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China Auto Sector China / Hong Kong Industry Focus China Auto Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 22 Feb 2018 HSI : 30,966 Auto OEMs: Rotational play ANALYST Market volatility offers accumulation opportunity Rachel MIU +852 2863 8843 [email protected] Rotational play into laggards on potential earnings recovery and undemanding valuations; consumption upgrades remain strong for luxury Recommendation & valuation names Company Pric e Target Recom FY18F Mkt 2017 earnings preview – mixed performance Price PE Cap expected HK$ HK$ x US$m Our picks: BAIC (1958 HK), BYD (1211 HK) and Auto manufacturers Brilliance China 20.30 25.60 BUY 11.1 13,149 Brilliance (1114 HK) (1114 HK) Accumulation on market volatility. YTD, the auto OEMs’ share Dongfeng Motor* 9.73 11.00 HOLD 4.7 3,612 price has been lacklustre, despite some automakers having set (489 HK) 20-30% volume sales growth targets for 2018. This is because Geely Auto 23.70 24.00 HOLD 13.8 27,203 the market has already anticipated the strong sales target. But (175 HK) laggards such as BAIC and BYD are looking attractive, in Great Wall Motor* 8.78 11.10 HOLD 8.2 14,330 anticipation of FY18 earnings recovery and valuation upside. (2333 HK) The recent amendments to electric car subsidy has little impact Guangzhou Auto 17.74 25.00 BUY 7.3 21,261 on BYD as the company is moving up the value chain on both (2238 HK) travel distance and battery technology. With ongoing BAIC Motor 10.72 13.20 BUY 9.3 2,880 consumption upgrade (on rising disposal income level and (1958 HK) preference for quality cars), luxury brands' entry models are BYD 73.00 92.00 BUY 26.6 25,630 expected to benefit. We expect Brilliance’s new BMW X3 (1211 HK) model to ride on the consumption upgrade. Geely is likely to CQ Changan 'B' 8.73 n.a. NR 3.9 1,008 (200625 CH)^@ range trade after last year's exceptionally strong performance. SAIC Motor 'A' 34.02 n.a. NR 10.3 60,113 HK-listed auto OEM sector is trading at 5-27x FY18 PE, on (600104 CH)^@ projected earnings growth of about 30%. Overall, the auto sector is still appealing after recent correction. Source: Thomson Reuters, DBS Vickers ^ Consensus * TP & Rating under review Saleable new car models needed to sustain buying interest; a China automaker index vs volume sales growth three-way fight. We anticipate the Chinese self-brands to face rising competition this year, especially after the expiry of the Index (1 J an 09 = 100) '000 Units favourable vehicle purchase tax on small cars. Chinese 1,600 3,500 automakers are rebranding themselves with new auto brands. 1,400 3,000 Great Wall Motor’s WEY and Geely’s Lynk & Co (Lynk) are two 1,200 new brands vying for a slice of the mass-market segment, 1,000 2,500 while Guangzhou Auto’s Trumpchi is rolling out several new 800 2,000 models to rival WEY and Lynk. It is going to be an intense 600 1,500 landscape since the foreign auto brands have always been 400 1,000 dominating the market. We forecast the Chinese auto market 200 to grow at 3-4% each from 2017-2020, as the overall market 0 500 has already reached a sizeable scale with annual sales of over 20m units for the past five years. Also, the Chinese Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 government’s goal is to raise the electric car penetration rate in Automaker index (LHS) the coming years. We forecast the electric vehicle market Total vehicle sales in China (RHS) (volume sales) to grow at ~30% per annum till 2020. Source: CEIC; Thomson Reuters; DBS Vickers ed-TH / sa-CS / AH Industry Focus China Auto Sector Auto OEMs – picky on our stock picks 2017 volume sales growth vs share price performance Market volatility; opportunity to accumulate laggards on %% rotational play. The recent market volatility trading pattern is a 340 80 good opportunity to accumulate. However, we have a selective 240 60 approach after a strong share price performance in 2017. 140 40 20 40 Some automaker laggards are looking attractive, especially 0 with a turnaround angle in 2018 sales performance. These (60) -20 names include BAIC, BYD, and Great Wall Motor, which are (160) -40 (260) -60 expected to post a 30-65% decline in FY17 earnings due to weak volume sales last year. But these negatives have largely BYD been factored into their valuation multiples. We expect their FY18 earnings recovery (on anticipation of volume and margin Geely Auto Geely BAIC Motor improvements) to lift trading sentiments. Brilliance China Brilliance Dongfeng Motor Guangzhou Auto Guangzhou Wall Motor Great Share price change (LHS) China automakers YTD share price performance Total sales v olume change (RHS) % Source: Companies, Thomson Reuters 10 7.20 5.30 5 2.85 3.50 Chinese automaker rebranding strategy to remain competitive. 0 Nothing beats saleable new brands/models. 2018 is expected to remain challenging, because the Chinese auto market has (5) -2.87 -1.90 -4.21 already reached a sizeable scale, coupled with auto vehicle (10) sales restrictions in the major cities. Car buyers are becoming more demanding and automakers are constantly releasing new (15) -12.55 models to attract buying interest, amidst the rising market BYD competition. HSI index Geely Auto Geely In 2017, two Chinese automakers rolled out their new BAIC Motor brands – Great Wall Motor’s WEY and Geely’s Lynk & Co as Brilliance China Brilliance Dongfeng Motor Dongfeng Guangzhou Auto Guangzhou Great Wall Wall Motor Great part of their rebranding strategy to move up the auto value Source: Bloomberg Finance L.P. chain. We plot the sales charts of these two brands to illustrate the buying interest as follows: On the other hand, the 2017 outperformers are expected to trade sideways as the market is becoming more demanding and would require a bigger surprise to further drive their share price higher. Based on the chart below, the outperformers in 2017 have enjoyed robust volume sales. Therefore, a multi-fold jump in share price could be challenging (since these positives have largely been priced in) compared with the laggards. Page 2 Industry Focus China Auto Sector WEY vs Lynk & Co monthly sales trend is rivalling WEY and Lynk with an aggressive new model pipeline. Hence, we believe this market will be a three-way Unit fight between these three Chinese auto brands. In our view, 12,000 market has remained sideline on Geely because its FY18 PE is 10,000 relatively higher than its peers, which implies the positives 8,000 could have been priced into its share price. 6,000 4,000 Valuation and our stock picks 2,000 Volume sales and rebranding strategy driving auto sector index performance. The automakers’ performance in 2017 was 0 largely driven by strong volume sales growth of the Chinese brands and high expectations built into the potential benefits Jul-17 Jan-18 Jun-17 Oct-17 Sep-17 Dec-17 Nov-17 Aug-17 from certain Chinese automakers’ rebranding strategy. In our Great Wall Motor - WEY VV7 sales opinion, the rebranding strategy is slowly taking shape and it Great Wall Motor - WEY VV5 sales may probably need another 3-6 months to assess the new Geely - Lynk & Co brands’ sales impact on earnings. However, automakers have generally set realistic sales targets for 2018, which should Source: Companies support earnings growth. On this basis, we believe the automaker segment will continue to draw investment interest. We anticipate market to watch very closely the performance of these two new brands, which is critical on their share price movement. On the other hand, Guangzhou Auto’s Trumpchi, China automaker index vs volume sales growth Index (1 Jan 09 = 100) '000 Units 1,600 3,500 1,400 3,000 1,200 2,500 1,000 800 2,000 600 1,500 400 1,000 200 0 500 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Automaker index (LHS) Total vehicle sales in China (RHS) Source: CEIC; Thomson Reuters; DBS Vickers Southbound trading momentum. As the following chart shows, southbound shareholding has risen from about 9.7% in March Chinese investors have generally favoured the automakers. The 2017 to approximately 13% on 22 February 2018. Among the southbound trades on automakers have been trending up after automakers, Brilliance, Great Wall Motor and Sinotruk are the its short blip in early 4Q17. The positive momentum could investors’ favourites. support the sector’s performance. As a percentage, Page 3 Industry Focus China Auto Sector Southbound shareholding of automakers Auto OEM Auto OEM mn 13% 3,000 2,900 12% 2,800 2,700 11% 2,600 10% 2,500 2,400 9% 2,300 2,200 8% 17-Jul-17 17-Jul-17 17-Jan-18 17-Jun-17 17-Oct-17 17-Feb-18 17-Sep-17 17-Apr-17 17-Dec-17 17-Jan-18 17-Nov-17 17-Jun-17 17-Mar-17 17-Feb-18 17-Oct-17 17-Aug-17 17-Apr-17 17-Sep-17 17-May-17 17-Dec-17 17-Nov-17 17-Mar-17 17-Aug-17 17-May-17 Brilliance (1114 HK) Great Wall Motor mn mn 200 1,400 180 1,200 160 140 1,000 120 800 100 80 600 60 400 40 200 20 0 0 17-Jul-17 17-Jul-17 17-Jan-18 17-Jun-17 17-Jan-18 17-Oct-17 17-Feb-18 17-Jun-17 17-Apr-17 17-Sep-17 17-Oct-17 17-Feb-18 17-Dec-17 17-Apr-17 17-Sep-17 17-Nov-17 17-Dec-17 17-Mar-17 17-Nov-17 17-Aug-17 17-Mar-17 17-May-17 17-Aug-17 17-May-17 Source: HKEx Page 4 Industry Focus China Auto Sector Our picks.
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