China autos seeing accelerating sales growth: In our report, “Staging
a stronger than expected recovery in FY09”, we were looking for 24%
Y/Y growth in China’s passenger vehicle sales in FY09 due to: (1) a
series of supportive policies; and (2) China urban households’ real
disposable income growth started to rise in 4Q FY08. Now, in light of
China’s surprisingly strong car sales data for the seasonally slack season
of July, and our on-the-ground check with car dealers, we increase our
FY09 and FY10 sales forecasts for passenger vehicles by 12% and 14%,
respectively. We now expect China’s passenger vehicle sales to rise 38%
Y/Y in FY09. Notably, the 19 key Chinese auto groups' net margin has
risen from 2.9% in Jan-Feb FY09 to 8.9% in May-June 09 .
• Raising China auto sector’s earnings estimates, but downgrading the
sector rating: In light of the stronger-than-expected demand, we raise
our FY09 and FY10 earnings estimates for Dongfeng Motor by 3.3%,
and 10%, and for Denway Motors by 11%, and 20%, respectively, to
mainly factor in our higher sales volume, and margin forecasts. Despite
the upward earnings revision, we downgrade our rating on China’s
passenger vehicle sector from OW to Neutral. We maintain OW on
Dongfeng Motor, but take it off the AFL, downgrade Minth and Great
Wall Motor from OW to Neutral, and downgrade Denway from Neutral
to UW. Our downgrades mainly reflect: (1) the sharp rise in China auto
stocks’ share prices, which have reflected the sharp improvement in their
sales, and earnings; (2) the uncertainty on whether the government will
renew the vehicle purchase tax for vehicles with an engine size of 1.6
liters and below; and (3) the possible negative impact on car sales from
the recent correction in the domestic stock market.
• We maintain DongFeng Motor as our top pick, and our Jun-10 PT of
HK$10.3 is based on two standard deviations above its median historical
12-month forward P/E ratio, translating into 2.5x FY10E P/B. We
maintain our Jun-10 PT of HK$3.85 for Denway, based on 10.6x FY10E
P/E, a 10% premium over its average prospective P/E of 9.6x since 1998
when its 50% owned Guangzhou Honda started to produce cars.