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Equity Market Summary: Impact of Auto Tariff Reduction on Hong Kong and Chinese Markets

Core Content

This report discusses the impact of China's reduction of auto import tariffs from 25% to 15%, effective July 1, 2018, and an additional 25% tariff on US imports, on the auto industry and related equity markets in Hong Kong and China. The analysis focuses on how this policy change affects sales, pricing, and the performance of key players in the sector.

Main Points

Market Overview

• Hong Kong HSI: Declined by 0.38% on July 20, 2018.
• HSCEI: Declined by 0.52%.
• Turnover: HK$77 billion, a 23% decrease from the 30-day average.
• SSE Composite: Declined by 0.53%.
• SZSE Component: Declined by 0.51%.

Sector and Stock Performance

• Sector Tracking:
  • Iron & Steel: +2.2% (1D), +72.6% (1Y)
  • Personal Products: +0.9% (1D), +67.0% (1Y)
  • Construction: +0.7% (1D), +66.7% (1Y)
  • Woods: +0.7% (1D), +61.9% (1Y)
  • Gas: +0.7% (1D), +57.3% (1Y)
• Stock Tracking:
  • YUK WING GROUP H (1536): +75.6% (1D), +17.9% (1Q)
  • BASETROPHY GROUP (8460): +25.4% (1D), +16.3% (1Q)
  • CHI HO DEVELOPME (8423): +17.9% (1D)
  • AV PROMOTIONS HO (8419): +16.3% (1D)
  • ZHENG LI HOLDING (8283): +15.8% (1D)
  • SANAI HEALTH IND (1889): +15.8% (1D)

Auto Tariff Reduction and Its Effects

• Tariff Cut: China reduced auto tariffs from 25% to 15%, with an additional 25% on US imports.
• Impact on Prices:
  • A car priced at RMB240,000 had a total cost of RMB126,900 after the tariff cut.
  • This equates to an average price reduction of 8% for imported vehicles.
• Consumer Behavior:
  • The reduction in tariffs is expected to increase the affordability and popularity of imported cars.
  • Luxury cars are likely to see a rise in market share due to lower prices and ongoing consumption upgrades.
• Expected Sales Growth:
  • China's auto sales volume in Jan-Apr 2018 increased by 4.8% YoY.
  • German brands saw the highest growth at 9.3% YoY, outperforming other foreign brands.

Key Information

Beneficiaries

• Zhongsheng Group (881HK): Second-largest auto dealer in China, major dealer for Toyota and Lexus, second-largest dealer for Mercedes-Benz.
• Yongda (3669HK) and Zhengtong (1728HK): Fifth and eleventh largest auto dealers, major dealers for BMW and Porsche.
• MeiDong Auto (1268HK): Focus on luxury brands like BMW, Porsche, and Lexus, with a significant portion of revenue from these.
• BMW, Mercedes-Benz, and Lexus: Top imported brands in 2017, expected to benefit from lower tariffs and price reductions.

Sufferers

• BAIC (1958HK): Majorly reliant on Beijing Benz, which is likely to see reduced sales if consumers shift to imported Mercedes-Benz.
• Brilliance Auto (1114HK): Suffers due to the shift in consumer preference towards imported BMW SUVs.
• GAC (2238HK): Mainly produces Japanese brand cars, and the tariff reduction may make imported Japanese cars more competitive, affecting GAC's profits.

Conclusion

The reduction of auto tariffs in China is expected to significantly boost the sales of imported luxury cars, particularly German and Japanese models, and to lower the overall price of these vehicles. This shift is likely to benefit major luxury car dealers in Hong Kong, such as Zhongsheng Group, Yongda, Zhengtong, and MeiDong Auto. Conversely, joint ventures with foreign automakers, such as BAIC and Brilliance Auto, may face challenges due to the potential decline in domestic sales. The report highlights the importance of monitoring consumer behavior and market trends in the context of these policy changes.