Asia Auto Parts Sector
THEME
China's global ambitions
We believe that Chinese component makers are riding on a strong secular
growth trend. Top contestants should not only benefit from China’s robust
auto sector growth and its need for import substitution, but they should
also benefit from the rising demand from multinational auto manufacturers
and tier-one suppliers to outsource to lower-cost producers.
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Targeting the major league. Auto parts manufacturers play an important
role in China’s plans for the automobile industry. China’s export of auto parts
is targeted to increase from US$22 bn in 2006 to US$40 bn by 2010 and
US$100 bn by 2020.
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M&A is the way. Both domestic and overseas M&A activities are expected
to pick up significantly in the coming few years. In particular, M&A of
distressed international auto and auto parts manufacturers by Chinese
companies are likely to become a more prominent development trend.
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Dealing with near-term challenges. Trade tensions, renminbi appreciation
and raw material cost inflation are some of the key challenges facing auto
parts manufacturers in China. The situation is manageable, in our view, as
long as there are not sharp spikes in the currency and raw material prices.
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Where we want to be. We are initiating coverage of China Metal, Minth,
Fuyao Glass and Xinyi Glass with OUTPERFORM ratings, and of Weichai
Power with a NEUTRAL rating. We also reiterate our OUTPERFORM rating
on Hyundai Mobis and UNDERPERFORM rating on Johnson Electric.

Table of contents
Stock ratings ........................................................................................................................6
Targeting the major league ..................................................................................................7
Autos and auto parts go hand-in-hand ............................................................................7
The last frontier in China’s outsourcing story...................................................................9
M&A is the way ..................................................................................................................12
Consolidating auto parts industry faces less hurdles.....................................................12
Overseas acquisitions highly encouraged .....................................................................13
Dealing with near-term challenges.....................................................................................15
Trade tensions...............................................................................................................15
Renminbi appreciation...................................................................................................16
Raw materials cost inflation...........................................................................................17
Where we want to be .........................................................................................................19
Component makers can see continued rerating............................................................19
Commercial vehicles versus passenger vehicles ..........................................................19
Domestic sales versus export........................................................................................20
OEM versus replacement market ..................................................................................20
Tier-one supplier versus tier-two/three supplier.............................................................20
Independent supplier versus captive supplier................................................................20
Top picks in the sector...................................................................................................22
Appendix I: Companies ......................................................................................................29
China Metal International – Recovery on all fronts ........................................................30
Fuyao Glass Industries Co. Ltd – From domestic tier-one to global tier-one.................36
Hyundai Mobis – Maturing, but still healthy ...................................................................42
Johnson Electric Holding – Rolling slowly .....................................................................48
Minth Group Ltd – Top notched.....................................................................................54
Norstar Founders Group Ltd – Moving up the tiers .......................................................60
Weichai Power Co. Ltd – A bumper year.......................................................................66
Xingda International Holdings – Gaining approvals from global majors ........................72
Xinyi Glass Holdings Co. Ltd – Well-timed upstream expansion...................................78