3 Oct 2019 CMB International Securities | Equity Research | Sector Update Auto OEM sector Market bottoms with potential policy stimulus MARKET-PERFORM (Initiation) We analyze the recent development of the auto sector and summarize some China Auto Sector critical changes happened recently. These structural changes include low investment return, used-car market development and so on, which present us Jack Bai with an analytical framework for auto stock selection. We believe that the decline (852) 3900 0835 in Auto market was a structural phenomenon rather than a short-term effect. [email protected] Accordingly, we recommend investors to choose companies that have strong JVs with foreign brands, great competitive local brand awareness while maintaining certain exposure on the oversea market. Our top picks are GAC (2238 HK) and Geely (175 HK). Overall market continued to decline in Aug. The auto market has slowed Inventory down since 2018 and continued its unpleasant performance in 1H19. In Aug, ('000 units) Inventory: Passenger vehicle the production and sales volume of passenger vehicle were 1.69mn and 1,400 1.65mn, down by 0.7% and 7.7% YoY respectively. The decline in production 1,200 1,000 and sales was slightly narrower than the previous month. 800 An inflection point is expected to appear in 4Q19. We did not anticipate 600 400 any major changes in our structural analysis. However, in our analysis, we 200 0 strongly believe the specific consumption-boosting policy will be rolled out 2012-03 2013-06 2014-09 2015-12 2017-03 2018-06 soon later this year. With potential policy stimulus and seasonal effect, we expect a moderate sales recovery in 4Q19. Source: Wind, CMBIS Low prevailing investment return is the most critical constraint for resident spending. In our analysis, we found that even though residents have the willingness to spend more, the low return prevailing in the market does not provide adequate spending power. Entrepreneur Confidence Index: Low capacity utilization rate with amass of loss entities prompts for Auto Industry potential policy stimulus. Recent public news states that some OEMs and Entrepreneur Confidence Index: Auto Industry 145 auto parts producers are experiencing difficulties and even stopped 140 135 production in 3Q19. This suggests that overall auto market condition was at 130 the critical point affecting the overall employment market. We anticipate the 125 120 government will potentially launch stimulus policy to support auto consumption. 115 110 105 100 We present a methodology to select auto stocks in the following years. 2013-03 2013-10 2014-05 2014-12 2015-07 2016-02 2016-09 2017-04 2017-11 2018-06 2019-01 Factoring in near-term and medium-term potential, we recommend investors to select companies with strong JVs and reputable local brands while having Source: Wind, CMBIS the capability to expand abroad. A strong financial condition is a plus for the company. Valuation/Key risks. 1) Continued slowdown in the Chinese economy. 2) Policy support was less than expected. Valuation Table Mkt Cap Last Px TP P/E(x) P/B(x) ROE Company Ticker Rating (LC mn) (LC) (LC) FY19E FY20E FY19E FY19E GAC 2238 HK Buy 119,488 7.55 9.67 7.08 5.08 0.78 11.76% GeelyGroup 175 HK Buy 122,185 13.40 16.35 9.87 8.61 1.82 21.83% Dongfeng 489 HK Hold 64,535 7.49 8.20 3.91 3.47 0.44 11.72% GWM 2333 HK Hold 67,157 5.24 4.99 13.92 11.54 0.79 5.73% SAIC 600104 CH Hold 277,833 23.78 25.59 9.25 8.55 1.17 5.69% Source: Bloomberg, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 3 Oct 2019 Contents The inflection point is approaching? Automotive industry near-term forecast ..................................................................................................... 3 1. What has happened to consumer spending? .............................................. 3 2. Industry Overview ........................................................................................... 6 3. Market Prediction ..........................................................................................13 4. Stock pick ......................................................................................................15 GAC Group (2238 HK) ............................................................................ 16 Company Overview .................................................................................................18 Focus Charts ............................................................................................................19 Financial Analysis ...................................................................................................21 Valuation ...................................................................................................................22 Financial Summary ..................................................................................................23 Geely (175 HK) ........................................................................................ 24 Investment Thesis ...................................................................................................25 Focus Charts ............................................................................................................27 Company Overview .................................................................................................28 Financial Analysis ...................................................................................................30 Valuation ...................................................................................................................31 Financial Summary ..................................................................................................32 Dongfeng Motor (489 HK) ...................................................................... 33 Investment Thesis ...................................................................................................34 Focus Charts ............................................................................................................39 Company Overview .................................................................................................40 Financial Analysis ...................................................................................................41 Valuation ...................................................................................................................42 Financial Summary ..................................................................................................43 Great Wall Motor (2333 HK) ................................................................... 44 Investment Thesis ...................................................................................................45 Focus Charts ............................................................................................................47 Company Overview .................................................................................................49 Financial Analysis ...................................................................................................53 Valuation ...................................................................................................................54 Financial Summary ..................................................................................................55 SAIC Motor (600104 CH) ........................................................................ 56 Investment Thesis ...................................................................................................57 Focus Charts ............................................................................................................59 Company Overview .................................................................................................60 Financial Analysis ...................................................................................................63 Valuation ...................................................................................................................64 Financial Summary ..................................................................................................65 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 3 Oct 2019 The inflection point is approaching? Automotive industry near-term forecast 1. What has happened to consumer spending? According to the data released by the National Bureau of Statistics, the total retail sales of consumer goods in 2018 was RMB 38.1tn, an increase of 9.0% YoY. However, the growth rate in 2018 was the lowest since 2003. A recent good news is that consumer spending was on a recovery track in Jun 2019. In 1H19, the total retail sales of consumer goods reached RMB 19.5tn, a nominal increase of 8.4% YoY (the real increase of 6.7% after factoring inflation). Among them, the total retail sales of consumer goods in Jun was RMB 3.9tn, an increase of 9.8% YoY. We believe the overall growth rate of consumer spending will have a slight YoY decrease in 2019. Figure 1: Total retail sales of social consumer goods Source: NBS, CMBIS In our analysis, we try to answer the following question which directly affect the auto sales: What are the main factors that causing the slowdown in consumer spending? 1.1 Spending willingness – residents are willing to spend more Is the slowdown of total retail sales growth rate caused by the decline of spending willingness among residents? In Jun 2019, PBOC