Transportation equipment / Japan 4 April 2014 Japanese report: 31 Mar 14 Chinese automobile market to China Research Trip mature; considerable, albeit (automobiles/auto parts) silent, shift confirmed Chinese automobile sector in transition from growth to maturity; direction of sector to be decided over next five years Demand to keep growing at annual 10% clip, buzz phrases are “regional small cities” and “automation”; future focus on possible changes in foreign investment rules amid export growth Automation to progress sharply amid major impact on production costs from rising wages How do we justify our view? Eiji Hakomori Meanwhile, in inland China, sales While the sales battleground moves to (81) 3 5555-7072 continue to grow due to so-called smaller cities in regional areas, a future [email protected] motorization. That said, Dah Chong slowdown in market growth is also Shiro Sakamaki Hong Holdings (1828.HK; DCH), which worth watching. As companies continue (81) 3 5555-7067 operates car dealerships, including for to add capacity, efforts to fill the [email protected] Japanese brands, seems to be stuck supply/demand gap by ramping up with a gross margin on new car sales of exports will likely gain momentum, just 2-3%. Both Dongfeng Nissan and especially among local automakers. What’s new DCH plan to focus on after-sales service Automobile exports from China We visited China on a research trip and other peripheral businesses. currently total around 1 million 10-14 March. Our trip included Dongfeng Nissan also intends to units/year. However, as domestic factory tours and visits to auto parts accelerate development of dealerships demand already exceeds 20 million makers/local dealers. in fourth- to fifth-tier regional cities. In units, once automakers change to our view, the front in the battle for lifting exports, China could become What’s the impact higher sales will shift to smaller cities. a major auto exporter. The Chinese automobile market is in transition from being based on While price competition is cut-throat In that event, debate could progress assumptions of continuous growth of and cost-cutting involving auto parts about changing (1) restrictions on production/sales to a market preparing makers is urgent, labor costs are rising foreign investment (Chinese for maturity. We feel that the long-term by around 10% annually. In addition, government states that foreign direction of the Chinese automobile the government could rule that automakers’ equity interest in local sector will be determined during this temporary employees comprise less production is 50% max; generally quiet yet considerable shift. than 10% of a firm’s workforce speaking, joint ventures) and (2) the (increasing proportion of permanent 25% tariff on automobile imports. This We were struck that sector buzz phrases employees and making labor costs more development would stem from have changed to “regional small cities” fixed). In addition, some firms considerations recognized by the WTO for sales and “automation” for commented that securing workers in as posing damage to the domestic production. Given this, China’s unique Guangzhou when ramping up automobile industry, conflicting with foreign investment regulations (joint production is becoming harder China becoming a major automobile ventures have to be formed with local following increased employment exporter. The 50-50 joint venture firms for automobile assembly) opportunities in inland China. restriction will probably be reviewed. could be reviewed in the future. The companies we visited are What we recommend Despite the issue of shadow banking pushing ahead with assembly line This report does not present any and other factors behind volatility, automation. To maintain lean cost revisions to our earnings forecasts many believe the Chinese automobile structures, it seems increasingly or investment ratings for individual market will grow by around 10% a year important that firms adopt firms. Of the Japanese companies for the time being. Although demand is initiatives and intensify their own whose Chinese subsidiaries we currently brisk in coastal regions efforts (not relying on cheap labor). visited, we have a 2 (Outperform) (maturing market), Dongfeng Nissan For auto parts makers, expanding rating on NHK Spring (5991) and a 3 Passenger Vehicle (subsidiary of Nissan sales beyond the group and (Neutral) rating on Nissan Motor Motor [7201]) thinks some customers increasing transactions with local and Keihin (7251). We have no are bringing purchases forward due automakers, amid some local rivals ratings on Unipres (5949), Akebono to fears of restrictions on the gaining momentum, will likely be Brake Industry (7238), or Toyoda number of new vehicle registration necessary for growth. Gosei (7282). plates authorized. Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Research Trip (automobiles/auto parts) 4 April 2014 NHK-Uni Spring (Guangzhou) (NHK Spring [5991]) ···························P10 Table of contents, overview Has transactions with wide range of customers, centering on major Japanese automakers. We expect We visited the following Japanese-affiliated firms on further sales growth in the future and think significant our automobile sector research trip to China. (Listed in capacity additions will be necessary at some point. order of visit starting with automakers then auto parts makers.) Akebono Corporation (Guangzhou) Dongfeng Nissan Passenger Vehicle (Akebono Brake Industry [7238]) ········ P12 (Nissan Motor [7201]) ·························· P3 Company eyes increasing disc brake shipments from 2.9 million units in 2013 to 6.3 million in 2016. In Firm is targeting y/y sales growth of 20% in 2014. addition to current mainstay customer Nissan Motor, Targeting small and mid-sized cities in its regional firm aims to diversity customers. strategy and increasing focus on the Venucia brand and SUVs in its product strategy. Unipres Guangzhou /Unipres Precision Toyoda Gosei (Shanghai) Guangzhou (Unipres [5949])···············P14 (Toyoda Gosei [7282]) ··························P6 Auto body parts business at Unipres Guangzhou to continue expanding with a new base established in Competition is cut-throat, partly due to emergence of Zhengzhou. Unipres Precision Guangzhou’s local auto parts supplier Minth Group (425.HK), but transmission parts operations likely to see sales to non- the company has been restructuring since 2011. Jatco customers increase through FY16. Pursuing increased sales beyond Toyota Motor group. Jatco (Guangzhou) Automatic Transmission Dongguan Keihin Engine Management (Jatco [unlisted]) ································ P17 System (Keihin [7251]) ·························P8 Makes continuously variable transmissions, mostly for Local procurement rates up compared with our prior Dongfeng Nissan. By improving costs, the company visit in 2011. Coming up with initiatives aimed at aims for a leaner cost structure than at other bases, further localization, including construction of a including those in Japan and Mexico. technical center and increase in staff from Japan. Chart 1: Chinese Passenger Car Sales Volume (market has expanded 6-fold over past 10 years on volume basis) (mil units) 20 50% 18 45% 16 40% 14 35% 12 30% 10 25% 8 20% 6 15% 4 10% 2 5% 0 0% CY04 05 06 07 08 09 10 11 12 13 Sales volume (left; shipment basis) Y/y (right) Source: Marklines; compiled by Daiwa. - 2 - China Research Trip (automobiles/auto parts) 4 April 2014 Motor joined hands with only DFM. The partnership stands out in that it offers a wide range of line-ups Dongfeng Nissan Passenger through a single channel. Vehicle We recently participated in a plant tour hosted by the company. The visit offered us an opportunity to deepen Nissan Motor (7201) our understanding of the firm—it included a tour of the Huadu No.2 plant in Guangzhou (which came online in 1. Company overview, our visit 2012), updates on recent production/sales and Dongfeng Nissan Passenger Vehicle is the passenger strategies for 2014, and a Q&A session with the vehicle arm of Dongfeng Motor Co., Ltd. (DFL), which company president. was jointly established by Nissan Motor and Dongfeng Motor Corporation (DFM) in June 2003—DFM spun 2. Production off and contributed the commercial vehicle and other Dongfeng Nissan Passenger Vehicle’s annual output core businesses, while Nissan Motor invested the capacity for passenger vehicles as of 2013 was 1.07 equivalent value in cash (DFL is a consolidated million units. That year, the firm manufactured 1.24 subsidiary of Nissan Motor, which has a 50% stake in million units overall (up 7% y/y; including light it). commercial vehicles) including 947,000 passenger vehicles (up 25%). The Huadu plant has an output Japanese automakers that form joint ventures in China capacity of 670,000 units (small/mid-sized vehicles), generally do not take over existing businesses of local the Xiangyang plant 220,000 units (luxury cars), and makers. DFL stands out in that it was established the Zhengzhou plant 180,000 units (SUVs, local brand based on DFM core businesses. Furthermore, while Venucia). A new plant with an annual output capacity major foreign makers tend to form joint ventures with of 150,000 units is set to be launched by end-2014 in more than one local firm (Shanghai Volkswagen/FAW- Dalian. Volkswagen Automobile; Tianjin FAW Toyota Motor/GAC Toyota Motor; Guangqi Honda Automobile/Dongfeng Honda Automobile), Nissan Chart 2: Dongfeng Nissan Passenger Vehicle Established Jun 2003 Company overview Manufactures/sells Nissan Motor’s passenger vehicles; no. 5 market Business outline share among Chinese manufacturers for 2013, but jumped to no.4 from Ownership Nissan Motor: 50% Sep; top sales among joint ventures with Japanese automakers; actively markets local–brand vehicles Dongfeng Motor Corporation: 50% Position within group Equity-method affiliate of Nissan Motor (50% stake); equity-method Models Teana, Sylphy, Qashqai, others gains from Chinese bases estimated to make up 15-20% of Nissan assembled/marketed Motor’s total FY13 recurring profit Production capacity 1.07 mil vehicles/year (as of 2013) 400,000 at Huadu No.