Daily China: China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019 and more

In this briefing:

1. China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019
2. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float
3. Weimob IPO Trading Update – Existing Shareholders to the Rescue
4. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob
5. 2018 HK-Connect SouthBound In a Nutshell

1. China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019

China’s 2018 auto demand came to 27.8m units according to CAAM’s published statistics, bringing the YoY decline to 3.9%.  The results were consistent with our expectations since 1H18, that:

1. In the absence of government stimuli in 2H18, FY18 demand is likely to see a decline, not low single digit growth as consensus was anticipating at the time (see March China Auto Demand: 28.9M SAAR – 2H Could Face Some Headwinds , April China Auto Demand: Implied NEV SAAR Reaches Above 1.0m Units for the Second Time).
2. We also argued that NEV demand growth based on YTD selling rate strength would not be able to compensate for the weakness we were seeing in the ICE segments (see May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H ). 

We estimate that the acquisition tax reduction for 1.6L and smaller engine displacement vehicles in 2016 and 2017 front-loaded about 2.0-2.2m units to PC demand in those two years, similar to the impact of tax reduction effect seen in 2009-10.  This is a segment that saw 1.1m units in volume reduction in 2018 which should be seen as a natural result of the end of the tax subsidies.  In fact we believe that these after-effects of front-loaded demand were most likely more influential on China’s 2018 demand downturn than any headline narratives about negative impacts of trade wars.

Our initial expectations for 2019 are:

1. The 1.6L and smaller engine displacement segment should see stable to slightly lower annual demand, but there is nothing currently in the statistics that suggests that higher segments should also see declines.  This should at least partly be a natural pattern of second and third time car buyers trading up.
2. As we have pointed out in May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H , CV SAAR was unusually strong in 1H18 so this could be an obvious segment of weakness going into 2019, especially if 4Q average CV SAAR of 3.7m units (vs. 4.2m unit FY18 demand) is any indicator of what to expect going forward.

While we expect some residual effects of the 1.6L and lower segment tax subsidy ending in 2017 to remain in effect in 2019 we do not expect its impact to be as large as it was in 2018.  Our low single digit decline scenario considers a lower CV SAAR in YoY terms which appears likely as we head into 2019.  

2. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float

Chengdu Expressway Company Limited (1785 HK) raised US$112m at the fixed price of HK$2.20 per share. We have previously looked at the IPO in Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. Weimob IPO Trading Update – Existing Shareholders to the Rescue

Weimob.com (2013 HK) IPO was priced at the low-end at HKD2.80/share. The retail tranche was 0.79x covered while the institutional tranche was slightly over-subscribed.

I’ve covered most aspects of the deal in my earlier insights: 

• Weimob Pre-IPO – Can Be Steamrolled by Tencent, Anytime
• Weimob IPO Quick Take – Less SaaS, More Ads -> Lower Valuation

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

4. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob

We slide into 2019 with GER’s recap of our latest IPO research. This week, we talk chicken as Arun initiates on the IPO Malaysian poultry producer Leong Hup International (LEHUP MK). Secondly, Venkat initiates on China Tobacco International (GHALPZ CH) with a cautious view. In addition, Arun initiates on online broker Futu Holdings Ltd (FHL US)  and we remind of Arun’s valuation piece on Weimob.com (2013 HK) . 

Quote of the week 

Are you insane?

-Sky news presenter to UK MP Boris Johnson ahead of the Brexit parliament vote planned for today

Best of luck for the week and new year- Rickin, Venkat and Arun

5. 2018 HK-Connect SouthBound In a Nutshell

Since autumn of 2014, the HK-Shanghai Connect, and later the HK-Shenzhen Connect mechanisms have provided means for mainland investors to buy Hong Kong-listed stocks. 

We have been tracking the H/A relationships and the Southbound flows per name on a weekly basis and occasionally writing commentary about it since late 2016. 

This report provides a brief synopsis of the SOUTHBOUND flows into Hong Kong-listed stocks over the course of 2018, by sector, by average percentage change in mainland ownership of HK shares outstanding subject to the Connect mechanisms, and the top and bottom five names per sector per quarter.