Guangzhou Automobile (2238): Recovery of Japanese brands and development of NEV – Maintain Buy
Guangzhou Automobile (2238, $10.06, GAC) is considered a proxy to the Japanese brand performance. Japanese
brand sales recovery is continuing through November. The three largest Japanese automakers reported exciting
sales growth in China market (Nissan +96% yoy, Toyota +41% yoy and Honda +101% yoy). According to the latest
data, GAC sold a total of 109,040 vehicles in November, up 90% yoy and led by the strong growth of GAC Honda
(+122%), GAC Toyota (+44%) and its own brand (+101%). Total sales in the first 11 months increased 35% yoy, one
of the highest among listed automakers. We believe the Japanese brand recovery story will be more solid in 4Q13
and extend to 2014 as more new models will be launched during the period.
Another price catalyst is the fast growing market of new energy vehicle (NEV) in China. On 26 November 2013, the
Chinese government announced that 28 cities/regions had been selected as the first batch of participants in China’s
electric vehicle program. The total NEV sales target was set at ~250k units between 2013 and 2015 in these areas,
compared with total sales of 12.8k in 2012. According to market news, the list of second batch will be released this month so that total cities/regions involved will increase to 100. If the NEV sales targets could be achieved, we will
see a great time for NEV in China.
GAC is developing NEV models under its proprietary brand, GAC Trumpchi. Three concept models have been posed
on the stage in different auto shows. Another new model will be launched in 2014. From JV side, the hybrid electrical
system of Toyota is expected to be localized in 2015. The company is also in the final discussion with BYD Company
(1211) to set up a JV for NEV development and manufacturing, which is expected to focus on e-buses first. GAC will
develop a full scale of product portfolio by then and own close cooperation with international leaders with long
development history and advanced technology. We are confident that GAC will be one of the beneficiaries in the
China’s NEV feast.
Since our buy recommendation on 16 October 2013, the stock price was up 11% and outperformed HSI and HSCEI
by 9% and 4%, respectively. According to market consensus, GAC is currently trading at 17.7x FY13 PER and 12.3x
FY14 PER, with 2-year EPS CAGR of 89% between FY12 and FY14. Japanese brand sales recovery in the shortterm
and development of NEV business in the mid- to long-term will be key earnings growth drivers for GAC. We
maintain our BUY rating on GAC and raise price target to $11.42 implying 14.0x FY14 PER. Major risk factor is Sino-
Japan political conflict.