China’s car industry is hitting a few bumps in the road, with manufacturers likely to see prices deteriorate as volume hits its peak, analysts say.
The sector may see gross profits decline by as much as 10 to 15 per cent in the fourth quarter as average selling prices continue to slide, a CLSA report said.
Average prices from factories fell by 8 to 9 per cent between July and September, even as revenue increased 13 per cent, according to CLSA analysts Alexious Lee and Nick Feng.
And Chinese carmakers saw their gross margins — the percentage difference between revenue and cost of goods sold — decline by 1 to 3 per cent.
Things are “not as rosy” for the car sector, as Lee and Feng expect shipment volumes to grow by only 3 per cent in the fourth quarter, after spiking at 28 per cent in the third.
The market will now see a shift away from luxury vehicles to cars with engines smaller than 1.6 litres, with the distance between the market segments widening by 4.6 per cent so far in 2016. It may widen by 2.5 per cent in 2017, according to the report.
“The continuous expansion of the gap will likely weigh on gross margin and profitability for the Chinese automakers,” Lee and Feng said.
China’s cars also experienced a 5.2 per cent drop in sector-wide retail sales between July and September.
“Unlike previous years, new model launches in 2016 did not help retail prices, mainly due to intense competition,” Lee and Feng said.
Additionally, the purchase tax on cars may rise from 5 per cent to 7.5 per cent next year, creating near-term volatility in the sector that “will likely dampen investor sentiment,” they said.
Another area of concern for the automotive sector could be China’s slowing economy, which is experiencing tightening liquidity and lending, as well as the spectre of growing debt.
“A slowdown in economic growth could alter consumer sentiment and weaken auto demand,” UBS analysts Yankun Hou, Tianlong Zou, and Mark Leung said in a report.
Great Wall Motors, the country’s largest sports utility vehicle (SUV) manufacturer, reported third quarter earnings growth of 53 per cent, although gross margins fell by 0.2 per cent.
Following their results, analysts at Nomura and HSBC downgraded the company’s stocks.
But Lee and Feng remain bullish on new model launches in the second half of 2016 and in 2017, setting a target price of HK$8.48. Great Wall shares closed at HK$7.30 on Friday.
Dongfeng Motor, a state-owned car manufacturer based in Wuhan, posted better-than-expected earnings in the third quarter, up 30 per cent to 3.16 billion yuan on high volume growth, a Credit Suisse report said.
Its local brand Dongfeng Fengshen saw volume surge 85 per cent between July and September, “a key surprise” that pushed the company’s gross margin to a two-year high, Credit Suisse analysts Bin Wang and Mark Mao said.
They set Dongfeng’s target stock price at HK$9.2, up on Friday’s closing price of HK$7.82.
Guangzhou Automobile Group, one of the biggest state-owned carmakers in China, posted disappointing third quarter results, largely because of surprisingly low investment income from its joint ventures, according to Wang and Mao.
But the company recently raised 15 billion yuan from an issuance of new shares to six institutional investors affiliated with the Guangzhou government, “a long-term positive for the company,” according to UBS.
Guangzhou Auto recently issued a recall on cars from its venture with Japan’s GAC Toyota, sending its shares plunging by almost 15 per cent. But its stock rebounded to close Friday at HK$9.51.
Credit Suisse’s Wang and Mao maintain the stock will outperform, setting its target price to HK$14.20.
Article source: http://www.scmp.com/business/companies/article/2043549/chinese-car-industry-faces-bumpy-road-prices-slide-volume-hits