Asia Pacific Equity Research 22 June 2020
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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
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.
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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 own cars, driving their own cars is most preferred. transportation app) monthly usage Net-net, the implications for the segment are probably mixed across Asian markets, mn users, % (RHS) but have put at least a short-term dent in the growth of this segment, more evident in Japan (pg 13) and also India (pg 21) amongst the countries we cover in this report. 3 30% s n o i l l i 20% Clear shift in inclination towards driving owned vehicles, or towards owning one M 10% What’s seen in common across all Asian markets is that people’s tendency to utilize 0% their owned vehicles has increased, be it cars, motorcycles or bicycles. We also
-10% believe that the propensity to own a vehicle (or another) has increased as well. In China, traffic congestion in major cities has reached or exceeded pre-COVID-19 2 -20% 9 9 9 9 0 0 1 1 1 1 2 2 levels. In Korea, post the February dip, auto demand has rebounded since March and ------t r c n g b c p e u u e O A J F A D remains strong (above pre-COVID-19 levels), and the usage of navigation apps were # of users y-y (RHS) was more resilient than the use of public transportation apps. In India, Google searches for two-wheeler OEM brands have increased sharply, to pre-COVID levels. Source: Koreanclick Reflection of ‘propensity' to 'demand' likely materializes in different aspects by markets Price of ‘hygiene’ would be perceived differently by people Hygiene awareness has unexpectedly become a key factor that supports vehicle ownership demand, and we believe it would remain the case as long as COVID-19 concerns (including second wave concerns) exist. The price of ‘hygiene’ however, would be perceived differently by people, depending on various factors but most importantly, their income levels. Hence, while we believe that people would generally spend an increased proportion of their disposable income to own vehicles near-term, we think the translation of ‘propensity’ into ‘demand’ would vary by region.
3 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 4: "Uber" search interest in Increase in cheaper PV ownership (used cars, small cars and two wheelers) US (Peak interest = 100) likely more prominent in Japan and India 110 For the majority of the population currently using ride-sharing services or public 100 transportation, buying a new car may not be economically feasible, as car ownership 90 requires large upfront and maintenance costs. We think many would opt to buy used 80 cars or two-wheelers (especially in regions where such transportation is prevalent) as 70 both options significantly lower the financial burden to individuals compared to 60 buying a new car. We believe such would be more prominent in Japan and India. 50 9 0 9 9 0 9 1 2 1 1 2 1 ------t r c b n g c p e u e u In Japan, domestic new car registrations in April fell by 29% y-y, but used car O A J F A D Source: Google trends registrations were down just 8% y-y in the same timeframe. We see growth potential for used cars as demand shifts from car-sharing services to personally owned Figure 5: "Lyft" search interest in vehicles (POV), and we consider the modest decline in used car demand compared US (Peak interest = 100) with new car registrations as a sign of high POV demand. At the same time, 100 motorcycle demand has outpaced automobile sales, with sub-50cc motorcycle demand already exceeding pre-COVID-19 levels (same seen in ASEAN markets as 80 well). The trend is similar in India, where the majority of people looking to purchase a vehicle typically evaluate entry level cars or two-wheelers. 60 Demand mix shift to higher-segment cars more prominent in Korea and China 40 We believe consumers who are less price-sensitive and already have sufficient funds to purchase vehicles (but have not done so for other reasons, i.e., low usage, etc.) would 20 opt to purchase higher segment vehicles. We think this would be the case for countries 9 9 0 9 9 0 1 1 2 1 2 1 ------t
r where a vehicle is considered more of a luxury than a necessity, and where COVID-19 c n b g c p e u u e O A J F A D exerted less economic impact in a relatively shorter timeframe – Korea and China. Source: Google trends Korea auto demand has barely been impacted by COVID-19 – the February sales Figure 6: Korea monthly auto decline (-16% y-y) was more related to supply bottlenecks at OEMs, while imported demand brand sales (where supply was not impacted) continue to grow. Auto demand in ‘000 units, % (RHS) Korea has swiftly recovered to above pre-COVID19 levels since March, with a 200 15% notable mix shift towards larger cars and luxury segments. The case appears similar in China – auto demand recovered in two months since the February dip, with pent- 150 0% up demand materializing more at higher-end models and entry-level premium brands, 100 driven by wealthier customers with strong purchasing power or young customers -15% 50 purchasing their first car. Furthermore, more customers appear to opt for additional options and features, especially those functions that are related to filters, air 0 -30% 9 9 9 9 0 0 conditioning, and overall respiratory conditions. 1 1 1 1 2 2 ------l t r r n n c u p p a a J A O A J J Korea Auto demand ST implications for auto manufacturers – Pent-up demand % y-y (RHS) to be realized, driven more by retail customers than fleet Source: Company data. Pent-up new car demand to resurface near-term, V- or U-shaped recovery more likely in major markets than an L-shaped one We believe COVID-19 would have pressured more on supply than demand at least right after the lockdown in most countries, evident from resilient Korea demand where lockdown was not implemented, and also in China where demand swiftly recovered as lockdowns get lifted. Hence, we believe pent-up demand exists in all markets, more or less, which will likely drive a resilient pickup in volumes once lockdowns are lifted. We believe the shape of the recovery would be correlated to the duration of lockdown measures – Korea and China V-shaped, US U-shaped recovery so far (Europe also likely to follow suit). That said, in some EM where COVID-19 may exert extended pressure on economic activities, employment and household income, a meaningful recovery may happen later.
4 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 7: China monthly auto Strong used car demand might be dilutive to new car demand, but would demand support new car prices mn units, % (RHS) As mentioned earlier, people’s propensity to own vehicle would materialize in 3 20% various aspects, including increased demand for used cars. On the surface, this 0% appears dilutive to new car demand, however, strong demand for used cars would 2 -20% support the secondhand price, and in turn, support demand and prices for new cars as -40% well (for low-seg cars with overlapping pricing points), in our view. Strong used car 1 -60% demand would also be supportive to those who are seeking to replace their cars with -80% new ones, we think, especially with several major markets offering subsidies for car 0 -100% 0 9 0 9 9 9 replacements or new purchases (xEV subsidies, tax cuts, etc.). 1 2 1 2 1 1 ------l t r r n n c u p p a a J A O A J J China Auto Demand Lower fleet sales, more retail customer sales (with higher mix) positive to margins Even prior to COVID-19, many OEMs were reducing their fleet mix, targeting profit % y-y (RHS) improvement over sheer volume competition. During and post COVID-19, we think Source: Company data. fleet mix will see another meaningful decrease, especially as the public starts to use fewer taxies and rental cars. For traditional OEMs, lower fleet sales are negative to overall volume and revenue, however, positive to mix and margins, especially as Figure 8: US monthly auto demand fleet models are often barebones (no premium options), generally lower segment and mn units, % (RHS) not profitable. 2.0 20% 10% 1.5 0% Position to companies positively exposed to post-COVID19 -10% 1.0 demand shift -20% 0.5 -30% Based on the near-term outlook of the Auto industry mentioned above, we suggest -40% the below names as relevant plays within the region: 0.0 -50% 9 0 9 9 0 9 1 2 1 1 2 1 ------l t r r n n c u p p a a
J In China (covered by Nick Lai and Rebecca Wen), we recommend investors focus O A A J J US auto demand on dealers that derive most of their earnings from the resilient aftermarket business % y-y (RHS) rather than the new car sales market with high cyclical uncertainty. Yongda is our preferred premium dealer followed by Zhongsheng Auto. Among OEMs, we Source: Motor Intelligence recommend investors stay with companies with strong positions in the premium space (e.g. Brilliance China) or company-specific stories (e.g. BYD, Guangzhou Auto and Changan Auto-B). For auto parts, we are OW on Minth and at the same time like selected names in EV supply chain e.g. Putailai, Wuxi Lead. Figure 9: J.D. Power US Used car price index In Japan (covered by Akira Kishimoto), we recommend Honda Motor (7267 JP) 105 and Yamaha Motor (7272 JP) as companies levered to motorcycle demand.
100 In Korea (covered by SM Kim), we recommend Hyundai Motor (005380 KS) and Mando (204320 KS) as companies levered to auto demand mix gains and higher 95 option adoption rate (link to our recent report), and also given their exposure to key 90 markets where COVID-19 headwinds is largely behind (Korea, China and the US).
85 In India (covered by Gunjan Prithyani), we recommend 2Ws given our view of a 2H recovery in domestic 2Ws led by pent-up demand, rural improvement, preference 80 for private transport and a benign base. We continue to like risk/reward in Hero 3/1 4/1 5/1 Motocorp (HMCL IN) and Bajaj Auto (BJAUT IN). Wholesale Retail
Source: J.P. Morgan based on J.D. Power 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 the virus. And if we assume that the world we live today is temporary and one-off, post-COVID19 trends in vehicle demand we currently see and expect to see in the near term could turn out to be short-lived.
5 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
However, we do not think this necessarily means that the auto industry would face a subdued demand when COVID-19 ends. The absolute impact of COVID-19 on auto demand was clearly negative due to various reasons (lockdown, social distancing, unemployment, etc.). As such, the net impact of a ‘termination of COVID-19’ on auto demand, if any, should be positive, in our view, especially combined with government stimuli set forth in major auto markets. Our view and recommendations suggested above are those that are deemed as positive or defensive plays when global auto demand is still passing through the turmoil.
6 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
China
China's auto market experienced production suspension and store closure impact due to COVID-19 in Jan-Mar. During the outbreak of the pandemic, people were forced to change their lifestyle habits and buying behavior. We saw some structural changes in both individual customer behavior and corporates’ business strategies and we believe some of these would remain post COVID-19 or even in the longer term.
How did COVID-19 change Chinese consumer’s behavior? Our view and outlook For the short term, the increasing trend of individual car usage could be maintained for some time, while people care more about epidemic prevention.
Driving own cars or taking taxi/car-hailing preferred post COVID-19: While driving their own cars or taking taxis/car-hailing, people feel more protected in a relatively private space versus on metros where crowds congregate which could bring about potential risk of infection. Such preference could also be partially evidenced by the fact that traffic congestion has reached/exceeded its previous normal levels in major cities including Beijing, Shanghai, Guangzhou, Shenzhen and Wuhan (see figures below). According to ITDP’s recent survey regarding preference of commuting methods: Car owners would rather choose driving their own cars as individual car usage appears safer to them compared with other commuting methods. Around 65% of respondents said they would drive their own car now vs 55% before the pandemic. For people who don’t have cars: Besides taking taxi/ car-hailing services, they also prefer walking or riding bicycles/scooters post COVID-19 to avoid contact with crowds. 19% of respondents now choose to ride bicycles/scooters (from 14% before COVID-19) and 15% of them choose to take taxi/car-hailing (from 11%) while only 14%/10% of them continue to take subway/bus (from 26%/17%). Figure 10: Survey on commute method preference (Car owners) Figure 11: Survey on commute method preference (Ppl without cars)
1% Now 13% 9% 3% 65% 2%7% Now 26% 19% 14% 10% 4% 15% 12%
Before 13% 10% 11% 7% 55% 4% Before 25% 14% 26% 17% 3% 11% 4%
Walk Bycicle/ scrooter Subway Bus Car Taxi/ Car-hailing Others Walk Bycicle/ scrooter Subway Bus Car Taxi/ Car-hailing Others
Source: ITDP China, Sohu news Source: ITDP China, Sohu news
7 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 12: Autonavi traffic congestion index
2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 2019-12-02 2020-01-02 2020-02-02 2020-03-02 2020-04-02 2020-05-02 Beijing Shanghai Guangzhou Shenzhen Wuhan
Source: Wind, Autonavi
For the longer term, we don’t expect the temporary pandemic to drive long-term auto demand, considering the gap between the cost of car ownership and public transportation usage. Macro headwinds from slow overseas economies stemming from COVID-19 as well as potential re-escalation of Sino-US tensions could also affect consumer confidence. But we do expect the below trends to be sustained.
Consumer preference shift towards premium and Japanese brands: Premium segment saw stronger/ more resilient growth compared with mass- market brands post COVID-19. According to our latest channel checks with dealers, high-end models and entry-level models from premium brands have seen a better recovery as they are favoured by wealthier customers with strong purchasing power and young customers who would buy their first car. During the recent May holiday, we visited select car showrooms such as BMW, Benz, Tesla, General Motors and Nio and saw divergent trends and crowds between premium and mass market brands. While we believe auto growth will largely stay between mid to low single digits in 2H20 considering economic headwinds, premium brands should continue to be favored by Chinese customers and the segment could enjoy resilient growth relative to the broader PV market. Japanese brands remain popular among Chinese customers thanks to their fuel economy and product durability. Both of these features should continue to support the popularity of Japanese cars in China, especially given that economic uncertainty remains high in 2020. Disinfection function: Besides autonomous and connectivity content, customers are attaching more importance to disinfection features of vehicles. According to CAAM and Autohome’s recent survey, ~70% of respondents appreciate the in- car air purification functions and more than 80% of respondents are willing to pay for the hygiene/disinfection content. We expect such functions to become more valued going forward thanks to the public’s increasing hygiene awareness.
8 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Corporates’ adaptive business strategies We expect to see a continuous digitalization trend in China’s auto consumption while corporates adapt themselves to customers’ contactless shopping needs. During the store closure period, both dealers and OEMs adopted online sales and marketing strategies which are welcomed by Chinese customers. Taking Autohome’s online showroom as an example, its daily UV post spring festival/ outbreak of COVID-19 was five times the number before. Additionally, live-streamed sales campaigns on online platforms/ social media apps (such as Bitauto, Dongchedi, Tik Tok and Kuaishou, etc.) also gained traction successfully. While more well-designed online live shows with VR functions or contactless solutions are introduced, we believe the digitalization trend is inevitable and online sales could gain continuous traction thanks to the flexibility and convenience offered by digitalized tools.
Figure 13: Daily PV of Autohome’s online showroom
Source: Autohome
Figure 14: SAIC PV live streamed sales campaign on Tik Tok
Source: Tik Tok, Xinhua net
Recent observations post COVID-19 outbreak Public transportation picked up quickly along with work resumption though still has not reached normal levels before COVID-19: China’s public transportation usage has declined dramatically with the COVID-19 outbreak and picked up quickly along with work resumption, though still has not yet reached normal levels seen prior to COVID-19. As of mid-May, daily subway passenger volume has been back to ~70-80% of normal level in major cities such as Shanghai, Guangzhou; even in Wuhan, the daily volume has also resumed to ~35-40% of its normal level after its 76-day lockdown from 23 Jan to 8 April.
9 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 15: Daily subway passenger volume in Shanghai, Guangzhou and Wuhan (weekdays only) mn passengers 14 12 10 8 6 4 2 0 2020-01-01 2020-02-01 2020-03-01 2020-04-01 2020-05-01 Shanghai Guangzhou Wuhan
Source: Wind
Figure 16: Nationwide monthly passenger volume (subway, bus, taxi) mn passengers 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Bus Subway Taxi
Source: Wind
Auto sales trend: While China’s auto sales were impacted by the production suspension and store closures in Feb and Mar, weekly sales momentum (see Figure 17) has seen a recovery since April. China’s April auto sales turned positive after 21 consecutive months of yoy decline since 2H18.
Figure 17: Weekly sales growth trend (yoy%) 40% 20% 0% -20% -40% -60% -80% -100% -120% Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar Apr Apr Apr Apr May 1W 2W 3W 1W 2W 3W 4W 1W 2w 3W 4W 1W 2W 3W 4W 1W Wholesales Retail
Source: CPCA
10 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 18:BMW store visit
Source: J.P. Morgan.
Figure 19: Benz store visit
Source: J.P. Morgan.
Figure 20: Tesla store visit
Source: J.P. Morgan.
11 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Japan
Japanese car sharing market has grown quickly, driven by Times Car Share, but watching current slowdown In Japan, ride-sharing services using personal vehicles are regulated by the Road Transportation Act, and the market for car-sharing services based on a vehicle cost- sharing model has expanded further. According to the Eco-Mo Foundation, the number of vehicles in the domestic car-sharing market was up 19.8% YoY at 34,984 as of March 2019, and the number of members was up 23.2% at 1,626,618. Given that car sharing involves the sharing of vehicles rather than the sharing of rides, entrants in this market consist mainly of companies that have traditionally provided parking lot management and vehicle leasing services. The main companies and services in Japan include Park24 with Times Car Share, Orix with Orix CarShare, Mitsui Fudosan with Careco, and Honda Motor with EveryGo.
Figure 21: Japan car sharing market total vehicle units 1,000 units %
40 50% 35 40% 30
25 30% 20 15 20% 10 10% 5 0 0% 3/10 3/11 3/12 3/13 3/14 3/15 3/16 3/17 3/18 3/19 Total vehicle YoY (RHS) Source: J.P. Morgan based on Eco-Mo Foundation
Figure 22: Japan major car sharing players (station share) Figure 23: Japan major car sharing player (vehicle share) % %
2% 0% 1% 1% 0% 1%
9% 13% 10% 12%
72% 79%
Times Car Sharing Orix Car Sharing Careco Times Car Sharing Orix Car Sharing Careco Cariteco Earth Car Honda Every Go Cariteco Earth Car Honda Every Go
Source: J.P. Morgan based on company data Source: J.P. Morgan based on company data
Park24 entered the car-sharing market by launching its Times Car Share service in 2009, and has since driven the overall market by expanding the number of locations to 13,078 at the end of April and the number of vehicles to 27,870.
12 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Growth has shown signs of slowing since March due to the impact of COVID-19, and the number of Times Car vehicles that Park24 owns in its mobility business was down 1.0% YoY in March and down 4.9% in April, recording the first YoY declines in five years. We believe this reflects a decrease in utilization rates as a result of stay- at-home orders and the reluctance of users to share things with an unspecified number of people. We believe we need to pay particular attention to trends in users of car sharing services, which were previously viewed as a growth market.
Figure 24: Park24: Times CAR Vehicle Units 1,000 units % 70 30% 60 50 20% 40 10% 30
20 0% 10 0 -10% 10/16 4/17 10/17 4/18 10/18 4/19 10/19 4/20 Times CAR vehicle units YoY (RHS)
Source: J.P. Morgan based on Park24 monthly reports Note: Times CAR includes Rent-a-car and Car Sharing businesses
May see structural tailwinds for used cars and motorcycles Domestic new car registrations fell 29% YoY in April, deteriorating sharply, but used car registrations were down just 8% YoY. According to USS, average auction contract prices were down 17% YoY at ¥565,000 in April, but weekly used car prices in North America, which serve as a leading indicator, have recovered to near levels before COVID-19. In addition, wholesale prices have led the decline in US used car prices, due partly to the sale of rental cars at steep discounts, and given that the decline in retail prices has been moderate, we believe the used car market is being supported by final retail demand. In Japan, we see growth potential for used cars as demand shifts from car sharing services to personally owned vehicles (POV), and we consider the modest decline compared with new car registrations as a sign of high POV demand.
Figure 25: Japan: Monthly PV Sales YoY (New versus Used) % 40%
20%
0%
-20%
-40% 5/19 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 Used PV sales New PV sales
Source: J.P. Morgan based on JADA, JAMA
13 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 26:USS Average Auction Price per Vehicle Figure 27: J.D .Power Used Car Price Index JPY1,000 x 800 105
700 100 95 600 90 500 85
400 80 1/19 4/19 7/19 10/19 1/20 4/20 3/1 3/8 3/15 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 Wholesale Retail
Source: J.P. Morgan based on USS Source: J.P. Morgan based on J.D. Power Note: Indexed as of 3/1
In addition, motorcycle sales volume has outperformed automobile sales in terms of YoY trends, in line with results briefing comments by some automakers that motorcycle demand has been high since the COVID-19 outbreak in Japan (February- April). In particular, trends for 50cc and smaller motorcycles have improved even compared with before COVID-19, which we believe is likely to have some positive impact. In ASEAN, motorcycle sales volumes ha e been little affected by COVID-19, with Indonesia down 3.2% YoY at 561,739 units in April and Vietnam down 3.0% at 731,077 units in January-March. As people avoid travelling on public transportation, we continue to watch the possibility that demand may continue to expand for motorcycles, which are lower priced than automobiles.
In a period of growing POV demand, we see potential for demand to shift from sharing and public transport services to POV, especially used cars and motorcycles. Even with a decline in overall automobile demand, we believe that if demand continues to shift towards POV, it could be a relatively positive factor for Honda Motor and Yamaha Motor, given high ratios for motorcycles.
Figure 28: Japan: Monthly Sales YoY (MC versus PV) 50%
30%
10%
-10%
-30%
-50% 5/19 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 MC (~50cc) MC (50cc~) PV
Source: J.P. Morgan based on JAMA
14 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 29: Indonesia MC monthly sales trend Figure 30: Vietnam MC quarterly sales trend ‘000 units, % (RHS) ‘000 units, % (RHS)
700 60% 1,000 10%
600 800 40% 500 600 400 20% 0% 400 300 0% 200 200 -20% 100 - -10% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q - -40% 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 2018 2019 2020 Indonesia MC sales YoY (RHS) Vietnam MC sales YoY (RHS)
Source: J.P. Morgan based on ASEAN Automotive Federation Source: J.P. Morgan based on ASEAN Automotive Federation
Related Stocks Honda Motor (7267) Honda Motor operates a global business centered on the production and sale of motorcycles and automobiles. It reported FY2019 sales of ¥14.9 trillion, operating profit of ¥633.6 billion, group motorcycle sales volume of 19.34 million units (top in world), and group automobile sales volume of 4.79 million units. Honda’s motorcycle business is exceptionally strong in emerging markets, mainly ASEAN.
Yamaha Motor (7272) Yamaha Motor operates a global business centered on the production and sale of motorcycles, four-wheel recreational vehicles, outboard motors, and water vehicles. It reported FY2019 sales of ¥1.7 trillion, operating profit of ¥115.4 billion, and motorcycle shipment volumes of 5.06 million units.
USS (4732, not covered) USS operates a domestic business centered on auto auctions and used vehicle purchase/sales. It reported FY2019 sales of ¥78.1 billion, operating profit of ¥36 billion, and auction listing volume of 2.92 million units (top in Japan).
Nextage (3186, not covered) Nextage operates a domestic business centered on automobile purchase/sales (including a dealership business), auction sales, and maintenance. It reported FY2019 sales of ¥219.3 billion, operating profit of ¥6.1 billion, retail sales volume of 76,153 units, and purchase volume of 37,669 units.
15 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Korea
Long-term trends prior to COVID-19 outbreak Public transportation is highly advanced and well-supported by the government, ride-sharing hasn't developed meaningfully in Korea Korea has three major methods of transportation: 1) public transportation; 2) PV; and 3) taxis. Public transportation has been the most preferred method of transportation (65% of total) throughout the decade as the government continues investing in public transportation. Unlike other regions, ride sharing has not developed, mostly due to cheap & advanced public transportation, along with political struggles between ride- sharing providers and taxi providers.
Figure 31: Method of transportation in Seoul (by %) Figure 32: Increase in public transportation infrastructure in Seoul
100% 5% 5% 4% 4% 4% 4% 4% 4% 4% 4% 350 20 6% 6% 7% 7% 7% 7% 7% 7% 7% 7% 80% 16 26% 26% 24% 24% 23% 23% 23% 23% 24% 24% 340 60% 12 330 35% 35% 36% 37% 38% 39% 39% 39% 39% 40% 40% 8 320 20% 4 28% 28% 28% 28% 27% 27% 27% 27% 26% 25% 0% 310 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Bus Subway PV Taxi Others Subway line increase (km, LHS)) Bus-only road increase (km, RHS)) Source: Seoul government database. Source: Seoul government database.
Transportation mix has moderately shifted from PV to public transportation, however auto demand volume and mix continued to increase While the composition of transportation method has remained stable since 2010 with a moderate shift to public transportation (mainly subway) from PV, such shift does not appear to have dampened auto demand in Korea. Auto demand hovered around 1.5-1.6mn units throughout 2010-2014, however, has jumped to c.1.8mn units in 2015 and stayed at that level. Against flattish auto demand throughout 2015-19, we saw ongoing demand shift to higher segment cars and import (mainly German) brands during the period – a demand trend that is far from an economic one.
Figure 33: Auto demand vs. Method of Transportation %, ‘000 units (RHS) 100% 2,000
1,800 75% 26% 26% 24% 24% 23% 23% 23% 23% 24% 24% 1,600 50% 1,400 63% 63% 64% 65% 66% 66% 66% 66% 65% 65% 25% 1,200
0% 1,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Public transportation PV Taxi Others Auto Demand (RHS)
Source: Company data, KAIDA, Seoul government database.
16 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Recent observation post COVID-19 outbreak Public transportation usage has significantly declined, PV usage relatively less Our observation of high frequency data indicates that while overall road traffic has decreased upon COVID-19, the decline was more prominent in usage of public transportation than private cars, i.e., traffic mix has shifted to self-driven cars amid general decline in road traffic.
According to Korean app usage provider Koreanclick, usage of navigation app T Map fared better and showed a steeper rebound than usage of public transportation app Kakao Subway. Such trend is supported with physical data. Based on recent data from the Seoul government, the number of bus users dropped sharply since March (-30~40% y-y) upon COVID-19. Despite an improving COVID-19 situation, we note that the number of bus users has not fully normalized even in May. On the other hand, expressway traffic volume has fully normalized, material evidence of what we noticed with app usage data supporting transportation via private vehicles.
Figure 34: T Map (navigation app) monthly usage Figure 35: Kakao Subway (public transportation app) monthly usage # of users, % (RHS) # of users, % (RHS) 5,500,000 10% 2,800,000 30%
5,300,000 20% 5% 2,600,000 5,100,000 10% 0% 2,400,000 4,900,000 0% -5% 2,200,000 4,700,000 -10%
4,500,000 -10% 2,000,000 -20% 9 0 9 0 0 9 0 9 0 9 9 9 9 9 9 9 9 0 9 9 0 0 0 0 1 2 1 2 2 1 2 1 2 1 1 1 1 1 1 2 1 1 1 2 1 2 2 2 ------l l t t r r r r c y v c v y n b p g p g n n n b c c u u a a p p e a o e o a a e e u e u a u u e J J O A O A J J J J F M F M D N S A D S N A M M # of users y-y (RHS) # of users y-y (RHS)
Source: Koreanclick. Source: Koreanclick.
Figure 36: # of bus users in Seoul Mn passengers, % (RHS) 180 10%
0% 160 -10% 140 -20% 120 -30%
100 -40% 8 9 8 7 8 8 8 8 7 8 8 8 8 9 8 9 9 9 9 8 9 9 9 9 0 9 0 0 0 9 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 2 2 2 1 2 ------l l t t r r r r r r v c y v c y v c y b g n n p b g n n p b n u c u c a p a p a p o e a o e a o e a a u a u a e u e e u e e J J A O A O A J J J J J M F M F M F N A D S N A D S N D M M M # of passengers y-y
Source: Seoul government database.
17 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 37: Expressway traffic volume in Korea Mn vehicles, 7-day average 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 2018 2019 average 2020
Source: Korea Expressway Corporation and J.P. Morgan. Grey lines are data for 2017-2019.
Auto demand temporarily declined in Feb but fully recovered since March As mentioned above, road traffic has shifted from public transportation to self-driven cars, nonetheless declined overall as business closures, WFH, delayed school opening and increased health awareness have rendered overall pressure in transportation requirements.
Interestingly, it has not dampened auto demand meaningfully. February auto demand saw an 18% decline y-y, however, it was mainly due to supply bottlenecks (of components shipped from China) and not from weak customer demand. As such, auto sales quickly normalized from March (+10% y-y) onwards.
We note that: 1) Korea has not imposed lockdown on dealers, while; 2) online purchases appear to have more than offset any declines at offline dealer traffic. Pre- orders for new models at OEMs were high even during February-March, with no signs of demand meaningfully impacted by COVID-19.
Figure 38: Korea Auto demand (monthly) ‘000 units 250 30%
200 15% 150 0% 100 -15% 50
0 -30% 0 0 9 9 9 9 8 8 8 8 7 7 7 7 6 6 6 6 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l l l t t t t r r r r r n n n n n c u c u c u c u p p p p p a a a a a J J J J A A O A O A O A O J J J J J Korea Auto demand % y-y (RHS)
Source: KAMA, KAIDA, company data
18 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Our outlook beyond a COVID-19 recovery COVID-19 may lead to an increased propensity to own cars, however may not necessarily lead to actual demand COVID-19 has materially changed the public’s hygiene awareness, and we believe it could potentially increase people's propensity to own cars over using public transportation, taxis or shared cars (although shared mobility does not materially exist in Korea currently), especially if similar situation (pandemic) recurs in a more frequent and consistent manner in the future. However in Korea, we do not think such ‘propensity’ would lead to a visible and structural change in actual auto ‘demand’, for various reasons, but mostly due to the wide economic gap between owning PV and using public transportation.
Economic gap in using public transportation vs owning cars is vast in Korea In Korea, public transportation is vastly more economic. Public transportation is c.W1,500 per fare (averaged for different trip length and time). Conservatively assuming a round trip to commute everyday + 1 additional trip for each day (and similar usage during weekends), monthly cost of using public transportation would be c.W130k. On the other hand, assuming that one buys a used Avante (c-seg sedan; c.W15M), the cost triples at least. Excluding various maintenance and taxes, monthly payment (W250k per month, assuming 5 year usage), insurance (roughly ~W1M per year and substantially higher for younger drivers), and fuel price (W1M-1.5M per year at 7,000-10,000km range) amounts to monthly cost of over W400k.
Shift to car ownership limited for c.60% of total working population at sub-3M monthly salary, might see some change at higher income population As seen in Figure 39 (method of commute by salary levels), commuting via self- driving increases by 9%p when monthly salary increases from W1-2M level to W2- 3M, and another 12%p at W3-4M level. While this shows a mix of commuting methods only (not whole transportation), we can still construe that PV ownership and usage increases materially for Korean consumers when cost of ownership declines from 20-40% to 10-15% of monthly salary. Assuming no material change in income dynamics in the future, we believe the shift from public transportation to car ownership would be limited for the population under ~W3M monthly income (c.60% of total working population).
For population of above, say, W4M income (c.25% of total working population), we may potentially see some shift, in our view. Self-driving ratio plateaus (at 25%-27%) at higher salary levels and still a vast majority uses public transportation (54%-56%), mostly due to its convenience. We think this composition may alter in the future, if health concerns from using public transportation outweigh its convenience, as they have room to afford additional cars if deemed necessary.
19 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Figure 39: Method of commute in Seoul by monthly salary (2018, %) Figure 40: Monthly salary of working population
100% 0% 4% ~850k, 4% 90% 13% 6.5m+, 9% 25% 25% 27% 80% 5.5m ~ 6.5m, 5% 850k ~ 1.5m, 70% 60% 55% 19% 60% 4.5m ~ 5.5m, 61% 50% 7% 55% 54% 56% 40% 3.5m ~ 4.5m, 30% 12% 20% 10% 0% 1.5m ~ 2.5m, Under W1M W1M~2M W2M~3M W3M~4M W4M~5M +W5M 2.5m ~ 3.5m, 28% 17% Walking 2-wheel Public transportation Taxi PV Etc
Source: Seoul government database. Source: Korea statistics.
Shift to car ownership looks limited at age of below-30 and above-60 Looking at the method of commuting by age (Figure 41), we can see that people under 30s (mostly students or workers at lower salary) are predominately walking or using public transportation to commute. PVs are almost non-existent in this demographic. The economics explain the car ownership gap between various ages groups, with under 30s group earning less than ~W3M monthly salary. We also note that PV commuting declines at age of above 60s, presumably due to various reasons upon aging – reduced income, subsidy on public transportation usage, less ownership of driver's licence, etc. – which should not materially change, hence, limiting the shift in demand from public transportation to car ownership.
Figure 41: Method of commute in Seoul (by age group, 2018) Figure 42: Average monthly salary in Korea (by age group, in 2018) % Wmn
100% 1% 4.5 6% 3.8 3.9 4.0 26% 23% 36% 3.2 80% 36% 3.5 3.0 47% 2.8 3.0 2.5 2.6 60% 2.5 2.2 82% 40% 1.9 2.0 1.5 40% 62% 48% 42% 1.5 1.0 20% 0.5 0.0 0% ~20s 30s 40s 50s +60s 10s 20s 30s 40s 50s 60s Median Average Walking 2-wheel Public transportation Taxi PV Etc
Source: Seoul government database Source: Korea Statistics
20 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
India
Gradually coming out of a stringent lockdown India is gradually coming out of one of the most stringent and extended lockdowns across the world (well reflected in ‘zero’ auto sales in April and May down ~70-90% across OEMs). Whilst it is still early to gauge which way India will move (given HH income hit in lockdown); preliminary discussions/our survey do suggest some pent- up demand and a preference to own private vehicles (over shared mobility). Public transportation is inadequate & not in a good shape in India. Further, it has its own set of challenges which will make it near impossible to pursue social distancing norms.
Assessing the early feedback Rural recovering faster than Urban In our view, the rural market is likely to recover ahead of urban which bodes well for entry 2Ws and mass segment cars. This is peculiar to India unlike other regions where premium is growing faster. Rural has been to a large extent insulated from lockdowns given early relaxations given for crop harvesting, good crop produce/ procurement from select state government & pent-up demand. Normalcy in rural is underscored by recent positive tractor prints in May –- which is the first full month post relaxations.
In general, comments from auto OEMs have been optimistic on a rural recovery which bodes well for tractors & 2Ws segments. Having said this, this is yet to manifest in terms of discretionary spends on 2Ws based on our dealer discussions (c40% of normative volumes). In our view, tractors will lead the recovery in India Autos; while we expect 2Ws to see a recovery only in 2H given a preference for private vehicle ownership over shared (2W fares well on cost of economics), pent-up demand, higher rural share & a benign base.
Figure 43: Tractor volumes - Monthly trend Y/Y 120,000 40%
100,000 21% 20% -5% 5% 0% 2% 0% 80,000 -15% -5% -13% -13% -14% -17% -16% -20% 60,000 -13% -50% -40% 40,000 -60%
20,000 -79% -80%
0 -100%
Source: TMA
Personal transport to get some boost – JPM Survey on ‘Future of Mobility’ A consistent message from industry experts has been that there could in general be a reluctance to use shared or public transport as lockdowns are lifted. Consequently, personal ownership of vehicle / car buying could get a boost. While there is bound to be an increase in the propensity to own a private vehicle, the eventual fillip to demand will rely on confidence on income levels/job security. However, we believe 2Ws could certainly see some boost, given they fare well on affordability (cost of ownership, i.e. EMI + running) over shared cab usage.
21 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
We conducted a primary survey to assess the ‘future of mobility’ in the post- COVID-19 era. The survey results unequivocally point to a reluctance to travel by shared/public transport and an increased propensity to own a private vehicle (2Ws/cars). Our target segment was mainly mid-income working professionals in Mumbai/Bengaluru to better gauge the possibility of this trend. A large part of our target set (>50%) was largely reliant on cab sharing or public transport to commute to work pre-COVID-19. Key takeaways from the survey results include.
80% of respondents noted their reluctance to use shared transport as work places open up, reflecting the fear of COVID-19. The shift, it seems, will be equally split towards vehicle ownership or using single-passenger cab (instead of public transport or shared cab). Close to 40% of respondents are looking to purchase a vehicle with a majority (75%) evaluating an entry-level car or a 2W. Figure 44: Respondents Commuting Mode (pre Covid-19) Figure 45: Respondents Expected Commuting Mode (post Covid-19) 60% 36% 36% 49% 50% 35%
40% 34% 27% 30% 23% 33% 32% 32% 20% 32%
10% 31%
0% 30% Public Transport Cab (Single Passenger) Private Vehicle Public Transport Cab (Single Passenger) Private Vehicle (Bus/Train/Shared Cab) (Car/Bike/Scooter) (Bus/Train/Shared Cab) (Car/Bike/Scooter) Source: J.P. Morgan. Source: J.P. Morgan.
Figure 46: Consumer Preference towards Public Transport Post- Figure 47: Consumer Preference for Vehicle Ownership Post-COVID- COVID-19 19 No change, 19% No (private vehicle), 6% Yes (planning earlier), 17%
Less Others, 58% comfortable Yes (Covid after COVID- related), 19% 19, 81%
Source: J.P. Morgan.
Source: J.P. Morgan.
22 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Digital is the new buzzword Auto dealers have been worst hit over the last two years due to a steep downcycle followed by the COVID-19 hit. We have already seen some consolidation/ closures in this space last year but the current environment will entail a review of the dealership model. A leaner dealer showroom with lower inventory levels is the key.
More importantly, there is a need to enhance the digital presence for OEMs as well as dealerships as the large part of the purchase cycle is likely to shift online and offline would likely cater to fairly limited steps (test drive/delivery). Digital was becoming important even pre COVID-19 in terms of model research/feedback/ comparisons. We have seen all big OEMs launch online platform offering the almost the entire buying process along with financing.
In that context, we believe web searches could likely be an early indicator of a demand pick-up. We note that web searches for car/2W brands (more so for 2Ws than cars) have started to see a discernible rise over the past two weeks (post lockdown relaxations).
Below we have mapped Google search trends for two large 2W OEMs (Hero & Bajaj Auto); web searches are back or above the pre-COVID levels. Recent comments from Maruti and Hyundai also indicate fairly high online enquiries and, interestingly, the skew is towards smaller hatchback cars, underscoring some down-trading in the markets.
Having said that, we note that conversions of online sales is taking longer and could likely even have a much lower hit ratio.
Figure 48: Hero Motocorp – Google Trends – India Figure 49: Bajaj Auto – Google Trends – India
110 Google Trend Index 6 Week Moving Average 100 80 Google Trend Index 6 Week Moving Average 70 100 90 65 70 60 90 80 55 80 60 70 50 70 60 50 45 60 50 40 50 40 35 40 40 30 30 30 30 25 20 20 20 20
Source: Google. Source: Google.
Innovative financing schemes to ease initial payments A prominent trend clearly emerging in the last two weeks has been innovative finance to ease the initial payment stress – schemes like Buy now, Pay later, No EMI for initial 3-6 months, Step up EMI etc. are prominent across OEMs. These flexi schemes although tricky given the ballooning of payments later, will allow buyers to suit their income / CF position given the uncertainty on cash flows near term.
23 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Table 1: India Auto OEMs – Financing Schemes
OEM Key Financing Schemes Maruti has rolled out flexi financing schemes with large banks (HDFC/ICICI) which entail low EMI/lower down-payment for an initial few months, while discounting levels have also moved up. HDFC - Step up EMI plus balloon scheme with initial EMI of Rs 1,111 per lakh for loan tenure of 84 Maruti months. Low EMI for 3 months every year up to 100% on road funding. ICICI - EMI amount starting Rs899 on a loan of Rs 1 Lakh for first three months. Maruti is offering benefits ranging from Rs 10,000 to Rs 45,000 on almost its entire range.
Offering several Flexi finance schemes in UVs to ease initial EMI/ downpayment and support vehicle ownership. Some of these include a) 50% processing fee waiver for doctors and the option to buy now, pay later (90 days moratorium), b) Owning of a BSVI Mahindra Pickup and paying M&M the same EMI as a BSIV vehicle, c) Owning the SUV now and commencement of the EMI next year, d) Balloon and step up EMI to lower the monthly payments, e) lower rate of interest starting from 7.75%.
Financing scheme on TVS XL100 Moped under which a) Availing a moratorium of six months before the commencement of EMI payment b) TVS Offer available till Jul 31, 2020 c) LTV of 75% d) loan of ~36 months
EMI assurance program for select new customers covering up to three EMIs and offering cash and exchange offers on several products up to Rs Hyundai 1 lakh. Also a) 3 months low EMI scheme b) Step-up scheme c) Balloon scheme d) Longest duration scheme e) Low down payment scheme (not all models)
Paperless payment of car loans, special offers for women car loan participants and professional based products for salaried, self-employed, Nissan Government and PSU employees, police and the agriculture sector. ‘Job loss protection’ on EMI’s covering loss of job and medical emergencies, ‘Buy now - pay from Jan 2021' on certain select products and ‘zero mile car’ product in the used car business. Source: J.P. Morgan.
Segment-wise outlook In terms of the outlook for F21, we expect tractor (-5% JPMe for F21) to lead the recovery followed by 2Ws (in 2H) on higher rural share plus some boost from preference for private ownership of vehicle (over shared/ public). PV recovery could likely lag a bit, given discretionary & higher urban/replacement demand.
CVs have been worst hit and will likely take much longer to recover. This given structural oversupply issues (low fleet utilization), financing challenges (fall out of cash flow stress) and weak freight trends.
Segment wise update for May below PV volumes saw an 80-90% Y/Y decline in May: This is not surprising, given the disrupted supply chain and partial dealership openings in the month of May. With issues around the supply chain largely behind albeit at lower throughput, focus will now shift to the demand side. Retail, we believe, is tracking around 30-40% at normative levels with around 60% of dealerships open and the rest likely to open gradually given recent relaxations from lockdowns. Given unsold inventory in the channel ranging from 2-3 months on current demand run rates, OEMs are unlikely to aggressively ramp up production/dispatches. Hence, expect Jun volumes to remain depressed (Jun-Q 70-75% Y/Y down, JPMe). For F21, we believe the industry could likely see a high-teens decline with a gradual improvement expected in 2H supported by pent-up demand/relatively better rural, seasonality (festive) and preference for personal transport.
24 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
2Ws – Retail trends gradually picking up – May wholesales were down 70-80% Y/Y. Retail across the board was better than dispatches – our assessment suggests that retail was 30-40% of normative levels given graded dealer openings in May (HMCL retails at 160K, RE at 23-24K). 2W companies have taken price hikes ranging from 1-3% in the last 2-3 weeks (after BS6 price hikes) partly attributable to supply shortage for certain SKUs – this is also reflective of disciplined competition. Overall, the expectation remains for 2Ws to see recovery in 2H given affordable mode of private transport (over shared transport), pent-up demand, higher rural share and a benign base. We model in a mid-teens decline in 2W industry volumes in FY21E largely attributable to a disrupted 1H due to COVID-19.
Tractor prints surprised positively with flat Y/Y wholesales trends in May (retail volume has grown). This is a good outcome reflecting near normalization in rural supported by early relaxation in rural markets (for farm activity) and good crop produce/procurement. In general comments on rural are optimistic though we need to monitor monsoons, spread of COVID-19 (on migrants moving back) & impact of recent locusts attacks (limited as of now). We expect the tractor segment to lead the recovery within autos and model in 5% decline in industry volumes (down 9% in F20) factoring loss of some seasonal volumes for Rabi during lockdown.
CVs – It’s a long road to recovery – The outlook for the M&CV segment was bleak even pre COVID-19 given the structural oversupply (post axle) and expected BS6 price shock. The trajectory has now further worsened due to the lack of freight amid COVID-19 dislocation. Cash flow issues for transporters have been fairly high with fleet utilizations very depressed (below 30%) and driver availability issues. Financing is likely to be constrained for this space given asset quality stress and there have been press reports of higher repossessions in CVs. A sequential improvement near term will likely play out as production normalizes and there is negligible BS6 stock in the channel. However, looking beyond that, M&HCVs will be the last to recover out of this disruption, in our view. We expect a 20%+ decline in F21 after a steep 42% decline seen in F20. We believe LCVs will fare relatively better given the rising need for last mile connectivity & relatively better rural.
25 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Companies Discussed in This Report (all prices in this report as of market close on 19 June 2020, unless otherwise indicated) Bajaj Auto(BAJA.BO/Rs2674/OW), Boyd Gaming Corp(BYD/$21.14/OW), Brilliance China Automotive (1114)(1114.HK/HK$7.54/OW), Chongqing Changan Automobile - B(200625.SZ/HK$4.30/OW), Guangzhou Automobile Group - H(2238.HK/HK$6.47/OW), Hero Motocorp Ltd.(HROM.BO/Rs2356/OW), Honda Motor (7267)(7267.T/¥2851[22 June 2020]/OW), Hyundai Motor Company(005380.KS/W98500[22 June 2020]/OW), Mando Corporation(204320.KS/W23400[22 June 2020]/OW), Minth(0425.HK/HK$22.00/OW), Putailai New Energy - A(603659.SS/Rmb99.76/OW), Wuxi Lead - A(300450.SZ/Rmb47.80/OW), Yamaha Motor (7272)(7272.T/¥1653[22 June 2020]/N), Yongda Auto(3669.HK/HK$9.20/OW) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect the research analyst’s personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, if applicable, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. All authors named within this report are research analysts unless otherwise specified. In Europe, Sector Specialists may be shown on this report as contacts but are not authors of the report or part of the Research Department. Important Disclosures
Market Maker: J.P. Morgan Securities LLC makes a market in the securities of Boyd Gaming Corp. Market Maker/ Liquidity Provider: J.P. Morgan is a market maker and/or liquidity provider in the financial instruments of/related to Boyd Gaming Corp, Guangzhou Automobile Group - H, Chongqing Changan Automobile - B, Putailai New Energy - A, Wuxi Lead - A, Honda Motor (7267), Yamaha Motor (7272), Hero Motocorp Ltd., Bajaj Auto. Market Maker/ Liquidity Provider (Hong Kong): J.P. Morgan Securities (Asia Pacific) Limited and/or J.P. Morgan Broking (Hong Kong) Limited and/or an affiliate is a market maker and/or liquidity provider in the securities of Brilliance China Automotive (1114), Guangzhou Automobile Group - H and/or warrants or options thereon, which are listed or traded on The Stock Exchange of Hong Kong Limited. Manager or Co-manager: J.P. Morgan acted as manager or co-manager in a public offering of securities or financial instruments (as such term is defined in Directive 2014/65/EU) for Boyd Gaming Corp within the past 12 months. Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Wuxi Lead - A. Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Boyd Gaming Corp, Guangzhou Automobile Group - H, Minth, Honda Motor (7267), Yamaha Motor (7272), Hyundai Motor Company, Mando Corporation. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment banking clients: Boyd Gaming Corp, Honda Motor (7267), Hyundai Motor Company. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Boyd Gaming Corp, Guangzhou Automobile Group - H, Minth, Honda Motor (7267), Yamaha Motor (7272), Hyundai Motor Company, Mando Corporation. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-securities-related: Boyd Gaming Corp, Honda Motor (7267), Yamaha Motor (7272), Hyundai Motor Company. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services from Boyd Gaming Corp, Honda Motor (7267), Hyundai Motor Company. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Boyd Gaming Corp, Honda Motor (7267), Hyundai Motor Company. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Boyd Gaming Corp, Guangzhou Automobile Group - H, Minth, Honda Motor (7267), Yamaha Motor (7272), Hyundai Motor Company, Mando Corporation.
26 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
Debt Position: J.P. Morgan may hold a position in the debt securities of Yongda Auto, Brilliance China Automotive (1114), Boyd Gaming Corp, Guangzhou Automobile Group - H, Chongqing Changan Automobile - B, Minth, Putailai New Energy - A, Wuxi Lead - A, Honda Motor (7267), Yamaha Motor (7272), Hero Motocorp Ltd., Bajaj Auto, Hyundai Motor Company, Mando Corporation, if any. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477- 0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477- 0406 or e-mail [email protected]. Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Kim, SM: Doosan Bobcat (241560.KS), Hankook Tire & Technology (161390.KS), Hanon Systems (018880.KS), Hyundai Glovis (086280.KS), Hyundai Mipo Dockyard (010620.KS), Hyundai Mobis (012330.KS), Hyundai Motor Company (005380.KS), Hyundai Steel Company (004020.KS), Hyundai Wia (011210.KS), KEPCO (015760.KS), Kia Motors (000270.KS), Korea Shipbuilding & Offshore Engineering (009540.KS), Mando Corporation (204320.KS), Nexen Tire (002350.KS), POSCO (005490.KS), Samsung Heavy Industries (010140.KS) Lai, Nick YC: BAIC Motor Corp LTD (1958) (1958.HK), BYD Company Limited - A (002594.SZ), BYD Company Limited - H (1211.HK), Baoxin Auto Group Limited (1293) (1293.HK), Brilliance China Automotive (1114) (1114.HK), China ZhengTong Auto Service Holding Limited (1728) (1728.HK), Chongqing Changan Automobile - A (000625.SZ), Chongqing Changan Automobile - B (200625.SZ), DongFeng Motor Co., Ltd. (0489) (0489.HK), Geely Automobile Holdings Ltd. (0175) (0175.HK), Great Wall Motor - A (601633.SS), Great Wall Motor - H (2333.HK), Guangzhou Automobile Group - A (601238.SS), Guangzhou Automobile Group - H (2238.HK), NIO (NIO), SAIC Motor Corp - A (600104.SS), Sinotruk (3808) (3808.HK), Yongda Auto (3669.HK), Zhengzhou Yutong Bus - A (600066.SS), Zhongsheng Group Holdings (0881) (0881.HK) Wen, Rebecca Y: CATL - A (300750.SZ), Fuyao Glass - A (600660 CH) (600660.SS), Fuyao Glass - H (3606.HK), Gotion High-Tech - A (002074.SZ), Huayu - A (600741 CH) (600741.SS), Minth (0425.HK), Nexteer (1316.HK), Ningbo Joyson - A (600699.SS), Ningbo Shanshan - A (600884.SS), Ningbo Tuopu - A (601689.SS), Putailai New Energy - A (603659.SS), Wuxi Lead - A (300450.SZ), Yinghe Technology - A (300457.SZ), Yunnan Energy New Material - A (002812.SZ), Zhongshan Broad Ocean Motor - A (002249.SZ) Kishimoto, Akira: Aisin Seiki (7259) (7259.T), Bridgestone (5108) (5108.T), Denso (6902) (6902.T), Hino Motors (7205) (7205.T), Honda Motor (7267) (7267.T), Isuzu Motors (7202) (7202.T), Koito Manufacturing (7276) (7276.T), Mazda Motor (7261) (7261.T), Mitsubishi Motors (7211) (7211.T), Nissan Motor (7201) (7201.T), SUBARU (7270) (7270.T), Sumitomo Rubber Industries (5110) (5110.T), Suzuki Motor (7269) (7269.T), Toyo Tire (5105) (5105.T), Toyota Industries (6201) (6201.T), Toyota Motor (7203) (7203.T), Yamaha Motor (7272) (7272.T) Prithyani, Gunjan: ACC Limited (ACC.BO), Ambuja Cements Limited (ABUJ.BO), Ashok Leyland (ASOK.BO), Bajaj Auto (BAJA.BO), Eicher Motors (EICH.NS), Grasim Industries Ltd (GRAS.BO), Hero Motocorp Ltd. (HROM.BO), Mahindra & Mahindra (MAHM.BO), Maruti Suzuki India Ltd (MRTI.BO), Shree Cement (SHCM.NS), TVS Motors (TVSM.NS), Tata Motors (TAMO.BO), UltraTech Cement Ltd (ULTC.BO)
27 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
J.P. Morgan Equity Research Ratings Distribution, as of April 04, 2020 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 46% 40% 14% IB clients* 52% 49% 37% JPMS Equity Research Coverage 44% 42% 14% IB clients* 75% 68% 57% *Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months. Please note that the percentages might not add to 100% because of rounding. For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter.
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28 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
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29 SM Kim Asia Pacific Equity Research (82-2) 758 5710 22 June 2020 [email protected]
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30 Completed 22 Jun 2020 06:00 PM HKT Disseminated 22 Jun 2020 06:04 PM HKT