After almost two years of downturn, the growth of China's auto market has fully recovered. As a major auto company and parts supplier, Wuling Automobile Group will certainly benefit.

The implementation of the sixth national emission standard triggered a sharp increase in demand for replacement, boosting the group's engine sales.

The proposed incentive car purchase policy is targeted at the urban market, which is conducive to the sales of Shantong five commercial micro-vehicles, and the Group will also benefit directly.

Hongguang MINI EV hot sales, leading to the growth of group parts sales, is also expected to introduce other auto companies new energy vehicle parts orders. With the launch of more models of new energy vehicle products, the group's spare parts sales will further increase.

Guangxi Automobile Group, a major shareholder, is setting up a production base with an annual production capacity of 200000 new energy vehicles in Liudong, and plans to start production by the end of 2021, which is expected to bring business opportunities for coordination and cooperation for Wuling Industries under the group.

In the first half of FY20E, Wuling Industrial's sales of new energy vehicles and electric commercial vehicles increased by 73.0% to 1900 compared with the same period of FY19A, which is similar to FY19A's annual sales. It is expected that the growth rate of its new energy vehicles and electric commercial vehicles sales will accelerate.

It is estimated that Wuling Automobile Group will achieve a surplus in the second half of FY20E, so its full-year loss on FY20E will be significantly narrowed by RMB 110 million from the first half to RMB 86.848 million. It is expected that the group will reverse its losses in FY21F and make a shareholder profit of RMB 150 million. Earnings for its FY22F shareholders are expected to grow by a further 41.6 per cent to close to 220 million yuan.

Based on the closing price of HK$1.32 yuan on December 11, the Group's FY21F price-to-earnings ratio is 22.1 times, which is much lower than the weighted average forecast price-to-earnings ratio of 47.5 times for Shenzhen, Shanghai and Hong Kong listed auto parts manufacturers and 45.5 times for Shenzhen, Shanghai and Hong Kong listed auto companies. It is recommended to buy Wuling Automobile Group with a target price of HK$2.0 yuan, which is equivalent to a price-to-earnings ratio of 33.5 times FY21F.