Automotive and Accessories Industry Calls for High Growth of the Automotive Industry in 2010

In the first quarter of 2011, car sales remained high, and the growth rate fell sharply. In the first quarter, China's car sales reached 4.98 million, an increase of only 8.08% year-on-year. In 2009 and 2010, policies drove consumption to overwhelm consumer demand in 2011 to a large extent. In the first quarter of this year, the growth of automobile sales has shown a sharp decline. The cross-selling passenger vehicles that benefited the most in the past two years have experienced negative growth year-on-year, and we do not expect any significant improvement during the year. The year-on-year increase in the number of passenger vehicles will drop significantly but it will still maintain a growth rate of around 10%, while the decline in the growth rate of commercial vehicles will become more apparent. Considering the above factors comprehensively, the national car sales in 2011 will have an increase of around 5-10%.

In the first quarter of 2011, SUVs and MPVs maintained rapid growth, and the growth rate of basic passenger cars with small displacements of 1.6 liters or less exceeded expectations. From January to March, SUV and MPV models still performed well; sales volume of basic passenger cars with small displacements of 1.6 liters and below increased 12.77% year-on-year, which was higher than the industry average and exceeded expectations. We believe that the main reason is the release of demand for car purchases in third- and fourth-tier cities in China. As the impact of the withdrawal of preferential policies gradually decreases, and the demand for car purchases in third and fourth-tier cities continues to be released, the growth rate of small-displacement passenger cars in 2011 will increase. Expect to be above the industry average.

The gross profit rate of vehicle companies declined, and the profitability of passenger vehicles and commercial vehicles was different. Due to the general increase in raw material prices and the sharp decline in sales growth, gross profit margin of listed vehicles decreased slightly year-on-year. We believe that under the background of high inflation expectations in 2011, raw material prices will be less likely to decline. Interest rates will decline. In the first quarter of 2011, the profitability of passenger car companies continued to increase, and the profitability of most commercial vehicle companies has begun to decline.

The profitability of parts and components companies is significantly different. (1) The industry status of leading enterprises such as Ningbo Huaxiang (002048) and Weifu High-tech (000581) has further consolidated, and the potential for scale expansion and business growth is huge. (2) In the first quarter of 2010 and 2011, the profitability of tire companies declined significantly. We expect rubber prices will gradually be adjusted after the second quarter, and the cost pressures faced by tire companies will be significantly reduced, and profitability is expected to improve.