Sentiment remains strong for China auto sales recovery

Geely and GAC picked as favourites by analysts

PUBLISHED : Friday, 13 November, 2015, 11:35am
UPDATED : Friday, 13 November, 2015, 11:35am

The recovery of China’s passenger-vehicle sales in October came in stronger than expected and the momentum should persist for at least a few months, analysts said, recommending manufacturers strong in small-engine vehicles like Geely Automobile and GAC Group.

“China PV sales-volume recovery now seems more pronounced to us, partly on the purchase-tax cuts announced at end-September. We expect the strength in unit sales to continue until end-2015 at least,” a report issued by Daiwa Securities said.

Analysts with UBS Securities said in a report the sales rebound in October was “above expectations”.

It said the auto sales will keep posting fast growth rates in November and December.

China’s state council announced it would halve the 10 per cent purchase tax on passenger vehicles with or below a 1.6 litre engine size between October 1, 2015 and December 31, 2016, along with renewing pledges to support new energy vehicles and encourage the retirement of cars that fall short of new emission standards.

Wholesale deliveries of sedans, SUVs and multipurpose vehicles climbed 13 per cent to 1.94 million vehicles in October after the tax cut, the state-backed China Association of Automobile Manufacturers said on Tuesday, reversing a contraction in the sector after the summer stock rout and slow economic growth.

Daiwa recommended Geely, the east China auto maker which also operates the Volvo brand, as a top pick, given its strength in small-engine vehicles, setting a target price for the firm at HK$4.9.

UBS said: “Going forward, we believe Japanese brands will likely regain market share in the next 12 months on the back of comprehensive SUV portfolios, more commitments and product launches from Toyota, Honda, and Nissan.”

“Meanwhile, we remain cautious towards the profitability of the premium segment due to product mix deterioration, yuan depreciation, severe price competition and intensifying competition.”

UBS recommended GAC Group, the Guangdong based automobile manufacturer which owns joint ventures with Toyota and Honda.

“We believe GAC should benefit from the purchase tax cut since it has varieties of small car products, while also potential earnings upside from GAC Honda engine plant, new localized Jeep SUV launches, and further earnings contributions from Trumpchi.”

It also recommended SAIC and Great Wall Motor, given their high percentage in small car sales, and Yutong Bus thanks to the robust development of the new energy bus segment.

Jefferies said Great Wall was estimated to have one of the highest exposures to vehicles with engine sizes of 1.6 L engines which outperformed in October, with shipments up by 14 per cent year-on-year, compared to 3 per cent in September.

“However ... sedans, pick-ups and the M-series continued their sharp falls,” Jefferies said in a note on Tuesday, rating the company as a “Buy”.

Passenger vehicle density stands at 80 per 1,000 people as of end-2014, well below the 400 in Japan and the US and 300 in South Korea.

The difficulty for China to achieve penetration levels similar to developed markets is due to the country’s uneven population density, Fitch said in an earlier report, expecting car ownership to grow to 150 to 200 per 1,000 people over the next two decades, with incremental growth coming from smaller cities and the wider use of SUVs and budget SUVs.