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Lentuo Releases 2013 Chairman Letter

Stocks in this article: LAS

BEIJING, May 22, 2014 /PRNewswire/ --

Dear Shareholders,

China, as a nation, is only beginning its love affair with the road. In 2013, we saw double-digit growth in car sales, rising 14% to 22 million vehicles, according to the China Association of Automobile Manufacturers, after two years of relatively weak, single-digit growth in the world's largest auto market.

This is part of a process, as car ownership spreads from the sophisticated urban base of China's capital, Beijing, and its coastal cities, to the fast-growing second and third-tier cities of China's interior. We expect 2014 to be another strong year. A range of factors is boosting demand – rapid urbanization, economic stimulus measures, and falling car prices. The last phenomenon is an effect of higher levels of local content in cars produced by joint manufacturing ventures under international brands, making car ownership more affordable for China's aspirational middle-class consumers. Based on estimates by the consulting firm McKinsey & Company, by 2022 China's middle class will increase by 100 million people to 357 million, and 54% of Chinese households will have disposable annual income of between RMB 106,000 and RMB 229,000 ( US$17,191 to US$37,141).

A good year, and new directions for Lentuo

This is all good news for Lentuo International, as one of China's largest non-state owned auto retailers. For the full year we had net income of RMB 23.8 million ( US$3.9 million) on revenues of RMB 3.3 billion ( US$540.6 million). A compelling measure of our success is that we saw increases in gross margin in both auto sales and repair and maintenance services, at 4.9% and 42.4% respectively, even though overall revenues were flat.

To provide more color to our revenue profile, car sales actually increased by 3.9% to 17,561 vehicles in 2013. In previous years, this might have translated into higher revenues with no change in gross margins. In 2013, we saw three parallel developments. As manufacturers responded to competition, they reduced prices by introducing new models with higher margins and lower prices. At the same time, an increasing number of car models previously imported are now manufactured domestically, with lower costs of production translating into lower retail prices. A third piece of the story is that Lentuo introduced discounts on older models in order to clear inventory and stimulate sales on behalf of the auto manufacturers; for which the Company was compensated for.

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