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Asia Auto Sector
THEME
China auto sales to decline in 2009
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We expect China’s auto sales to slow from the 22% YoY growth
recorded in 2007 to around 10% YoY growth in 2008, then decline a
further 3-5% in 2009. Both passenger and commercial vehicles are
expected to record negative growth next year.
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Although commercial vehicle demand should benefit from Beijing’s
Rmb4 tn fiscal stimulus package over the next two years, we do not
think that increased infrastructure spending will be enough to buffer
the significant slowdown in the property, mining and export sectors.
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We expect passenger vehicle sales in the past few months of this year
to be relatively strong, as manufacturers try their best to get rid of
unsold inventory as well as meet their FY08 sales targets. However, the
strong sales push by auto manufacturers in 4Q08 is likely to result in:
1) even more sluggish sales in 1Q08 and 2) continued margin pressure,
despite the sharp falls in commodity prices.
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We are downgrading our FY09-10 forecasts for the China auto sector by
6-37%, with target prices cut across the board. Our revised target prices
are based on 0.4-0.5x FY08 P/B, which are pretty much historical trough
valuations for the China auto sector. We believe that steep discounts to
book values are warranted, as we are already starting to see companies
book impairment losses on assets. In this regard, we believe that the
glass and commercial vehicle makers are more vulnerable than the
passenger vehicle manufacturers. For longer-term investors, Denway is
expected to be more defensive in the sector, given its strong cash pile.
We maintain our UNDERWEIGHT on the sector.
China auto sales to decline in 2009
With our recent GDP growth forecast revisions as well as the continued slump in the
domestic and export markets, we believe that auto sales will remain very sluggish for the
next one to two years. We now expect China’s auto sales to slow from the 22% YoY
growth recorded in 2007 to around 10% YoY growth in 2008E, decline by 3-5% in 2009E.
Both passenger vehicles (PV) and commercial vehicles (CV) are expected to record
negative growth next year.
CV – government’s stimulus not enough
China’s CV sales growth fell from 25% YoY in 1Q08 to 19% YoY in 2Q08, to -5% YoY in
3Q08, then further dropped by 9% YoY in October, as: 1) forward buying ahead of Euro
III implementation subsides and 2) China’s economic growth slows. Note that the rate of
decline in CV sales has already been buffered by continued growth in the mini truck and
light truck segments, as China has delayed the nationwide implementation of Euro III on
CVs below 3.5 tonnes to 1 July 2009 (except in Shanghai, Nanjing, Hangzhou and
Shenzhen where pollution is believed to be more serious than in other cities). Although
CV demand is likely to benefit from the central government’s Rmb4 tn fiscal stimulus
package over the next two years, we do not think that the increased infrastructure
spending will be enough to buffer the significant slowdown in the property, mining and
export sectors.
China’s CV market is actually a rather saturated market, if not for the boom in the property,
mining and export industries over the past few years, which has led CV manufacturers to
further increase their production capacity. The country has traditionally relied on exports to
take care of its chronic overcapacity problem, and most vehicle exports are to emerging
markets rather than developed markets. However, the prospect of China’s vehicle exports
to emerging markets has been significantly hampered by the global financial tsunami. Not
only have orders from these countries shrunk as a result of the rapid economic slowdown
and much tighter credit environment, Chinese companies also need to keep a close eye on
the collectability of their receivables from these countries.
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