Abstract

ㅁPositive on passenger vehicles, but macro weakness expected to drag on commercial vehicle market

ㅁVolume sales and profits may take a hit from economic slowdown and currency devaluation

ㅁPositive mid-term outlook as tier 3 and 4 cities remain important volume drivers

ㅁTop picks: Minth, Nexteer and GAC for strong product pipeline

The Chinese auto market is gradually entering a transition growth phase after posting annual sales of over 20 million units for three consecutive years (2012 to 2015). The Chinese passenger vehicle market is around 1.2 times that of the US light vehicle market in unit sales terms. The car penetration rate in China is still low, especially in tier 3 and 4 cities, and this should sustain a 5-8% volume growth over the medium term. This year, we project total vehicle volume sales to increase by 7.5%. Although we are positive on the passenger vehicle market, the weakness in the macro economy is expected to drag on the commercial vehicle market.

The weak macroeconomic picture is affecting overall consumer sentiment, but the auto market is still growing versus other consumer segments. We forecast the passenger vehicle market will expand by about 9.6% this year (2015: 7.2%) on the release of pent-up demand. The commercial vehicle market is expected to remain sluggish and we have forecast volume sales to decline by 5% (2015: 8.8% decline), due to the deceleration of the Chinese economy. Some Chinese auto companies like Geely, Xinchen, ZhengTong and Minth have US dollar-denominated loan exposure. Our analysis shows a 5% devaluation in the Chinese yuan could potentially hit net profit by 3-7%. However, a cheaper currency will also help exporters such as Minth. Hence the devaluation impact on net earnings is reduced.

The Chinese automotive sector is one of the important economic pillars under the 13th five-year plan and the Chinese government would prefer to develop the industry at a healthy pace to avoid over-expansion. We maintain a positive medium-term outlook on car sales as tier 3 and 4 cities are important volume drivers, given their low car penetration rates. The auto sector's 2016 fiscal year valuation is below 2015’s trough level but not in dire straits compared to 2008. For 2016 stock picks, we like Minth (export growth), Nexteer (strong US auto sales) and GAC (strong product pipeline).