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1、Global Research 28 January 2019EquitiesChinaAutomobilesPaul Gong Analyst +852-2971 7868Yizhe Wang Analyst +852-2971 8007Aria Ma +86-105-832 8664Nora Min +86-213-866 8905Wei Shen +86-213-866 8897China AutosWill 2019 be a year of recovery?Deciphering 2018 before forecasting 20192018 was the first year
2、 of declining China auto sales since 1990. Investors are wondering if the sales of 28m vehicles and 24m passenger vehicles (PV) in 2018 were a temporary hiccup or the beginning of a structural downturn? We review the possible causes of the decline, and make 2019 forecasts based on a detailed analysi
3、s of scrappage replacement and ownership penetration. While mixed, the findings seem moderately more constructive than market consensus.Finding the real cause of the 2018 sales declineWe examined several possible explanations for the weak auto sales in 2018: 1) the effect of pre-loading due to the 2
4、016-17 tax cuts; 2) the trade war reducing consumer confidence; and 3) a negative wealth effect in a macro deleveraging environment. We estimate the 2016-17 tax cuts stimulated 4.8m units of extra demand (based on engine size breakdown), impacting 2018/19 demand. We largely rule out the trade wars e
5、ffect on consumer confidence-though we think the negative wealth effect removed some marginally affluent consumers from the car buyer group. We therefore think the 2019 outlook depends more on domestic monetary policy than the trade conflict.Forecasting 2019 on two componentsDespite macro uncertaint
6、ies in 2019, we broke PV demand down into scrappage replacement and ownership expansion, formulating a framework to gauge the medium-term demand outlook. Scrappage replacement seems certain and promising, we estimate it will add over 1m units of additional demand per annum over the next five years,
7、with an accelerating trend. However, at Chinas current car penetration level, fleet expansion should decelerate, as shown by an in-depth analysis of Japan and South Koreas experience. Overall, we estimate a 2019-21 PV demand CAGR of 2%. Based on our price elasticity analysis, we think stimulus polic
8、ies, if any, should still create visible short-term demand.Valuation: downside risks well priced in-probably too much soTrading at 10-year trough PE and P/BV valuations, the market has assumed China auto companies not only face a significant slowdown or decline in sales, but also diminishing ROE. Bu
9、t with the past demand overdraft diminishing and replacement demand kicking in, the market might still be too bearish on the sector. We prefer Geely Automobile (Geely), Great Wall Motor (GWM) and Guangzhou Automobile (GAC) (all Buys) over Brilliance China Automotive (BAIC) (Sell) and Dongfeng Motor
10、(Dongfeng) (Neutral).Figure 1: Coverage snapshotAbove data as of 25 January 2019. Source: Datastream, UBS estimatesCompanyTickerRatingShare pricePT20I9E PECommentGeely Auto0175.HKBuy13.3817.807.2More attractive valuation; promising long-term growth.GZ Automobile2238.HKBuy8.7412.205.7Solid earnings g
11、rowth from Toyota JV expansion.Great Wall2333.HKBuy5.546.406.7Enhanced earnings visibility and attractive valuation.Brilliance China1114.HKBuy7.2610.003.6Share price includes too much discount on uncertainties.Dongfeng Motor0489.HKNeutral8.248.805Hard to deliver growth despite the low valuation.BAIC
12、 Motor1958.HKSell5.023.508.5BJ Benz JV could potentially change stake.This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 24. UBS does and seeks to do business with companies covered in its research reports. As a result, investor
13、s should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Figure 11: China PV sales by brand origin, (2017)45.0%40.0%35.0%30.0%25.0%20.0%15.0%10.0
14、%5.0%0.0%Premium brandsEuropean massPremium brandsEuropean massUS brandsJapanese 2015 2016 2017 2018KoreanChineseSource: NBS, UBS estimates5.0%4.0%3.0%2.0%1.0%0.0%-1.0%-2.0%-3.0%5.0%4.0%3.0%2.0%1.0%0.0%-1.0%-2.0%-3.0%Source: NBS, UBS estimatesFigure 12: China PV market share gain/loss (2018 vs. 2017
15、)The product mix data also shows that sales of medium (B-segment) and large (C- segment) sedans continued to grow in 2018, as did sales of high-end MPVs.The sharpest declines were in low-end crossover MPVs and small A0 segment sedans. This again suggests high-end products were more resilient than lo
16、w-end products during the industry downturn.Figure 13: Product mix change in China PV sales (2015-18)9,000,000Source: CPCA, UBS estimatesRecall that Chinas car penetration by province remains highly uneven and is largely in line with the uneven distribution of GDP per capita and wealth. Therefore we
17、althy Beijing, despite strict licence-place restrictions since end-2010, still has the highest penetration among all provinces (though Zhejiang is catching up quickly and may soon bypass it). The barrier preventing further increases in penetration in large cities like Beijing, Shanghai, Guangzhou, S
18、henzhen, Hangzhou and Tianjin is the licence-plate restriction. But in lower-tier cities and inland provinces the main barriers are affordability and wealth constraints.Figure 14: PV penetration per 1,000 people, by province (2017)bue一一ux EX6U-N (U-&UO nsuEo XUBBIIS ueuun nollNno uenip 一 s ucuuroH a
19、ueno 6uop6uen0 ueuriH ,OJqnH ueu工 6U0PUCUUS UB-1f ,5专 6U0IZ n8uw CU-&U2S 6ue:55u。-一工 = oucoen WO6UOW uu_ xUBqs oq H au.21意North Northeast East Central SouthSouthwest NorthwestChina Average2 years CAGRSource: CEIC, UBS estimatesSince the regions with key sales declines in 2018 were northeastern, nort
20、hwestern and northern China, and it was the lower-tier cities that dragged overall car sales, we conclude it was the negative wealth effect amid the tightening liquidity environment that was the largest factor in the car sales decline.Figure 15: China M1, M2 YoY growth and PV YoY growth-20%1/20101/2
21、0111/20121/20131/20141/20151/20161/20171/2018M1 YoYM2 YoYPV YoYSource: CEIC, CPCA, UBS estimatesUBS Researchreturn 个China Automobile SectorPIVOTAL QUESTIONSQ: What is the growth outlook for 2019?UBS VIEWDespite the recent downtrend, we expect a 2% sales recovery in 2019 and around 2% growth in 2020/
22、2021, mainly due to rising scrappage replacement demand. We believe scrappage will increase from 5.0m units in 2018, to 6.1m in 2019, 7.5m in 2020, 9.2m in 2021 and 11m in 2022, based on our scrappage ratio and car age analysis. Meanwhile, car penetration should decelerate after reaching 133 PVs/1,0
23、00 people in 2017, offsetting some of the rising replacement demand. Inventory destocking, if any, would lead to roughly flat production volume. We still believe any unexpected stimulus policy could create additional demand. We estimate another 2.5% tax cut covering 70% of new car sales would boost
24、demand 5%.EVIDENCEAn academic research paper 1 written by scholars from China5s Tsinghua University suggests the useful life of cars in China ranges from 8 to 15 years, with an average of 12 years, and points out the typical survival pattern of PVs in China.Chinas annual PV sales volume passed 2m in
25、 2003, 4m in 2005, 6m in 2007, 10m in 2009, and 13m in 2010.Historical actual scrappage volume corresponds well with the volume we calculate using ourscrappage volume model, and the temporary discrepancy is explainable. Based on our calculations, we estimate scrappage replacement will approach 50% o
26、f total sales by 2023, from about 20% in 2018.Data from Japan and South Korea shows penetration increases slowed after reaching 133 PVs per 1,000 people. We expect China to follow a similar pattern, with penetration rising continually, but at a slower rate.The latest CADA inventory survey suggests i
27、nventory is at 1.7 months, above the normal peak season level.Our analysis of previous rounds of stimulus policies suggests a 3.5 - 4 price elasticity, showing stimulus would be highly effective in the short run.WHATS PRICED IN?We believe the street is expecting zero growth or a continued decline in
28、 PV sales in 2019, and has largely ignored the rising scrappage replacement demand. We also tend to believe the street lacks insight into the historical experience in Japan and Korea, and is pricing in higher uncertainty on longterm car demand than is likely. Some bearish investors even think Chinas
29、 PV market will decline from 24m a year back to 20m-we believe this is unjustified.1 Vehicle survival patterns in China”, Hao H, Wang H W, Ouyang M G, et al., Science China Technological Sciences, March 2011, Vol. 54, No. 3: 625-629.What is the PV sales outlook for 2019?To forecast the car sales out
30、look in 2019, we break demand down into two parts: 1) replacement of old cars (scrappage); and 2) rising penetration of car ownership. Scrappage replacement demand is relatively straightforward, as it is linked to the size of the aged car fleet.How much will rising replacement demand contribute to c
31、ar sales?Before we calculate annual scrappage, we need two sets of data: 1) historical sales volume; and 2) the annual retention rate of aged cars. The first set of data is easily available. Based on a broad definition of PVs that includes crossover minivans, annual sales volume bypassed 2m in 2003,
32、 4m in 2005, 6m in 2007, 10m in 2009, and 13m in 2010. SUVs have taken a larger share in recent years, while the crossover minivan has almost vanished.Figure 16: Historical China PV sales volume (000)30,000Source: CAAM, UBS estimatesRegarding the annual retention rate or scrappage rate of aged cars,
33、 we referred to the academic paper cited earlier, and adopted the retention rate by age shown below. We also calculated the actual scrappage volume by subtracting the ownership increase to new car sales, and found simulated scrappage was highly similar to actual scrappage. The noticeable difference
34、in year 2015 is likely due to the government campaign to accelerate the scrapping of vehicles with low emission standards (or yellow label cars).100Figure 17: Annual retention rate of PV by age806040200YrO 1 2 34 56 78 9 10 11 12 13 14 15Retention rateULCUC 山OZON 山 65NFigure 18: Annual PV scrappage
35、volume, simulated versus actual10,000,0009,000,0008,000,0007,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,0000Source: Vehicle survival patterns in China, Hao H, Wang H W, Ouyang M G, et Source: Ministry of Transport, UBS estimates al., UBS estimatesBased on this model, we estimate annua
36、l scrappage volume will climb up from 5.0m in 2018, to 6.1m in 2019, 7.5m in 2020, 9.2m in 2021 and 11m in 2022. Even though we assume a slowing increase in the penetration rate, such scrappage and replacement demand would provide substantial support for PV sales in China.Figure 19: Calculated annua
37、l scrappage and replacement demandSource: UBS estimatesHow much will rising penetration contribute to annual car sales?12,000350Figure 20: GDP per capita comparison and PV penetration30010,0002508,0002006,0001504,0001002,00050RussiaMexicoBrazilChina Nominal GDP percapita (US$)PV Penetration per 1000
38、 people (RHS)Source: IMF, Wind, UBS ResearchTo forecast rising car penetration, we looked at the histories of Japan and South Korea at a similar stage of car penetration.In Japans case, PV penetration per 1,000 people ramped from 7 to 51 from 1961 to 1968, and from 51 to 133 from 1969 to 1973. In go
39、ing from 133 to 203, Japan spent another 7 yearsfrom 1973 to 1980.Figure 21: Historical PV penetration in JapanSource: CAAM, UBS estimatesIn South Koreas case, PV penetration per 1000 people ramped from 7 to 48 from 1981 to 1990, and to 134 in another five years (1991-95). Going from 134 to 207 took
40、 another 7 years- from 1995 to 2002.Figure 22: Historical PV penetration in South KoreaChina experienced similar stages of cars penetrating into normal families. Between 2001-11 Chinas car penetration ramped up from 7 to 53 per 1,000 people; it then ramped to 133 in another 6 years (2012-17), If we
41、assume the future penetration process resembles Japans since 1974 and Koreas since 1996, it should take another 6 yearsuntil 2024for penetration in China to ramp up above 200. We therefore assume a similar curve as below, and think the rate of further penetration should slow once it reaches the 130-
42、140 level, as in Japan and Korea. Noticeably, both Japan and Korea experienced a financial crisis during this process. Japan experienced the first oil crisis in 1974, and Korea experienced the Asia Financial Crisis in 1998. If China follows a similar pace to reach above 200 in 2018-24, it would allo
43、w for some similar pain during one of the years. Perhaps 2018 was similar in nature but of a lesser magnitude, in terms of an economic slowdown.Figure 23: Historical PV penetration in China(PVs/1,000 people)2502018-20242001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2
44、017 2018E 2019E 2020E 2021E 2022E 2023E 2024ESource: CAAM, UBS estimatesFigure 25: Deceleration of rising PV penetration of Japan, South Korea and China (per 1,000 people)Figure 24: PV penetration per 1,000 people in Japan (since 1967), South Korea (since 1989), China (since 2011)300JP-1967KR-1989CN
45、-2011Source: CEIC, UBS estimatesSimiliar level of PV25.020.015.010.05.00.0(5.0)Y+0Y+5Y+10Y+15Y+20JP-1967KR-1989CN-2011Note: Japans Year 0 is 1967, South Korea 1989, China 2011.Source: CEIC, UBS estimatesAdding up scrappage replacement and rising car penetration, we expect a China PV vehicle sales CA
46、GR of 2% in 2019-21, slowing to 1% in 2022-24. We therefore summarise our PV forecasts as below.Figure 27: China PV sales growthFigure 26: China PV sales including net imports (scrappage replacement vs. penetration rise)30,000,00025,000,00020,000,00015,000,00010,000,0005,000,00014%12%10%8%6%4%2%0%-2
47、%-4%CO 寸 L09Z860LCX1CO 寸 LO9N8 O O O O O O O i - i- i- Li- ll oooooooooooooooo CXJC4(N(NCNCXJOsJCXJCXJCXICNCslCXJ(NCN(Nuuccc山翁ON岗ozaoz山-zoz骂oz山 65C16%岗ON 山患ON 山WON 山woe 山 HOCXI 山oeoz 山 6ON 85Z Z.5CXJ 95N 95Z 寸5e ooEe CXJse Lse %-6 Total New Car Sales YoY Scrappage Net new increaseSource: CEIC, UBS estimatesSource: CEIC, UBS estimatesSource: CEIC, UBS estimatesSummarising the above analysis, we arrived at the base case estimates on China auto market volumes set out in the table below, in which we assume no stimulus policies are in place.Figure 28: China auto sales volume forecastSour