Sector Update Utilization in China to Rebound Gradually
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2015. 9. 16 Autos (OVERWEIGHT) Sector Update Utilization in China to rebound gradually * We visited China’s top automaker Shanghai Automotive Industry Corporation (SAIC) and its parts-making affiliate Huayu Automotive Systems over Sep 1-2. * SAIC says inventory corrections in the Chinese auto market are winding down, retail sales recovered somewhat in August, and utilization will gradually recover from September. It predicts that China’s auto demand will grow 3-5% pa in coming years and that JV brands will struggle over the next couple of years as local brands excel in inland cities and the SUV segment. Although we believe Hyundai Motor (HMC) and Kia Motors will see utilization recover from September on price policy changes and car launches, they need to revise their longer-term strategies in light of the shifting competitive landscape. * With utilization at HMC and Kia’s Chinese plants bottoming, parts makers oversold due to concerns over China warrant attention. We like Mando and Hyundai Wia. WHAT’S THE STORY? Utilization bottoming out on inventory adjustments: Wholesale auto sales in China fell 2.6% y-y in June, the first such decline since the market opened up in the early 2000s. They fell again in July (6.4%) and August (3%) as carmakers adjusted inventories. With dealership inventories have fallen from 1.9 months in June to 1.6 months in August (vs normal levels of 1.5 months), further price and utilization cuts aimed at inventory adjustments look unlikely. Retail sales rebounded to grow 0.6% y-y in August and demand should gradually recover from September as seasonal strength kicks in. Takeaways from SAIC Group visit: China’s top automaker Shanghai Automotive Industry Corporation (SAIC) predicts that Chinese auto demand will grow 3-5% pa in coming years and plans to defend its number-one position by launching models tailored to local tastes. SAIC’s parts-making affiliate Huayu Automotive Systems has gained expertise supplying SAIC-GM and SAIC-VW, and pursued M&As to acquire technology and expand its global reach. The parts maker, which generates 65% of its sales from SAIC, plans to reduce its dependence on the carmaker via M&A activity. HMC and Kia need to shake things up: With their models aging and utilization falling, Hyundai Motor (HMC) and Kia Motors have sought a breakthrough by price cuts. We believe HMC needs to alter its China strategy before its fourth and fifth China plants go online in 2017 by: 1) expanding the number of exclusive models it offers there; and 2) actively introducing new technology. Offering new models alongside older ones has so far boosted the automaker’s sales and profitability, but we believe the strategy needs modifying lest it hurts the carmaker’s brand image. Outlook for Korean parts makers: Mando, Pyeong Hwa Automotive, and S&T Motiv supply both local and global automakers in China. Global automakers’ development of China-only models in response to local brands’ value-for-money strategy may provide growth opportunities to Korean parts makers that boast competitive prices and quality. Autos 2015. 9. 16 Contents Automakers in China to see utilization recover Utilization bottoming out on inventory adjustments Wholesale auto sales in China fell 2.6% y-y in June, the first such decline since the market opened up in the early 2000s. With consumer sentiment dampened by an economic slowdown and stock market crash, automakers became wary of high inventories. To address this, they slashed prices by more than 10% and adjusted utilization rates. With dealership inventories standing at 1.6 months at end-August (slightly above normal levels of 1.5 months), further price and utilization cuts aimed at inventory adjustments look unlikely given that retail sales rebounded to grow 0.8% y-y in that month. The Chinese auto market is seasonally strongest in 4Q because of the Mid-Autumn Festival holidays in 4Q and Lunar New Year holidays in 1Q. As the holidays fall in late September and late February this time around, utilization at automakers should gradually recover. Although the Chinese economy remains a concern, the worst looks over for auto demand given that real-estate transactions (a measure of consumption) are still recovering and the government has announced massive fiscal stimulus measures. China: Auto inventory China: Recent cuts to vehicle ASPs ('000 vehicles) Automaker Details Announced price cuts of CNY10,000-54,000 700 GM Shanghai (KRW1.8m-9.5m) covering 40 models 600 Cut prices on select models (including mid-sized sedans) VW Shanghai 500 by up to CNY10,000 Bolstered promotional efforts, cut prices 400 Honda/Ford and covered excise taxes 300 Cut prices for H2 and H6 models by a respective 200 Great Wall CNY5,000 and CNY6,000 100 Cut price for main sedan (C30) by over 10% HMC Cut prices for Santa Fe and ix35 models by about 10% 0 Cut prices for Sportage (KM) and Sportage (SL) models (100) Kia by a respective CNY50,000 and CNY20,000 (200) Source: Local media, Samsung Securities Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Note: Excludes commercial vehicles Source: Auto Data Bowl, Samsung Securities 2 Autos 2015. 9. 16 China: Dealer-level automobile inventory index China: 2015 growth in wholesale and retail sales (Months) (% y-y) 2.5 15 2.3 10 2.1 5 1.9 1.7 0 1.5 (5) 1.3 (10) 1.1 (15) 0.9 Jan Feb Mar Apr May Jun Jul Aug 0.7 2012 2013 2014 2015 Retail sales Wholesale Source: China Automobile Dealers Association, Samsung Securities Source: Auto Data Bowl, Samsung Securities China: Housing transaction volume growth vs auto demand growth (% y-y) 70 60 50 40 30 20 10 0 (10) (20) (30) Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Housing transaction volume Auto demand Source: National Bureau of Statistics of China, KARI, Samsung Securities High-growth phase ends; competition to intensify We expect China’s auto demand to grow moderately at 3-5% pa in coming years. After seeing demand shrink 3.2% y-y in June, the China Association of Automobile Manufacturers has slashed its full-year demand growth forecast from 7% to 3%. Even though vehicle ownership per thousand people remains near 50, China’s top automaker SAIC also predicts that demand will grow 3-5% pa because: 1) annual demand has reached 20m units: 2) car penetration is significantly higher in eastern coastal cities than in inland/western cities; and 3) eight large cities limit new car registrations. We expect the Chinese auto industry to consolidate around 5-10 players as slowing demand whips up competition and tighter environmental regulations drive up R&D costs. Indeed, the top-10 firms already control 86.2% of the Chinese market. In China, some 100 automakers have a combined annual capacity of 40m vehicles—double that of current demand. Smaller players that manufacture 20,000-30,000 vehicles pa have so far survived on government subsidies, but may no longer be able to compete now that top players are cutting prices. 3 Autos 2015. 9. 16 Global automakers: China capacity forecasts (‘000 vehicles) 2012 2013 2014 2015E 2016E 2017E 2014-17E CAGR (%) Shanghai-VW 1,175 1,417 1,600 1,850 2,000 2,000 7.7 FAW-VW 1,010 1,275 1,560 1,560 1,560 2,280 13.5 VW 2,185 2,692 3,160 3,410 3,560 4,280 10.6 Dongfeng-PSA 450 525 600 750 750 1,290 29.1 Brilliance-BMW 150 200 300 300 500 500 18.6 Mercedes-Benz 100 100 154 328 400 400 37.5 Fiat 50 140 175 210 210 370 28.3 Renault 150 150 150 European OEMs 2,935 3,657 4,389 5,148 5,570 6,990 16.8 Growth (% y-y) 24.6 20.0 17.3 8.2 25.5 Shanghai-GM 1,000 1,160 1,235 1,610 1,610 1,830 14.0 Changan-Ford 325 550 579 1,088 1,350 1,350 32.6 US OEMs 1,325 1,710 1,814 2,698 2,960 3,180 20.6 Growth (% y-y) 29.1 6.1 48.7 9.7 7.4 BAIC-HMC 750 900 1,050 1,050 1,250 1,550 13.9 Dongfeng Yueda Kia 430 430 680 740 890 890 9.4 Korean OEMs 1,180 1,330 1,730 1,790 2,140 2,440 12.1 Growth (% y-y) 12.7 30.1 3.5 19.6 14.0 Dongfeng-Honda 360 360 420 480 480 480 4.6 GAC-Honda 480 480 480 600 720 840 20.5 Honda 840 840 900 1,080 1,200 1,320 13.6 GAC-Toyota 380 380 380 380 380 480 8.1 FAW-Toyota 520 560 560 630 680 680 6.7 Toyota 900 940 940 1,010 1,060 1,160 7.3 Changan-Suzuki 300 350 380 380 400 400 1.7 Dongfeng-Nissan 677 1,000 1,038 1,150 1,150 1,150 3.5 Mazda 340 340 400 400 400 400 0.0 Japanese OEMs 3,057 3,470 3,658 4,020 4,210 4,430 6.6 Growth (% y-y) 13.5 5.4 9.9 4.7 5.2 JLR (Jaguar Land Rover) 130 130 130 Indian OEMs 130 130 130 Growth (% y-y) 0.0 0.0 Great Wall 900 1,150 1,150 1,400 1,400 1,400 6.8 Geely 800 800 700 700 700 (4.4) Volvo 31 165 205 205 205 7.5 Chinese OEMs 900 1,981 2,115 2,305 2,305 2,305 2.9 Growth (% y-y) 6.8 9.0 0.0 0.0 Total 9,397 12,148 13,706 16,091 17,315 19,475 12.4 Growth (% y-y) 29.3 12.8 17.4 7.6 12.5 Source: Industry data, Samsung Securities 4 Autos 2015.