1. CHINA GLOBAL ANALYSIS INC.
CHINA GLOBAL ANALYSIS INC.
CHINESE AUTO MARKET UNDER THE SPOTLIGHT
Current
Price H
Target
Price H
Current
Price A
Target
Price A
Advice H
Shares
Advice A
Shares
Guangzhou 7.21 8.71 18.92 18.03 Mod. Buy Mod. Sell
BYD 42.55 43.82 - - Hold -
Geely Auto 3.38 3.03 - - Sell -
Great Wall 6.37 6.16 8.82 8.09 Mod. Sell Sell
H-Shares data in HKD. A-Shares data in RMB.
2015 PASSENGER CARS KEY
FIGURES
Cars sold: 21.1 million
Growth rate: 7.3% (compared to
10% in 2014)
___________________
Chinese brands’ market share:
41.3% (+290 basis points YoY)
Chinese brands’ growth rate: 15.3%
___________________
Production of energy cars: 102,461
(10.4 times YoY)
Sales of energy cars: 100,763 (10.6
times YoY)
___________________
Export: 427,700
___________________
Top 3 Automakers:
1. Hong Qi
2. BYD Co LTD
3. Chery Automobile Co
SUMMARY
Strong points:
• Reducing quality gap thanks to
constant investments in R&D
• Marketing
____________________
Weak points:
• Dependence on foreign suppliers
for technologies, raw materials
and semi-finished products
____________________
Concerns:
• Stock market fall
• Increase in taxes
• License plates
• Limited number of cars (Beijing)
• Growth in second-hand car
market
_________________
Future prospectives:
• Electric vehicles
• Anticipate change and new trends

2. CHINA GLOBAL ANALYSIS INC.
STRONG POINTS
In recent years, Chinese automakers have striven to reach Western’s level of technology, investing
a significant proportion of the budget for R & D. According to surveys conducted by JD Power, the
quality of Chinese brands in 2014 achieved the level of quality the foreign brands already had in
2011. The quality gap is reducing rapidly and consumers are more and more loving chinese brands.
In addition, China automakers are investing heavily in marketing, gradually increasing their
market share. In the near future, they will constitute a substantial threat to the high margins foreign
car manufacturers could reach.
An example is the “SUV boom” in China. Many rich Chinese aspire to own an SUV, but while in
the early stages of this circumstance the most sold were those produced by foreign companies with
local joint ventures, Chinese automakers are starting to catch up. In the first half of 2015, sales
of Chinese SUV brand have increased by about 30% compared to 12% for foreign brands. Under
increasing domestic pressure, foreign automakers have been forced to reduce the prices in order to
keep market share and stimulate sales (see Volkswagen and General Motors strategies).
WEAK POINTS
Despite growing effort in R&D, Chinese enterprises don’t have sufficient research skills to lead the
new trends of the sector, so they will continue to depend on foreign producers for access to the
most advanced technologies.
In fact, although Chinese products have significantly lower prices than those imported (a numerical
control lathe produced in China costs about 60% less of a lathe product abroad), the majority of
domestic enterprises use almost exclusively imported machine tools. Almost all the machinery
incorporating advanced technologies are of foreign manufacture. Chinese automakers also have to
deal with supply difficulties regarding raw materials and semi-finished products.
CONCERNS
In 2015 1Q Chinese auto makers have pushed too far the production, causing a dangerous over
supply crisis that could harm the sector in the future.
One significant phenomenon, that will accelerate the process of contraction of Chinese automotive
industry, is the fall that Chinese stock markets have been suffering from mid-June. In fact, the
collapse of Chinese stock markets and the consequent fall in consumer confidence have injected
uncertainty in the economy. Since many Chinese have lost part of their income in recent stock sell-
off, the level of expenditure for some categories of goods will probably decline, at least
temporarily.
Another concern is the increase of taxes by local authorities and restrictions on the sale of new cars
in major Chinese cities, especially Tier-1. The aim is to reduce congestion and pollution in densely
populated areas.

3. CHINA GLOBAL ANALYSIS INC.
A notable limitation is the complex mechanism that allows you to get the license plates. In order to
get the right for receiving new plates, Chinese citizens who decide to purchase a new car must
participate in a lottery. This system fuels black market, where wealthy Chinese are willing to pay to
get the license plate number without the need to win the lottery.
Another type of limitation is present in Beijing, where the authorities try to limit the number of
cars at peak hours to reduce congestion. The restriction prohibits the movement of cars based on
the license plate number, odd or even, and aims to improve air quality and to cut traffic.
In addition, the country has recentely developed a second hand car market. Now consumers have
more choices and they are not forced to buy a new car. A key advantage in the purchase of a used
car is that you also obtain the license plate, without participating in a lottery.
FUTURE GOALS
While the drop in oil prices supports the demand in the short term, on the other hand, the
introduction of fuel consumption targets opens the market to electric vehicles. Due to high carbon
emissions, Chinese government has required that by 2016 at least 30 percent of new vehicles are
powered by alternative energy sources.
This shows progressive commitment and a growing importance of environmental issues. Apart
from the relatively low purchase price of electric vehicles, due to the many funding initiatives, in
China there is generally less aversion to new technologies powered by electricity. The future
prospects of the electric vehicle market are optimistic. Given a low starting point, the future growth
rates in this segment will be more than considerable.
CONCLUDING REMARKS
Despite its contraction, auto market is still far from
a crisis. “The China Automobile Association said in
early January 2016 that sales rose a respectable 4.7%,
beating analyst expectations of a 3% spike this year
amidst a record slowdown in growth and sentiment in
Chinese economy” (Forbes Jan 12,2016: China’s Car
Market Beats the U.S. in 2015, and Will Again this
Year).
The market has still chances to grow, especially in
China’s smaller cities, where it has been registered an
increasing number of sales. That said, in the near future
it will be difficult to cope with the series of changes
that will be addressed by manufacturers. To survive in
such a changing environment the automakers will have
to move faster than the market, trying to anticipate
change and new trends.
42%
34%
14%
10%
Worldwide growth from 2011 to
2020
100%=33mn units
ROW China North America Europe
Source: McKinsey, Bigger, better, broader.

4. CHINA GLOBAL ANALYSIS INC.
GUANGZHOU AUTOMOBILE GROUP (2238:HK Hong Kong, 601238:CH Shanghai)
2014 2015E 2016E 2017E
Revenue 22,376 22,761 24,479 26,423
Net profit 3,185 3,502 4,020 4,251
Data in RMB Millions. Source: Morgan Stanley, 2015.
Brand volume growth and cost reduction due to localization permit the group to transmit the
revenue growth (CAGR 14-17 +5.70%) entirely to net profit, which grows even more (CAGR 14-
17 +10.10%) thanks to relatively stable administrative expenses.
H-Shares PE analysis suggests a target price range 5.85-10.03 HKD for 2016, with expected price
of 8.71 HKD (current 7.21). A-Shares could bounce between 14.37 to 21.14 RMB, target price at
18.03 RMB (current 18.92). We suggest moderate buy for H-Shares and moderate sell for A.
GEELY AUTOMOBILE HOLDINGS (175:HK Hong Kong)
2014 2015E 2016E 2017E
Revenue 21,738 30,148 42,696 53,973
Net profit 1431 2780 3876 5019
Data in RMB Millions. Source: Goldman Sachs, 2015.
We believe Geely’s increase in revenue (CAGR 14-17E +30%) and profit (CAGR 14-17E 45%)
are over weighted. The higher profit is led by higher non-operating income due to government
subsidy and net gains on plant disposal to Zhidou Electric Vehicle; we consider these aspects as not
reliable and not stable. Predicted growth is unlikely to happen since the data provided are not
enough reliable. Moreover, Geely launched in 2015 5 new models, 2 of them being SUVs which we
believe will suffer from strongly increasing competition and margin pressure. Our analysis
suggests a target price range 2.06-4.15 HKD, expected 3.03 in 2017 versus current 3.38. CGA last
advice is to adopt a Sell strategy, forecasting a -10% drop in stock price.
GREAT WALL MOTOR (2333:HK Hong Kong, 601633:CH Shanghai)
2014 2015E 2016E 2017E
Revenue 60,137 71,144 88,914 101,678
Net profit 8,042 8,469 11,689 13,735
4.00
8.00
12.00
16.00
20.00
24.00
28.00
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H-Shares A-Shares
2
3
4
5
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5. CHINA GLOBAL ANALYSIS INC.
Data in RMB Millions. Source: Bank of America Merrill Lynch, 2015.
Rating output on Great Wall is negative. We believe the competition in its low-end SUV segment is
structural, and the Street forecasts excess R&D expenses on electric vehicles in next FY, to catch up
with China’s fuel economy target by 2020. BYD’s stable operating profit makes that company
preferable: in fact Great Wall’s Op. Profit grows less than revenue (CAGR 14-17E 19.53% vs
18.92%), possibly because of decreasing efficiency. Expected H-Share price 6.16 HKD (range 6.99-
5.22, current 6.37 HKD) suggests moderate sell; expected A-Share price 8.09 RMB (range 10.82-
7.68, current 8,82 RMB) makes our advice a sell strategy.
BYD CO (1211:HK Hong Kong)
2012 2013 2014 2015E
Revenue 44,381 49,768 55,366 60,586
Net profit 81 553 434 539
Data in RMB Millions. Source: Morningstar, 2016.
BYD showed a good increase in revenue, reaching a 10.93% CAGR 12-15E. Net profit is slightly
unstable, recovering from a 2012 low at 81 RMB M. Operating profit is more stable, giving strenght
to a possible upward trend. H-Shares PE suggests a fair price of 43.82 HKD in next FY (current
42.55), the possible range going from 38.52 to 52.18 HKD. Estimated price +3% increase suggests
a hold strategy, supported by the forecasted future trend of possible growth.
CHINA GLOBAL ANALYSIS INC.
THE EQUITY RESEARCH TEAM
Enrico Astegiano
Filippo Cattabiani
Andrea D’Oro 6 March 2016
0
20
40
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H-Shares A-Shares
25
45
65
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