20180607-广发证券_香港_-China_Auto_Sector_Luxury_auto_dealers_the_key_beneficiaries_of_tariffs_cuts_9页_610kb

China Auto Sector Summary

Core Content

This report analyzes the impact of reduced import tariffs on the Chinese auto sector, focusing on the value chain, including upstream suppliers, domestic automakers, joint venture (JV) automakers, and downstream luxury auto dealers. It provides insights into the potential benefits and risks for various stakeholders, with investment recommendations and company ratings.

Main Points

1. Tariff Cuts Overview

• China reduced auto import tariffs from 25% to 15%, effective July 1, 2018.
• Auto component tariffs were lowered from 8%, 10%, 15%, 20%, and 25% to 6% (depending on the type).
• The import duty on PVs (passenger vehicles with fewer than nine seats) is now 15%, lower than the average of developing country peers (e.g., 9.8% in the EU, 8% in South Korea).

2. Impact on Upstream Suppliers

• Limited Impact: Auto component companies are expected to see minimal effect from the tariff cuts due to localized production and a comprehensive supply chain.
• Key Players: Nexteer (1316 HK), Minth Group (425 HK), and Fuyao Glass (3606 HK) are highlighted.
• Nexteer: Has localized production and a diversified client base. Tariff cuts on its key products (steering systems, driveline systems) from 10% to 6% are expected to have limited impact. However, the company faces challenges with flat topline growth and lower gross margins.
• Minth Group: Offers a broad range of auto parts, including lightweight and NEV components. The tariff cuts on auto components are unlikely to impact its earnings significantly.
• Fuyao Glass: Benefits from its domestic competitive advantage and the ramp-up of its US factory, which enhances its ability to withstand external pressures.

3. Impact on Domestic Automakers

• Limited Short-Term Impact: Domestic brands, such as Geely Auto (175 HK), are positioned in a different price segment compared to imported luxury cars.
• Price Gap: Domestic cars are significantly cheaper (Rmb80,000-100,000) than imported cars (Rmb380,000 on average).
• Geely Auto: Recommended as the top pick due to its strong product cycle, brand strategy (Geely + Lynk & Co), and global partnerships. Recent stock price correction is attributed to sector volatility and concerns about Lynk & Co's high-end market entry, but sales have rebounded.

4. Impact on Joint Venture Automakers

• Segment-Specific Impact: Tariff cuts have a limited effect on mass-market JVs but may intensify competition in the luxury segment.
• Luxury JVs: High-end JVs (e.g., BMW Brilliance, Beijing Mercedes-Benz) may face pressure from second-tier imported brands like Lexus, which benefit more from the tariff cuts.
• Cannibalization Risk: However, cannibalization between imported and localized luxury models is unlikely due to distinct pricing and customer bases.
• JV Advantages: JVs have established agile supply chains and can respond to local market demands more effectively than imports.

5. Impact on Luxury Auto Dealers

• Direct Upside: Lower import duties reduce purchasing costs for dealers, allowing them to capture part of the cost savings through higher gross margins and revenue.
• Key Beneficiaries: Yongda Auto (3669 HK) and Zhongsheng Holdings (881 HK) are highlighted as major beneficiaries.
• Yongda Auto: Expected to maintain double-digit growth in new car sales and see a steady increase in gross margins. The company benefits from BMW and Porsche's product cycles and Audi's rebound.
• Zhongsheng Holdings: The largest luxury auto dealer in Hong Kong, with 43% of its sales from luxury models. As the largest Lexus dealer, it is expected to benefit significantly from tariff cuts on imported cars.

Key Information

• Tariff Impact: Lower tariffs reduce the cost of imported vehicles and components, which may lead to price reductions and increased competition.
• Earnings Visibility: Upstream suppliers benefit from stable order backlogs and global exposure.
• Market Share Expansion: Domestic automakers are expected to see continued growth in market share due to product quality and brand positioning.
• Investment Recommendations:
  • Geely Auto (175 HK): Strong product cycle, brand strategy, and global partnerships. Recommended as a "Buy".
  • Brilliance China (1114 HK): Expected to benefit from long-term JV agreements and stable earnings. Recommended as an "Accumulate".
  • Yongda Auto (3669 HK): Strong growth and margin expansion. Recommended as a "Buy".

Risks

• Market Downside: Potential for market decline due to increased competition and trade frictions.
• Trade Frictions: Intensified international trade tensions could offset some of the benefits from tariff cuts.

Ratings

Stock Ratings

• Buy: Expected to outperform benchmark by more than 15%
• Accumulate: Expected to outperform benchmark by more than 5% but not more than 15%
• Hold: Expected stock relative performance ranges between -5% and 5%
• Underperform: Expected to underperform benchmark by more than 5%

Sector Ratings

• Positive: Expected to outperform benchmark by more than 10%
• Neutral: Expected sector relative performance ranges between -10% and 10%
• Cautious: Expected to underperform benchmark by more than 10%

Conclusion

The reduction in import tariffs is expected to have limited impact on the overall auto sector in the medium term, with the most significant benefits going to luxury auto dealers. Domestic automakers and upstream suppliers are relatively well positioned to withstand the changes due to localized production, strong supply chains, and global exposure. While luxury JVs may face short-term pressure, they are expected to benefit from lower procurement costs and maintain their competitive edge. Geely Auto and Yongda Auto are highlighted as top picks, with strong growth prospects and potential for margin expansion.