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

A Few Thoughts on China VI's Impact on Auto Demand

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

China's passenger vehicle demand of 1.9m units was down 11.7% sequentially but up by 11.2% YoY in April according to CAAM's latest monthly data release, while commercial vehicle demand of 0.4m units slowed down by 17.1% sequentially while rising by 11.7% YoY, in unadjusted terms.  It should be kept in mind that April had 3 less selling days than March while having 2 more selling days compared with April 2017, so what this means in practical terms is that SAAR was up both sequentially as well as in YoY terms.  Here are our observations for the month:<ul><li><div class="content-highlight">YTD average SAAR is up by 5.4% in total industry terms at 28.7m units.  While this looks good on a YoY basis, selling rates will have to strengthen in the remaining part of the year for overall demand to show positive growth on YoY basis.  This is because YTD average SAAR is currently coming in 1.3% weaker than the FY17 actual demand.</div></li><li><div class="content-highlight">As consensus begins to embrace official guidance/target of low single digit FY18 industry growth, we would continue to pay close attention to selling rate strength in the coming months, since the strong SAAR in 2H17 was artificially high.</div></li><li><div class="content-highlight">CADA's retail inventory tracking suggests that inventory levels have been consistently at above 50% through the first 4 months of the year, although on average basis, YTD 18 inventory levels remain somewhat lower than in the same period in 2017.  What the pattern suggests is that currently OEMs are anticipating a stronger 2H18 so are in re-stocking mode.  However, we are concerned about the fact that YTD selling rates are weaker than what would make us confident about a strong 2H18 at this point.</div></li><li><div class="content-highlight">Implied NEV SAAR reached 1.07m units in April, the highest seen in this segment, based on a preliminary NEV tally of 82,000 units.  This is the second time that NEV SAAR has come in at above 1.0m units, the last time being December 2017 at 1.05m units.  YTD NEV SAAR stands at 756k units, implying 11% YoY growth against FY17's 679k units.</div></li><li><div class="content-highlight">NEVs (not counting imports) now account for 3.1% of the passenger vehicle sales on YTD basis based on preliminary tally of April NEV sales, versus 2.7% for FY17.  </div></li></ul>90% of NEV sales in China are in the A-C platform segments where local brands show dominance, which means that current winners especially in the BEV space are largely local brands.  Increasing NEV product offerings from foreign brands will likely pose a medium term threat and pricing pressure but for now we believe the BEV space belongs to local players.  While we continue to brace for a possibility of negative demand growth in FY18 based on observations of YTD selling rate strength, perhaps a stronger than expected EV demand may be the positive catalyst for the market to look to in the coming months.<table class="table table-striped"><colgroup></colgroup><tbody><tr><td colspan="15" style="width: 615pt;"><h2>China YTD Auto Demand</h2></td></tr><tr><td>(Mn Units)</td><td>Apr-18</td><td>Mar-18</td><td>MoM</td><td>Apr-17</td><td>YoY</td><td>YTD 18</td><td>YTD 17</td><td>YoY</td><td>Apr 18 SAAR</td><td>Apr 17 SAAR</td><td>YoY</td><td>YTD 18 AVG SAAR</td><td>YTD 17 AVG SAAR</td><td>YoY</td></tr><tr><td>PV</td><td>1.9</td><td>2.2</td><td>-11.7%</td><td>1.7</td><td>11.2%</td><td>8.0</td><td>7.7</td><td>4.5%</td><td>25.0</td><td>24.1</td><td>3.9%</td><td>24.5</td><td>23.2</td><td>5.5%</td></tr><tr><td>CV</td><td>0.4</td><td>0.5</td><td>-17.1%</td><td>0.4</td><td>11.7%</td><td>1.5</td><td>1.4</td><td>5.0%</td><td>4.2</td><td>4.0</td><td>4.2%</td><td>4.2</td><td>4.0</td><td>4.7%</td></tr><tr><td>Total</td><td>2.3</td><td>2.7</td><td>-12.7%</td><td>2.1</td><td>11.3%</td><td>9.5</td><td>9.1</td><td>4.6%</td><td>29.2</td><td>28.1</td><td>4.0%</td><td>28.7</td><td>27.2</td><td>5.4%</td></tr></tbody></table><div class="content-caption">Source: CEIC</div>

China's passenger vehicle demand of 1.9m units was down 11.7% sequentially but up by 11.2% YoY in April according to CAAM's latest monthly data release, while commercial vehicle demand of 0.4m units slowed down by 17.1% sequentially while rising by 11.7% YoY, in unadjusted terms.  It should be kept in mind that April had 3 less selling days than March while having 2 more selling days compared with April 2017, so what this means in practical terms is that SAAR was up both sequentially as well as in YoY terms.  Here are our observations for the month:YTD average SAAR is up by 5.4% in total industry terms at 28.7m units.  While this looks good on a YoY basis, selling rates will have to strengthen in the remaining part of the year for overall demand to show positive growth on YoY basis.  This is because YTD average SAAR is currently coming in 1.3% weaker than the FY17 actual demand.As consensus begins to embrace official guidance/target of low single digit FY18 industry growth, we would continue to pay close attention to selling rate strength in the coming months, since the strong SAAR in 2H17 was artificially high.CADA's retail inventory tracking suggests that inventory levels have been consistently at above 50% through the first 4 months of the year, although on average basis, YTD 18 inventory levels remain somewhat lower than in the same period in 2017.  What the pattern suggests is that currently OEMs are anticipating a stronger 2H18 so are in re-stocking mode.  However, we are concerned about the fact that YTD selling rates are weaker than what would make us confident about a strong 2H18 at this point.Implied NEV SAAR reached 1.07m units in April, the highest seen in this segment, based on a preliminary NEV tally of 82,000 units.  This is the second time that NEV SAAR has come in at above 1.0m units, the last time being December 2017 at 1.05m units.  YTD NEV SAAR stands at 756k units, implying 11% YoY growth against FY17's 679k units.NEVs (not counting imports) now account for 3.1% of the passenger vehicle sales on YTD basis based on preliminary tally of April NEV sales, versus 2.7% for FY17.  90% of NEV sales in China are in the A-C platform segments where local brands show dominance, which means that current winners especially in the BEV space are largely local brands.  Increasing NEV product offerings from foreign brands will likely pose a medium term threat and pricing pressure but for now we believe the BEV space belongs to local players.  While we continue to brace for a possibility of negative demand growth in FY18 based on observations of YTD selling rate strength, perhaps a stronger than expected EV demand may be the positive catalyst for the market to look to in the coming months.China YTD Auto Demand(Mn Units)Apr-18Mar-18MoMApr-17YoYYTD 18YTD 17YoYApr 18 SAARApr 17 SAARYoYYTD 18 AVG SAARYTD 17 AVG SAARYoYPV1.92.2-11.7%1.711.2%8.07.74.5%25.024.13.9%24.523.25.5%CV0.40.5-17.1%0.411.7%1.51.45.0%4.24.04.2%4.24.04.7%Total2.32.7-12.7%2.111.3%9.59.14.6%29.228.14.0%28.727.25.4%Source: CEIC

April China Auto Demand: Implied NEV SAAR Reaches Above 1.0m Units for the Second Time