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2H17 Auto Sector Outlook Summary

Core Content

The 2H17 auto sector outlook provides an analysis of the performance and future expectations of the Chinese auto industry, focusing on passenger vehicles (PV) and commercial vehicles (CV). It highlights the expected rebound in PV sales, the continued dominance of domestic brands, and the strong growth in CV sales, particularly in trucks. The report also evaluates key auto companies and suggests investment strategies based on their product offerings and financial performance.

Main Views and Key Information

Sales Trends in 2H17

• PV Sales Rebound: After a mild growth in 1H17, PV sales are expected to rebound in 2H17 due to improved buyer sentiment, new model launches, and the end of the purchase tax discount policy in late 2017.
• SUVs to Lead Growth: SUVs are anticipated to maintain their strong growth trajectory, with a projected YoY increase of 20% to ~10.80m units, representing 42.6% of total PV sales.
• Sedans and MPVs: Sedan sales are expected to decline modestly in 2H17, with a full-year decline of 2.8% to ~11.81m units. MPV sales are expected to decline further, with a full-year drop of 12.9% to ~2.18m units.

Market Share Dynamics

• Domestic Brands: Domestic brands are expected to continue dominating the PV market, with a projected market share of 44.4% in 5M17.
• Japanese Brands: Japanese brands have seen a significant increase in market share, up from 15.6% in 2016 to 17.3% in 5M17, mainly due to the loss of market share by Korean brands.
• Korean Brands: Korean brands have experienced a decline in sales, attributed to Sino-Korean political tensions and weaker branding in the Chinese market.
• German and American Brands: These brands are expected to show further growth in 2H17, driven by new product launches and improved market conditions.

CV Sales Growth

• Strong Growth in 1H17: CV sales grew by 17.6% YoY in 1H17, primarily due to the low comparable base and improved economic growth.
• Truck Sales as a Key Driver: Trucks were the main contributors to CV growth, with a 23.2% YoY increase in 5M17. The report expects further growth in truck sales due to economic recovery and infrastructure development.
• Bus Sales Weakness: Bus sales remain weak, with a 17% YoY decline in 5M17, but are expected to recover slightly in 2H17, with a projected decline of 7.4% for the year.

Investment Strategy

• Focus on Product Mix and Earnings: The report suggests investing in auto companies with improved product offerings and strong earnings expectations, as they are better positioned to maintain sales strength without aggressive price discounts.
• Undervaluation: H-share auto names are considered undervalued, with current P/E ratios below historical averages. Accumulating shares in these companies is recommended.

Top Picks

Risks

• Upside Risks: Stronger-than-expected auto sales growth, additional stimulus policies.
• Downside Risks: Continued weakening of sales growth, reduced consumer spending due to slower economic growth.

Valuation Analysis

• Sector Valuation: The auto sector is currently trading at 9.4x 2017E P/E, below the three-year historical average of 10x.
• Geely Auto Valuation: Geely Auto is currently trading at 11x 12-month forward P/E, below its historical average of 14x. The stock is undervalued based on its strong earnings growth and improved sales performance.

Summary of Key Figures

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 in China (2013-2017).
• Figure 5: VIA index (2013-2017), reflecting inventory pressure.
• Figure 6: Changes in retail prices and discounts (2013-2017).
• Figure 7 & 8: Monthly SUV sales volume and growth in China (2013-2017).
• Figure 9 & 10: Monthly sedan sales volume and growth in China (2013-2017).
• Figure 11 & 12: Monthly MPV sales volume and growth in China (2013-2017).
• Figure 13: Monthly CUV sales volume (2013-2017).
• Figure 14 & 15: Monthly CV sales volume and growth in China (2013-2017), and 5M17 YoY sales growth of brands from different countries.
• Figure 16: 2017 sales forecasts and historical data.
• Figure 17: Stock valuation and financial data for Geely Auto.
• Figure 18: Key assumption adjustments for model sales and financial data.
• Figure 19: Geely Auto sales mix, sales volume, and profit growth.
• Figure 20: Financial statements for Geely Auto.

Conclusion

The auto sector is expected to experience a rebound in sales in 2H17, with SUVs leading the growth and domestic brands maintaining a strong market position. The report suggests that the sector is undervalued and recommends accumulating shares in companies with strong product offerings and earnings growth. Geely Auto and Brilliance China are highlighted as top picks due to their improved sales performance and strategic advantages.