China’s Finance Ministry said that it will cut import tariffs on vehicles to 15 percent, down from 25 percent, starting 1 July 2018. The magnitude of vehicle import tariff cut is lower than previous market expectation at 5-10%, thus less impact on the domestically produced luxury car manufacturers. The sector has dropped significantly since the government raised the idea of import tariffs cut on vehicles, as the market anticipated the measures may greatly damage the competitiveness of the sector. We expect the market will react positively to the news and we see potential rebound opportunities in the sector amid the ease of fear of having a large cut on import tariff on vehicles. Besides, the finance ministry said it will also cut import tariffs on automotive parts to 6%, which is not anticipated by the market, that should benefit those luxury car manufacturers that heavily relied on import auto parts from cost reduction. Brilliance China Automotive (1114) holds 50% of BMW Brilliance, a joint venture with BMW which produces, distributes and sells BMW passenger cars in mainland China. The automotive tire is the only component that supplied domestically to Brilliance China for BMW production, other components are mostly supplied through import. We think the tariff cut on auto parts should benefit Brilliance China from cost reduction and enhance its market competitiveness through lower domestically produced BMW prices. Besides, there will be several domestically produced new models of BMW ready to launch in the coming 2-3 years, including new X3 in 2018 and new generation 3 Series models and new X2 in 2019. The strong BMW product cycle should last at least 2-3 years. With a very attractive valuation of Brilliance China, investors may accumulate Brilliance China’s shares as a long term investment.

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