20221019-招银国际-China_Auto_Sector__2H22E_likely_beat__FY23E_consensus_overstated_19页_2mb

China Auto Sector Summary

Core Content

The China auto sector is undergoing significant changes, with a focus on the performance of major automakers such as BYD, GAC, and Great Wall Motor (GWM). The report outlines the expected performance for the second half of 2022 and the full year of 2023, highlighting both the potential for beating expectations and the risks associated with the subsidy phase-out and increased competition.

Main Points

• 2H22E Performance: The auto sector is expected to outperform in 2H22, with retail sales rising 9% YoY to 1.86mn units in September 2022 and wholesale volume surging 33% YoY to 2.33mn units. This was driven by significant inventory buildup, with over 260,000 units added to dealers in September 2022, the highest in history.

• FY23E Concerns: The FY23E consensus is likely overestimated due to the expiration of purchase tax cuts and the phase-out of new-energy vehicle (NEV) subsidies. These factors are expected to lead to a decline in wholesale volume, with a more significant impact on internal combustion engine (ICE) vehicles. NEV sales growth is expected to slow, increasing competition and margin pressure.

• BYD Performance: BYD's 3Q22 earnings exceeded expectations, with a net profit range of RMB 5.5–5.9bn. The company's FY22E net profit is estimated to rise over 300% YoY to RMB 13.3bn, 34% higher than the consensus. However, the FY23E net profit is projected to decline by 19–29% compared to the consensus due to subsidy phase-out and margin pressures.

• Subsidy Impact: The phase-out of NEV subsidies is expected to reduce gross margins for NEV makers. BYD, for example, would need to increase gross margins by 2.5–3.5 ppts for PHEVs and 4–7 ppts for BEVs to maintain the same margins as in 2022. This could make it difficult to raise retail prices, leading to earnings pressure.

• Valuation and Target Price: The report provides a sum-of-the-parts (SOTP) valuation for BYD, leading to a revised target price of HK$218, down from HK$255. The valuation considers different segments including NEV, battery, semiconductor, and handset. Key risks include lower NEV sales and margins, as well as sector re-rating or de-rating.

• GAC Performance: GAC's 3Q22E net profit is projected to rise by 240% YoY and 17% QoQ to RMB 3.2bn, driven by GAC Toyota and GAC Honda. The FY22E net profit is expected to be RMB 11.0bn, 5% higher than consensus. However, the FY23E consensus is considered too high, with the company cutting its FY23E net profit to RMB 9.9bn due to macro uncertainties.

• GAC Valuation: The report uses SOTP to value GAC, with a target price of HK$8.00, down from HK$12.00. Aion, a subsidiary, is valued at HK$3.5 per share based on a conservative P/S multiple, while JVs and associates are valued at HK$4.5 per share. Trumpchi is valued at 0 due to its current loss-making status.

Key Information

• Stocks Covered: The report covers several auto companies, including Xpeng, NIO, Li Auto, GWM, GAC, and BYD. Most are rated BUY, except BYD, which is rated HOLD.

• Key Ratios: The report includes key financial ratios such as P/E, P/B, and ROE for the companies, showing varying levels of profitability and valuation.

• Market Trends: The report suggests that the auto sector may experience a similar trend to 2018, with range trading expected in 2023 due to increased competition and margin pressures.

• Investor Sentiment: Despite the strong performance in 3Q22, the market has already reflected concerns about future earnings, with a share price plunge indicating a cautious outlook.

Summary of Projections

Key Risks

• Subsidy Phase-Out: Likely to reduce margins for NEV makers, making it harder to maintain profitability.
• Increased Competition: More NEV model rollouts and aggressive production capacity expansion are expected to increase competition.
• Macro Uncertainties: Potential economic downturns or policy changes could affect sales and profits.
• Sector Re-rating/De-rating: The auto sector may face valuation adjustments, affecting stock prices.

Conclusion

The China auto sector is expected to see strong performance in 2022, with some companies beating earnings expectations. However, the outlook for 2023 is more cautious due to the phase-out of subsidies and increased competition. The report suggests a conservative approach to valuation and highlights the need for companies to adjust their strategies to maintain profitability in the face of these challenges.