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China Auto Market


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China Auto Market

  1. 1. CHINA GLOBAL ANALYSIS INC. CHINA GLOBAL ANALYSIS INC. CHINESE AUTO MARKET UNDER THE SPOTLIGHT Current Price H Target Price H Current Price A Target Price A Advice H Shares Advice A Shares Guangzhou 7.21 8.71 18.92 18.03 Mod. Buy Mod. Sell BYD 42.55 43.82 - - Hold - Geely Auto 3.38 3.03 - - Sell - Great Wall 6.37 6.16 8.82 8.09 Mod. Sell Sell H-Shares data in HKD. A-Shares data in RMB. 2015 PASSENGER CARS KEY FIGURES Cars sold: 21.1 million Growth rate: 7.3% (compared to 10% in 2014) ___________________ Chinese brands’ market share: 41.3% (+290 basis points YoY) Chinese brands’ growth rate: 15.3% ___________________ Production of energy cars: 102,461 (10.4 times YoY) Sales of energy cars: 100,763 (10.6 times YoY) ___________________ Export: 427,700 ___________________ Top 3 Automakers: 1. Hong Qi 2. BYD Co LTD 3. Chery Automobile Co SUMMARY Strong points: • Reducing quality gap thanks to constant investments in R&D • Marketing ____________________ Weak points: • Dependence on foreign suppliers for technologies, raw materials and semi-finished products ____________________ Concerns: • Stock market fall • Increase in taxes • License plates • Limited number of cars (Beijing) • Growth in second-hand car market _________________ Future prospectives: • Electric vehicles • Anticipate change and new trends
  2. 2. CHINA GLOBAL ANALYSIS INC. STRONG POINTS In recent years, Chinese automakers have striven to reach Western’s level of technology, investing a significant proportion of the budget for R & D. According to surveys conducted by JD Power, the quality of Chinese brands in 2014 achieved the level of quality the foreign brands already had in 2011. The quality gap is reducing rapidly and consumers are more and more loving chinese brands. In addition, China automakers are investing heavily in marketing, gradually increasing their market share. In the near future, they will constitute a substantial threat to the high margins foreign car manufacturers could reach. An example is the “SUV boom” in China. Many rich Chinese aspire to own an SUV, but while in the early stages of this circumstance the most sold were those produced by foreign companies with local joint ventures, Chinese automakers are starting to catch up. In the first half of 2015, sales of Chinese SUV brand have increased by about 30% compared to 12% for foreign brands. Under increasing domestic pressure, foreign automakers have been forced to reduce the prices in order to keep market share and stimulate sales (see Volkswagen and General Motors strategies). WEAK POINTS Despite growing effort in R&D, Chinese enterprises don’t have sufficient research skills to lead the new trends of the sector, so they will continue to depend on foreign producers for access to the most advanced technologies. In fact, although Chinese products have significantly lower prices than those imported (a numerical control lathe produced in China costs about 60% less of a lathe product abroad), the majority of domestic enterprises use almost exclusively imported machine tools. Almost all the machinery incorporating advanced technologies are of foreign manufacture. Chinese automakers also have to deal with supply difficulties regarding raw materials and semi-finished products. CONCERNS In 2015 1Q Chinese auto makers have pushed too far the production, causing a dangerous over supply crisis that could harm the sector in the future. One significant phenomenon, that will accelerate the process of contraction of Chinese automotive industry, is the fall that Chinese stock markets have been suffering from mid-June. In fact, the collapse of Chinese stock markets and the consequent fall in consumer confidence have injected uncertainty in the economy. Since many Chinese have lost part of their income in recent stock sell- off, the level of expenditure for some categories of goods will probably decline, at least temporarily. Another concern is the increase of taxes by local authorities and restrictions on the sale of new cars in major Chinese cities, especially Tier-1. The aim is to reduce congestion and pollution in densely populated areas.
  3. 3. CHINA GLOBAL ANALYSIS INC. A notable limitation is the complex mechanism that allows you to get the license plates. In order to get the right for receiving new plates, Chinese citizens who decide to purchase a new car must participate in a lottery. This system fuels black market, where wealthy Chinese are willing to pay to get the license plate number without the need to win the lottery. Another type of limitation is present in Beijing, where the authorities try to limit the number of cars at peak hours to reduce congestion. The restriction prohibits the movement of cars based on the license plate number, odd or even, and aims to improve air quality and to cut traffic. In addition, the country has recentely developed a second hand car market. Now consumers have more choices and they are not forced to buy a new car. A key advantage in the purchase of a used car is that you also obtain the license plate, without participating in a lottery. FUTURE GOALS While the drop in oil prices supports the demand in the short term, on the other hand, the introduction of fuel consumption targets opens the market to electric vehicles. Due to high carbon emissions, Chinese government has required that by 2016 at least 30 percent of new vehicles are powered by alternative energy sources. This shows progressive commitment and a growing importance of environmental issues. Apart from the relatively low purchase price of electric vehicles, due to the many funding initiatives, in China there is generally less aversion to new technologies powered by electricity. The future prospects of the electric vehicle market are optimistic. Given a low starting point, the future growth rates in this segment will be more than considerable. CONCLUDING REMARKS Despite its contraction, auto market is still far from a crisis. “The China Automobile Association said in early January 2016 that sales rose a respectable 4.7%, beating analyst expectations of a 3% spike this year amidst a record slowdown in growth and sentiment in Chinese economy” (Forbes Jan 12,2016: China’s Car Market Beats the U.S. in 2015, and Will Again this Year). The market has still chances to grow, especially in China’s smaller cities, where it has been registered an increasing number of sales. That said, in the near future it will be difficult to cope with the series of changes that will be addressed by manufacturers. To survive in such a changing environment the automakers will have to move faster than the market, trying to anticipate change and new trends. 42% 34% 14% 10% Worldwide growth from 2011 to 2020 100%=33mn units ROW China North America Europe Source: McKinsey, Bigger, better, broader.
  4. 4. CHINA GLOBAL ANALYSIS INC. GUANGZHOU AUTOMOBILE GROUP (2238:HK Hong Kong, 601238:CH Shanghai) 2014 2015E 2016E 2017E Revenue 22,376 22,761 24,479 26,423 Net profit 3,185 3,502 4,020 4,251 Data in RMB Millions. Source: Morgan Stanley, 2015. Brand volume growth and cost reduction due to localization permit the group to transmit the revenue growth (CAGR 14-17 +5.70%) entirely to net profit, which grows even more (CAGR 14- 17 +10.10%) thanks to relatively stable administrative expenses. H-Shares PE analysis suggests a target price range 5.85-10.03 HKD for 2016, with expected price of 8.71 HKD (current 7.21). A-Shares could bounce between 14.37 to 21.14 RMB, target price at 18.03 RMB (current 18.92). We suggest moderate buy for H-Shares and moderate sell for A. GEELY AUTOMOBILE HOLDINGS (175:HK Hong Kong) 2014 2015E 2016E 2017E Revenue 21,738 30,148 42,696 53,973 Net profit 1431 2780 3876 5019 Data in RMB Millions. Source: Goldman Sachs, 2015. We believe Geely’s increase in revenue (CAGR 14-17E +30%) and profit (CAGR 14-17E 45%) are over weighted. The higher profit is led by higher non-operating income due to government subsidy and net gains on plant disposal to Zhidou Electric Vehicle; we consider these aspects as not reliable and not stable. Predicted growth is unlikely to happen since the data provided are not enough reliable. Moreover, Geely launched in 2015 5 new models, 2 of them being SUVs which we believe will suffer from strongly increasing competition and margin pressure. Our analysis suggests a target price range 2.06-4.15 HKD, expected 3.03 in 2017 versus current 3.38. CGA last advice is to adopt a Sell strategy, forecasting a -10% drop in stock price. GREAT WALL MOTOR (2333:HK Hong Kong, 601633:CH Shanghai) 2014 2015E 2016E 2017E Revenue 60,137 71,144 88,914 101,678 Net profit 8,042 8,469 11,689 13,735 4.00 8.00 12.00 16.00 20.00 24.00 28.00 03/2015 06/2015 09/2015 12/2015 H-Shares A-Shares 2 3 4 5 03/2015 06/2015 09/2015 12/2015
  5. 5. CHINA GLOBAL ANALYSIS INC. Data in RMB Millions. Source: Bank of America Merrill Lynch, 2015. Rating output on Great Wall is negative. We believe the competition in its low-end SUV segment is structural, and the Street forecasts excess R&D expenses on electric vehicles in next FY, to catch up with China’s fuel economy target by 2020. BYD’s stable operating profit makes that company preferable: in fact Great Wall’s Op. Profit grows less than revenue (CAGR 14-17E 19.53% vs 18.92%), possibly because of decreasing efficiency. Expected H-Share price 6.16 HKD (range 6.99- 5.22, current 6.37 HKD) suggests moderate sell; expected A-Share price 8.09 RMB (range 10.82- 7.68, current 8,82 RMB) makes our advice a sell strategy. BYD CO (1211:HK Hong Kong) 2012 2013 2014 2015E Revenue 44,381 49,768 55,366 60,586 Net profit 81 553 434 539 Data in RMB Millions. Source: Morningstar, 2016. BYD showed a good increase in revenue, reaching a 10.93% CAGR 12-15E. Net profit is slightly unstable, recovering from a 2012 low at 81 RMB M. Operating profit is more stable, giving strenght to a possible upward trend. H-Shares PE suggests a fair price of 43.82 HKD in next FY (current 42.55), the possible range going from 38.52 to 52.18 HKD. Estimated price +3% increase suggests a hold strategy, supported by the forecasted future trend of possible growth. CHINA GLOBAL ANALYSIS INC. THE EQUITY RESEARCH TEAM Enrico Astegiano Filippo Cattabiani Andrea D’Oro 6 March 2016 0 20 40 03/2015 06/2015 09/2015 12/2015 H-Shares A-Shares 25 45 65 03/2015 06/2015 09/2015 12/2015