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A Profit Opportunity in the World’s Largest Auto Market

|Includes:Lentuo International Inc. (LAS)

The world’s largest auto market, China, continues to produce conflicting news. On one hand you have results such as GM’s 20% year-over-year sales surge in November. On the other hand you have China sales at Ford dropping 7% in November.

While the short-term picture is murky, and results vary widely, the larger macro-environment is extremely clear: the vehicle penetration rate in China has a long way to go before it catches up to the rest of the developed world. Recent data shows China having a mere 70 vehicles per 1,000 inhabitants. This compares to 601 vehicles per 1,000 inhabitants in Italy, 551 vehicles per 1,000 inhabitants in Germany, and 450 vehicles per 1,000 inhabitants in the U.S.

One reason for the conflicting short-term results is China’s enormous swing from an environment favorable to vehicle sales to one that has become extremely restrictive. Government incentives for first-time car buyers, which drove record sales across China, expired at the end of 2010. The pendulum then swung the opposite direction in China’s largest auto market, Beijing, when city officials implemented a restrictive license plate lottery system aimed at curbing traffic congestion. As a result of the policy change, vehicle sales in Beijing dropped nearly 50% year-over-year in the first half of 2011.

One company navigating these challenges is Lentuo International (NYSE: LAS), the largest non-state-owned automobile retailer in Beijing.

LAS reacted swiftly to the policy changes, implementing a multifaceted growth strategy focused on geographic expansion and broadening its brand portfolio. The Company has nearly doubled its dealership network over the past six months, including three dealerships in markets outside of Beijing that are unaffected by the vehicle registration lottery.

Another area of focus for LAS is its growing repair and maintenance segment. Research giant IBISWorld has forecasted China’s auto repair industry to grow at double-digit rates over the next five years, reaching $9.1 billion in 2016. As a high-margin business for LAS, the Company has focused on implementing attractive incentive programs for its repair services to build its customer base. With the Company’s reputation for providing excellent customer service, this should result in a long-term positive impact on its bottom line.

Together, these new initiatives have enabled LAS to grow in the face of market headwinds. On the surface, this growth has been hidden to investors that haven’t taken the time to look deeper. This type of oversight creates an opportunity for those that do take the time.

Since the policy change, LAS has managed to grow revenues each quarter. On a quarter-on-quarter basis, revenues grew 9.3% in the second quarter and 14.4% in the third quarter. If LAS continues this type of growth in the fourth quarter, which can be expected by the Company’s fiscal guidance, it will be in the position to report nearly 40% year-over-year revenue growth in the first quarter of 2012. That’s the type of performance that will catch the attention of major investors.

Investors who take a position in LAS now have an incredible profit opportunity: a strong growth, NYSE-listed, shrewdly managed company with a Big 4 auditor, trading at an extremely low valuation. You can learn more about LAS by watching the Company’s presentation from last week’s RedChip virtual conference.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may maintain positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Stocks: LAS