20150908-Maybank_KERPL-Rapid_downshift_to_growth,_margins_14页_745kb

China Auto OEM Summary

Core Content

The report provides an analysis of the Chinese automotive OEM sector, focusing on the outlook for sales, margins, and stock performance in 2015 and 2016. It highlights the sector's challenges due to moderating growth, aggressive price cuts, and lower utilization rates, which are expected to compress margins further. Despite the sector appearing cheap on a 1-year forward PER, the report remains cautious, anticipating more earnings revisions and continued downward pressure on valuations.

Main Views

• Sales Growth:
  The report has revised down China auto sales growth for 2015 to 0.3% YoY from 6.8%, indicating a weak market. For 2016, growth is expected to be 1.7% YoY.

  • Sedan sales are expected to remain weak.
  • SUV sales continue to grow, driven by strong demand for compact SUVs.
  • New energy vehicle sales are on an uptrend.

• Margins Pressure:
  Margins are under pressure due to falling production and utilization rates, along with aggressive discounting.

  • The sector trades at 6x 1-year PER, which is considered low but still appears optimistic compared to the report's assumptions.
  • IHS Automotive estimates that China's auto capacity utilization will fall below 70% in 2015, further impacting margins.

• Stock Recommendations:

  • BUY: Geely (175 HK) and Brilliance (1114 HK)
    • Brilliance is expected to regain market share in 2016 with a stronger product pipeline.
    • Geely's product portfolio has reached a turning point and is expected to improve.
  • HOLD: Dongfeng (489 HK), Great Wall (2333 HK), SAIC (600104 CH), GAC (2238 HK)
    • Dongfeng and Great Wall show mixed results with some short-term rebound potential.
    • SAIC is supported by its dividend yield.
    • GAC is expected to face margin pressure due to capacity expansion.
  • SELL: BAIC (1958 HK)
    • BAIC's performance has been weak, with significant earnings declines.
    • The company is expected to remain loss-making through 2017.

Key Information

• Market Trends:

  • SUV sales rose 46% YoY in 1H15, driven by compact SUVs.
  • New energy vehicle sales are continuing to grow.
  • Sales of the overall sector are expected to remain weak in 2H15 and 2016.

• Earnings Outlook:

  • The sector's consensus earnings have been revised down by 6% YTD.
  • BAIC's earnings were trimmed by 16%, while Brilliance and SAIC were revised down by 10.4% and 8.8%, respectively.
  • Geely is the only company in the report's coverage that saw a positive earnings revision.

• Valuation:

  • The sector trades at 6.1x 12-month PER, near the 2008 financial crisis trough.
  • PB valuation is at 1.0x, still 25% above the sector trough.
  • ROE for most automakers has been declining since 2009.

• Dealers Performance:

  • Most dealers are loss-making in 1H15, with expectations of more closures and M&A activity.
  • Channel inventory pressure eased slightly in August but remains a concern.
  • Dealers are expected to continue discounting, which may lead to further margin contraction.

• RMB Depreciation Impact:

  • BAIC is most affected by RMB depreciation due to high import costs and EUR payables.
  • Dongfeng benefits from RMB depreciation due to its EUR loans.
  • Geely and Great Wall have limited FX exposure.

Summary Table

Additional Notes

• The report highlights the structural challenges in the sector, including weak demand, margin compression, and continued earnings revisions.
• It also discusses the impact of RMB depreciation on different OEMs, with BAIC being the most affected.
• The sector's valuation is considered less attractive despite appearing cheap on a PER basis.
• The report recommends caution, with a NEUTRAL rating on the sector as a whole, but maintains BUY calls on Geely and Brilliance.