China / Hong Kong Industry Focus China Auto Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Aug 2017 HSI: 27,540 Enormous potential from auto financing ANALYST • Auto financing boosts car sales, especially for Rachel MIU +852 2863 8843 [email protected] expensive ones • Auto finance market could grow at 20% per annum, providing lucrative returns to industry Recommendation & valuation players • Key risks: Credit, residual values and interest rate Company Price Target Recom FY18F Mkt hike Price PE Cap HK$ HK$ x US$m • China ZhengTong (1728 HK) has enormous Auto manufacturers growth potential from auto finance business Brilliance China* 19.30 16.20 BUY 13.4 12,511 Auto finance drives vehicle sales. China is fast developing its (1114 HK) Dongfeng Motor 9.51 10.30 BUY 4.9 10,546 auto finance market, a driver of future vehicle sales as the (489 HK) auto market becomes more advanced. In order to promote Geely Auto* 17.74 10.50 HOLD 17.2 20,315 car sales, automakers and auto dealers are offering (175 HK) attractive auto finance packages to consumers. Total vehicle Great Wall Motor 9.87 9.20 HOLD 7.0 15,368 sales are projected to reach c.33m units by 2020, and this (2333 HK) should be positive to the overall auto loans market, as the Guangzhou Auto* 15.82 14.60 BUY 9.2 21,080 younger consumers are more receptive to financing their (2238 HK) purchases. In recent years, automakers and auto dealers BAIC Motor 6.97 9.80 BUY 5.7 6,776 have become more active in this market, providing auto (1958 HK) retail finance and dealer inventory finance services. BYD 48.30 55.10 BUY 17.9 18,747 (1211 HK) Abundant of opportunities on the horizon. The auto loans CQ Changan 'B' 10.32 n.a. NR 3.8 6,346 market in China has huge growth potential, as the (200625 CH)^@ penetration rate is low (~25-30%) compared to other SAIC Motor 'A' 30.15 n.a. NR 8.9 51,850 developed nations in the west (~80%). China’s auto finance (600104 CH)^@ penetration rate could reach ~50% by 2020, especially for the high-end car market. The profit potential is high for auto Auto dealers financing, at >50% GP margin. We estimate the total auto China ZhengTong 7.48 9.50 BUY 11.6 2,117 (1728 HK) finance market to reach US$250bn by 2020, enjoying a China Yongda 9.70 11.90 BUY 7.8 2,112 CAGR of about 20% from 2016-2020F. Currently, the auto (3669 HK)^ dealers still rely heavily on car sales and we expect auto financing to make up a more meaningful portion of their * TP & Rating under review total business going forward. ^ Consensus China ZhengTong the biggest beneficiary. We should value @RMB dealerships with auto finance business at a premium as they Source: Thomson Reuters, DBS Vickers are still in the early stage of expanding this business and their growth potential is huge. We like China ZhengTong for its strong earnings outlook and substantial increase in contributions from auto finance business by 2018. BUY with TP at HK$9.50. YTD, majority of auto dealerships’ share price has appreciated by >100% on improving operating environment. We expect there could be some profit-taking on the sector after the recent rally, which offers an opportunity to accumulate. ASIAN INSIGHTS VICKERS SECURITIES ed-TH / sa- AH Industry Focus China Auto Sector China auto finance has huge potential ahead US auto sales and auto finance growth rates Expect China auto finance market to catch up, similar trend with that of the US. We believe the Chinese auto finance market will perform in a similar fashion as what the US has Y-o-Y growth % experienced, given that China is now the largest auto market 15 in the world. China vehicle sales reached about 28m units in 10 2016, posting an annual growth rate of 18%. On the other 5 hand, China has a low penetration rate in auto financing, 0 because many car buyers paid cash for their purchases previously. However, we forecast the auto finance penetration -5 rate to rise in China, as younger Chinese consumers are more -10 receptive to buying goods on credit. Moreover, as China’s auto -15 market becomes more advanced, auto finance will be an -20 important tool to drive volume expansion. Our study will centre on the US auto finance industry's development and identify -25 trends and inflexion points which the Chinese auto finance market could also draw some implications from. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Vehicle loans Vehicle sales US auto finance market and vehicle sales moving in tandem, China should also follow the same pattern. The US’s auto Source: CEIC finance market is one of the most developed in the world, tagging along with its auto market. US vehicle sales plunged Auto finance helps to drive higher price car sales. Since following the onset of the global financial crisis (GFC), which emerging from the GFC, the average loan quantum per vehicle also impacted auto finance demand as well. The US vehicle has been on the rise, implying that consumers are buying more demand started to recover in 2010, followed by auto loans in expensive cars on credit. This could also hold true for China as 2011. Light vehicle sales in the US have posted seven straight consumers are going for the more expensive models, such as years’ of expansion, lifting the auto loan market. BMW, Mercedes-Benz, Cadillac, etc. US light vehicle sales and auto finance trend US average financing loan per vehicle US$bn mn US$/vehicle 5,000 20 30,000 4,500 18 4,000 28,000 16 3,500 3,000 14 26,000 2,500 12 2,000 24,000 10 1,500 1,000 8 22,000 500 6 20,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Vehicle loans (LHS) Vehicle sales (RHS) Sep/08 Sep/09 Sep/10 Sep/11 Sep/12 Sep/13 Sep/14 Sep/15 Sep/16 Mar/08 Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Mar/14 Mar/15 Mar/16 Mar/17 Source: CEIC Source: CEIC Page 2 Industry Focus China Auto Sector Potential drivers of Chinese auto finance market. The Chinese China vehicle sales projections. Under the new normal auto finance market could be driven by two important environment, we project China vehicle market to grow at factors – volume growth and consumers' preference for about 5% per annum from 2016-2020. This is still better than expensive cars, similar to the US. We look at the premium car the rest of the auto markets globally (with the exception of penetration rate in Germany and United Kingdom (UK) to draw India). The US auto market is already showing signs of slowing references from these two markets on their economic growth down while Europe is expected to post low single-digit growth and premium car sales. going forward. Based on Germany and UK experience, it shows that premium China total vehicle sales projections car share has a high correlation with the economy. m units YoY, % United Kingdom GDP - premium car penetration 35 50 30 40 GBP m % 25 2,000,000 27 20 30 1,800,000 24 15 20 1,600,000 10 10 21 5 1,400,000 0 0 18 1,200,000 1,000,000 15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F PV sales (LHS) CV sales (LHS) Total sales growth (RHS) 2009 2010 2011 2012 2013 2014 2015 2016 GDP UK (LHS) Source: CEIC; DBS Vickers Premium car share of total cars (RHS) Sales of luxury cars on the rise in China. Also, the Chinese Source: CEIC consumers prefer the more expensive cars (locally made and imported ones). Therefore in recent years, the high-end and Note: Premium car penetration = premium car sales/total car sales premium car demand has been holding well, particularly the German luxury brands. The share of premium segment to the Germany GDP - premium car penetration total market (2016) is still low in China compared to the western markets and therefore the growth potential is good in EURbn % the long-term.. 3,300 35 3,100 2,900 30 2,700 2,500 25 2,300 2,100 1,900 20 1,700 1,500 15 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDP Germany (LHS) Premium car share of total car (RHS) Source: CEIC Note: Premium car penetration = premium car sales/total car sales Page 3 Industry Focus China Auto Sector Premium segment share of total market (2016) China luxury car sales projections 30% m units % 4 25 25% 20 20% 3 15% 15 World Average: 9.3% 2 10% 10 1 5% 5 0% 0 0 UK Italy USA India Brazil Spain Japan China France 2013 2014 2015 2016 Turkey 2017F 2018F 2019F 2020F Germany Car sales (LHS) Y-o-Y growth (RHS) South Korea Source: Global Insight Source: DBS Vickers By using the most popular luxury brands such as Audi, BMW China auto finance projections. The auto finance market has and Mercedes-Benz as reference, the premium car market is on been growing at about 20% from 2011 to 2014 and going an expansion phase. The high-end and premium car segment is forward, we have conservatively assumed the same rate of the market that most auto finance service providers are expansion, as auto finance penetration rate is low in China and interested in.