Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

<p>Our observations on China's auto demand on a quarterly basis in SAAR terms suggests that selling rates were weakest during 1Q19 but have strengthened steadily throughout 2Q and 3Q.  This may be somewhat inconsistent with nominal readings which is China equity market convention.  However, we believe that not adjusting for seasonal factors have historically led to much distorted readings in sell side research.  Here are our thoughts on the selling rate strength YTD:</p><ul>
<li>Much of the 1H19 selling rate weakness coincided with the period of uncertainty surrounding the lack of details regarding the China 6 emissions standards implementation and its impact on China 5 compliant vehicle owners, according to our observations.  In fact, it was not until June that the central government clarified that China 5 compliant vehicle owners would be able to resell their vehicles that much buyer anxiety was alleviated based on our reading of the monthly industry statistics.</li>
<li>In other words, we believe the extent of demand weakness this year especially in 1H19 was impacted more by industry anxiety over lack of policy clarity on the China 6 Emissions Standards implementation, than by media and sell side convention which tend to focus more on the impact of the Sino-American trade war which is a simpler, more emotionally gripping equity market concept to pass around.</li>
<li>As we have observed in the past, the government's tightening on shadow banking does not appear to have made a meaningful impact on industry demand in the past year.</li>
<li>This is not to say that we should be looking forward to a blue sky scenario in the coming quarters, however, since YTD average SAAR is still suggesting that industry demand is currently looking at 7.8% YoY decline, with PV SAAR suggesting a 9.0% YoY decline.  To be sure industry weakness in present in our view but it looks as if 2H weakness may perhaps be more moderate than what the market may be inclined to believe at the moment.</li>
</ul><p>We highly expect 2H auto demand in China to be stronger than 1H19 based on our observations, but continue to expect a mid to high single digit YoY decline in industry demand for FY19.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/102/536/original/Screen%20Shot%202019-10-20%20at%205.23.08%20PM.png?1571617415" class="editor-image img-responsive" data-smartkarma-image-id="102536"></figure><div class="content-caption">Sources: CEIC, SAAR calculated by Author using known seasonal factors</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/102/542/original/Screen%20Shot%202019-10-20%20at%205.36.24%20PM.png?1571618196" class="editor-image img-responsive" data-smartkarma-image-id="102542"></figure><div class="content-caption">Sources: CEIC, SAAR calculated by Author using known seasonal factors</div>

Our observations on China's auto demand on a quarterly basis in SAAR terms suggests that selling rates were weakest during 1Q19 but have strengthened steadily throughout 2Q and 3Q.  This may be somewhat inconsistent with nominal readings which is China equity market convention.  However, we believe that not adjusting for seasonal factors have historically led to much distorted readings in sell side research.  Here are our thoughts on the selling rate strength YTD:
Much of the 1H19 selling rate weakness coincided with the period of uncertainty surrounding the lack of details regarding the China 6 emissions standards implementation and its impact on China 5 compliant vehicle owners, according to our observations.  In fact, it was not until June that the central government clarified that China 5 compliant vehicle owners would be able to resell their vehicles that much buyer anxiety was alleviated based on our reading of the monthly industry statistics.
In other words, we believe the extent of demand weakness this year especially in 1H19 was impacted more by industry anxiety over lack of policy clarity on the China 6 Emissions Standards implementation, than by media and sell side convention which tend to focus more on the impact of the Sino-American trade war which is a simpler, more emotionally gripping equity market concept to pass around.
As we have observed in the past, the government's tightening on shadow banking does not appear to have made a meaningful impact on industry demand in the past year.
This is not to say that we should be looking forward to a blue sky scenario in the coming quarters, however, since YTD average SAAR is still suggesting that industry demand is currently looking at 7.8% YoY decline, with PV SAAR suggesting a 9.0% YoY decline.  To be sure industry weakness in present in our view but it looks as if 2H weakness may perhaps be more moderate than what the market may be inclined to believe at the moment.
We highly expect 2H auto demand in China to be stronger than 1H19 based on our observations, but continue to expect a mid to high single digit YoY decline in industry demand for FY19.Sources: CEIC, SAAR calculated by Author using known seasonal factorsSources: CEIC, SAAR calculated by Author using known seasonal factors

3Q China Auto Demand: 2H19 Looks Stronger than 1H19 - 1Q Was the Worst Quarter in SAAR Terms