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China Auto and Auto Parts Sector Summary (May 9, 2018)

Core Content

The China auto and auto parts sector is undergoing significant structural changes, driven by technological innovation, policy shifts, and the emergence of new players. Despite a slowdown in auto sales growth due to the end of tax incentives, the industry is evolving rapidly, especially in the areas of electric vehicles (EVs), smart vehicles, and online distribution channels.

Main Trends

• Auto Sales Growth:

  • China's passenger vehicle (PV) sales grew by only 1.9% YoY in 2017, marking the lowest growth rate in a decade.
  • Auto sales growth is expected to remain subdued in 2018, with a focus on rural areas where car ownership is still low.
  • Urbanization is expected to drive faster growth than the market average.

• Industry Hierarchy Shift:

  • Local OEMs have been gaining market share from joint venture (JV) brands since 2013.
  • New entrants with strong capital and technological capabilities are challenging both local and JV brands.
  • The mid-end segment is under pressure due to consolidation and innovation from new players.

• EV and Smart Vehicle Development:

  • The NEV market has grown significantly, with 53.3% YoY growth in 2017 to 777,000 units, making China the world's largest NEV market.
  • New players like Byton, NIO, Xpeng, and WM Motor are leveraging internet and high-tech funding to develop smart vehicle ecosystems.
  • These new entrants are still in the early stages of product development and mass production, but they are collaborating with traditional OEMs to accelerate their growth.

• Auto Distribution:

  • Traditional dealers are struggling with weak demand and low margins.
  • They are shifting focus to after-sales services, including auto financing and used car sales.
  • Online platforms like Yixin Group are gaining traction, especially among the younger generation, with growing popularity in new and used car sales and after-sales services.
  • Competition between traditional dealers and online platforms is currently modest, due to limited customer overlap.

Key Players and Innovations

• Geely:

  • A leader in the mid-to-low end market with a multi-brand strategy.
  • Offers value-for-money products with advanced technology and strong R&D.
  • Launches Lynk 02 in 2H18, targeting 1.5 million units in 2018.
  • Best-selling models include Emgrand sedan, Borui SUV, and Lynk 01.

• BYD:

  • A major NEV player with strong EV sales.
  • Faces challenges in EPS growth and profitability, but continues to expand in the EV segment.

• Great Wall Motor:

  • Focuses on mid-end and rural markets.
  • Launches WEY VV6, P8, VV5s Hi4, VV7s Hi4 in 2H18 and ORA R2 EV in 2H19.
  • Has a strong presence in SUV and compact models.

• Byton:

  • A new EV disruptor backed by China Harmony Auto and FAW Group.
  • Focuses on smart vehicle development rather than just NEVs.
  • Plans to launch its first SUV in 2H19 with a target price of Rmb300k (excluding subsidies).

• Nexteer and Shenzhen Inovance:

  • Nexteer is a tier 1 auto parts supplier with strong steering system technology.
  • Shenzhen Inovance specializes in motor controllers for EVs and is expanding into passenger vehicles.
  • Both companies are benefiting from the growth of NEVs and smart vehicles.

• Yixin Group and Dah Chong Hong:

  • Yixin Group is an online platform offering new and used car sales, auto financing, and after-sales services.
  • Dah Chong Hong is a distribution and service provider with growing revenue and earnings from after-sales services.

Key Information and Insights

• New models and innovations are expected to be launched in the next 12-18 months, including:

  • CATL: A-share listing in 2H18.
  • BAIC BJEV: IPO in A-share in 3Q18.
  • Benz: New China-made C-class, GLC, and A-class models.
  • BMW: Launch of China-made X3 and imported X2, X7, i3, and i8 models.
  • Geely: Lynk 02 in 2H18.
  • Great Wall: WEY VV6, P8, VV5s Hi4, VV7s Hi4, and Haval H4 in 2H18; ORA R2 EV in 2H19.
  • BYD: New model Qing, Song EV, and Yuan EV360 in 2H18; new EV compact sedan in 1H19.
  • NIO: ES8 in 2H18; plans to file for US IPO in 1H19.
  • WM Motor and Xpeng: Product launches in 2H18 and 1H19.
  • Byton: First SUV in 2H19.

• New entrants are gaining momentum, but they face challenges in product development, manufacturing, and market penetration.

• Traditional OEMs are forming strategic alliances with these new players to leverage technology and funding.

• Auto parts companies are expected to see high double-digit earnings growth, driven by strong relationships with local OEMs and government support for NEVs and smart vehicles.

Key Figures and Comparisons

• Figure 1: China PV market share - local brands are gaining on JV brands.
• Figure 2: China overall PV sales growth vs. NEV sales growth - NEV growth is significantly higher than traditional PV growth.
• Figure 9: Geely has a stronger value proposition compared to peers in terms of engine size and price range.
• Figure 10: Reliability index for NEV models - WM Motor and NIO are leading in R&D and funding.
• Figure 17-20: Nexteer, Shenzhen Inovance, and Ningbo Gaofa are showing strong revenue growth and market potential.

Conclusion

The China auto and auto parts sector is on the cusp of a major transformation, with local OEMs, new EV players, and auto parts companies poised to benefit. While traditional dealers face challenges, online platforms are gaining traction. The NEV and smart vehicle trends are expected to drive long-term growth, with Byton, NIO, and Geely as key champions in the evolving landscape.