China Passenger Vehicle Monthly:June PV sales better than expected;purchase tax cut still a driving factor

　　June PV wholesale/retail sales up 20.6%/22.8%YoY, better than expected.

　　According to the CPCA, passenger vehicle (PV) industry wholesale sales were 1.735munits in June, up 20.6% YoY (UBS-e: +14%), while retail sales were c1.653m units, up22.8% YoY. H116 wholesale and retail sales growth reached 11.5% and 12.1% YoY,respectively, higher than our full-year forecast of 8% YoY. We estimate sales growthcould hit 30% YoY in July due to a lower comparable figure.

　　Main drivers: Low base, purchase tax cut.

　　Even given the low base in the same period last year, recent PV sales were better thanexpected. We mainly attribute this to purchase taxes being cut in half. Our recentcommunication with industry participants and experts revealed market expectationsthat the purchase tax cut policy will not be renewed after expiring at the end of theyear. On one hand, we think this will bring forward some purchases to this year, withacceleration in advance purchases towards year-end. On the other hand, some demandbeing brought forward would have a significantly negative impact on PV sales in 2017.

　　Increased dealership inventories; stable end-user prices.

　　As of end-June, we estimate total dealership inventories reached 3.25m units, up 2%MoM. Meanwhile, dealership inventory turnover was 1.95 months (May 2016: 1.85months; June 2015: 2.05 months). In addition, retail prices were stable in June. Of themodels tracked, c62% saw retail prices fall (May 2016: 67%; June 2015: 90%). Wethink current dealership inventories are at a historically upper-middle level. If inventoriesrise further in July-August (slack season), they could put heavy pressure on end-userprices.

　　Investment advice: We recommend Yutong/SAIC/Changan.

　　We remain optimistic about Yutong Bus, which benefits from a growing volume ofnew-energy vehicle buses and is recovering market share. We also prefer SAIC Motorand Changan Automobile, given their undemanding valuations and a sector growthrebound.