CHINA AUTOS - CRACKS START TO APPEAR IN AUTO MARKET - J.P. MORGAN.pdf

Asia Pacific Equity Research
05 July 2005

China Autos
Cracks start to appear in auto market
• In our report dated 17 June, we cautioned that the recovery in China
China’s auto market might not be sustainable. We recently Automobile Manufacture
contacted a number of dealers in Beijing and Shanghai, and found Frank Li
that the recovery in China’s auto market seems to be losing steam (852) 2800-8511
earlier than expected, as reflected in the following: (1) the @
renewed price reductions at the dealers, with the increased car Relative performance: Denway,
production. For instance, Guangzhou Honda’s Fit model, which Brilliance China and Red Chips
was hotly sought-after in April and May, is now being discounted 140%
by Rmb 8,000, or -8%, at the dealers’ level, given rising 120%
inventory at the dealers’ level; (2) adjusting for the factor of the 100%
week-long holiday in May, a number of dealers reported a drop in 80%
car sales in June. 60%
40%
Jul-04 Oct-04 Jan-05 Apr-05
• Meanwhile, we believe China’s auto sector faces downward
Brilliance China Denway
earnings revision risks from the Chinese government’s possible Red chips
delay in adopting the preferential consumer tax policy for Euro 3
Source: Datastream.
emission standard cars. We estimate that Denway Motors and
Brilliance China face an increasing risk of