2008 Investment Strategies for the Automotive and Accessories Industry

Abstract: 1, China's auto industry is still in the rising cycle of prosperity. From January to October, China's automobile sales reached 7.15 million units, an increase of 24.% year-on-year; of these, passenger cars and commercial vehicles achieved sales of 5.08 million vehicles and 2.07 million vehicles, respectively, a year-on-year increase of 23.6% and 25.1%, respectively. The year is expected to reach 8.7 million.

2. From January to August, the profits of the vehicle industry increased by 60%, the highest level of profit growth since 2003. The gross profit rate was 16.2%, an increase of 0.5% from 2006 and 1.1% from 2005. We believe that the improvement of product structure, scale effect, and cost control capability of the automotive industry are the main reasons for the rapid growth of industry profits.

3. For the auto industry in 2008, we believe that the growth rate of heavy trucks will slow down. It is expected that the heavy truck industry in 2008 will grow at a rate of approximately 15%-20%. We believe that the growth of passenger vehicles is expected to be relatively stable. It is expected that the growth rate of passenger cars, which account for about 75% of passenger vehicles, will be around 20%. At the same time, there is a structural differentiation trend in passenger cars. Passenger vehicles with a displacement of less than or equal to 1 liter were negatively increased by 13.6% year-on-year; displacement ranges from 1 to 1.6 liters were still gold displacements; passenger cars with 1.6 to 2.0 liters and 2.0 to 2.5 liters were rapidly growing. We expect that this trend will continue in 2008 if there are no further adjustments in oil prices, taxes, etc. at the policy level.

4. We believe that in the entire industrial chain of the auto industry, the auto parts industry will benefit from the industrial transfer. From January to August this year, the income and profit growth rates of the auto parts industry were 36.7% and 67.9%, respectively, which were 7 and 7.7 percentage points higher than the whole vehicle. The auto parts industry faces two regions, domestic and international, and faces two markets, OEM support and AM sales, providing multiple drivers for the growth of the industry. In the first three quarters, the export value of auto parts products increased by 33% year-on-year, while the growth rate of imports in the same period was only 10%. In terms of profitability, we believe that the profitability of the auto parts industry has stabilized.

The uncertainties in the auto industry in 2008 and 2008 include rising oil prices, fuel taxes, recently discussed emission taxes, and the country's three emission standards. We believe that we should pay more attention to the structural changes brought about by the related possible policies. The risks in the auto parts industry are mainly reflected in the adjustment of export tax rebate policy, the changes in prices of upstream raw materials, and the linkage risks arising from downstream matching demand.