20150723-三星证券-Salad_days_in_China_coming_to_an_end_27页_1mb

Sector Update Summary

Core Content

This report provides an analysis of the Chinese auto industry and the performance of Hyundai Motor (HMC) and Kia Motors in the market. It outlines the current state of auto demand, the impact of pricing strategies, and the long-term growth potential of Korean automakers in China.

Main Viewpoints

• Auto Demand in China:

  • Auto demand in China has weakened, with a 3.2% year-over-year decline in June 2015, the first since December 2008.
  • The China Association of Automobile Manufacturers revised its full-year demand growth forecast from 7% to 3%.
  • The correction in demand is expected to be temporary, as vehicle ownership per thousand people is still around 50.

• Factors Affecting Demand:

  • Economic slowdown and anti-corruption policies have dampened consumer sentiment.
  • License plate restrictions in major cities led to a surge in demand before their implementation.
  • Wholesale data was previously used to calculate demand and market shares, leading to overproduction and inventory issues.

• Price Trends:

  • Vehicle prices in China are converging toward global average levels, which will affect profitability for Korean automakers.
  • HMC's Santa Fe is priced 40% higher in China than in Korea, contributing to higher margins.
  • Japanese automakers, such as Toyota, have adopted aggressive pricing strategies, which may negatively impact HMC and Kia sales.

• Market Consolidation:

  • The Chinese auto industry is expected to consolidate around 5-10 major players.
  • Smaller automakers may be forced out of the market due to increased competition and reduced profitability.
  • The top 10 Chinese automakers control 86% of the market, with a potential merger between the second and fourth players.

• HMC/Kia in China:

  • HMC and Kia are well-received in China for their quality and cost control.
  • However, they are not expected to recover sales quickly due to resistance to price cuts from BAIC and the aggressive pricing of Japanese automakers.
  • HMC and Kia are expected to remain among the top-five players in China, but need to adjust their segment mix and focus on new technology.

• Competitive Landscape:

  • Great Wall and BAIC are key local players with growth potential.
  • Great Wall is investing heavily in its Baoding complex and aims to become an iconic Chinese company.
  • BAIC is reluctant to cut ASPs at BHMC due to its second JV with Mercedes-Benz, which is growing rapidly.

• Performance Metrics:

  • HMC and Kia are ranked highly in J.D. Power studies, including the Initial Quality Study (IQS), Automotive Performance Execution and Layout (APEAL), and Customer Satisfaction of after-sales Index (CSIS).
  • HMC has topped the Sales Satisfaction Index Study (SSIS) for the past two years.

• Future Outlook:

  • HMC and Kia are expected to recover sales in 4Q 2015 or 1Q 2016 if they adjust their pricing policy.
  • BHMC plans to expand its China production capacity by 600,000-800,000 vehicles by late 2016-2017.
  • Kia's capacity is set to increase by 150,000 vehicles in 2016.

• Recommendations:

  • Temper expectations for excess profits at Korean automakers as vehicle prices approach global averages.
  • Focus on new technology and China-only models to secure long-term growth.
  • Reduce reliance on Korean automakers for parts vendors and seek new customers in China.

Key Information

• Target Prices:

  • Hyundai Motor: KRW190,000 (+37.7%)
  • Kia Motors: KRW60,000 (+41.8%)
  • Hyundai Mobis: KRW250,000 (+24.4%)

• Market Share:

  • The top 10 Chinese automakers control 86% of the market.
  • HMC and Kia are ranked among the top five in terms of quality and cost control.

• Price Comparisons:

  • HMC's Santa Fe is priced 40% higher in China than in Korea.
  • Japanese automakers have brought their prices below HMC/Kia models due to aggressive pricing strategies.

• Inventory and Sales:

  • Auto demand and inventories were previously calculated using wholesale data, leading to overproduction.
  • From 2015 onwards, retail sales figures are being used to manage inventory levels.

• Company Visits:

  • The report includes insights from visits to BAIC and Great Wall, highlighting their strategic approaches and growth expectations.

• Investment Plans:

  • Great Wall is investing in EV R&D, smart transmission systems, and battery systems.
  • BHMC is planning to expand its China production capacity to support future growth.

Conclusion

The Chinese auto market is undergoing a period of correction and consolidation, with vehicle prices converging toward global averages. While HMC and Kia face challenges due to pricing strategies and competition from Japanese automakers, their strengths in quality and cost control position them well for long-term success. The market's growth potential remains intact, and we expect a rebound in demand by 4Q 2015 or 1Q 2016.