February 26, 2014 China: Automobiles Equity Research Remain positive on luxury dealers despite new car GP cut; Buy Zhengtong/Baoxin/Harmony Luxury sector to outpace broader market We expect luxury car sector growth (12%-15%) to outpace that of the overall car market (9%-10.5%) in 2014-16, given: 1) Upper/upper middle class expansion and shift in consumption pattern; 2) higher affordability on lower ASP and increased auto financing penetration; 3) rising supply due to capacity boost and more products to be localized; and 4) dealer network extending to lower-tier cities. Entry-level models remain the sweet spot In 2013, China’s entry-level luxury models accounted for 56% of the total luxury market vs. the global average of 64%. We believe this entry- level luxury mix would continue to increase in 2014-16, driven by robust new product cycles and higher affordability resulting from lower ASPs. Prefer dealers on robust aftersales growth We expect the luxury car fleet to grow faster than new luxury car sales due to low scrappage rates. Hence, we believe dealer revenue/GP from the aftermarket business would grow faster than that from new car sales, and prefer luxury dealers vs. OEMs on the former’s higher aftermarket exposure. We revise earnings estimates/target prices We adjust 2013E-15E EPS for our China auto dealer coverage by -15% to +4% in light of our revised assumptions on new car sales, the aftermarket segment and other value-added businesses. In general, we lower the gross profit (GP) contribution from new car sales for dealers given lower volumes, ASPs and GPMs (on slowing sector growth/mix decline/fierce competition/slow new store expansion), partly offset by stronger aftersales growth. Accordingly, we update our 12- month P/B-ROE based target prices by -8% to +3%. Buy Zhengtong/Baoxin/Harmony We continue to like Zhengtong/Baoxin/Harmony for their high exposure to the luxury segment as well as attractive valuations (2014E average P/E of 7.3X vs. H-share auto coverage of 9.2X). Valuation summary – luxury segment Source: Datastream, Gao Hua Securities Research. CHINA LUXURY OEM/DEALER COVERAGE SUMMARY Source: Datastream, Gao Hua Securities Research. RELATED RESEARCH China: Automobiles: Distributors: Strong earnings growth outlook, valuations attractive; Buy Zhengtong (upgrade), Baoxin, July 18, 2013 Yipeng Yang +86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Yuqian Ding +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited The Goldman Sachs Group, Inc. Global Investment Research 2/21/2014 12 Month Potential Ticker Company Name Currency Rating Close TP up/downside 3836.HK Harmony HKD Buy 5.45 7.65 40.4% 1728.HK Zhengtong HKD Buy 4.45 5.98 34.4% 1293.HK Baoxin HKD Buy 6.48 8.27 27.7% 0881.HK Zhongsheng HKD Neutral 11.20 11.16 -0.4% 1114.HK Brilliance HKD Neutral 12.24 11.62 -5.1% Valuation Summary Ticker Company name Rating 2014E 2015E 2014E 2015E 1293.HK Baoxin Buy 8.5 6.4 2.1 1.6 1728.HK Zhengtong Buy 7.2 6.0 0.9 0.8 3836.HK Harmony Buy 6.3 5.0 1.5 1.2 0881.HK Zhongsheng Neutral 10.5 7.9 1.6 1.4 1114.HK Brilliance Neutral 11.3 9.8 3.1 2.5 Average 8.8 7.0 1.8 1.5 P/E P/B
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February 26, 2014
China: Automobiles
Equity Research
Remain positive on luxury dealers despite new car GP cut; Buy Zhengtong/Baoxin/Harmony
Luxury sector to outpace broader market
We expect luxury car sector growth (12%-15%) to
outpace that of the overall car market (9%-10.5%)
in 2014-16, given: 1) Upper/upper middle class
expansion and shift in consumption pattern; 2)
higher affordability on lower ASP and increased
auto financing penetration; 3) rising supply due to
capacity boost and more products to be localized;
and 4) dealer network extending to lower-tier cities.
Entry-level models remain the sweet spot
In 2013, China’s entry-level luxury models
accounted for 56% of the total luxury market vs.
the global average of 64%. We believe this entry-
level luxury mix would continue to increase in
2014-16, driven by robust new product cycles and
higher affordability resulting from lower ASPs.
Prefer dealers on robust aftersales growth
We expect the luxury car fleet to grow faster than
new luxury car sales due to low scrappage rates.
Hence, we believe dealer revenue/GP from the
aftermarket business would grow faster than that
from new car sales, and prefer luxury dealers vs.
OEMs on the former’s higher aftermarket exposure.
We revise earnings estimates/target prices
We adjust 2013E-15E EPS for our China auto
dealer coverage by -15% to +4% in light of our
revised assumptions on new car sales, the
aftermarket segment and other value-added
businesses. In general, we lower the gross profit
(GP) contribution from new car sales for dealers
given lower volumes, ASPs and GPMs (on slowing
sector growth/mix decline/fierce competition/slow
new store expansion), partly offset by stronger
aftersales growth. Accordingly, we update our 12-
month P/B-ROE based target prices by -8% to +3%.
Buy Zhengtong/Baoxin/Harmony
We continue to like Zhengtong/Baoxin/Harmony
for their high exposure to the luxury segment as
well as attractive valuations (2014E average P/E of
Yipeng Yang +86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
We expect luxury segment to outpace overall market in 2014-16 3
We favor luxury dealers on their strong aftermarket growth 8
P/B-ROE still our preferred framework; Zhengtong/Baoxin/Harmony seem undervalued 11
Disclosure Appendix 20
The prices in the body of this report are based on the market close of February 21, 2014, unless otherwise mentioned.
Exhibit 1: Valuation summary: China luxury OEM/dealer coverage
Note: Prices as of market close on February 21, 2014.
Source: Datastream, Gao Hua Securities Research.
Valuation Summary -luxury car segment 2/21/2014 12 Month 12 Month PotentialTicker Company Name Currency Rating Close TP TP-old up/downside Methodology Key risks3836.HK Harmony HKD Buy 5.45 7.65 8.36 40.4% PB-ROE: H Share Weaker price/margin erosion of luxury and super luxury new car sales; weaker aftermarket sales1728.HK Zhengtong HKD Buy 4.45 5.98 6.41 34.4% PB-ROE: H Share Lower price/volume of luxury car, esp. BMW, JLR and Volvo.1293.HK Baoxin HKD Buy 6.48 8.27 8.97 27.7% PB-ROE: H Share Price/margin erosion of new car sales; potential restriction from BMW on new car sales post NCGA acquisition0881.HK Zhongsheng HKD Neutral 11.20 11.16 10.88 -0.4% PB-ROE: H Share Higher/lower price/volume of luxury car; Japanese brands recovery1114.HK Brilliance HKD Neutral 12.24 11.62 11.62 -5.1% PB-ROE: H Share Higher/lower vol./price; higher/lower electric vehicle R&D expenditure
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 3
We expect luxury segment to outpace overall market in 2014-16
China’s luxury car sector recorded a stronger-than-expected sales volume growth of 22% in FY13. We maintain our 2014-16 China
luxury car sector sales volume growth estimates of 15%/15%/12% – faster than our overall car market growth estimates of
10.5%/10%/9%.
Exhibit 2: We forecast 2014-16 luxury sector growth of 15%/15%/12% Luxury sales volume in ‘000 units, yoy growth rate in %
Exhibit 3: We estimate China’s luxury car sector volume to grow at a pace
faster than that of the overall car market Overall car market and luxury sector yoy sales volume growth in %
Source: Global Insight, Gao Hua Securities Research.
Source: Global Insight, Gao Hua Securities Research.
YoY growth forecast (in %) 2011 2012 2013 2014E 2015E 2016ELuxury car market (new) 31.3% 22.5% 22.0% 15.0% 15.0% 12.0%Luxury car market (old) 31.3% 22.5% 18.0% 15.0% 15.0% NAVar. (New vs. old) 4.0% 0.0% 0.0% NA
24 43 53 97 97 111 169 241 302 432
741 973
1,191 1,453
1,671 1,922
2,153
81.7%
22.2%
83.8%
-0.6%
15.0%
52.0%42.7%
25.1%
42.9%71.6%
31.3% 22.5% 22.0%15.0%15.0%
12.0%
-300%
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
0
500
1000
1500
2000
2500
3000
3500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
2015
E
2016
E
Luxury sales volume (in '000 units) Growth rate (YoY) (RHS)
24.1%
32.5%
22.4%
7.4%
51.1%
35.4%
8.7% 7.5%
18.3%
10.5% 10.0% 9.0%
15.0%
52.0%
42.7%
25.1%
42.9%
71.6%
31.3%
22.5% 22.0%
15.0% 15.0%12.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
2015
E
2016
E
Overall passenger car yoy growth rate Luxury car yoy growth rate
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 4
2013 recorded stronger-than-expected volume growth; Germany’s ‘Big 3’ remain dominant
Despite a slowdown in 1H13 due to the anti-corruption campaign promoted by the central government, the luxury car market still
recorded a decent growth in 2013 of 22% yoy, which is higher than our 18% estimate.
We see higher volume growth in 2H13 than 1H13, as suggested by the monthly volume trend of Germany’s ‘Big 3’, namely Audi,
BMW and Mercedes-Benz (see Exhibit 5). Germany’s ‘Big 3’ remain dominant in the segment with a combined market share of 74%,
albeit slightly lower than 2012’s 76%. Brands such as JLR/Cadillac/Volvo/Infiniti outperformed on the back of strong product cycles
and a speed up in localization.
Exhibit 4: Cadillac/Infiniti/Volvo led luxury growth while JLR led super luxury
growth; Germany’s ‘Big 3’ slightly lost share to peers in 2013 Sales volume in units, yoy growth rate in %
Exhibit 5: Higher volume growth in 2H13 than 1H13 for Germany’s ‘Big 3’
Luxury + Super luxury total 1,204,517 1,468,918 22%Germany 3 921,164 1,093,579 19%As % of total luxury 76% 74%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
0
10,000
20,000
30,000
40,000
50,000
60,000
Jan-
2013
Feb-
2013
Mar
-201
3
Apr-2
013
May
-201
3
Jun-
2013
Jul-2
013
Aug-
2013
Sep-
2013
Oct
-201
3
Nov
-201
3
Dec
-201
3
Mercedes BMW Audi Total YoY Change (RHS)
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 5
We believe the luxury car market can sustain a growth rate higher than that of the overall car
market in 2014-16 due to four major reasons:
1) Expansion of upper/upper middle class and consumption pattern leaning towards individuality
Based on BME company data, China has the fourth highest number of high net worth individuals (net worth over US$1mn) in the
world in 2011. Also, the premium-relevant households (the upper/upper middle class) would triple in 2012-2025 (see Exhibit 6). We
expect this further expansion of the upper/upper middle class to boost the secular growth of the luxury car market in China. We
believe the long-term growth outlook of HNWI (or upper class) as well as the upper middle class in China is the fundamental driver
of the secular growth of the country’s luxury car sector.
Along with wealth accumulation, we also find that consumer pattern/clientele has been evolving over time. For example, the typical
buyers of the Audi previously were mainly government officials and senior managers (see Exhibit 7). At present, Audi’s consumer
profile has widened and is more diversified (i.e., more private (non-government)/women/younger buyers).
Exhibit 6: We believe further expansion of premium-relevant upper/upper
middle class would boost secular growth of China’s luxury car market Number in mn people, 2012 and 2025
Exhibit 7: More individuality in luxury consumption; Audi is a good example
Source: BMW company data, IHS Global.
Source: Audi company data.
2) Higher affordability on lower ASP due to increasing entry-luxury mix and higher penetration of auto financing
The entry-level luxury segment (defined as cars not bigger than the D segment, i.e., BMW 3/Audi A4/Mercedes C Class) has been
growing faster than the overall luxury segment over the past 10 years. In 2013, China’s entry-level mix represented 56% of the total
luxury car market, still lower than the global average of 64%. We believe this entry-level mix will continue to increase in 2014-16,
driven by strong localization of product pipelines and increasing affordability from lower ASP after localization.
105
21323
107
24
73
11
31
0
90
180
270
360
450
2012 2025E
Lower middle class (20-40k USD) Middle class (40-60k USD)
Upper middle class (60-100k USD) Upper class (>100k USD)
Around 46mn. premium-relevant households
15 mn. premium-relevant households
Government customersSenior managers
over 90% private buyers
2/3 families
1/3 women
age: mid-thirties
over 1/3 are first-time buyer
Previous consumer profile Current consumer profile
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 6
Exhibit 8: Analysis of China’s entry-level luxury cars vs. other markets shows
under-penetration and growth opportunity 2013 status quo
Exhibit 9: China luxury car market new model launch (local-made) plans
Locally-assembled entry-level luxury new model line up
Source: Global Insight.
Source: ChinaAutoMarket.
Exhibit 10: China entry-level luxury cars gained weight significantly
China entry-level luxury and others as % of total, 2000-2013
Exhibit 11: Global entry luxury mix has also expanded in the past 10 years
Global entry luxury and others as % of total, 2000-2013
Source: Global Insight.
Source: Global Insight.
56%64%
88% 87%78% 76% 71% 67%
61%55% 55% 52%
38%
0%
20%
40%
60%
80%
100%C
hina
Wor
ld A
vera
ge
Spa
in
Fran
ce
Uni
ted
Kin
gdom
Ger
man
y
Japa
n
Indi
a
Mal
aysi
a
Thai
land
Taiw
an
Uni
ted
Sta
tes
Sou
th K
orea
Entry luxury % of total luxury
Brand Model Type Body type Expected timeBMW Zinoro 1E New model EV 2013.Q4
FWD sedan New model Sedan 20151 Series New model Sedan TBDX3 New mode SUV TBD
Audi A3 NB New model Sedan 2014.Q1A3 HB New model Sedan 2014.Q2A4 New generation Sedan 2015
Mercedes Benz C-Class New generation Sedan 2014.Q3GLA New model SUV 2014.H2
Infiniti Q50L New model Sedan 2014QX50L New model SUV 2014
Lexus Mid-size sedan New model Sedan 2016Lincoln Mid-size sedan New model Sedan 2015/16Acura SUV-X New model SUV 2016Cadilac ATS New model Sedan 2014.H1
LTS New model Sedan 2015Volvo XC60 New model SUV 2014.12
Moreover, we see increasing market acceptance for auto financing. We estimate the auto finance penetration for luxury brands has
expanded to 25%-35% in 2013 from 15%-25% in 2011 (see Exhibit 12). This higher acceptance may be linked to the increasing
consumer bases of the luxury sector to more private/women/younger buyers, who are typically more open to consumer credit.
3) Increasing supply from capacity expansion and new product localization plans
Besides Germany’s ‘Big 3’, other brands such as Volvo, Cadillac, Infiniti, Lexus, Acura, Lincoln and JLR have also started to build
their localization capacity. We expect the overall luxury segment capacity to expand at a CAGR of 42% in 2013-16E (see Exhibit 14).
Also, we expect more new luxury models to be localized (see Exhibit 13), which may increase the choice of luxury car buyers and
hence potentially inspire more sales in the luxury sector. In addition, the 25% import tariff savings from localization of more luxury
products may help lower the ASP and increase the affordability of potential buyers.
4) Extended sales network
We believe more dealership expansions, especially in lower tier cities, could also support the overall luxury volume growth (see
Exhibit 15).
Exhibit 12: Auto finance penetration is higher in the luxury segment
Auto finance penetration in %
Exhibit 13: We expect more local production models to be launched in 2014-
16 Length (mm), entry price (Rmb), and retail volume (bubble size) by model, 2013
Note: The star indicates new models in and after 2014, the position is the estimated
price and length, and size doesn’t represent volume.
Source: Harmony company data, Gao Hua Securities Research.
Source: Cheshi.com, Company data, Gao Hua Securities Research.
c. 15-25%
c. 25-35%
0%
5%
10%
15%
20%
25%
30%
35%
Luxury brand (2011) Luxury brand (2013E)
Auto finance penetration
200,000
250,000
300,000
350,000
400,000
450,000
500,000
4,100 4,300 4,500 4,700 4,900 5,100 5,300 5,500
Price (in RMB)
Length (in mm)
Sedan - NB
Segment C Segment D Segment E
Audi A6L
Audi A4L
Cadillac XTS
Volvo S80L
MB E-class
MB C-class
BMW 3 Series
BMW 5 Series
Crown
BMW FWD
Audi A3 NB
Volvo S60L
Lexus ES
Cadillac ATS
Cadillac LTS
Existing model New model
Tesla model S
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 8
Exhibit 14: We see strong luxury capacity CAGR resulting from acceleration
of localization Capacity in ‘000 units, 2009-2016E
Exhibit 15: Germany’s ‘Big 3’ plan to increase dealership in 2014-16
Dealership counts for Audi/BMW/Mercedes
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
We favor luxury dealers on their strong aftermarket growth
We see secular growth in the aftermarket business for dealers
The aftermarket segment usually grows in line with the total car fleet number. We expect the growth of China’s luxury car fleet to
outpace new luxury car sales growth given the high base comparison for new car sales and the low scrappage in recent years (as
the average car age is young). In addition, along with the aging of China’s luxury car fleet, we expect growth of the aftermarket in
monetary terms to outpace growth in the car fleet as maintenance costs tend to increase once a car reaches four to five years old.
Considering these factors, we expect the luxury aftermarket segment to post sales CAGR of more than 25% over the next three years.
We favor luxury dealers over luxury OEMs given the former’s higher exposure to the secular growth of the aftermarket business.
210345 420
605
805
1380
1720
2290
0
600
1200
1800
2400
3000
2009 2010 2011 2012 2013 2014E 2015E 2016E
Brilliance - BMW FAW-Audi Beijing Benz Volvo Cadillac Infiniti Lexus Acura Lincoln Chery-JLR
CAGR at 42%
410 496
615
998
1202
14201540
1650
-
500
1,000
1,500
2,000
2009 2010 2011 2012 2013 2014E 2015E 2016E
Audi BMW + Mini Mercedes-Benz
CAGR at 11%
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 9
Exhibit 16: Dealers enjoy higher GPM from luxury new car sales
GH China dealer coverage, gross profit margin in %, 2010-2016E
Exhibit 17: The listed dealers are focusing on increasing their luxury mix
Luxury new car sales mix, as % of total, 2010-2016E
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
Exhibit 18: We expect luxury car fleet growth to outpace new car sales
growth China luxury sector new car sales volume and fleet volume growth, 2008-2015E
Exhibit 19: We expect aftersales revenue growth to outpace new car sales
revenue growth in our coverage Our coverage new car sales revenue growth vs. aftersale service revenue, 2010-
2016E
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
7.7%
9.1%
6.8% 6.5% 6.3% 6.2% 6.1%
3.4%4.2%
1.8% 1.8% 1.8% 1.8% 1.9%
0.0%
3.0%
6.0%
9.0%
12.0%
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
Luxury new car sales GPM Mid-to-high end new car sales GPM
16.6%
23.1%
30.8%34.5% 34.5% 35.4%34.9%
53.3%
65.0%69.6%
72.9%75.6%
50.4%
60.8%
69.8%
81.1% 83.5%85.6%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013E 2014E 2015E
Zhongsheng Zhengtong Baoxin Harmony
25.1%
42.9%
71.6%
31.3% 22.0% 18.0%15.0% 15.0%
42.0%
39.8%34.8% 30.6%
27.1%24.4%
0.0%
15.0%
30.0%
45.0%
60.0%
75.0%
90.0%
2008
2009
2010
2011
2012
2013
2014
E
2015
E
China luxury car sales growth China luxury car fleet growth
69%73%
41%
23%14% 11% 10%
58% 67% 54%45%
32%26%
19%
0.0%
30.0%
60.0%
90.0%
120.0%
2010
2011
2012
2013
2014
E
2015
E
2016
E
Our China dealer coverage new car sales revenue growth
Our China dealer coverage after sales service revenue growth
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 10
Margin contribution from new car sales for dealers may be under medium-term pressure
In general, we forecast dealer new car sales gross profit to post slower growth on lower-than-expected volume/ASP/GPM, mainly
due to the following reasons: 1) Slowdown in luxury demand from peak of 71.6% in 2010 to mid-to-low teen growth in the coming
three years (although we expect luxury demand to grow stronger than the overall market); 2) high supply growth in terms of both
capacity and numbers of new models to be launched; 3) ASP in the luxury sector is declining as a result of mix shift towards entry-
level luxury models as products with higher prices usually command higher GPMs; 4) luxury OEMs are expanding their dealer
network which may fuel the competition among different dealers and lead to higher incentive/lower GPM of new car sales; and 5)
certain listed dealers such as Harmony have announced plans to refocus on maintenance-only stores and postpone 4S (sales, spare
parts, service, survey) store expansion plan.
We believe the GPM of new car sales may be the biggest single risk factor when forecasting the earnings of dealers. We see
pricing/GPM as stable in the near term for our China auto dealer coverage as a result of moderate sales target set by OEMs and the
current dealer inventory at a normalized level of about 1.5 months for most of the luxury brands. Nevertheless, any deceleration in
demand growth could potentially lead to dealer stock increase and price erosion, which in turn may hurt dealer new car sales
margin given the strong bargaining power of OEMs (OEMs may not fully compensate for dealer incentives).
Summary of earnings drivers of luxury car makers and dealers in 2014-16
In Exhibit 20, we summarize the key earnings drivers of luxury car makers and luxury car dealers in 2014-16, since the luxury sector
players, especially the luxury dealers are exposed to the same industrial trends.
Exhibit 20: Earnings drivers of luxury car makers and dealers
Source: Gao Hua Securities Research.
Players Positive drivers Negative drivers1. Luxury demand outpacing total car market as a result of surge in entry luxury segment;
1. Potential ASP/GPM decrease as a result of mix decrease;
2. Increasing model localization (replacing imports);
2. Higher local R&D cost;
3. Increasing localization of key components (e.g., engine);
3. GPM might normalize in long‐run as result of fierce competition (e.g., more 2nd tier luxury brands will localize their production in China);
4. Costs saving from economy of scale;5. Potential launching of China specific models (e.g., JV's local brands);6. Capacity increase;1. Listed dealers favored by OEMs when granting new store authorization;
1. Potential new car sales volume decrease of existing stores: OEM might open stores at a speed faster than volume growth;
2. Engagement with multiple luxury brands to avoid product cycle fluctuation of any single brand;
2. longer pay‐back from the newly opened stores;
3. Strength in management/finance/human resources;
3. New car sales GPM might decrease due to product mix decrease and fierce competition;
4. Strong growth in aftersales business and other value‐added services; Aftersales market is growing at a faster pace vs. new car sales market due to hiking number and aging luxury car fleet;
4. 4S stores' aftersales GPM might decrease in long‐run as owners of aging cars are more price sensitive and multi‐brands stores might compete at a lower price level;
5. New business model of "multi‐brands maintenance only stores";
5. Legal constraints in some core value‐added services: e.g., used car;
Valuation summary: Global auto dealers and H-share auto coverage
Exhibit 22: Valuation summary: Global auto dealers
Note: * denotes stock is on our regional Conviction List. Prices as of market close on February 21, 2014. NC = Not Covered; NC estimates are from Reuters/Bloomberg.
Source: Datastream, Reuters, Bloomberg, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Valuation Summary - Auto Parts ChinaTicker Company name Currency Rating Close Market cap EPS
0881.HK Zhongsheng HKD Neutral 11.20 2,253 41% 14.8 10.1 7.9 2.0 1.7 1.5 14% 18% 20% 1% 2% 3% 22% 10% 14% 15%1728.HK Zhengtong HKD Buy 4.45 861 31% 8.4 6.8 5.6 1.0 0.9 0.8 13% 14% 15% 2% 3% 4% 16% 16% 13% 15%1293.HK Baoxin HKD Buy 6.48 2,113 46% 10.2 7.7 5.7 2.6 2.0 1.6 29% 29% 31% 1% 2% 3% 17% 24% 24% 28%3836.HK Harmony HKD Buy 6.06 766 41% 7.8 5.4 4.7 1.9 1.4 1.1 39% 30% 26% 0% 0% 0% 25% 16% 18% 15%3669.HK Yongda HKD NC 7.38 1,409 19% 8.0 6.8 6.4 1.1 1.0 0.9 NA NA NA NA NA NA NA NA NA NA1828.HK Dah Chong Hong HKD NC 6.15 1,452 7% 6.7 5.6 5.3 0.9 0.8 0.8 NA NA NA NA NA NA NA NA NA NA
Off Shore Average 31% 9.3 7.1 6.0 1.6 1.3 1.1 24% 23% 23% 1% 2% 2% 20% 16% 17% 18%601258.SS Pangda CNY NC 5.31 2,276 218% 30.3 15.6 14.2 1.3 1.2 1.1 NA NA NA NA NA NA NA NA NA NA002607.SZ Yaxia CNY NC 6.35 238 23% 10.8 8.2 7.4 1.2 1.1 1.0 NA NA NA NA NA NA NA NA NA NA
On Shore Average 120% 20.6 11.9 10.8 1.3 1.1 1.0 NA NA NA NA NA NA NA NA NA NA
Global peersTicker Company name Currency Rating Close Market cap EPS
AEJ Average 5% 20.9 20.1 18.3 4.8 4.3 3.9 24% 23% 23% 3% 3% 3% 15% 15% 16% 15%INCH.L Inchcape GBP NC 624.50 4,565 10% 14.9 13.5 12.3 1.8 1.7 1.6 NA NA NA NA NA NA NA NA NA NAPDG.L Pendragon GBP NC 327.70 1,554 8% 12.7 11.7 11.3 1.1 1.1 1.0 NA NA NA NA NA NA NA NA NA NALOOK,L Lookers GBP NC 122.50 742 9% 16.3 15.1 13.6 NA NA NA NA NA NA NA NA NA NA NA NA NA
Europe Average 9% 14.6 13.5 12.4 1.5 1.4 1.3 NA NA NA NA NA NA NA NA NA NA7599.T Gulliver International JPY NC 562 616 1% 2.1 1.5 1.2 0.2 0.2 0.2 NA NA NA NA NA NA NA NA NA NA4732.T USS JPY NC 12,390 3,978 8% 18.3 17.8 17.2 2.6 2.5 2.5 NA NA NA NA NA NA NA NA NA NA9832.T Autobacs Seven JPY NC 1,422 1,355 3% 18.1 16.5 15.0 0.9 0.9 0.9 NA NA NA NA NA NA NA NA NA NA
Japan Average 4% 12.8 11.9 11.1 1.3 1.2 1.2 NA NA NA NA NA NA NA NA NA NASAH Sonic USD Neutral 22.89 1,254 9% 11.3 11.2 10.5 2.0 1.7 1.5 15% 17% 14% 0% 0% 0% 7% 7% 6% 7%GPI Group 1 USD Neutral 63.42 1,441 12% 13.5 10.8 9.9 1.6 1.4 1.3 13% 14% 14% 1% 1% 1% 9% 8% 8% 8%AN AutoNation USD Neutral 51.08 6,173 14% 15.7 15.1 13.5 2.8 2.7 2.3 20% 19% 18% 0% 0% 0% 9% 8% 8% 8%PAG Penske USD Sell 42.09 3,801 15% 13.1 13.2 12.1 2.1 2.0 1.8 18% 17% 16% 2% 2% 2% 8% 6% 8% 7%LAD Lithia Motors USD NC 67.13 1,924 10% 19.8 17.8 17.5 3.4 2.9 2.5 NA NA NA NA NA NA NA NA NA NA
American Average 12% 14.7 13.6 12.7 2.4 2.2 1.9 16% 17% 15% 1% 1% 1% 8% 7% 7% 8%
P/E P/B ROE Dividend yield CROCI
P/E P/B ROE Dividend yield CROCI
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 13
Exhibit 23: Valuation summary: Global auto companies
Note: * denotes stock is on our regional Conviction List. Prices as of market close on February 21, 2014.
Source: Datastream, Reuters, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Valuation Summary - Auto ChinaTicker Company name Currency Rating Close Market cap EPS
Common stock issuance (repurchase) 0.0 0.0 2,014.2 0.0
Other financing cash flows (1,162.5) (5.4) (6.4) (7.1)
Cash flow from financing 2,534.9 841.9 769.2 (364.3)
Total cash flow (391.0) (325.7) 716.0 510.2 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 20
Disclosure Appendix
Reg AC
We, Yipeng Yang and Yuqian Ding, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities.
We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,
returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage
universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month
volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make
comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well
positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on
quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Yipeng Yang: China Alternative Energy & Utilities, China Autos, China Transportation.
China Alternative Energy & Utilities: Beijing Jingneng Clean Energy, CLP Holdings, China High Speed Transmission Equipment Group, China Longyuan Power, China Power International, China
Resources Power, China Yangtze Power, Datang Int'l Power Generation, Datang International Power Generation (A), Dongfang Electric Corporation Limited (A), Dongfang Electric Corporation Limited
(H), Guangdong Investment, Harbin Electric, Hong Kong & China Gas, Huadian Power International (A), Huadian Power International (H), Huaneng Power International (A), Huaneng Power International
(ADR), Huaneng Power International (H), Huaneng Renewables Corporation, Power Assets Holdings, Shanghai Electric Group, Xinjiang Goldwind Science & Technology (A), Xinjiang Goldwind Science
& Technology (H).
China Autos: Anhui Jianghuai Automobile Co., BYD Company, Baoxin Auto Group, Brilliance China Automotive Holdings, China Harmony Auto Holding Ltd, Chongqing Changan Auto (A), Chongqing
Changan Auto (B), Dongfeng Motor, FAW Car, Geely Automobile Holdings, Great Wall Motor Co., Great Wall Motor Co.(A), Guangzhou Automobile Group Co, Huayu Automotive Systems, Minth
Group, SAIC Motor, Sinotruk (Hong Kong), Weichai Power (A), Weichai Power (H), Xingda International, Zhengtong Auto Services Holdings, Zhongsheng Group Holdings.
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of
Goldman Sachs and referred to in this research.
Goldman Sachs has received compensation for investment banking services in the past 12 months: Brilliance China Automotive Holdings (HK$12.04) and China Harmony Auto Holding Ltd (HK$5.49)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Baoxin Auto Group (HK$6.49), Brilliance China Automotive Holdings
(HK$12.04), China Harmony Auto Holding Ltd (HK$5.49), Zhengtong Auto Services Holdings (HK$4.45) and Zhongsheng Group Holdings (HK$10.94)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Baoxin Auto Group (HK$6.49), Brilliance China Automotive Holdings (HK$12.04) and China
Harmony Auto Holding Ltd (HK$5.49)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: China Harmony Auto Holding Ltd (HK$5.49)
Goldman Sachs makes a market in the securities or derivatives thereof: Brilliance China Automotive Holdings (HK$12.04)
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 21
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 53% 45% 36%
As of January 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,637 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment
Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage
groups and views and related definitions' below.
Price target and rating history chart(s)
Baoxin Auto Group (1293.HK)
8.97
7.32
6.777.21
8.469.21
6.08
2.003.004.005.006.007.008.009.00
10.00
8,000
9,000
10,000
11,000
12,000
13,000
14,000Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Yipeng Yang,as of Oct 3, 2012
Not covered by current analyst
Hang Seng China Ent. Index
Inde
x Pr
ice
Stoc
k Pr
ice Oct 3
FB
M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D2011 2012 2013
Zhengtong Auto Services Holdings (1728.HK)
6.41
6.15.22
4.86
5.066.82
4.84
2.00
4.00
6.00
8.00
10.00
12.00
8,000
9,000
10,000
11,000
12,000
13,000
14,000Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Yipeng Yang,as of Oct 3, 2012
Not covered by current analyst
Hang Seng China Ent. Index
Inde
x Pr
ice
Stoc
k Pr
ice Oct 3 Jul 17
NF
BM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2011 2012 2013
China Harmony Auto Holding Ltd (3836.HK)
8.36
8.087.64
8.06
4.00
5.00
6.00
7.00
8.00
9.00
8,000
9,000
10,000
11,000
12,000
13,000
14,000Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Yipeng Yang,as of Jul 17, 2013
Not covered by current analyst
Hang Seng China Ent. Index
Inde
x Pr
ice
Stoc
k Pr
ice Jul 17
FB
M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D2011 2012 2013
Zhongsheng Group Holdings (0881.HK)
10.888.64
8.719.64
10.1311.15
9.15
5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
8,000
9,000
10,000
11,000
12,000
13,000
14,000Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Yipeng Yang,as of Oct 3, 2012
Not covered by current analyst
Hang Seng China Ent. Index
Inde
x Pr
ice
Stoc
k Pr
ice Oct 3
FN
M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D2011 2012 2013
Brilliance China Automotive Holdings (1114.HK)
11.8910.02
9.21
10.1811.25
9.538.98
8.638.66
9.969.68
7.67
5.00
7.00
9.00
11.00
13.00
15.00
8,000
9,000
10,000
11,000
12,000
13,000
14,000Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Yipeng Yang,as of Dec 15, 2011
Not covered by current analyst
Hang Seng China Ent. Index
Inde
x Pr
ice
Stoc
k Pr
ice Dec 15 May 24 Jan 17
NA N BF
NM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2011 2012 2013
February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 22
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February 26, 2014 China: Automobiles
Goldman Sachs Global Investment Research 23
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