Auto Sector Post-COVID19 World of Autos
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Asia Pacific Equity Research 22 June 2020 This report is neither intended to be distributed to Mainland China investors nor to provide securities investment consultancy services within the territory of Mainland China. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. Clients should contact representatives and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Auto Sector Post-COVID19 World of Autos In this report, we lay out our observations and thoughts on the Asian Auto Asia Autos industry as we undergo COVID-19 in different levels and stages. We’re observing AC an increased propensity to own vehicles amidst COVID-19, which we believe SM Kim (82-2) 758 5710 would translate into resilient near-term demand if and when lockdowns are [email protected] alleviated. This demand will likely be polarized to cheaper and expensive vehicle Bloomberg JPMA SMKIM <GO> options, hence companies that are levered to such skewness would likely prove J.P. Morgan Securities (Far East) Limited, defensive against the current industry turmoil – select OEMs and dealers that are Seoul Branch levered to higher segment cars, two-wheeler manufacturers and xEV players (see Nick Lai AC page 5 for our stock recommendations within the region). As for a potential and (86-21) 6106 6353 eventual dissipation of COVID-19, while it may render some of the arguments in [email protected] the report less relevant in the future (i.e., the propensity to own vehicles may Bloomberg JPMA LAI <GO> decline), we do not deem it to be a headwind for the industry – COVID-19 is the SAC Registration Number: S1730520030008 single largest drag for the whole auto industry, hence the end of it, if it happens, J.P. Morgan Securities (China) Company would be the strongest catalyst for the sector, in our view. Limited Rebecca Wen AC Increased propensity to own materializes in different aspects by markets. A (852) 2800-8505 drastic shift in transportation demand is seen globally, from public transportation [email protected] and shared cars to owned vehicles, boosting people’s propensity to own cars. Bloomberg JPMA RWEN <GO> Affordability is a different question, due to which vehicle demand is likely to be J.P. Morgan Securities (Asia Pacific) Limited skewed to cheaper options (two-wheelers, used cars and small vehicles – likely to Akira Kishimoto AC be seen in Japan and India) and expensive ones (for customers that are less (81-3) 6736-8646 income-sensitive – more prominent in Korea and China). Hence while the [email protected] propensity-affordability equation is different by vehicle segment and region, we Bloomberg JPMA KISHIMOTO <GO> can at least assume that an increased proportion of disposable income would be JPMorgan Securities Japan Co., Ltd. spent to own a vehicle. Gunjan Prithyani AC (91-22) 6157-3593 Pent-up demand to materialize, driven more by retail customers than fleet, [email protected] ‘digitalization’ of sales likely expands. As evident from the cases of Korea Bloomberg JPMA PRITHYANI <GO> and China, we believe auto demand would show resilience in key markets once J.P. Morgan India Private Limited lockdowns are alleviated and sales channels reopen. In markets where offline Jun Ho Jung sales are less feasible, OEMs and dealers are shifting their sales channels online (82-2) 758-5705 – ‘digitalization’ is another trend we see amid COVID-19. Given the shift in [email protected] transportation demand, we see more auto demand from retail customers than J.P. Morgan Securities (Far East) Limited, Seoul Branch fleet, with skewness towards two-wheelers and higher segment cars compared with pre-COVID-19 levels. What if COVID-19 ends? We think the large part of the current skewness in transportation demand or propensity to own vehicles would normalize over time, if we assume an eventual dissipation of COVID-19. That said, we don’t think this necessarily implies subdued auto demand. The absolute impact of COVID-19 on auto demand was clearly negative due to various reasons (lockdown, social distancing, unemployment, etc.). As such, the impact of the ‘termination of COVID-19’ on auto demand, if it happens, should be positive, especially with government stimuli set forth in major auto markets. See page 26 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected] Table of Contents Post-COVID-19 World of Autos ...............................................3 Propensity to own cars, if any, has materially increased ...........................................3 Reflection of ‘propensity' to 'demand' likely materializes in different aspects by markets...................................................................................................................3 ST implications for auto manufacturers – Pent-up demand to be realized, driven more by retail customers than fleet.................................................................................4 Position to companies positively exposed to post-COVID19 demand shift................5 China .........................................................................................7 How did COVID-19 change Chinese consumer’s behavior? Our view and outlook...7 Corporates’ adaptive business strategies ..................................................................9 Recent observations post COVID-19 outbreak.........................................................9 Japan.......................................................................................12 Japanese car sharing market has grown quickly, driven by Times Car Share, but watching current slowdown ...................................................................................12 May see structural tailwinds for used cars and motorcycles ....................................13 Related Stocks ......................................................................................................15 Korea .......................................................................................16 Long-term trends prior to COVID-19 outbreak ......................................................16 Recent observation post COVID-19 outbreak.........................................................17 Our outlook beyond a COVID-19 recovery............................................................19 India .........................................................................................21 Gradually coming out of a stringent lockdown .......................................................21 Assessing the early feedback .................................................................................21 Segment-wise outlook ...........................................................................................24 2 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected] Figure 1: Survey on commute method preference (ppl without PV) Post-COVID-19 World of Autos Now 26% 19% 24% 19% Propensity to own cars, if any, has materially increased Public transportation least preferred amid COVID-19 As we enter the sixth month of the COVID-19 outbreak, we are witnessing notable Before 25% 14% 43% 14% shift in people's perception of different transportation types for their commute and travel. The magnitude of the shift varies by markets (we lay out the cases of key Asian countries – China, Japan, Korea and India), but as a general trend we’re seeing people‘s Walk Bike/Scooter tendency to avoid the use of public transportation. Such trends are evident in recent Bus / Subway PV/Taxi/Hailing surveys (China [Figure 1] and India [Figure 2]), and also in app usages (Korea [Figure Others 3]). The sharp drop in the usage of public transportation may recover from trough Source: ITDP China, Sohu news levels as government lockdowns lift and people start to commute/travel, however, it is unlikely to return to pre-COVID-19 levels until the outbreak is confidently contained. Figure 2: Preference towards Public Transport Post-COVID-19 in India Preference for ride sharing/hailing or taxi mixed by markets, nonetheless faces a dent post COVID-19 No change, COVID-19 is mainly transmitted through respiratory droplets, generated through 19% coughing, sneezing, or exhaling. It is very difficult to protect oneself fully from the virus in an enclosed atmosphere, as one can be infected even by breathing if infected Less comfortable personnel are in close proximity. Such contagiousness poses a potential concern for after COVID-19, all ride-sharing activities, as ride-sharing services force a small group of people to 81% share a closed area in close proximity. Such concerns are evident from recent trends in usage of ride sharing apps (Figures 4-5). Source: J.P. Morgan Given the above concern is greater for public transportation, people who do not own cars appears to prefer ride sharing/hailing and taxis at least over riskier buses and Figure 3: Kakao Subway (public subways. However, for those who