20170630-广发证券香港-2H17_Auto_Sector_Outlook_Sales_rebound_ahead_in_2H17_18页_1mb

2H17 Auto Sector Outlook Summary

Core Content

This report provides an outlook for the Chinese auto sector in the second half of 2017 (2H17), focusing on sales trends, key market segments, and investment opportunities. It highlights the impact of policy changes, market dynamics, and company-specific developments on the industry.

Main Views

• Sales Rebound in 2H17: After a mild growth in 1H17, the report anticipates a stronger rebound in PV sales in 2H17, driven by new model launches and improved consumer sentiment.
• SUV Dominance: SUVs are expected to continue leading auto sales growth in 2017 due to their popularity and performance enhancements, with a projected 19.4% YoY growth in full-year sales.
• Sedan Sales Modest Decline: Sedan sales are expected to see a modest decline in 2H17, but marketing efforts and promotions may help mitigate the decline.
• MPV Sales Decline: MPV sales are likely to continue declining in 2H17, with a projected 12.9% YoY drop in full-year sales.
• Commercial Vehicle (CV) Growth: CV sales grew strongly in 1H17, with trucks as the main growth driver. The report expects steady growth in 2H17.
• Market Share Shifts: Domestic brands are expected to maintain and expand their market share, while Japanese brands may gain more traction in the higher-end market.
• Undervaluation: The auto sector is considered undervalued, with H-share auto names trading at a P/E ratio below the historical average, suggesting potential for growth.

Key Information

Sales Trends

• 1H17 PV Sales: Grew mildly by 1.8% YoY, with a significant decline in May compared to the previous quarter.
• 1H17 CV Sales: Grew by 17.6% YoY, driven by low comparable base and economic growth.
• 5M17 Sales:
  • PV sales: 9.42m units (up 1.8% YoY)
  • CV sales: 1.76m units (up 17.6% YoY)
• Full-Year Forecasts:
  • PV sales: ~25.32m units (3.9% YoY growth)
  • CV sales: ~4.25m units (16.3% YoY growth)

Market Segments

• SUVs:
  • 5M17 sales: 3.79m units (up 17.6% YoY)
  • Full-year sales: ~10.80m units (19.4% YoY growth)
  • Expected to account for 42.6% of overall PV sales in 2017.
• Sedans:
  • 5M17 sales: 4.516m units (down 2.7% YoY)
  • Full-year sales: ~11.81m units (2.8% YoY decline)
  • Expected to account for 46.7% of overall PV sales in 2017.
• MPVs:
  • 5M17 sales: 847k units (down 17.7% YoY)
  • Full-year sales: ~2.18m units (12.9% YoY decline)
  • Expected to account for 8.6% of overall PV sales in 2017.
• Trucks:
  • 5M17 sales: 1.59m units (up 23.2% YoY)
  • Full-year sales: ~3.74m units (20.5% YoY growth)
• Buses:
  • 5M17 sales: 171k units (down 17.0% YoY)
  • Full-year sales: ~503k units (7.4% YoY growth)

Brand Performance

• Domestic Brands:
  • Market share: 44.4% in 5M17 (up from 43.2% in Dec 2016)
  • Expected to continue gaining market share from Korean brands.
• Korean Brands:
  • Sales declined by 43.4% YoY in 5M17, due to political tensions and weak branding.
• Japanese Brands:
  • Sales grew by 17.6% YoY in 5M17, gaining market share from Korean brands.
• German Brands:
  • Market share: 20.1% in 5M17
  • Expected to grow further due to BMW's new product cycle.
• American Brands:
  • Market share: 11.9% in 5M17
  • Expected to maintain steady growth.

Investment Strategy

• Buy Auto Names with Better Product Offerings and Earnings Expectations: Companies with improved product mixes and new product cycles are expected to perform better and maintain sales strength without aggressive discounts.
• Top Picks:
  • Geely Auto (175 HK): Maintained Buy rating, target price raised to HK$20.88.
  • Brilliance China (1114 HK): Maintained Buy rating, target price raised to HK$17.30.

Risks

• Upside Risks:
  • Stronger-than-expected auto sales growth
  • Additional stimulus policies to boost sales
• Downside Risks:
  • Continued weakening of sales growth
  • Reduced consumer spending due to weaker economic growth

Valuation

• Sector P/E: 9.4x for 2017E, below the three-year historical average of 10x.
• Geely Auto (175 HK):
  • Current price: HK$16.50
  • Forward P/E: 11x (2017E), below historical average of 14x
  • Revised 2017-2019 EPS: Rmb1.04 / Rmb1.56 / Rmb2.14
  • Target price raised to HK$20.88 based on 14x revised 2017E EPS.
• Brilliance China (1114 HK):
  • Current price: HK$14.00
  • Forward P/E: 10.5x (2017E), below historical average of 13x
  • Target price raised to HK$17.30 based on 13x 2017E P/E.

Figures and Data

• Figure 1-2: Monthly auto sales volume and growth in China (2013-2017)
• Figure 3-4: Monthly PV sales volume and growth
• Figure 5: VIA index (2013-2017)
• Figure 6: Changes in retail prices and discounts
• Figure 7-10: Monthly SUV, sedan, MPV, and CUV sales volume and growth
• Figure 11-12: Sales data and full-year sales forecasts for 5M17
• Figure 13-14: Sales volume and growth for key models
• Figure 15-18: Sales data and full-year sales forecasts
• Figure 19: Valuation comparison of selected auto companies
• Figure 20-28: Stock performance, key data, financial statements, and profitability analysis
• Figure 29: Income statement data for Geely Auto (2015-2019)

Conclusion

The auto sector in China is expected to see a rebound in PV sales in 2H17, with SUVs leading the growth. Domestic brands are expected to dominate the market, while Japanese brands may gain more traction in the higher-end segment. The report highlights Geely Auto and Brilliance China as top picks, citing their strong sales performance, improved product mix, and potential for earnings growth. The sector is considered undervalued, with H-share auto names trading at a P/E ratio below the historical average.