565
EBITDA                             1,948         2,617        3,115       3,537    Total Cap. & Liab.                18,802    24,304   22,795    28,817

Sales Gth (%)                      228.0         42.9          20.5        15.0    Non-Cash Wkg. Cap                   (571)     332     4,236    (5,094)
EBITDA Gth (%)                      82.1         34.3          19.0        13.5    Net Cash/(Debt)                    1,123      494    (2,101)    8,771
Opg Profit Gth (%)                  98.5         31.8          25.4        13.6
Net Profit Gth (%)                  34.5         15.7          28.1        13.0
Effective Tax Rate (%)              14.9         18.5          19.1        19.8
Cash Flow Statement (RMB m)                                                        Rates & Ratio
FY Dec                            2009A         2010A        2011F       2012F     FY Dec                            2009A     2010A    2011F     2012F
Pre-Tax Profit                     1,550         1,900        2,462      2,807     Gross Margins (%)                   18.1      18.4    18.8      19.1
Dep. & Amort.                         365           525         490         554    Opg Profit Margin (%)               11.3      10.4     10.9     10.7
Tax Paid                            (205)        (214)        (351)       (470)    Net Profit Margin (%)                8.4       6.8      7.2      7.1
Assoc. & JV Inc/(loss)                 10             7           8           9    ROAE (%)                            22.4      19.0     19.9     18.9
(Pft)/ Loss on disposal of FAs           0            0           0           0    ROA (%)                              8.2       6.3      7.4      7.7
Chg in Wkg.Cap.                     (849)         (721)     (4,024)      9,245     ROCE (%)                            15.7      13.7     14.8     15.0
Other Operating CF                     77          485          163         176    Div Payout Ratio (%)                12.5      12.4    15.0      15.0
Net Operating CF                      949        1,983      (1,251)     12,320     Net Interest Cover (x)              47.7      10.9    16.1      17.0
Capital Exp.(net)                   (717)      (1,529)      (1,000)     (1,000)    Asset Turnover (x)                   1.0       0.9      1.0      1.1
Other Invts.(net)                   (346)         (134)            0          0    Debtors Turn (avg days)             18.1      19.9     70.0     70.0
Invts in Assoc. & JV                   (8)             0        (10)          0    Creditors Turn (avg days)           60.1      90.2     71.8     71.8
Div from Assoc & JV                      0            0           0           0    Inventory Turn (avg days)           18.4      18.7    24.0      25.6
Other Investing CF                  (235)           318          66          35    Current Ratio (x)                    1.4       1.3      1.6      1.5
Net Investing CF                 (1,306)       (1,346)        (944)       (965)    Quick Ratio (x)                      0.7       0.5      1.1      1.2
Div Paid                              (91)        (148)       (170)       (263)    Net Debt/Equity (X)                CASH      CASH       0.2    CASH
Chg in Gross Debt                  3,322         (639)        (300)       (300)    Capex to Debt (%)                   16.8      36.9    26.0      28.2
Capital Issues                        825          106            0           0    Z-Score (X)                          N/A       N/A      N/A      N/A
Other Financing CF                    (89)          (52)       (229)      (220)    N.Cash/(Debt)PS (RMB)               0.15      0.07   (0.29)     1.19
Net Financing CF                   3,966         (732)        (699)       (783)    Opg CFPS (RMB)                      0.26      0.37    0.38      0.42
Currency Adjustments                     0          (10)          0           0    Free CFPS (RMB)                     0.03      0.06   (0.31)     1.54
Chg in Cash                        3,609          (105)     (2,894)     10,571
Interim Income Statement (RMB m)                                                   Segmental Breakdown (RMB m) / Key Assumptions
FY Dec                         2H2008        1H2009        2H2009      1H2010      FY Dec                         2009A    2010A        2011F     2012F
Turnover                          4,222        5,949         8,121        9,236    Revenues (RMB m)
Cost of Goods Sold              (3,574)       (4,819)       (6,709)     (7,487)     Auto & related parts         13,917    19,483       23,490    26,970
Gross Profit                         648       1,130         1,411        1,748     Gearbox                         152       616          739       887
Other Oper. (Exp)/Inc                181        (362)         (585)        (540)   Total                         14,069    20,099       24,229    27,857
Operating Profit                     828         768           826        1,208
Other Non Opg (Exp)/Inc                 0           0             0            0
Associates & JV Inc                (141)            3          (13)          (7)
Net Interest (Exp)/Inc               (13)         (8)          (25)         (97)   Key Assumptions
Exceptional Gain/(Loss)                 0           0             0            0    Basic passenger cars - Units      326.7     415.8    479.8     541.4
Pre-tax Profit                       674         763           787        1,104    Sold ('000)
Tax                                  (46)       (109)         (122)        (192)    Blended ASP (RMB/unit)         39,897.0 44,789.0 47,028.5 47,969.0
Minority Interest                       9        (58)          (78)        (107)
Net Profit                           636         596           587          805
Net profit bef Except.               636         596           587          805
EBITDA                               687         931         1,017       `1,473

Sales Gth (%)                    6,289.0 8,768.8               92.3        55.3
EBITDA Gth (%)                     217.0    281.5              48.1        58.2
Opg Profit Gth (%)               9,615.5 (3,131.2)             (0.3)       57.3
Net Profit Gth (%)                 217.2    145.4              (7.8)       35.1
Gross Margins (%)                   15.3      19.0             17.4        18.9
Opg Profit Margins (%)              19.6      12.9             10.2        13.1
Net Profit Margins (%)              15.1     10.0               7.2         8.7


Source: Company, DBS Vickers




                                                                                                                                              Page 139
Automobile Sector
Great Wall Motor
Bloomberg: 2333 HK Equity | Reuters: 2333.HK


                                                                                            King of SUV
NOT RATED HK$11.00 HSI : 22,869
                                                                                            •   Steady increase in business through higher product quality
Price Target : n.a.                                                                             rather than volume boost
Potential Catalyst: A share listing and M&A deal                                            •   SUV demand to remain robust, 4M11 growth already
Analyst
                                                                                                ahead of the industry
Rachel MIU +852 2863 8843                                                                   •   Cheapest valuation in the sector. Consensus FY10-12
rachel_miu@hk.dbsvickers.com
                                                                                                earnings CAGR of 20% should support higher valuation,
                                                                                                benchmarked to peers
                                                                                            Quality vs quantity. Great Wall Motor will develop more fuel-
                                                                                            efficient vehicles as a long-term goal to strengthen its
Price Relative                                                                              competitiveness in the domestic and export markets. The
        HK$                                                         Relative Index
                                                                                            company is rolling out five new series of low-emission vehicles
     14.50                                                                    322
                                                                                            for its SUV, sedan and pick-up this year. Three of the
     12.50                                                                    272
     10.50                                                                    222
                                                                                            company’s models have met the national green car standards
       8.50
                                                                              172           and are entitled to RMB3K subsidies. Its strong product quality
       6.50
       4.50
                                                                              122           has positioned Great Wall Motor as the top player in SUV and
       2.50                                                                   72
                                                                                            pick-up trucks segment last year.
       0.50                                                                 22
          2007             2008            2009              2010        2011
                                                                                            Earnings outlook boosted by strong SUV growth. The
         Great Wall Motor (LHS)                    Relative HSI INDEX (RHS)
                                                                                            target is to sell 500K vehicles this year, up c.38% from FY10, is
                                                                                            achievable amid strong demand for its new SUV and sedan
Forecasts and Valuation
                                                                                            models launches. 4M11 industry SUV growth of 39% was
FY Dec (RMB m)                         2007A         2008A          2009A      2010A        higher than passenger vehicle segment’s 7.6% expansion. With
Turnover                                7,579         8,211         12,396     22,175       higher economies of scale, Great Wall’s sedan unit recovered
EBITDA                                  1,184            748         1,280      3,545       from a negative 21% margin in FY08 to 15% gross return last
Pre-tax Profit                          1,044           585            932      3,039
Net Profit                                937            513         1,023      2,698
                                                                                            year, which will further lift profits. FY11 consensus earnings are
Net Pft (Pre Ex.)                         937            513         1,023      2,698       RMB3.22bn, up 19% from FY10.
EPS (RMB)                                0.34           0.19          0.37       0.99
EPS (HK$)                                0.41           0.22          0.45       1.18
                                                                                            Attractive valuation. Great Wall Motor is trading on 7.8x
EPS Gth (%)                              33.4         (45.3)          99.3      163.9       FY11 PE, lowest among the peers. Given its consistent past
Diluted EPS (HK$)                        0.41          0.22           0.45       1.18       performances, leadership in the SUV and pick-up truck segment
DPS (HK$)                                0.10           0.07          0.12       0.24       and strong earnings outlook, we believe it deserves higher
BV Per Share (HK$)                       2.82          2.95           3.33       4.39
PE (X)                                   26.8           48.9          24.5        9.3
                                                                                            valuation, at least benchmarked to the local peers. Excluding
P/Cash Flow (X)                          23.1           34.0          18.2         7.9      the outliners, the sector average PE is 9.7x. Its proposed
P/Free CF (X)                             nm             nm           60.3       25.8       304.2m A shares issue is progressing well, to enhance its
EV/EBITDA (X)                            18.7           31.1          17.8         6.3      market presence and fund business expansion.
Net Div Yield (%)                         0.9            0.7           1.1        2.2
P/Book Value (X)                           3.9           3.7           3.3        2.5       At A Glance
Net Debt/Equity (X)                     CASH          CASH           CASH       CASH        Issued Capital - H shares (m shs)                     1,033
ROAE (%)                                 17.8            7.8          14.3       30.6                        - Non H shrs (m shs)                 1,705
                                                                                            H shs as a % of Total                                    38
Other Broker Recs:                                         B: 18       S: 1          H: 5   H Mkt. Cap (HK$m/US$m)                       11,365 / 1,461
                                                                                            Major Shareholders
                                                                                                 Wei Jian Jun & Asso (%)                          38.1
ICB Industry: Consumer Goods                                                                     Nandayuan Town (%)                               24.1
ICB Sector: Automobiles & Parts                                                             Major H Shareholders (%)
Principal Business: Auto manufacturer for pickup truck, SUV and                                  Morgan Stanley (%)                               10.2
sedans                                                                                           William Blair & Company, LLC (%)                  6.3
                                                                                                 HSBC Global Asset Management (%)                   5.2
Source of all data: Company, DBSV, Bloomberg, HKEX                                               FIL Limited (%)                                    5.0
                                                                                            H Shares-Free Float (%)                               73.4
                                                                                            Avg. Daily Vol.(‘000)                                8,446




Page 140
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Refer to important disclosures at the end of this report
ed- MY / sa- CW
                                                                                                                              Automobile sector
                                                                                                                             Great Wall Motor
Income Statement (RMB m)                                                            Balance Sheet (RMB m)
FY Dec                            2007A       2008A          2009A        2010A     FY Dec                        2007A     2008A     2009A     2010A
Turnover                           7,579       8,211       12,396       22,175      Net Fixed Assets               1,597     2,776     4,206     5,380
Cost of Goods Sold               (5,783)     (6,721)      (10,248)     (17,314)     Invts in Assocs & JVs             10        18        23        26
Gross Profit                       1,796       1,489          2,148        4,861    Other LT Assets                2,681     2,940     2,564     3,444
Other Opng (Exp)/Inc                (801)       (979)       (1,269)      (1,886)    Cash & ST Invts                3,312     2,092     2,592     3,095
Operating Profit                     995         510            879        2,975    Inventory                        958       876     1,590     2,104
Other Non Opg (Exp)/Inc                0           0              0            0    Debtors                          152       252       148       327
Associates & JV Inc                   21           7             22           42    Other Current Assets           1,451     1,863     3,941     9,394
Net Interest (Exp)/Inc                29          68             31           22    Total Assets                  10,162    10,816    15,063    23,770
Exceptional Gain/(Loss)                0           0              0            0
Pre-tax Profit                     1,044         585            932        3,039    ST Debt                            0         0        76         0
Tax                                  (37)        (33)           140         (214)   Other Current Liab             3,235     3,732     6,495    11,959
Minority Interest                    (70)        (38)           (49)        (126)   LT Debt                            0         0         0         0
Preference Dividend                    0           0              0             0   Other LT Liabilities              70        67       654     1,410
Net Profit                           937         513          1,023        2,698    Shareholder’s Equity           6,442     6,734     7,593    10,015
Net Profit before Except.            937         513          1,023        2,698    Minority Interests               416       283       245       385
EBITDA                             1,184         748          1,280        3,545    Total Cap. & Liab.            10,162    10,816    15,063    23,770

Sales Gth (%)                       54.1         8.3          51.0         78.9     Non-Cash Wkg. Cap              (674)     (741)     (816)      (134)
EBITDA Gth (%)                      33.3       (36.8)         71.2        177.0     Net Cash/(Debt)                3,312     2,092     2,516     3,095
Opg Profit Gth (%)                  35.9       (48.7)         72.4        238.3
Net Profit Gth (%)                  33.4       (45.3)         99.3        163.9
Effective Tax Rate (%)               3.5         5.7           N/A          7.0
Cash Flow Statement (RMB m)                                                         Rates & Ratio
FY Dec                            2007A        2008A        2009A        2010A      FY Dec                        2007A     2008A      2009A    2010A
Pre-Tax Profit                     1,044          585           932       3,039     Gross Margins (%)               23.7      18.1       17.3     21.9
Dep. & Amort.                         168         231           400         549     Opg Profit Margin (%)            13.1       6.2       7.1     13.4
Tax Paid                            (140)         (95)          (49)       (172)    Net Profit Margin (%)           12.4        6.2       8.2     12.2
Assoc. & JV Inc/(loss)                (21)          (7)         (22)         (42)   ROAE (%)                         17.8       7.8      14.3     30.6
(Pft)/ Loss on disposal of FAs           0           0            0            0    ROA (%)                          11.3       4.9       7.9     13.9
Chg in Wkg.Cap.                       172          50            77        (269)    ROCE (%)                         16.8       6.9      11.2     27.1
Other Operating CF                     26          62            34           87    Div Payout Ratio (%)            23.4      32.0       26.8     20.3
Net Operating CF                   1,250         826         1,373        3,192     Net Interest Cover (x)            NM        NM        NM       NM
Capital Exp.(net)                (1,443)      (1,100)         (957)     (2,221)     Asset Turnover (x)                0.9       0.8       1.0      1.1
Other Invts.(net)                     (34)      (665)         (327)        (998)    Debtors Turn (avg days)           4.4       9.0       5.9      3.9
Invts in Assoc. & JV                  (96)         (4)          (20)          (4)   Creditors Turn (avg days)        87.1      87.9      83.4     87.0
Div from Assoc & JV                      0           0            0            0    Inventory Turn (avg days)       52.3      51.6       45.6     40.2
Other Investing CF                  (153)          (4)          749           65    Current Ratio (x)                 1.8       1.4       1.3      1.2
Net Investing CF                 (1,727)      (1,772)        (554)      (3,157)     Quick Ratio (x)                   1.1       0.6       0.4      0.3
Div Paid                            (158)       (249)         (195)        (287)    Net Debt/Equity (X)            CASH      CASH       CASH     CASH
Chg in Gross Debt                        0           0           39         (76)    Capex to Debt (%)                 N/A       N/A   1,265.6      N/A
Capital Issues                     1,542             0            0            0    Z-Score (X)                       N/A       N/A       N/A      N/A
Other Financing CF                       1           0            0            9    N.Cash/(Debt)PS (RMB)            1.21      0.76      0.92     1.13
Net Financing CF                   1,385        (249)        (156)        (354)     Opg CFPS (RMB)                  0.39      0.28       0.47     1.26
Currency Adjustments                  (25)        (25)           (9)         (18)   Free CFPS (RMB)                (0.07)    (0.10)      0.15     0.35
Chg in Cash                           883     (1,220)          654        (337)
Interim Income Statement (RMB m)                                                    Segmental Breakdown (RMB m)
FY Dec                         1H2009        2H2009       1H2010        2H2010      FY Dec                        2007A     2008A     2009A     2010A
Turnover                          5,155        7,196        9,125        12,996     Revenues (RMB m)
Cost of Goods Sold              (4,252)       (5,996)      (7,176)     (10,138)      Pick-up trucks                2,905     3,447     4,114     5,377
Gross Profit                         903       1,200        1,949          2,858     SUVs                          4,263     3,628     3,987     9,432
Other Oper. (Exp)/Inc              (594)        (675)        (823)       (1,063)     Sedan                             0       368     3,247     5,782
Operating Profit                     310         525        1,126          1,794     Other vehicles                  106       258       436       331
Other Non Opg (Exp)/Inc                 4         11           14             19     Others                          305       509       612     1,254
Associates & JV Inc                     1          5            7              2    Total                          7,579     8,211    12,396    22,175
Net Interest (Exp)/Inc                  2         29            9             13
Exceptional Gain/(Loss)                 0          0             0             0
Pre-tax Profit                       317         570        1,156          1,828
Tax                                  (37)        177         (248)            34
Minority Interest                    (17)        (32)         (40)           (86)
Net Profit                           262         715          867          1,776
Net profit bef Except.               262         715          867          1,776
EBITDA                               315         541        1,147         `1,815

Sales Gth (%)                       11.8        99.8          77.0         80.6
EBITDA Gth (%)                     (34.0)    1,256.8         264.4        235.5
Opg Profit Gth (%)                 (34.3)    1,251.7         263.7        242.0
Net Profit Gth (%)                 150.3       172.5          21.3        104.9
Gross Margins (%)                    17.5       16.7          21.4         22.0
Opg Profit Margins (%)                6.0        7.3          12.3         13.8
Net Profit Margins (%)                5.1        9.9           9.5         13.7

Source: Company, DBS Vickers




                                                                                                                                            Page 141
Automobile Sector
Guangzhou Automobile Group
Bloomberg: 2238 HK Equity | Reuters: 2238.HK




NOT RATED HK$8.22 HSI : 22,869                                                            Ride on M&A
Price Target : n.a.                                                                       •   Merger benefits not reflective in FY11 earnings yet
Potential Catalyst: Successful launch of new JV with Mitsubishi
                                                                                          •   FY11 auto sales likely to trail industry trend
Analyst                                                                                   •   A-share listing should enhance its profile and offers
Rachel MIU +852 2863 8843
rachel_miu@hk.dbsvickers.com                                                                  new funding avenue. FY12 valuation benchmarked to
                                                                                              sector leader
                                                                                          Positive mid-term development with M&A and A-
                                                                                          share listing on the cards. The company will start a new
                                                                                          JV with Mitsubishi to produce SUV in China. GAC is also
Price Relative
        HK$
                                                                                          seeking listing on A-share market to diversify its investors
                                                                  Relative Index
                                                                            219           and fund base. GAC will merge with GAC Changfeng
     14.40

     13.40
                                                                            169
                                                                                          Motor (600991 CH, will be delisted) via the issue of
     12.40
                                                                                          470.11m A-shares. We believe the whole exercise will be
     11.40
                                                                            119
     10.40                                                                                positive on future earnings but will have to bear the brunt
       9.40                                                                 69            of short-term EPS dilution.
       8.40

       7.40
         Aug-10               Nov-10               Feb-11           May-11
                                                                          19
                                                                                          Better leverage from commercial vehicle unit, but
     Guangzhou Automobile Group (LHS)                  Relative HSI INDEX (RHS)           continues to underperform. This unit turned around last
                                                                                          year with gross margin of 3.4% compared to negative
Forecasts and Valuation                                                                   9.2% margin. We believe with better leverage of its CV
                                                                                          operation, margin improvement is in sight. However,
FY Dec (RMB m)                         2007A         2008A        2009A      2010A
Turnover                               42,407        43,770       50,254     59,848
                                                                                          passenger vehicle continued to underperform the industry
EBITDA                                  5,636         4,055        4,945      7,521       last year and will likely remain so this year until its M&A
Pre-tax Profit                          5,011         3,460        3,980      6,492       and A-share listing exercises are completed. For 4M11,
Net Profit                              3,495         1,567        2,032      4,295
                                                                                          GAC achieved total sales of 209K units, down 13% from
Net Pft (Pre Ex.)                       3,495         1,567        2,032      4,295
EPS (RMB)                                0.89           0.40        0.54       0.92       same period last year. Judging from its 4M performance,
EPS (HK$)                                1.07           0.48        0.65       1.10       GAC is unlikely to outperform the industry. We attribute
EPS Gth (%)                               N/A         (55.2)        35.9       69.8       this to its narrow product range and impact from shortage
Diluted EPS (HK$)                        1.07          0.48         0.65       1.10
DPS (HK$)                                0.00           0.00        0.00       0.13       in parts supplies from Japan.
BV Per Share (HK$)                       3.00          3.48         3.98       5.00       Valuation inline with sector average. FY11 PE reflects
PE (X)                                     7.7          17.2        12.6        7.4
P/Cash Flow (X)                            8.0          15.2        11.2         7.6      GAC’s current earnings potential, based on existing
P/Free CF (X)                             8.4           47.8          5.0      30.3       product lines. The new JV with Mitsubishi will only start to
EV/EBITDA (X)                              4.0           5.7          3.7        2.0      contribute from 2013. Market has benchmarked GAC to
Net Div Yield (%)                         0.0            0.0         0.0        1.6
P/Book Value (X)                           2.7           2.4         2.1        1.6
                                                                                          Dongfeng Motor (489 HK), and based on FY12 consensus
Net Debt/Equity (X)                     CASH          CASH         CASH       CASH        earnings, GAC is valued on 7.0x PE.
ROAE (%)                                 35.5           14.8        16.6       22.2
                                                                                          At A Glance
Other Broker Recs:                                         B: 4      S: 0         H: 10
                                                                                          Issued Capital - H shares (m shs)                     2,213
                                                                                                           - Non H shrs (m shs)                 3,935
                                                                                          H shs as a % of Total                                    36
ICB Industry: Consumer Goods                                                              H Mkt. Cap (HK$m/US$m)                       18,193 / 2,338
ICB Sector: Automobiles & Parts                                                           Major Shareholders
Principal Business: Produces and sells passenger and commercial                                Guangzhou Automobile (%)                          58.8
vehicles, under JCE with Honda and Toyota as well as self-owned                           Major H Shareholders (%)
brands                                                                                         Templeton Asset Management (%)                    28.1
Source of all data: Company, DBSV, Bloomberg, HKEX                                             Platinum Investment Management (%)                 7.0
                                                                                               JPMorgan Chase & Co. (%)                            5.9
                                                                                          H Shares-Free Float (%)                                59.0
                                                                                          Avg. Daily Vol.(‘000)                                10,278




Page 142
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Refer to important disclosures at the end of this report
ed- MY / sa- CW
                                                                                                                                  Automobile Sector
                                                                                                                  Guangzhou Automobile Group
Income Statement (RMB m)                                                              Balance Sheet (RMB m)
FY Dec                              2007A        2008A         2009A        2010A     FY Dec                          2007A     2008A     2009A     2010A
Turnover                          42,407       43,770        50,254       59,848      Net Fixed Assets                 5,832     7,254     8,338     8,841
Cost of Goods Sold               (35,277)     (36,446)      (41,918)     (49,576)     Invts in Assocs & JVs            3,113     3,293     4,645     5,201
Gross Profit                         7,130        7,324         8,336     10,272      Other LT Assets                    899     1,626     2,268     3,813
Other Opng (Exp)/Inc              (3,068)      (4,420)       (5,116)      (4,951)     Cash & ST Invts                 13,315    14,021    24,470    26,244
Operating Profit                     4,062        2,904         3,220        5,321    Inventory                        1,294     1,658     2,242     3,018
Other Non Opg (Exp)/Inc                  31          (85)           39           27   Debtors                          2,297     2,220     1,666     4,263
Associates & JV Inc                    838          515           716        1,130    Other Current Assets                 0         0         0         0
Net Interest (Exp)/Inc                  80           126             5          14    Total Assets                    26,751    30,071    43,628    51,379
Exceptional Gain/(Loss)                   0            0             0            0
Pre-tax Profit                       5,011        3,460         3,980        6,492    ST Debt                            967     1,454     1,070     1,365
Tax                                   (138)        (602)         (724)        (974)   Other Current Liab               7,801     8,202    12,900    15,303
Minority Interest                  (1,378)      (1,291)       (1,224)      (1,222)    LT Debt                          1,325     1,292     7,649     7,999
Preference Dividend                       0            0             0            0   Other LT Liabilities                55       292       547       850
Net Profit                           3,495        1,567         2,032        4,295    Shareholder’s Equity             9,838    11,409    13,060    25,612
Net Profit before Except.            3,495        1,567         2,032        4,295    Minority Interests               6,765     7,421     8,402       249
EBITDA                               5,636        4,055         4,945        7,521    Total Cap. & Liab.              26,751    30,071    43,628    51,379

Sales Gth (%)                         N/A           3.2         14.8         19.1     Non-Cash Wkg. Cap               (4,210)   (4,324)   (8,991)   (8,023)
EBITDA Gth (%)                        N/A        (28.0)         21.9         52.1     Net Cash/(Debt)                 11,023    11,275    15,750    16,880
Opg Profit Gth (%)                    N/A        (28.5)         10.9         65.2
Net Profit Gth (%)                    N/A        (55.2)         29.7        111.4
Effective Tax Rate (%)                2.8         17.4          18.2         15.0
Cash Flow Statement (RMB m)                                                           Rates & Ratio
FY Dec                             2007A       2008A          2009A        2010A      FY Dec                          2007A     2008A     2009A     2010A
Pre-Tax Profit                      5,011       3,460          3,980        6,492     Gross Margins (%)                 16.8      16.7      16.6      17.2
Dep. & Amort.                          705         721           970        1,043     Opg Profit Margin (%)              9.6       6.6       6.4       8.9
Tax Paid                             (411)       (571)          (568)       (831)     Net Profit Margin (%)              8.2       3.6       4.0       7.2
Assoc. & JV Inc/(loss)               (838)       (515)          (716)     (1,130)     ROAE (%)                          35.5      14.8      16.6      22.2
(Pft)/ Loss on disposal of FAs             0         0              0           0     ROA (%)                           13.1       5.5       5.5       9.0
Chg in Wkg.Cap.                        (70)      (101)         4,374      (1,661)     ROCE (%)                          20.8      11.8      10.0      13.5
Other Operating CF                     (24)        248           317        (138)     Div Payout Ratio (%)               0.0       0.0       0.0      15.7
Net Operating CF                    4,372       3,242          8,357        3,775     Net Interest Cover (x)             NM        NM        NM        NM
Capital Exp.(net)                 (1,164)     (2,679)        (3,206)      (2,719)     Asset Turnover (x)                 1.6       1.5       1.4       1.3
Other Invts.(net)                          0         0              0           0     Debtors Turn (avg days)           19.8      18.8      14.1      18.1
Invts in Assoc. & JV                       0         0       (1,131)         (115)    Creditors Turn (avg days)         80.7      80.1      91.5     101.8
Div from Assoc & JV                        0         0              0           0     Inventory Turn (avg days)         13.7      15.1      17.4      19.8
Other Investing CF                  1,843     (2,112)        (3,668)        3,845     Current Ratio (x)                  1.9       1.9       2.0       2.0
Net Investing CF                       679    (4,790)        (8,005)        1,012     Quick Ratio (x)                    1.8       1.7       1.9       1.8
Div Paid                                   0         0              0           0     Net Debt/Equity (X)              CASH      CASH      CASH      CASH
Chg in Gross Debt                      134         341         6,071          781     Capex to Debt (%)                 50.8      97.5      36.8      29.0
Capital Issues                       (568)       (690)         (629)        (798)     Z-Score (X)                        N/A       N/A       N/A       N/A
Other Financing CF                         0         0              0         (97)    N.Cash/(Debt)PS (RMB)             2.80      2.87      4.00      2.75
Net Financing CF                     (434)       (349)         5,442        (114)     Opg CFPS (RMB)                    1.13      0.85      1.06      1.16
Currency Adjustments                     (4)       (19)            (1)        (25)    Free CFPS (RMB)                   0.82      0.14      1.37      0.23
Chg in Cash                         4,613     (1,917)          5,793        4,648
Interim Income Statement (RMB m)                                                      Segmental Breakdown (RMB m) / Key Assumptions
FY Dec                          1H2009 2H2009                1H2010       2H2010      FY Dec                         2007A    2008A       2009A     2010A
Turnover                         20,668      29,586           28,897       30,951     Revenues (RMB m)
Cost of Goods Sold             (17,240) (24,678)            (23,613)     (25,963)      Revenue breakdown            41,285    42,953      49,370    58,118
Gross Profit                       3,427       4,909           5,284         4,988     Passenger vehicles              483       257         345       898
Other Oper. (Exp)/Inc            (1,999)     (3,117)          (2,085)      (2,866)     Commercial vehicles             275       268         264       450
Operating Profit                   1,428       1,792           3,199         2,122     Auto parts                      364       292         275       382
Other Non Opg (Exp)/Inc                 21          18            13            15     Others                          N/A       N/A         N/A       N/A
Associates & JV Inc                   133         583            601           529    Total                         42,407    43,770      50,254    59,848
Net Interest (Exp)/Inc                  63        (58)           (10)           24
Exceptional Gain/(Loss)                   0          0             0              0
Pre-tax Profit                     1,646       2,334           3,803         2,689
Tax                                 (247)       (477)           (548)         (426)
Minority Interest                   (759)       (465)           (946)         (276)
Net Profit                            640      1,392           2,308         1,987
Net profit bef Except.                640      1,392           2,308         1,987
EBITDA                             2,047       2,898           4,293        `3,227

Sales Gth (%)                          N/A          N/A         39.8          4.6
EBITDA Gth (%)                         N/A          N/A        109.8         11.4
Opg Profit Gth (%)                     N/A          N/A        124.0         18.4
Net Profit Gth (%)                     N/A          N/A        260.5         42.8
Gross Margins (%)                     16.6         16.6         18.3         16.1
Opg Profit Margins (%)                 6.9          6.1         11.1          6.9
Net Profit Margins (%)                 3.1          4.7          8.0          6.4

Source: Company, DBS Vickers




                                                                                                                                                Page 143
Automobile Sector
BYD Company
Bloomberg: 1211 HK | Reuters: 1211.HK




NOT RATED HK$23.95 HSI : 22,869                                                           Outlook remains challenging
Price Target : n.a.
Potential Catalyst: Breakthrough in electric vehicle sales
                                                                                          •   Slow auto sales dragged by removal of subsidies
                                                                                          •   A-share listing in progress, to support its business
Analyst
Rachel MIU +852 2863 8843                                                                     expansion plan
rachel_miu@hk.dbsvickers.com
                                                                                          •   FY11 consensus valuation top sector average at 18.1x. Lack
                                                                                              of catalyst to limit valuation appreciation
                                                                                          Expect weak May-July sales. The overall slow down in auto
                                                                                          sales have bigger impact on Chinese self-brands like BYD. With
Price Relative                                                                            sales of only 159K units in 4M11, it might be difficult for the
        HK$                                                       Relative Index          company to achieve its original 10-15% sales growth target for
                                                                             756
     86.80
                                                                             656
                                                                                          2011. BYD wants to move away from small-sized cars to bigger
     76.80
     66.80                                                                   556          vehicles with the launch of its SUV series. However, keen
     56.80
     46.80
                                                                             456

                                                                             356
                                                                                          competition cap price upside to boost sales. In early 2011, BYD
     36.80
     26.80
                                                                             256          slashed ASP by up to RMB19K or 19% on certain car models.
     16.80                                                                   156

       6.80                                                               56              New funding on battery and vehicle operations. The
          2007             2008            2009            2010        2011
                                                                                          company plans to issue 79m A shares to fund its battery and
          BYD Company (LHS)                       Relative HSI INDEX (RHS)
                                                                                          vehicle business, which includes R&D, production facilities and
                                                                                          lithium battery development. The plan is to have monthly
Forecasts and Valuation
                                                                                          capacity of 1,000 units each of F3DM (dual-mode) and E6 (pure
FY Dec (RMB m)                         2007A         2008A        2009A       2010A       electric) to boost its electric vehicle (EV) unit. BYD is looking to
Turnover                               21,211        26,788       39,469      46,685      invest RMB1-2bn to expand its car batteries operation. Therefore,
EBITDA                                  3,014         3,126        6,510       5,646
Pre-tax Profit                          1,743         1,364        4,509       3,142      EV business’ contributions to bottomline will be limited in the
Net Profit                              1,612         1,021        3,794       2,523      near future. The company is selling its EVs to taxi companies to
Net Pft (Pre Ex.)                       1,612         1,021        3,794       2,523      increase its profile. In FY10, BYD sold 417 units of F3DM and 63
EPS (RMB)                                0.79           0.50        1.77         1.11
EPS (HK$)                                0.95           0.60        2.12         1.33
                                                                                          units of E6 and 163 and 4 units respectively in 4M11.
EPS Gth (%)                              45.0         (36.7)       253.9       (37.3)     PE multiples declining on unexciting earnings outlook.
Diluted EPS (HK$)                        0.95          0.60         2.12         1.33
DPS (HK$)                                0.41           0.00        0.00         0.00     FY11 consensus shows c.6% earnings growth translating to PE
BV Per Share (HK$)                       6.27          6.61         9.34        9.74      of 18.1x, above sector average of 11.6x. Earning upside is limited,
PE (X)                                   25.2           39.9        11.3         18.0     given the challenging auto market outlook and price competition
P/Cash Flow (X)                          16.2           17.1          7.7         9.6     ahead. We do not expect any re-rating in the near-term as sales
P/Free CF (X)                              nm            nm          6.9          nm
EV/EBITDA (X)                            15.0           16.1          7.1        10.6     boost from the government’s EV subsidy program has been
Net Div Yield (%)                         1.7            0.0         0.0          0.0     limited so far.
P/Book Value (X)                           3.8           3.6         2.6          2.5
Net Debt/Equity (X)                        0.2           0.6          0.1         0.6     At A Glance
ROAE (%)                                 20.1            9.3        27.1         14.4     Issued Capital - H shares (m shs)                        793
                                                                                                           - Non H shrs (m shs)                  1,482
Other Broker Recs:                                         B: 4     S: 12          H: 7   H shs as a % of Total                                     35
                                                                                          H Mkt. Cap (HK$m/US$m)                        18,975 / 2,439
                                                                                          Major Shareholders
                                                                                               Wang Chuan-fu (%)                                 25.1
ICB Industry: Industrials
                                                                                               LU Xiang Yang (%)                                 17.7
ICB Sector: Electronic & Electrical Equipm
                                                                                               Xia Zuo Qian (%)                                   5.5
Principal Business: BYD produces and sells cars and IT parts business
                                                                                          Major H Shareholders (%)
which includes rechargeable batteries and handset components &
                                                                                               MidAmerican Energy Holdings Company               28.4
assembly services                                                                              LL Group, LLC (%)                                   7.0
Source of all data: Company, DBSV, Bloomberg, HKEX                                             Morgan Stanley (%)                                  5.3
                                                                                          H Shares-Free Float (%)                                59.4
                                                                                          Avg. Daily Vol.(‘000)                                 6,033



Page 144
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed- MY / sa- CW
                                                                                                                                  Automobile sector
                                                                                                                                      BYD Company
Income Statement (RMB m)                                                               Balance Sheet (RMB m)
FY Dec                              2007A         2008A        2009A        2010A      FY Dec                         2007A     2008A     2009A      2010A
Turnover                          21,211        26,788       39,469       46,685       Net Fixed Assets               10,342    14,716    18,907     25,044
Cost of Goods Sold               (16,964)      (21,569)     (30,905)     (38,421)      Invts in Assocs & JVs               0         0         0          0
Gross Profit                         4,248         5,219        8,565        8,264     Other LT Assets                 2,647     3,276     4,632     10,278
Other Opng (Exp)/Inc               (1,933)       (2,981)      (3,611)      (4,639)     Cash & ST Invts                 5,583     1,706     2,351      1,993
Operating Profit                     2,314         2,237        4,953        3,625     Inventory                       4,549     6,916     4,408      6,538
Other Non Opg (Exp)/Inc               (212)         (473)        (207)        (255)    Debtors                         5,433     5,566     9,793      8,153
Associates & JV Inc                       0             0            0          26     Other Current Assets              736       712       645      1,869
Net Interest (Exp)/Inc                (360)         (401)        (237)        (254)    Total Assets                   29,288    32,891    40,736     53,875
Exceptional Gain/(Loss)                   0             0           0            0
Pre-tax Profit                       1,743         1,364        4,509        3,142     ST Debt                         6,829     4,371       547     11,003
Tax                                    (41)          (88)        (431)        (224)    Other Current Liab              8,752    10,024    17,830     17,672
Minority Interest                       (91)        (254)        (285)        (395)    LT Debt                         1,295     4,792     3,107      3,049
Preference Dividend                       0             0            0            0    Other LT Liabilities                2       367       225        999
Net Profit                           1,612         1,021        3,794        2,523     Shareholder’s Equity           10,708    11,286    16,682     18,460
Net Profit before Except.            1,612         1,021        3,794        2,523     Minority Interests              1,702     2,052     2,345      2,691
EBITDA                               3,014         3,126        6,510        5,646     Total Cap. & Liab.             29,288    32,891    40,736     53,875

Sales Gth (%)                         63.9         26.3         47.3         18.3      Non-Cash Wkg. Cap               1,965     3,169    (2,984)    (1,112)
EBITDA Gth (%)                        55.4           3.7       108.2        (13.3)     Net Cash/(Debt)                (2,541)   (7,456)   (1,303)   (12,060)
Opg Profit Gth (%)                    49.2          (3.3)      121.4        (26.8)
Net Profit Gth (%)                    44.2        (36.6)       271.5        (33.5)
Effective Tax Rate (%)                 2.3           6.5         9.5          7.1
Cash Flow Statement (RMB m)                                                            Rates & Ratio
FY Dec                             2007A      2008A           2009A         2010A      FY Dec                         2007A     2008A     2009A      2010A
Pre-Tax Profit                      1,743      1,364           4,509         3,142     Gross Margins (%)                 20.0      19.5     21.7       17.7
Dep. & Amort.                          911     1,362           1,764         2,249     Opg Profit Margin (%)             10.9       8.4     12.5         7.8
Tax Paid                               (49)     (209)           (284)        (441)     Net Profit Margin (%)              7.6       3.8       9.6        5.4
Assoc. & JV Inc/(loss)                    0         0               0             0    ROAE (%)                          20.1       9.3     27.1        14.4
(Pft)/ Loss on disposal of FAs            0         0               0            0     ROA (%)                            7.1       3.3     10.3         5.3
Chg in Wkg.Cap.                   (1,585)    (1,023)           5,744       (2,046)     ROCE (%)                          14.3       9.6     19.6        11.4
Other Operating CF                     699       232             266           207     Div Payout Ratio (%)             43.5        0.0       0.0        0.0
Net Operating CF                    1,718      1,725         11,998          3,112     Net Interest Cover (x)             6.4       5.6     20.9        14.3
Capital Exp.(net)                 (3,896)    (5,640)         (5,797)       (8,114)     Asset Turnover (x)                 0.9       0.9       1.1        1.0
Other Invts.(net)                         0         0               0            0     Debtors Turn (avg days)          72.5      74.9      71.0       70.2
Invts in Assoc. & JV                      0         0               0             0    Creditors Turn (avg days)       111.7     113.5     115.0      113.8
Div from Assoc & JV                       0         0               0            0     Inventory Turn (avg days)        87.6     103.5      70.9       55.2
Other Investing CF                (1,088)       (191)        (1,359)       (4,541)     Current Ratio (x)                  1.0       1.0       0.9        0.6
Net Investing CF                  (4,984)    (5,830)         (7,156)     (12,655)      Quick Ratio (x)                    0.7       0.5       0.7        0.4
Div Paid                             (220)      (850)             (8)         (802)    Net Debt/Equity (X)                0.2       0.6       0.1        0.6
Chg in Gross Debt                   2,387      1,039         (5,519)      10,391       Capex to Debt (%)                48.0      61.6     158.7       57.7
Capital Issues                            0      701           1,581             0     Z-Score (X)                        N/A       N/A      N/A         N/A
Other Financing CF                  5,021       (581)           (299)         (405)    N.Cash/(Debt)PS (RMB)           (1.24)    (3.64)    (0.61)     (5.30)
Net Financing CF                    7,188        309         (4,245)         9,183     Opg CFPS (RMB)                   1.61      1.34      2.92       2.27
Currency Adjustments                      0       (42)             18           22     Free CFPS (RMB)                 (1.06)    (1.91)     2.89      (2.20)
Chg in Cash                         3,922    (3,838)             615         (338)
Interim Income Statement (RMB m)                                                       Segmental Breakdown (RMB m)
FY Dec                          1H2009 2H2009                1H2010       2H2010       FY Dec                         2007A     2008A     2009A      2010A
Turnover                         16,132     23,337            24,246       22,440      Revenues (RMB m)
Cost of Goods Sold             (12,967) (17,937)            (19,068)     (19,353)       Batteries & other products     7,149     6,208     4,081      4,582
Gross Profit                       3,165      5,400            5,177         3,087      Mobile handset components      9,187    11,933    14,397     20,553
Other Oper. (Exp)/Inc            (1,550)    (2,053)           (2,213)      (2,426)      Automobile & related prodts    4,872     8,646    20,991     21,550
Operating Profit                   1,615      3,346            2,964           661
Other Non Opg (Exp)/Inc               (16)     (191)             (99)        (156)
Associates & JV Inc                      0          0               0            26    Total                          21,211    26,788    39,469     46,685
Net Interest (Exp)/Inc              (141)      (105)             (92)         (162)
Exceptional Gain/(Loss)                  0          0               0             0
Pre-tax Profit                     1,458      3,051            2,774           369
Tax                                 (192)      (238)            (186)           (38)
Minority Interest                     (88)     (197)            (167)         (228)
Net Profit                         1,178      2,616            2,421           102
Net profit bef Except.             1,178      2,616            2,421            102
EBITDA                             2,409      4,109            3,909        `1,736

Sales Gth (%)                        30.2          62.1         50.3          (3.8)
EBITDA Gth (%)                       59.0         155.1         62.3        (57.7)
Opg Profit Gth (%)                   52.1         184.7         83.5        (80.2)
Net Profit Gth (%)                  176.8         122.1         (7.4)       (95.8)
Gross Margins (%)                    19.6          23.1         21.4          13.8
Opg Profit Margins (%)               10.0          14.3         12.2           2.9
Net Profit Margins (%)                7.3          11.2         10.0           0.5

Source: Company, DBS Vickers




                                                                                                                                                Page 145
Industry Focus
Automobile Sector

Appendix

Passenger vehicle monthly sales                                                                                      Passenger vehicle monthly sales growth

 unit                                                                                                                 YoY, %
 1,800,000                                                                                                            140
 1,600,000                                                                                                            120
 1,400,000
                                                                                                                      100
 1,200,000
 1,000,000                                                                                                             80
   800,000                                                                                                             60
   600,000
                                                                                                                       40
   400,000
   200,000                                                                                                             20
         0                                                                                                              0
                                       Mar
                                              Apr




                                                                                            Oct
                                                                    Jul




                                                                                                               Dec
                      Jan
                               Feb




                                                            Jun


                                                                           Aug
                                                                                   Sep
                                                     May




                                                                                                     Nov



                                                                                                                      (20)




                                                                                                                             May-06
                                                                                                                             Sep-06

                                                                                                                             May-07
                                                                                                                             Sep-07
                                                                                                                              Jan-06



                                                                                                                              Jan-07



                                                                                                                              Jan-08
                                                                                                                             May-08
                                                                                                                             Sep-08
                                                                                                                              Jan-09
                                                                                                                             May-09
                                                                                                                             Sep-09
                                                                                                                              Jan-10
                                                                                                                             May-10
                                                                                                                             Sep-10
                                                                                                                              Jan-11
                                                                                                                             May-11
                                      2006                         2007                              2008
                                      2009                         2010                              2011

Commercial vehicle monthly sales                                                                                     Commercial vehicle monthly sales growth

 unit                                                                                                                 %
 600,000                                                                                                              200

 500,000
                                                                                                                      150
 400,000
                                                                                                                      100
 300,000

 200,000                                                                                                               50

 100,000
                                                                                                                        0
        0
                                     Mar
                                             Apr




                                                                                            Oct
                                                                   Jul




                                                                                                               Dec
               Jan
                            Feb




                                                           Jun


                                                                           Aug
                                                                                   Sep
                                                    May




                                                                                                     Nov




                                                                                                                      (50)
                                                                                                                             May-06
                                                                                                                             Sep-06
                                                                                                                              Jan-06



                                                                                                                              Jan-07
                                                                                                                             May-07
                                                                                                                             Sep-07
                                                                                                                              Jan-08
                                                                                                                             May-08
                                                                                                                             Sep-08
                                                                                                                              Jan-09
                                                                                                                             May-09
                                                                                                                             Sep-09
                                                                                                                              Jan-10
                                                                                                                             May-10
                                                                                                                             Sep-10
                                                                                                                              Jan-11
                                                                                                                             May-11
                      2006                                 2007                                   2008
                      2009                                 2010                                   2011

                                                                                                                     Market share of top 10 auto manufacturers by sales
Imported motor vehicles (volume)                                                                                     volume, 4M11

 '000 units                                                                                       YoY, %
 900                                                                                                       100                               Changan    Beijing Auto
                                                                                                                               First Auto
 800                                                                                                                                          12.80%       Works
                                                                                                           80                    Works
 700                                                                                                                            13.30%                     8.29% Guangzhou
                                                                                                                                                                     Auto
 600                                                                                                       60
                                                                                                                                                                     3.59%
 500                                                                                                                     Dongfeng
                                                                                                           40             Motor                                     Chery
 400
                                                                                                                          16.11%                                    3.58%
 300                                                                                                       20
 200
                                                                                                           0                                                        Jianghuai
 100                                                                                                                                                                  3.13%
                                                                                                                                  Shanghai    Others
   0                                                                                                       (20)                               13.00%
                                                                                                                                    Auto                          Huachen
        2000
               2001
                            2002

                                     2003
                                             2004

                                                    2005
                                                            2006
                                                                    2007
                                                                            2008

                                                                                     2009
                                                                                              2010




                                                                                                                                   21.07%                          2.68%
                                                                                                                                                        BYD
                                                                                                                                                       2.44%
        Imported motor vehicles (LHS)                                               Growth (RHS)

Source: CEIC




 Page 146
                                                                                                                                                           Industry Focus
                                                                                                                                                     Automobile Sector

Automobile exports                                                                 2010 Sales of foreign JV brands - Passenger Vehicle

 '000 units                                                              YoY, %     '000 units
 700                                                                       400      2,000
                                                                           350      1,800
 600
                                                                           300      1,600
 500                                                                       250      1,400
 400                                                                       200      1,200
                                                                           150      1,000
 300                                                                       100        800
 200                                                                       50         600
                                                                           0          400
 100                                                                       (50)       200
   0                                                                       (100)        0
       2003

              2004

                     2005

                            2006

                                    2007

                                           2008

                                                  2009

                                                         2010

                                                                 5M11*




                                                                                                                                                         Mitsubishi
                                                                                                 Nissan
                                                                                           Volkswagen
                                                                                                    GM




                                                                                                                                                                       Chrysler
                                                                                                                                   Mazda
                                                                                                                                                             BMW
                                                                                                               Peugeot-Citroen
                                                                                                                                     Ford




                                                                                                                                                             Volvo
                                                                                                                                                                         Isuzu
                                                                                                                                                     Mercedes-Benz
                                                                                                Toyota


                                                                                                                       Honda
                                                                                           Kia-Hyundai




                                                                                                                                   Suzuki
                     Exports - Motor Vehicles (LHS)
                     Exports - Sedan (LHS)
                     YoY growth - Motor Vehicles (RHS)
                     YoY growth - Sedan (RHS)

*3M11 for sedan

New Registration of Motor Vehicle: PV – Tier 1 cities                              New Registration of Motor Vehicle: PV – Tier 2 cities

 '000 units                                                                         '000 units
 900                                                                                900
 800                                                                                800
 700                                                                                700
 600                                                                                600
 500                                                                                500
 400                                                                                400
 300                                                                                300
 200                                                                                200
 100                                                                                100
   0                                                                                  0
       2002 2003 2004 2005 2006 2007 2008 2009                                             2002 2003 2004 2005 2006 2007 2008 2009
                                                                                             Tianjin                               Zhejiang                         Jiangsu
           Beijing                 Shanghai                     Guangdong                    Liaoning                              Yunnan

Domestic made PVs’ sales breakdown by displacement                                 2005-2009 CAGR of per capita GDP in the PRC

                                                                                    %
   100%
    90%                                                                             25.0
    80%                                                                                     19.2       19.0                                              National
                                                                                    20.0
    70%                                                                                                                                                average: 16%
    60%                                                                             15.0                             12.6               12.1
    50%                                                                                                                                                   8.8
    40%                                                                             10.0                                                                                6.9
    30%
                                                                                     5.0
    20%
    10%                                                                              0.0
                                                                                                       Hubei




                                                                                                                                                                        Shanghai
                                                                                             Sichuan




                                                                                                                                         Guangdong
                                                                                                                        Zhejiang




                                                                                                                                                          Beijing




     0%
              2005 2006 2007               2008 2009 2010 4M11
    <=1L              1<-<=1.6L            1.6<-<=2L             2<-<=2.5L
    2.5<-<=3L         3<-<=4L              >4L

Source: CAAM, CEIC




                                                                                                                                                                             Page 147
Industry Focus
Automobile Sector

                                                                 Average disposable income per capita of Tier 1 and Tier 2
Average GDP of Tier 1 and Tier 2 cities                          cities


 RMB bn                                                           RMB
 1,200                                                            30,000

 1,000                                                            25,000

   800                                                            20,000

   600                                                            15,000

   400                                                            10,000

   200                                                             5,000

     0                                                                  0
            2004    2005      2006      2007    2008      2009               2004     2005     2006       2007   2008   2009
                               Tier 1           Tier 2                                           Tier 1           Tier 2

Auto sales – China, Japan & US                                   Private car ownership


 '000 units                                         '000 units    m units
 2,000                                                    900     70
 1,800                                                    800
 1,600                                                    700     60
 1,400                                                    600
 1,200                                                            50
                                                          500
 1,000
                                                          400     40
   800
   600                                                    300
   400                                                    200     30
   200                                                    100
     0                                                    0       20
         Jan-04
          Jul-04
         Jan-05
          Jul-05
         Jan-06
          Jul-06
         Jan-07
          Jul-07
         Jan-08
          Jul-08
         Jan-09
          Jul-09
         Jan-10
          Jul-10
         Jan-11




                                                                  10

                                                                   0
                   China (LHS)                 US (LHS)
                                                                       1990
                                                                       1991
                                                                       1992
                                                                       1993
                                                                       1994
                                                                       1995
                                                                       1996
                                                                       1997
                                                                       1998
                                                                       1999
                                                                       2000
                                                                       2001
                                                                       2002
                                                                       2003
                                                                       2004
                                                                       2005
                                                                       2006
                                                                       2007
                                                                       2008
                                                                       2009
                   Japan (RHS)                                         2010

Consumption tax                                                  Vehicle and vessel usage tax


              2010                                                                                  Annual tax charge (RMB)
     Cylinder              Tax rate                              Cars with different                    1st draft in 2nd revision on
      <=1.0L                 1%                                  engine sizes                Previous    Nov 2010       Feb 24 2011
   1.0L<-<=1.5L              3%
   1.5L<-<=2.0L              5%                                  <=1L                         60-660           60-360           60-360
   2.0L<-<=2.5L              9%
                                                                 1.0 - 1.6L (incl. 1.6)      360-660          360-660          300-540
   2.5L<-<=3.0L             12%
   3.0L<-<=4.0L             25%                                  1.6 - 2.0L (incl. 2.0)      360-660          660-960          360-660
       >4.0L                40%                                  2.0 - 2.5L (incl. 2.5)      360-660        960-1,620        660-1200
                                                                 2.5 - 3.0L (incl. 3.0)      360-660      1,620-2,460       1200-2400
                                                                 3.0 - 4.0L (incl. 4.0)      360-660      2,460-3,600       2400-3600
                                                                 > 4.0L                      360-660      3,600-5,400      3,600-5,400

Source: CAAM, CEIC, Xinhua news




 Page 148
                                                                                                                                                    Industry Focus
                                                                                                                                  Automobile Sector

China premium segment development                                          Premium segment share of total market 2010

 '000 units                                                                 %
 1,600                                                                      35
                                           CAGR:
                                           5%                               30
 1,400
                                                                            25
 1,200
                            CAGR:                                           20
 1,000
                            12%                                             15
   800
                                                                            10                                           World average: 8.7%
   600
              CAGR:                                                          5
   400        45%                                                            0




                                                                                                    France

                                                                                                             China

                                                                                                                     Russia



                                                                                                                                         S. Korea




                                                                                                                                                                      India
                                                                                                                                                             Brazil
                                                                                             USA
   200




                                                                                 Kingdom




                                                                                                                                                     Japan
                                                                                 Germany



                                                                                     Italy




                                                                                                                              Turkey
                                                                                  United
        0
              2005         2010          2015F         2020F

Income developments in China                                               Number of households with annual income >RMB250,000


 Number of households per income group (m)                                  million
 700
                             CAGR 2010-25                                                                                                                    37.67
                                                                            40
 600
                               +8.6%                                        35
 500                                                                                                                     CAGR:
                                                                            30
 400                                                                                                                     34%
                                        +6.5%                               25
 300
                                                                            20
 200                                                                        15                                                         11.89
                                          -6.4%
 100                                                                        10
    0                                                                        5               1.31              2.01
                                                                                      0.88
              1995              2010               2025
                                                                             0
            USD 0-15k        USD 15-60k        > USD 60k                          2008       2009             2010                 2015F                     2020F

Note: Data in real USD, price base 2005, purchasing power parity-
adjusted
Beijing market status

 New Registration
                           > New car licenses: 20,000 units/mth
 Policy in Beijing



   Total PC market
    and premium            > Beijing new registration policy poses challenges to the passenger vehicle sales
 segment 2011 YTD



 Ratio of premium          > But the new policy also brings opportunities to the premium segment since customers now tend to go
      segment              for premium cars and the ratio of premium segment in the total passenger vehicles market is increasing



   Implication for         > The outlook for premium segment is still quite positive
       BMW                 > Trade-in program has been established to maximize sales opportunities in Beijing
                           > Other 1st tier cities might also start limitation, but probably with a different approach than Beijing

Source: BMW, Global Insight, Registration data, State Information Center




                                                                                                                                                                      Page 149
Industry Focus
Automobile Sector




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Page 150
                                                                                                                                   Industry Focus
                                                                                                                            Automobile Sector


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                                                                                                                                               Page 151
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