We think sales upside could be offset by pricing downside。    Chinese passenger vehicle (PV) wholesale sales rose 4.1% YoY (11.7% MoM) inAugust, slightly ahead of our slow growth expectation, with a healthy inventoryoutlook. While upside risk exists to our 1.6% 2017China PV sales volume growthforecast, with stronger-than-expected last-minute purchases before the year-endexpiration of tax cut stimulus, we are not turning upbeat, as we see further carprice softening. Our top OEM Buys are BAIC Motor, Brilliance and GuangzhouAuto-H (GAC-H) on their key brands' sales strength.。    Over 4% growth for two consecutive months, partly helped by low base。    Based on China Association of Automobile Manufacturers' (CAAM) August salesdata, SUV sales were up 17.7% YoY (accounting for 41.3% of China PV sales) andlocal brands’ performance benefited, with their SUV sales making up 59.6% oftotal SUV sales. Although the sub-1.6L PV segment recorded an August YoY salesvolume drop of 0.5%, there was a 13.9% MoM sales increase, implying a potentialreturn of last-minute purchase demand, in our view. Meanwhile, above-1.6L PVwholesale sales improved 15.3% YoY in August, on our estimates, probably drivenby decent premium-brand sales amid the Chinese consumption upgrade.。    Inventory eased in August, but we envision deeper price cuts。    The China Automobile Dealers Association (CADA) reported that the July dealerinventory index eased MoM to 1.54months, and its August inventory alert indexfellto 47.1%, implying dealer optimism ahead of the peak season. Although theChina Passenger Car Association (CPCA) and WAYS forecast that Septembermainstream PV (i.e., excluding mini-car) wholesale volume will rise 5.3% YoY, westill think the monthly PV wholesale YoY growth rate will ease, on a high basewith additional price incentives, especially among local brands and JV brandswith slower sales/higher inventory. Indeed, GAIN’s July pricing indices indicatethat mass-market brand dealers’ incentives remained on the rise.。    We prefer premium exposure and SUV segment outperformer。    We use P/E to value auto OEMs and base our target prices for auto dealers onDCF analysis. In terms of OEM top Buys, we like BAIC Motor and Brilliance China,as we think that the premium auto segment growth will remain consistent, giventhe upgrade demand. We also rate GAC-H as a top Buy, as we observe a strongsales and earnings trend in its various entities, e.g., Trumpchi local brand, withpopularity in its new SUV models. Sector upside/downside risks: sudden rise/dropin sales and inventory level (see p5for details).。

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