20151002-Maybank_KERPL-China_Auto_OEM__Small_cars_get_a_boost_26页_975kb

China Auto OEM: Summary of Stimulus Measures and Market Outlook

Core Content

China has introduced new auto stimulus measures aimed at boosting the market, which includes a 50% reduction in purchase tax for passenger vehicles (PVs) with engine sizes of 1.6L or below, effective from 1 October 2015 and lasting until the end of 2016. This policy is expected to support small car and compact SUV sales, with the latter showing strong growth trends. The stimulus is seen as significant but less impactful than the 2009-10 measures due to changes in market dynamics and the absence of certain programs like the rural subsidy.

Main Views

• Market Impact: The auto market is expected to increase by 2.0% in 2015 and surge by 9.2% in 2016. However, the growth is projected to flatten in 2017.
• Compact Vehicle Segment: Over 67% of the PV market consists of vehicles with engine sizes of 1.6L or below, making this segment a key beneficiary of the tax cut.
• Domestic Brands Advantage: Domestic automakers such as Great Wall, Geely, and Dongfeng are expected to benefit significantly due to their high exposure to compact vehicles.
• Sales Projections: The tax cut is projected to drive additional sales of 340k units in 2015 and 1.2m units in 2016, with compact SUVs expected to outperform.
• Cautious Forecast: While the stimulus is expected to boost demand and alleviate pressure on OEMs, analysts remain cautious due to ongoing discounting and potential market saturation.

Key Information

• Tax Cut Details: The purchase tax for PVs with 1.6L or below engines is cut to 5%, effective from 1 October 2015.
• Market Share of Compact Vehicles:
  • Great Wall: 67% of PV models and 81% of unit sales.
  • Geely: 57% of PV models and 80% of unit sales.
  • Dongfeng: 60% of PV models and 58% of unit sales.
  • SAIC: 74% of PV models and 49% of unit sales.
• Sales Trends:
  • Compact SUVs accounted for 31% of the overall PV market in 1H15 and saw a 169% YoY increase.
  • PV sales in 2015 are expected to grow by 6.2% and 12.0% in 2016.
• Recommendations:
  • Geely (175 HK): Reiterate BUY, with a price target of HKD4.3 and 16.5% upside.
  • Great Wall Motor (2333 HK): Upgrade to BUY, with a price target of HKD10.0 and 16.8% upside.
  • Dongfeng Motor (489 HK): Upgrade to BUY, with a price target of HKD12.1 and 25.4% upside.
  • Brilliance (1114 HK): Maintain BUY, with a price target of HKD11.1 and 21.2% upside.
  • SAIC Motor (600104 CH): Maintain HOLD, with a price target of CNY19.0 and 13.1% upside.
  • GAC (2238 HK): Maintain HOLD, with a price target of HKD5.5 and 13.1% upside.
  • BAIC (1958 HK): Reiterate SELL, with a price target of HKD5.3 and -21.9% upside.
• Earnings Forecast:
  • The 2016 earnings forecast for the sector is raised by 4-13% due to the tax cut.
  • Domestic brands are expected to see higher growth compared to foreign joint ventures.
• Valuation:
  • The sector currently trades at a 7.0x forward PE, which is expected to re-rate to 8.0x, in line with its three-year average of 7.8x.
• Historical Performance:
  • In 2009, H-share listed auto OEMs saw share price increases of 260-590%, significantly outperforming the HSCEI index.
  • Great Wall and Dongfeng saw strong performance during that period, with unit sales increasing by 74% and 34-42% respectively.

Analysts

• Ka Leong Lo: (852) 22680630 | kllo@kimeng.com.hk
• Benjamin Ho: (852) 22680632 | benjaminho@kimeng.com.hk

Stock Recommendations

Conclusion

The tax cut on small cars is a strategic move to support the auto market, particularly the compact vehicle segment. Analysts expect a positive impact on demand and sales for domestic brands, with Great Wall, Geely, and Dongfeng being the most likely to benefit. Despite the stimulus, the market is still expected to grow modestly in the short term, and the long-term outlook remains cautious due to structural challenges. The valuation of the sector is seen as undervalued, with potential for re-rating.