China passenger vehicle sector:June auto wholesale momentum surged on low base

　　June auto sales growth a strong rebound on tax stimulus and easy comps.

　　Earlier today, China Association of Automobile Manufacturers (CAAM)released June China vehicle wholesale data. In summary, June passengervehicle (PV) sales were 1.8m units, implying a YoY growth rate of 17.7% (-0.5%MoM). By segment, SUV sales stayed strong in June (up by 40.8% YoY andaccounting for 35% of China PV sales) and local brands’ performancebenefited with their SUV sales making up 55% of total SUV sales. For 1H16,China PV wholesale grew by 9.2% YoY to 11.0m units. Regarding the impactof the sub-1.6L PVs’ 5ppt partial purchase tax cut, the policy led to 30.3% YoYwholesale growth for that segment to 1.3m units in June, reflecting thecontinuous effectiveness of the policy. In comparison, above-1.6L PVwholesales went down by 6.1% YoY during the same period, on our estimates.

　　In addition, sales of new energy vehicles (NEV) grew 1.1x YoY to 44k units inJune, with pure electric cars increasing 1.3x YoY and plug-in hybrid up 61.8%.

　　The slower NEV growth rate vs. 2015 is probably due to uncertainty in localgovernment subsidy, in our view. For 1H16, NEV sales were up 1.3x YoY.

　　Deutsche Bank view - low base effect expected to remain in 3Q16E.

　　While China PV wholesale growth of 9.2% in 1H16 is higher than our full-yearestimate of 8.2%, we are comfortable with our full-year PV sales forecastbecause YTD sales have made up about 48% of our 2016 estimate, similar torecent years’ level. We also believe such growth rate is attainable with 1) easycomparison base in 3Q16 amid inventory destocking last year; 2) purchase taxcuts on sub-1.6L-engine cars; and 3) new model launches. That being said, wedo foresee milder annual growth beyond 2016 due to likely higher sales baseamid pull-forward demand. Our top Buy for OEMs is Dongfeng given itsattractive valuation vs. peers. We also see nearer term share price upside onGuangzhou Auto-H given its robust PV sales (up by 29.6% in 1H16), especiallyfor its SUVs (up by 1.3x in 1H16). Sector upside/downside risks are suddensurge/drop in sales and inventory level.