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Sector Update Summary

Core Content

This sector update provides an analysis of the automotive industry in China and its implications for EV (electric vehicle) market growth, focusing on the strategies of local automakers and the potential profitability of EVs by 2020. It also includes insights into the performance and valuation of key companies such as Hyundai Motor, Kia Motors, Hyundai Mobis, Mando, and S&T Motiv.

Main Points

1. EV Market Growth in China

• Market Potential: China's EV market is expected to grow significantly, reaching 1.2 million vehicles by 2020.
• Government Support: The Chinese government has implemented various policies to boost EV demand, including subsidies, tax cuts, and restrictions on gasoline-powered vehicles.
• Subsidy Phase-Out: Subsidies are set to be phased out between 2017 and 2021, but automakers are working to cut costs to maintain competitiveness.
• Battery Cost Decline: Battery prices are falling by 10-15% annually, which is a key factor in making EVs more affordable.

2. BYD's Strategic Position

• Market Leadership: BYD is the leading EV manufacturer in China, with a strong presence in the fast-growing EV segment.
• In-House Production: BYD has developed in-house production capabilities for key parts, enhancing cost competitiveness and allowing it to maintain price advantage even as subsidies decline.
• Government Backing: BYD is well-positioned to influence EV standardization and benefit from strong government support.

3. Profitability of Mass-Market EVs

• Cost Cuts: Automakers are expected to cut costs by 10% annually, which should lead to mass-market EVs becoming profitable by 2020.
• Value Chain Impact: While parts suppliers may initially face margin pressure, they can gain exclusive supplier status, which helps in achieving economies of scale and diversifying customer bases.
• Recommended Companies: Mando, Hanon Systems, S&T Motiv, and Woori Industrial are favored due to their track records and diversified customer bases.

4. Smart Growth Strategies of Chinese Automakers

• Segment Focus: Chinese automakers are focusing on specific segments like SUVs to achieve economies of scale.
• Value-for-Money Approach: They are offering competitive prices and high-spec models to capture market share, especially in second- and third-tier inland cities.
• Technology Adoption: Many local firms are adopting core technologies from global automakers and are investing in in-house R&D and production.
• Strategic Partnerships: Companies like Great Wall and Geely are forming partnerships with global suppliers to enhance their product quality and competitiveness.

5. Key Players and Performance

• Hyundai Mobis: Expected to benefit from the Hyundai Motor Group's expansion into green vehicles.
• Mando: Has a target price of KRW200,000, with a 13.3% upside.
• S&T Motiv: Target price of KRW176,500, with a 37.8% upside.
• BYD: Despite its leadership, its valuation is lower than global competitors, indicating potential for growth.
• Great Wall and Changan: Both have shown strong growth in the SUV segment, with Great Wall's H6 being a top-selling model.

Key Information

• EV Growth Rate: China's EV market is projected to grow at 30% annually.
• EV Penetration: EVs currently account for 1.6% of the overall car market in China.
• Subsidy Reduction: The central government plans to reduce EV subsidies by 20% in 2017 and 2019 before ending them in 2021.
• Profitability Outlook: Operating margins for mass-market EVs are expected to reach 3% by 2020.
• Market Share Trends: Chinese automakers are gaining market share through focused strategies and partnerships.

Conclusion

The Chinese automotive industry is undergoing a transformation driven by favorable government policies, technological advancements, and strategic shifts towards specific segments like SUVs and EVs. While EVs are still in the early stages of growth, the industry is moving towards mass-market penetration by 2020, with local automakers and parts suppliers playing a crucial role. Companies that can adapt to cost-cutting and quality improvements are likely to benefit from this shift.