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
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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
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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.
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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
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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
20%.
Advantages of multi-branded over single brand auto dealers.
Multiple brand dealers have certain advantages over their
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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
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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
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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
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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
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 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
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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Industry Focus
Automobile Sector
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