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Deep Pockets: UOB says it prefers luxury cars and SUVs to smaller cars in China, which would be good news for makers of vehicles like this on display in Shenzhen.  Photo: Andrew Vanburen

Excerpts from latest analyst reports...

UOB KAY HIAN says China’s auto sector, serving the biggest market in the world, is “still going downhill” after most listed automakers saw worse than expected 2010 results.

Meanwhile, BOCOM has raised Great Wall Motor (HK: 2333) to BUY and hiked its target price on better than expected performance.

China powered past the US in 2009 to become the top global auto market thanks to vehicle sales growth that year of a stunning 46%, and last year the PRC moved past neighbor Japan to become the world’s second biggest economy.

So where does that leave the nation’s revved up automobile industry, and the countless upstream suppliers and downstream ancillary industries that rely on its growth?

UOB says China’s auto industry 'still going downhill', UNDERWEIGHT on sector

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Running out of Gas? An all-electric BYD taxi stuck emission-free in Shenzhen traffic.  Photo: Andrew Vanburen

Disappointing 2010 results Most automakers reported worse-than expected 2010 results, including GAGC (2238 HK/NOT RATED), Geely (175 HK/SELL) and BYD (1211 HK/SELL), due to margin pressure in 2H10. While GAGC and Geely saw significant h-o-h profit declines in 2H10, BYD even recorded a loss for its automobile segment in the same period. Only Great Wall Motor’s (2333 HK/NOT RATED) 2010 results beat expectations.

Consensus remains over-optimistic about 2011 Despite the disappointing 2H10 results of automakers, the market remains overoptimistic about their profit growth in 2011. Based on assumptions of mid- to high-teen growth in sales volume and margin improvement, the street is expecting an 18-35% earnings growth for GAGC, Geely and BYD, which seems unrealistic given the even tougher environment this year.

byd_metrics3
BYD is currently trading at 29.55 hkd, near 52-week lows

Price war breaking out Since Mar 11, a new round of price wars has been raging in the medium and small car markets. To fight for market share, major automakers are cutting prices, including Sino-foreign JVs like Shanghai GM and FAW Toyota, and domestic brands like BYD and Geely. Automakers usually shy away from declaring price cuts formally. Instead, they tend to encourage dealers to cut retail prices by giving dealers more incentive rebates, which would hurt automakers’ selling and distribution expenses.

Prefer luxury cars and SUVs to medium and small cars Given the weakening earnings momentum and still bullish consensus view, we remain UNDERWEIGHT on the auto sector. We prefer the luxury and SUV segments where corporate earnings are underpinned by healthier supply-demand dynamics, eg Dah Chong Hong (1828 HK/NOT RATED) and Great Wall Motor (2333 HK/NOT RATED).

See also: SPARKLE ROLL Making Fortune From China's Millionaires




BOCOM hikes TP on Great Wall Motor, expects strong 2011 sales

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Breadwinner: BOCOM says Great Wall will continue to rank among top 3 SUV sellers in China. Photo: Great Wall

Great Wall Motor Co Ltd (HK: 2333) saw 2010 operating revenue grow 78.9% to 22.175 bln yuan. Hover series SUVs and C30 sedans continued to be the key profit drivers. Sales of SUVs would probably continue to rank top 3 in the domestic industry. Sales of the Hover series SUVs in 2010 grew 135% to 136,900 units, squeezing into the top 3 position along with Honda’s CRV and Toyota’s RAV4.

The earthquake in Japan will affect the supply of imported generators and gearboxes of some JV brands in the near future, which will be beneficial to the sales of Great Wall Motor’s SUVs. Sales of SUVs in 2011 are estimated to reach 160,000-170,000 units, representing a y-o-y growth of around 20%. C30 and soon-to-be-launched C60 models will boost sedan sales in 2011.

We expect that sedan sales will grow over 50% y-o-y to around 200,000 units in 2011, boosting the profit growth of the company.

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Current price: 14.12 hkd

Exports of pickup trucks may be affected by unrest in Africa. Sales of pickup trucks grew 30.9% y-o-y to 98,600 units in 2010, 24,800 units of which were exported to foreign countries.

While most of its pickup trucks were exported to Russia and South Africa, exports of pickup trucks to Africa might be modestly affected by unrests in Africa. We believe sales of pickup trucks could increase by around 10% to 110,000 units in 2011.

Attractive valuation We expect total sales in 2011 to reach around 470,000 units with a growth rate of over 30%, beating the industry growth rate. FY11F/FY12F EPS are projected at RMB1.26/RMB1.57, equivalent to FY11F 7.6x PE.

We lift its rating from “LT-Buy” to “Buy” on attractive valuation and raise its TP to HK$15 from HK$14.

See also: BYD: No Sparkplug In Sight For Struggling EV Firm

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