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Our affordability analysis suggests that based on 2007 income levels
and assuming financing is available, 40% of urban households can
afford a medium-priced car, while 90% of rural households can afford
the lowest-end economy car. By 2020E, we expect car ownership to
reach 148 cars per 1,000 residents, surging 5x from current levels.
■ In the short term, we think the current YTD sales growth momentum of
21% is broadly sustainable for FY09 despite some potential seasonal
weakness in the next two to three months. We expect further details of
government stimulus measures to support unit sales.
■ While the commercial vehicle segment has potentially bottomed, with
the export sector likely driving the next phase of recovery, cyclicality
and higher segment valuations make it less appealing.
■ With sector profitability improving compared with the past two-year
historical average, we think M&A activities may slow. Domestically we
expect automakers to be very selective, focusing on weaknesses or
enhance their strengths.
■ We prefer the passenger vehicle secular growth trend relative to a
cyclical rebound for commercial vehicles. Dongfeng Motors is our top
pick (OUTPERFORM), as the key beneficiary from auto stimulus plans.
We believe Weichai Power (OUTPERFORM) is seeing a broad-based
recovery and benefits from the launch of its EGR China III products
and export recovery. Sinotruk is rapidly losing market share and we
initiate coverage with an UNDERPERFORM rating. Denway is rated
NEUTRAL due to a lack of near-term catalysts.
It’s all about growth
Secular growth over cyclical recovery
With domestic consumption remaining a cornerstone of the government’s plan to boost
economic growth in the medium term, we believe China’s rising wealth effect, aided by its
growing rural population, will continue to drive consumer demand for passenger cars. As a
result, we expect passenger car demand growth of around 20% in 2009 and 15% in 2010.
Based on 2007 income levels, our affordability analysis suggests that if auto financing is
available, 40% of urban households are already able to afford a medium-priced car, while
90% of rural households can afford the lowest-end economy car. Benchmarking Japan
and Korea’s experience, we believe China is about to accelerate into the expansion phase
of passenger car ownership, with car penetration expected to accelerate almost 5x to 148
cars per 1,000 residents by 2020E. Comparatively, while the commercial vehicle segment
has also potentially bottomed with the export sector recovery likely driving the next phase
of recovery, we think the cyclicality and higher segment valuations make it a less attractive
segment relative to passenger cars.
YTD sales momentum sustainable on stimulus boost
Boosted by the auto stimulus plan, YTD passenger car sales have surged 21% YoY,
rebounding from only 7% growth for all of 2008. In particular, the combined market for cars
with engines below 1.6 litres rose 8 p.p. to 72%, on the back of the purchase tax cut from
10% to 5%. With the government’s increasing concern about the country’s reliance on
imported oil, we expect small car market share to continue increasing supported by
favourable government policies. In the commercial vehicle segment, light truck sales,
accounting for 52% of 2008 truck sales, have increased 5% YTD, driven by the rural
subsidy and vehicle replacement programmes. Heavy duty truck sales have also been
rising MoM from the lows of January 2009, benefiting from the commencement of new
infrastructure projects under the Rmb4 tn stimulus package. We believe YTD sales growth
is likely sustainable for the rest of the year, with more details of the announced stimulus
measures supporting unit sales.
Improving sector profitability could impede M&A
With low inventory and longer waiting times driven by strong sales, we think a price war is
unlikely. That said, with auto manufacturers ramping up production on rising optimism, we
are slightly cautious that over-expansion could lead to industry oversupply if demand
weakens and a price war could ignite. Sector profitability is recovering to the past two-year
historical average, which potentially implies that M&A activity may happen more slowly
than expected. In the domestic M&A space, we expect automakers to be very selective,
focusing on weak areas (such as proprietary technology), product gaps or enhancing their
strengths by acquiring strong players in sub segments.
PV preferred – Dongfeng is our top pick
Passenger vehicle (PV) secular growth is our preferred segment relative to a cyclical
rebound for commercial vehicles (CV). While auto monthly sales may start to moderate
from a high base and on seasonal weakness, we believe more positive news flow from
government stimulus plans is likely to focus investor attention back to the sector. We
initiate coverage on Dongfeng Motors – our top pick – with an OUTPERFORM rating, as it
is the key beneficiary from PV and CV stimulus measures. Weichai Power
(OUTPERFORM) saw a broad-based recovery and benefits from the launch of its EGR
China III products and export recovery. With market share in the heavy-duty truck segment
being rapidly eroded and export sales likely to remain a drag on earnings, we initiate
coverage on Sinotruk with an UNDERPEFORM rating. We rate Denway NEUTRAL due to
a weaker growth profile and a lack of near-term catalysts.
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