China auto sector:Sector is slowing,but not collapsing

Share price correction due to some OEMs’ discount seems overdone

    Share prices for Hong Kong-listed China passenger vehicle (PV) manufacturers declined 5.3% today (vs. HSCEI’s -0.1%). We attribute that mainly to Great Wall Motor’s initiating another round of price promotion on 16 March (to last for 1.5 months until the end of April). In brief, the company will provided c.RMB1bn worth of coupons to consumers for the purchase of various Haval SUV models and after-sales maintenance services. In addition, the coupons could be used in combination with low-interest rate OEM auto financing plans and additional discounts at dealership levels. We believe this campaign, together with some other local brands’ extra discount, brought up market concerns that a price war will follow.

    We are indeed not surprised by Great Wall’s price promotion as we have been arguing that the company is experiencing incremental challenges from up-and-coming SUV brands such as Geely and Trumpchi. On the other hand, we doubt if Geely have to discount more as well given their product popularity, while Trumpchi is diversifying its portfolio to avoid production concentration risks.

    Disappointing weekly retail sales should not be over-interpreted either

    Meanwhile, China’s auto retail volume was down by 8% YoY in first 2 weeks of March, according to China Passenger Car Association (CPCA), while wholesale was just up by 1%. This is in-line with our 2017 expectation or slowing growth and potential pricing softness. That being said, we note that CPCA’s weekly sales data can be quite volatile and hence would not assume that auto demand is plunging. We maintain our forecast of a mild 4.5% full-year PV sales growth.

    Stick with premium brands; Top pick: BAIC Motor and Brilliance

    We prefer the premium auto segment given more consistent growth with upgrade demand. As such, our top OEM Buys are 1) BAIC Motor as we believe its Benz JV growth will be well supported by the E Class ramp-up, while we do not expect excessive risk for the Hyundai JV sales on geopolitical tension; and 2) Brilliance as the BMW JV is also in the midst of new product cycle with the recent launch of 1 series sedan and new generation 5 series sedan in 2H17. Sector upside/downside risks are sudden surge/drop in sales and inventory.