The Client: Chinese Momentum

CAAM June sales data released today show that total motor vehicle sales exceeded 1 million for the 4th consecutive month registering a year-over-year increase of 36.48% (see chart below). Critically, this marks 2Q of 2009 as the first quarter ever with reported sales in excess of 3 million units and, at 3.4 million in total, the CAAM target of 11 million for the year seems achievable. Passenger car sales as a category of the total experienced a 48% increase in June as tax rebates and improving vehicle quality selection continue to draw consumers to showrooms.

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The Client: Chinese Momentum  - a1

The latest NBSC production estimates, for May, show that total vehicle production increased by 28% for that month. Although NBS data production is notoriously sketchy, there is a very clear trend emerging. Domestic Chinese passenger automotive sales are outpacing commercial sales, and sales in total are outpacing production growth by a significant measure.  Add in anecdotal reports on engine component imports and individual reporting by foreign JV partners and we have a clear vision that retail Chinese automotive consumer strength is outperforming all but the most bullish expectations -and that it is driving rapid capacity growth by producers.

We have been consistently bullish on The Client's internal demand dynamics, and the consumer discretionary categories that should logically be feeling the biggest impact of the stimulus programs at this stage of the development cycle  -big ticket durable goods, appear to be  proving out our thesis.  As Chinese consumers continue to enter the car market for the first time or to trade up from inferior vehicles, we expect that they are also eyeing government sponsored incentives for household appliances, consumer electronics and small farm agricultural equipment.

Take note: as strategic investors we are China bulls, but as tactical investors we are pragmatic risk managers and will actively seek to trade in an out of a market that has experienced an intense short  term rally capable of correction with unchanged fundamentals.  With a process that employs overlapping durations we have the luxury of picking intermediate entry and exit points while remaining focused on the horizon -if you are married to a single duration by choice or circumstance you should be prepared for volatility as the complex recovery story continues to unfold in China.

As always we are here to answer any questions and welcome the opportunity to share ideas.

Andrew Barber

Director