China Auto Sector
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China Consumer Discretionary 10 May 2016 China Auto Sector Beijing Auto Show 2016: NEVs and SUVs take centre stage We saw a rich pipeline of planned NEV products on the back of the China government’s supportive policies Kelvin Lau We expect strong demand growth for SUVs, though margins could (852) 2848 4467 face pressure in the face of intense competition [email protected] Brian Lam Reiterating positive ratings on Geely, Brilliance, BYD and Dongfeng; (852) 2532 4341 neutral on Great Wall; and negative on BAIC [email protected] What's new: Following our visit to the Beijing Auto Show 2016 on 25 April- 4 May, where we saw a number of new models, we reiterate our favourable stance on China’s new energy vehicles (NEVs) and SUVs, particularly with the government backing the development of NEV technology. Accordingly, we expect new NEV sales to rise by 70% YoY for 2016 and 40% YoY for 2017, and by 20-30% YoY over 2018-20E. Our preferred pecking order for the China Auto Sector is Geely, Brilliance and BYD. What's the impact: During the show, the major OEMs showed off a slew of NEVs, including BYD’s hybrid version of its Yuan, BAIC’s all-electric EX200 SUV, DFM’s Fengxiang S50-EV, and SAIC Motor's Roewe e950 sedan. We believe these new launches are being driven by the China Government’s supportive stance on NEV development. The government estimates that Chinese drivers will own 5m NEVs by end-2020, and considering the strong pipeline of new NEV models among the major China OEMs over the next few years, we think this target is achievable. Meanwhile, the race to capture share of China’s SUV market is heating up. OEM Great Wall Motor’s new Haval H7 SUV was launched at the show, while international brands including Mercedes-Benz and Audi also showed off new SUVs. Even Maserati introduced its first SUV, the Levante. We estimate that SUVs will account for one-third of new models launched in 2016 and 50% of the total new model sales volume for the year. We expect SUV sales volume growth to remain strong at 33% YoY for 2016, but that the pace of SUV sales growth would slow to 10% YoY as we move into 2017. What we recommend: Geely (175 HK, HKD3.66, Buy [1]) remains our top pick, due to its strong product pipeline for 2016 and what we view as its long-term rerating story. We also expect strong sales growth for Brilliance (1114 HK, HKD7.27, Buy [1]) and Dongfeng Motor (489 HK, HKD7.82, Outperform [2]), as they too have rich pipelines. For investors seeking exposure to the NEV growth theme, we recommend BYD (1211 HK, HKD42.0, Outperform [2]). We remain neutral on Great Wall Motor (GWM) (2333 HK, HKD5.57, Hold [3]) as its valuation appears to price in its failure to upgrade its brand and an unexciting product pipeline, while its dominant SUV portfolio is facing intense competition and hence the risk of further margin deterioration. We are negative on BAIC (1958 HK, HKD5.87, Sell [5]), on its weaker-than-expected Hyundai sales YTD. The main risk to our Neutral sector call would be weaker/stronger-than-expected new car sales. How we differ: We are more bullish than the market on PV sales for 2016 but are one of the few houses to forecast a YoY decline in PV sales in 2017, ie, once the purchase tax cut comes to an end. See important disclosures, including any required research certifications, beginning on page 9 China Auto Sector: 10 May 2016 New models: NEVs and SUVs feature heavily Our visit to the Beijing Auto Show 2016 underlined the rise of NEVs and SUVs in the China market. The central government has a supportive policy stance on NEVs, including the following measures: 1) providing substantial subsidies to end-buyers, 2) boosting government purchases of such vehicles, 3) no NEV licence restrictions in any cities, 4) building more charging stations, and 5) supporting the development of battery technology. The government estimates that, by end-2020, Chinese drivers will own 5m NEVs, and considering the strong pipeline of new NEV models, we believe this target is realistic. Separately, there were several new SUVs at the show, including models from GWM, Mercedes, Audi and even Maserati. We estimate that SUVs will account for one-third of new models launched in 2016 and 50% of the total new model sales volume for the year. We forecast SUV sales volume growth to remain strong at 33% YoY for 2016, but to slow to 10% YoY as we move into 2017. Below we summarise the highlights from each player’s presence at the show. Geely NEVs and SUVs took Geely showcased its brand-new Emgrand GS, a sporty crossover hatchback which the centre stage this year company expects to launch domestically in June. There will be 2 versions: the GS Sport and a standard model, with prices ranging from CNY80,000-120,000. Meanwhile, in March 2016, the company launched its Boyue SUV (NL3). Sales of the Boyue climbed to 4,002 units in April, from 1,018 units in March, and we see further upside potential for NL3 sales. Geely plans to launch a number of models based on its CMA platform, developed in conjunction with Volvo, from 2017 onwards. We believe that models using this platform will compete with other foreign-local JVs, which account for about 50% of the domestic market. We have a Buy (1) rating on Geely, together with a 12-month target price of HKD4.90, based on a target PER of 11x applied to our 2016E EPS forecast (a 20% premium to the stock’s past-3-year average PER of 9x). In our view, Geely is well positioned to experience a long-term rerating, given its rich product pipeline and improving brand image. At the same time, by leveraging Volvo’s advanced technology and broadening its exposure to China’s lower-tier cities, the company should be able to realise ample business-growth potential. The key risk is lower-than-expected sales and ASP growth. Geely: Emgrand GS Geely: Boyue Source: Daiwa Source: Daiwa 2 China Auto Sector: 10 May 2016 Brilliance Brilliance unveiled its Brilliance unveiled its new X1 SUV, which will be produced at the JV plant of BMW new X1 SUV Brilliance in Shenyang. Targeted at the China market, the X1 SUV is a long-wheelbase version of the second-generation X1 that is 4,560mm in length, or 79mm longer than the standard wheelbase variant of the X1 sold in the rest of the world and just 100mm shorter than the existing X3. The decision to offer a long-wheelbase version of the X1 in China mirrors the move made with the BMW 2-series Active Tourer, where consumers can choose between 2 wheelbases (the longer of which is sold under the 2-series Gran Tourer name). We forecast the sales volume for the X1 to grow by 16% YoY for 2016 and 13% YoY for 2017, supporting overall sales volume growth for Brilliance of 12% YoY for 2016E and 10% YoY for 2017E. We have a Buy (1) rating on Brilliance and a 12-month target price of HKD9.20, based on 10x 2016E PER. In our opinion, 2016 will be a year of recovery for the BMW Brilliance JV, whose sales should be underpinned by a strong product pipeline (2 Series and X1, plus the facelifted 3 Series). Moreover, we expect management to prioritise margins over volumes. The key risk to our call: lower-than-expected sales growth. BMW: X1 BMW: i3 Source: Daiwa Source: Daiwa BYD BYD showcased its fully BYD launched its e5 300 fully electric car in China, with prices, including all clean-energy electric e5 300 subsidies, ranging from CNY120,800-140,800. The total subsidy for the BYD e5 is CNY109,000. The automaker also showed off its entry-level sport-utility vehicle, the Yuan. The hybrid version of the Yuan is priced at CNY209,800-249,000, or around CNY88,000 more than for the top-spec petrol version. We have an Outperform (2) rating on BYD, which is our top pick for investors seeking to capitalise on strong China NEV sales. On the policy front, BYD expects the government to fine-tune its policy on the energy density of batteries used in NEVs. Overall, management expects a strong 2016, as consumer subsidies are set to be cut by 20% starting from 2017. The key risk to our call: lower-than-expected new-car sales. 3 China Auto Sector: 10 May 2016 BYD: e5 BYD: Yuan Source: Daiwa Source: Daiwa Dongfeng Motor Dongfeng highlighted 4 Dongfeng highlighted 4 new electric cars, namely the Fengnuo E300, Fengxing S50-EV, new electric vehicles Fengshen A60-EV, and the S500-EV. The S500-EV is based on the Fengxing S500 MPV. Dongfeng is the first OEM to bring an electric compact MPV to the China market. The S500-EV has the same motor as the S50-EV (120hp and 280nm), and a claimed range of 250 kilometres. We view Dongfeng’s valuation as undemanding, with the stock trading currently at a 30% discount to its domestic peers on 8.0x PER, compared with its average discount of around 24% over the past 3 years. We have an Outperform (2) rating on the stock and a 12-month target price of HKD10.6, based on a 2016E PER of 7x.