China Auto Sector:4Q17to see strong NEV shipment,albeitatepid ICEmarket

New policy announced in Nov-17 to spur a rush of NEV PV sales ahead of year-end. In viewof the solid sales ramp-up in 10M17 and mitigating NEV policy impacts, we expect total NEV PV sales to exceed 500k units in FY17E and become the primary NEV sales growth driver in 4Q17, especially after the announcement of the new scheme in Nov-17 to restrict OEMs from launching new models in FY18E if they have failed to meet the gas consumption requirement for the FY16/17 period. To avoid additional higher expenses related to the non-conformity to the requirement, we expect to see strong NEV PV shipments in 4Q17, as OEMs may capture the time window to make a push before 2018 which may make it more difficult for some OEMs to launch new models given the stricter requirement.

    ICE shipment growth rapidly slowdownin Oct-17 due to weakPV sedansales growth.Although the sales growth of ICE vehicles has picked up significantly to 5.8% YoY in 3Q17 from merely 1.1% YoY in 2Q17, the shipmentgrowth during the traditional peak season has slowed down rapidly due to weak PV sedan sales.Thus, we anticipate ICE shipment growth would remain meagre in 4Q17, given the weak demand in the mass market signaledby the increasing dealers’inventory in Oct-17 following the emerging discrepancy between retail and wholesale growth amid the peak season. Meanwhile, we believe PV SUVswith displacement below 1.6L will remain the major catalyst in driving sales growth in 4Q17 in anticipation of the purchase tax will roll back to 10% in FY18E.

    PV OEMs posted third consecutive quarter margin declines, while stable margins for CV OEMs.Given the tepid ICE sales and increasingcommodity prices during 3Q17, we expect PV OEMs’ average margins to continue to decline in 4Q17, while we believe CV OEMs’ margins will tend to be more stable than that of the PV players due to the solid demand from domestic infrastructure construction year-to-date. NEV suppliers have also seentheir margins decline in the first three quarters due to ASP reduction after the subsidy cuts; however, we expect to see improvement in their revenue and earnings growth in4Q17 on assumption of improvement in NEV shipment growth going forward.