Source: VDA, Verband der Automobilindustrie
*USA, Brazil and Russia include light vehicles (trucks).
While the US was disappointed in Monday’s reports auto sales for September, numbers for the market leader in terms of number and growth, China, will be revealed later in the week. Thanks in part to a government stimulus in the form of a 50% tax cut on cars with an engine size 1.5 liters and less, September should follow the upward trend.
Here are the actual numbers, in units:
Source: VDA data, Verband der Automobilindustrie
With the tax cut holding through the end of December and the last few years showing heavier purchasing in the final quarter, the next few months should also show growth, sequentially as well as year on year. Three major Hong Kong listed Chinese auto companies demonstrate that historical seasonality as well as year this year’s super-charged numbers. Although the week-long vacation celebrating the Chinese New Year depresses auto sales at the beginning of the year, next week’s National Day, aka Golden Week, is more of a shopping holiday. The three companies are :Geely 175 hk, Great Wall 2333 hk and GAC 2238 hk.
Source: all 3 charts from Company Hong Kong Exchange Filings
BAIC hk 1958, another company which reports monthly sales volumes has been excluded from the seasonal comparison since it was newly-listed in 2014. It had also just started to develop its relationship with Daimler Benz, DAI gr, referred to as Beijing Benz, a 51%-owned subsidiary. BAIC is a big player in China, selling 1.6 million passenger vehicles in 2015 which included its own brand as well as Hyundai and Daimler. It was formed as an IPO in 2014 and has also shown increases in units sold 2016, thanks to Daimler and an aggressive push on its own brands, under the names of Senova, Weiwang and BJ.
Source: Hkex filings, January & February excluded since they were grouped together.
In numbers, sales of these four companies combined represent close to 22% of the year to date light vehicle sales in China for the first 8 months of 2016. China passenger vehicle sales for China were reported at 14.4 million in 2016 vs. 12.7 million in 2015 which was a 12.8% increase. (Reported by CAAM, not seasonally adjusted.) Their reported numbers from filings are as follows:
Although these four Chinese companies have all seen unit sales increases year to date, their stock prices have diverged.
Source: Bloomberg, values as of 10/3/2016
Geely, which sells only its own brand under the names of Emgrand, Vision and Boyue, has been the best performer year to date and over the last 12 months. This occurred in spite of the fact that the sales have been dominated by sedans versus the much more popular SUV’S. The company has, however, been gradually moving into more SUV’S and crossovers to offset the declining interest and sales in sedans.
Geely’s stock performance is due partly to its first half performance, where it was able to transform an 11.3% unit sales increase into a 35.8% net to shareholders increase. In its filing, it stated that the profit increase was due to both volume and an ex factory average sales price increase of 17% compared to the prior year.
Sales have continued strong following the first half, with August year to date showing an annual increase of 22%. Geely has been targeting ramping up production, taking over two plants as of 7/20/16 with additional capacity of 300,000 units by the third quarter of 2016. Baoji, is projected for production of 200,000 high end SUV’S while the other, Shanxi, is projected to produce 100,000 high end sedans and mid and high end new energy vehicles. Both were purchased by the company’s wholly-owned subsidary Jirun subsidiary from Baoji Geely and Shanxi New Energy for a combined 1.4billion rmb. (Both were held by Zhejiang Haoqing, the wholly-owned subsidiary of Geely Holdings.) Geely sales are primarily domestic, with exports on a downtrend over the last couple of years at only 12,871 year to date. Despite Geely’s pledge to become a major new energy vehicle producer, the company has given little details on sales with a brief mention of average sales of about 1,500 per month.
Geely’s plan to sell its subsidiaries Ninghai Zhidou, producers of low end energy vehicles and supplies, to a third party failed. They were sold instead to parent Geely Holdings, which is owned by Geely founder and Chairmen, Li Shufu. The breakdown is as follows:
Geely’s quoted rational for the disposal:
As part of the Group’s on-going strategy to enhance value for the Shareholders, the Group plans to consolidate and enhance its product portfolio and thus brand image by focusing on relatively higher-end automobiles going forward. In addition, recent policies issued in the PRC in relation to the eligibility for subsidies and tax exemptions have also been unfavourable to the product portfolios of the Kandi JV and the Zhidou JV and have a negative effect on their financial performance in 2016.
Geely reports unit sales monthly but doesn’t give quarterly statements. Geely has had a strong run but its trailing p/e is still moderate. Nomura raised its price in September to 8.33 hkd thanks partly to projected margin improvement, capacity utilization and product mix.
Guangzhou Auto, or GAC the second best performer, sells its own brand under Guangzhou auto with names such as Trumpchi, but also sells Toyotas, Hondas and Fiat Chrysler vehicles as joint ventures. Those JV’s powered its net profits in the first half to a 133% increase.
While Honda & Toyota have shown growth and dominance in unit sales, the company has had major growth with the Fiat Chrysler JV thanks to success of the Jeep Cherokee brand. It’s also been aggressively pushing its own brand, despite the potential losses as shown in the income statement, to increase market share.
August year to date sales were just as robust, with Chrysler taking up some of Toyota’s slack.
Per Auto News, Jeep’s sales in China rebounded from 2015 thanks to the addition of Cherokee at a factory in Changsha in October, of 2015. In April, Jeep began producing the Regenade subcompact crossover at a new plant in Guangzhou. It plans to add a new C-segment crossover to China in production by year end with another to follow, specifically designed for the Chinese market.
GAC’S unit sales and interim and its low p/e gives strong support to the stock continuing upward. In September, 2016 CICC put GAC on a conviction buy list with a target price of 13.2.
Despite relatively strong auto sales growth, BAIC has actually lagged the Hang Seng index. Much of this is due to its structure. It’s best profit driver has been with its subsidiary, BAIC Benz. Otherwise it sells its own brand, under the names of Weiwang, Senova and BJ, generally at a loss and has seen weakened demand for its JV with Hyundai, which has historically made up its biggest portion of unit sales. While revenues have increased along with sales, net to shareholders has grown only 11% reflecting Daimler’s outsized contribution to profits and BAIC’S brand losses and Hyundais’ flagging sales.
Source: hk filings
As shown below – Home Brand Beijing Motor is far behind Beijing Benz in profits.
Add to that the decline in JV earnings, which is mainly Hyundai, and GAC is struggling to increase profits despite sales increases. August sales have been even stronger than June, with Hyundai showing an upturn but Benz lower ytd than June and Beijing Brand climbing. BAIC doesn’t report quarterly earnings, however, so how those numbers translate into profits will be unclear until well after year end. On 9/27 Macquarie gave it a target price of 12 hkd based on strong Benz sales. (It also called the relationship a JV, which is incorrect.) Its current price of 8.14 is supported by its p/e which is close to the 6 month net profit to shareholder’s growth. Sales numbers for September will most likely be strong and buoy the price. However, profit growth for shareholders hasn’t kept up with unit growth.
BAIC has been rumored to be considering a JV with Chrysler Fiat. This isn’t surprising given GAC’S recent success with Jeep. BAIC has recently expanded a relationship with Daimler with Fujian Benz, which would reportedly produce high end mini-buses under the name of Viano, Sprinter and Vito but details have been light and sales to date have been minimal.
Home Brand Great Wall is the most disappointing of these four. For the first half, it lagged the others both in terms of sales and profits despite its concentration on SUV’s and its relatively popular Haval H6.
Since June, Great Wall has had better unit sales growth. Unfortunately, its razor thin profit margins have been declining further, resulting in net profit changes about 1/2 of unit changes. On 9/27/16 Citi rated it a buy at a price of 10 hkd. on 9/21, Credit Suisse rated it neutral at a price target of 8.8 hkd. Great Wall does report quarterly with a report due about the 23rd of October.
In conclusion, despite strong auto sales stimulated by the tax break, Chinese auto manufacturers have divergent sales and profit paths. All, however, are at risk for a bumpy ride in 2017 when the tax cut is set to expire.