China Autos & Auto
Parts
1H09 Preview: Volume
Surprise, But Not Bottom
Line; Prefer PV over CV
Investment conclusion: The strength in volume in
China’s auto industry in 1H09 was a positive surprise,
especially in passenger vehicles (PV); sales grew 19.5%
YoY, well ahead of our 6.5% forecast. Government
policy push and growing affordability in inland China
were the main drivers, in our view. Looking into 2H09,
we continue to favor PV over CV (commercial vehicles),
as we believe PV will deliver better earnings thanks to
volume pick-up and mix/price stabilization. CV plays are
likely to suffer from margin erosion due to tougher
competition and pricing discount. Our top picks are
Dongfeng, Denway and Great Wall; our least favored
stocks are Sinotruk, Weichai and Brilliance.
Passenger cars in the sweet spot: We raise our China
passenger car industry volume growth estimate from
6.5% to 27% for 2009, based on our China economist’s
new 2009 GDP forecast of 9.0%. We believe China’s
PV industry will remain in a sweet spot in 2H09, with
35% YoY volume growth given historical low inventory
levels, front-loaded purchases ahead of the
government’s stimulus policy and low base from last
year. As a more balanced supply/demand situation
would stabilize retail prices and product mix is also
expected to stabilize HoH, we expect industry
profitability to improve further.
Heavy duty trucks – competition gets tougher: We
now expect 2H09 volume to move into positive territory,
with 70% YoY growth off an extremely low base last year
(but flat HoH), and raise our 2009 heavy truck sales
growth by 21ppt to flat YoY growth, from our previous
estimate of 20% YoY drop. We highlight the growing
risk of pricing deflation (as companies fight for market
share), which would further reduce the already low
margins. We maintain our cautious view on trucks.