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2019-10-12 110 ENGLISH REPORTS
China auto market on track for another weak year: M In the 7M19 China's PV sales declined 12.8% yoy, and it has now seen 13 consecutive months of negative yoy growth. This is despite the introduction of aggressive discounts to destock China V models in May-June ahead of the China VI emission standards in many regions of the country. We also believe this is likely to have pulled forward some demand from later months, dampening hopes for a recovery in 2019. Cutting China's 2019 PV sales forecast to 7-8% yoy decline, but 1-2% growth in 2020e: We do not expect a recovery in auto demand this year, as macro indicators remain weak, especially employment. As a result, we lower our forecast for China's 2019 PV sales to a 7-8% decline, vs. a 5% decline previously. However, for 2020, we expect a replacement cycle to kick in and raise our PV sales forecast to 1-2% yoy growth for 2020, from a 3% decline previously. We note that this is the most positive growth forecast for PV sales among major global markets when compared to Morgan Stanley's 2020 estimates for -3% in Japan, -1% in Korea, -6% in US and -2% in Europe. Local governments may loosen license plate restriction following State Council's policy: On August 27, 2019, China's State Council issued a policy package to promote consumption. For the auto sector, it urged local governments to gradually loosen or cancel existing license plate restrictions, according to the local situation. If macro pressures linger in 2020, we believe local governments could be more likely to implement stimulus policies, which would support auto demand. Improved industry efficiency could improve profitability: Tough market conditions in 2018-19 have seen many OEMS reduce capacity and seen many small players lose share/exit the market. The fixed asset investment growth for the auto manufacturing industry has also fallen to historical lows. We believe these factors should lead to improved industry efficiency, which should help improve profitability once demand picks up. Expect price recovery in 2H19 and 2020: Many auto dealers offered aggressive discounts for China V models in May-June, before the implementation of China VI emission standards on July 1, 2019 in many regions of China.
These regions accounts for around 60% of China's total auto market. However, we have seen evidence of a gradual recovery in pricing in the market. For example, SAIC guided that pricing had recovered by Rmb6.6k per unit for SAIC Volkswagen since May-June. We expect this process to continue as the impact of the previous aggressive discounts wears off. Investment Summary Stocks pricing in bearish expectations: The six H-share listed OEMs we cover have posted an average of 11.6% YTD return in 2019, vs. the Hang Seng Index's 2.6%. However, considering they fell ~50% on average in 2018 (vs. -14% for the HSI), we believe their current valuations are still pricing in a bearish outlook. We believe the market is expecting 1-2% yoy sales volume declines for 2020, while we expect 1-2% positive growth. fr Luxury brands - expect margins to improve in 2H19: In 1H19, Brilliance BMW saw 26% yoy sales volume growth but the profit contribution to its parent Brilliance declined 3% yoy. Similarly, Beijing Benz had 12% yoy sales growth, but BAIC's profit contribution from the Benz JV declined 2% yoy. For Brilliance, the company guided this was mainly due to the large rebates given to dealers to destock old 3 series models. For BAIC, it guided the margin decline for Mercedes was due to low localization rates for A-class models, which resulted in low gross margin, and also the changed mix. For both companies, we expect some margin improvements in 2H19, and remain OW on both stocks given their luxury exposure. Japanese brands - remain positive, should benefit from replacement cycle: We remain positive on the Japanese JV brands, as they should benefit directly from the replacement cycle we expect in 2020. During the last round of stimulus, which started in 2015, the government introduced an auto purchasing tax benefit for vehicles with an engine size of 1.6L or lower. This supported low-end models' market share, as illustrated in Exhibit 24 . We expect these cars are likely to be replaced in the next 1-2 years, and believe many of these consumers could upgrade to JV brands. For mid-range products, as Japanese brands have now launched cheaper models that are similarly priced to domestic brands but offer better value for money, we believe the Japanese brands' strong momentum should continue.
标签： ENGLISH REPORTS