Auto&Auto Parts:PartsFocus on growth stocks and BMW industry chain while market bottoming out to pea

Aug industry sales climbed 5.3% YoY. 4Q17 sales growth to be boosted by rollback of tax incentive at year end but 2017E growthshould be around 5% on high base effect

    We expect leading independent brands and luxury market continue to outperform in the sector. We recommend auto makers Geely (top pick), Brilliance China,parts and components maker Fuyao Glass and luxury auto dealer ZhengTong

    Monthly sales moderately improving

    According to CAAM, Aug China auto sales reached 2.19mn units, up 5.3% YoY or 10.9% MoM. 8M17 sales climbed by 4.3% YoY to 17.51mn units. We estimate monthly sales to gradually increase in Sep-Dec. Accumulated sales have been increasing for 3 months. 4Q is peak season and sales will be boosted by rollback of tax incentive but growth will be limited on high base effect. We maintain our estimate of 5% 2017E sales growth unchanged.

    Auto makers: strong brands grow, weak brands recover

    1)Geely (175 HK, BUY): Aug sales surged 80% YoY, Geely could lift its annual sales target. We expect it to complete annual sales target of 2mn units earlier by 2019; 2) Brilliance China (1114 HK, BUY): Aug sales climbed 16.9% YoY, monthly sales could increase with the launch of new 5 series and 2017E sales could increase 25%+; 3) Greatwall (2333 HK, NEUTRAL): Aug sales edged up 0.8% with support of new products (WEY and new H6). Recovery is expected to continue but pressure on 2017 sales target remains high; 4) BAIC (1958 HK, NEUTRAL): sales of Beijing Benz rose 11.8% YoY but those of Beijing Hyundai/ Beijing Brand fell 35%/58%YoY; 5)We expect Geely and Brilliance China to keep rising monthly sales after peak season, while Greatwall and BAIC could recover moderately.

    Parts makers: leaders with steady growth, solid foundation

    1) Minth (425 HK, BUY): United Alloy-Tech acquisition to complete its chain, positive for lightweight business in mid/long-term; 2) Fuyao Glass (3606 HK, BUY): solid core fundamentals and US plants to enter harvest period while stock slumped on excessive forex concerns. Stabilizing RMB/USD rate and falling natural gas price recently to become catalysts for bottoming out.

    Luxury auto dealers: still upbeat, BMW story to continue

    Our latest channel checks indicated that the average discount rate in luxury auto market was only 9.4%, which remained low and continued to show the positive sector outlook. In our view, luxury auto dealers still have upside in mid/long-term and beneficiaries include ZhengTong Auto (1728 HK, BUY), Zhongsheng (881 HK, BUY), Harmony Auto (3836 HK, BUY), Yida China (3639 HK, NR) & Grand Baoxin (1293 HK, NR).