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Healthy Dividend Growth Projected for Chinese Automakers

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Healthy Dividend Growth Projected for Chinese Automakers Healthy dividend growth projected for Chinese Automakers Thursday, April 26th, 2018 Aggregate dividends from Chinese automotive companies are expected to increase to HKD 16.2bn by 2020, up 76% from 2017 • Future dividend growth is expected to be sustained by projected higher sales volume and booming sales of new-energy vehicles. • Declared dividends from Chinese automotive companies grew by 25% year-on- year (YOY) to HKD 9.2bn for 2017. • Majority of the companies adopt performance-linked payout policies, and we noted that some have lifted their payout ratio in 2017. • Market competition however, could create some risks on forecasted dividends. According to the latest filings, the automotive industry in China reported aggregate dividends growth of 25% YOY in 2017. More than two-third of the companies paid higher dividends, which is offset by lower earnings and dividends reported by some key players like Great Wall Motor (“Great Wall”). IHS Markit expects Chinese automakers to continue growing their payouts, with a well-sustained healthy growth rate in the forthcoming years. Aggregate dividends from the industry are forecasted to increase to HKD 16.2bn by 2020, representing an increase of 76% from the amount declared for 2017. We expect this growth to be underpinned by higher vehicle sales and flourishing new-energy vehicles (NEV) market. Aggregate dividends from Chinese automotive sector (HKD bn) 18.0 16.2 16.0 14.2 14.0 11.7 12.0 10.0 9.2 7.4 8.0 6.0 4.8 5.1 4.0 2.0 0.0 2014 2015 2016 2017 2018E 2019E 2020E Source: IHS Markit, FactSet. Dividends from H shares only. Excludes one-off payment Confidential | Copyright © 2018 IHS Markit Ltd Dividend Forecasting The above dividend forecasts incorporate insights such as light vehicle sales projection and key industry trends research provided by the IHS Markit Automotive business line. Our report will also touch on the potential China-US trade war, as well as the expected intra-industry market competition. We draw links between these factors and how they impact the prospects of future payouts from Chinese automakers. We highlight that the majority of these companies have adopted a performance- driven payout practice, as reported DPS changes from 2016 to 2017 have been positively correlated to EPS changes during the same reporting period. Geely Automobile Holdings (“Geely”) announced a striking earnings hike of 108% YOY to CNY 10.6bn, after successful sales of its newly launched sedans and SUVs. This prompted the company to increase its payout ratio to 22%. As a result, Geely’s dividends grew by 142%, which became the largest YOY DPS growth compared with the global automotive peers. Another company which lifted its payout ratio on a full- year basis is Dongfeng Motor Group (“Dongfeng”), as it paid an interim dividend of CNY 0.1 per share for the first time in the current fiscal year. Guangzhou Automobile Group (“Guangzhou”) has also increased its full-year payouts by 77%, following the company’s stable payout ratio of over 30% and in line with its profits gain, thanks to volume growth from its joint ventures and own brand Trumpchi. Conversely, Great Wall, BYD Company (“BYD”) and BAIC Motor Corp (“BAIC”) announced downbeat results for 2017. Great Wall and BYD cited higher competition, reduction in NEV subsidies, and excessive advertising and promotion costs as reasons for the sluggish results, whereas decline for BAIC was primarily due to deteriorated sales of its Beijing-Hyundai Motor unit, which is believed as a short term effect. Subsequently, all 3 companies have cut their dividends in proportion to the decline in earnings. However, we are expecting dividends from these three companies to demonstrate a rebound in FY18. DPS change VS. EPS change from 2016 to 2017, 2017 dividend payout ratios 150.0% 100.0% Geely Payout 22% Guangzhou 50.0% Payout 33% Dongfeng 0.0%Brilliance Payout 21% -100.0% EPS change -50.0% BYD 0.0% 50.0% 100.0% 150.0% 200.0% Payout 9% Payout 13% Great Wall -50.0% BAIC Payout 31% Payout 33% -100.0% DPS change *Size of the bubble indicates company’s full-year dividend payout ratio in 2017 Source: IHS Markit, FactSet. | 2 Dividend Forecasting New vehicle sales to continue to drive dividends growth Sales of new vehicles contribute directly to companies’ top-line performance and therefore are considered as a key component in our dividend forecasts. We consider the new-car purchase tax cut as a booster to new vehicle sales in recent years. China has a 10% new car purchase tax. Starting from October 2015, a 50% cut in the new car purchase tax for locally manufactured small-engine vehicles was implemented and significantly drove up the domestic demands. The same tax cut was extended throughout 2017, although it was revised to 25%. This tax incentive has directly led to a combined unit sales increase of 15% in 2016, up from 7% in the previous year from top Chinese automakers. This helps to explain the multi-year high growth of 45% in the payout ratio during the same period. Although the tax is reverted back to 10% in 2018, projected sales growth rates are still healthy, mostly attributed to rising income and new models in pipeline of various companies. Going forward, unit sales from companies are expected to be well maintained beyond the current level, and register steady growth in forthcoming years. Notably, IHS Markit is projecting light vehicle sales in China to grow by 2.6% annually on average over the next three years. This is likely to support growth in top line figures as light vehicle sales account for the lion share of total sales of top Chinese automakers highlighted in this report. We expect better sales to translate to higher earnings, which increase the capacity of these companies to pay higher dividends. According to our data and research, the following companies are likely to lead the growth: • We think Great Wall would reclaim some lost ground in 2018 after the company’s 2017 earnings plunged by 52% YOY on higher promotion, R&D outlays associated with its new WEY branded SUV. The company has been successful so far in its promotional efforts, as monthly sales of WEY brand exceeded 10,000 units for months in a row after its launch in June 2017, according to its annual report. We forecast dividends of the company would increase by 48% in proportional to its projected earnings for 2018, with the same payout ratio of 31%. • Geely reported annual sales of 1.2m units in 2017, beating its initial target of 1.1m. In 2018, the company is further aiming for another 27% jump in sales volume, leveraging on its competitive products range and strong sales capacity. The company has continuously raised its dividends payout ratio from 12% to 22% in the recent two years. As such, we see a high likelihood in the company lifting its payout ratio further to the industry average of 30% in the forthcoming years. The company is the largest dividend contributor, as it anchors around 28% to the industry total payouts, dwarfing Guangzhou's contribution of 13%. • Another company to highlight is Brilliance China Automotive Holdings (“Brilliance”). The company’s strategy is to focus on the high end of the spectrum, which relies on its partnership with BMW. Such strategy allows the company to ride on the growth in disposable income, which may lead to an upgrade or inclination towards luxurious cars. Elsewhere, this also allows the company to avoid competition from the mass market. Although the company payout ratio is also below the industry average of 30%, we see a low likelihood for Brilliance to increase the proportion of earnings that it pays out as dividends, considering its heavy capital expenditure (CAPEX) plan as part of the preparation for its joint venture with Renault. Aggregate CAPEX is projected to increase by 31% in future three years to CNY 636m. | 3 Dividend Forecasting Combined annual light vehicle sales growth of top Chinese automakers (million units) 15.0 12.9 13.5 11.6 11.7 12.2 10.1 9.4 10.0 5.0 0.0 2014 2015 2016 2017 2018E 2019E 2020E *Unit sales from Companies including BAIC, Brilliance Auto, BYD, Dongfeng, Geely, Great Wall, Guangzhou Auto Source: IHS Markit. Fundamentals suggest higher payouts from NEV producers China has been giving incentives to automakers to encourage them to improve sales on NEV in recent years. The government has a target to achieve two million units of annual production of NEV on a national level by 2020. Besides, tax exemption for NEV purchase will continue through the end of 2020, whereas tax for other regular fossil-fuel cars has been reverted back to 10%. NEV buyers for private use can borrow up to 85% of the cost of the car, also 5% higher than the fossil-fuel cars. There is no doubt that favourable policies would drive the demands for NEV and therefore eventually benefit bottom line performance and dividends payouts from companies with a focus on NEV. Two major companies are expected to benefit the most from the NEV boom – BYD and BAIC – each with several models leading the sales in Chinese market. BYD took the NEV sales crown in 2017, delivering more than 110,000 units during the year. Over 2018, the company's dividend is expected to increase to CNY 0.2 per share from CNY 0.141 per share, which translates to an increase of 42% on an aggregate level. Such forecast is defensive for two reasons: firstly, BYD’s source of earnings is widening as the company eyes a complete set of NEV (including passenger cars, E-trucks, and sky-rail, etc.) as the primary goal of its electronics strategy.
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