A Few Thoughts on Weak February China Auto Sales - Lunar Holidays Don't Explain It in SAAR Terms

China Auto: New Incentives Bring New Demand

China Auto: Rate of Decline Moderating but Too Early to Call a Recovery

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see <a href="https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html" target="_blank">https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html</a>, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see <a href="https://www.smartkarma.com/profiles/780" target="_blank" data-smartkarma-citation="accounts:780">Victoria Li</a> , <a href="https://www.smartkarma.com/insights/china-auto-new-incentives-bring-new-demand" target="_blank" data-smartkarma-citation="insights:29102">China Auto: New Incentives Bring New Demand</a> ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/048/original/Screen%20Shot%202019-04-15%20at%207.03.13%20PM.png?1555384986" class="editor-image img-responsive" data-smartkarma-image-id="85048"></figure><div class="content-caption">Source: CEIC, Author's Estimates using known seasonal factors</div>

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see Victoria Li , China Auto: New Incentives Bring New Demand ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. Source: CEIC, Author's Estimates using known seasonal factors

A Few Thoughts on China's March Auto Demand: SAAR Was Not as Bad as What News Headlines Suggested