Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

The domestic passenger vehicle market posted modest growth in 2017, with overall sales volume rising 1.4% year on year to 24.7 million units, broadly in line with our expectations. Domestic brands continue to gain market share amid ongoing product upgrades, while the trend of diverging performance among different joint-venture brands remains unchanged. In our view, the latest industry developments favor <a href="https://www.smartkarma.com/entities/128" target="_blank" data-smartkarma-citation="entities:128:1">Great Wall Motor Company (H) (2333 HK)</a>, or GWM, which has made steady inroads into the higher-value added product segment, and post rising challenges for <a href="https://www.smartkarma.com/entities/910" target="_blank" data-smartkarma-citation="entities:910:1">Dongfeng Motor Grp Co Ltd H (489 HK)</a>'s, or DFM’s, joint-venture product lines. For now, we retain our fair value estimates of HKD 14 per share and HKD 12.5 per share for GWM and DFM, respectively. We consider both stocks to be currently undervalued relative to their medium term net earnings growth prospects.Despite virtually no growth in 2017, we still believe the overall consumer demand remains healthy. The 2017 sales growth would have been in the range of 3%-5%, in our view, after factoring the demand front-loading in 2016 that led to an artificially higher sales volume base in 2016. By vehicle category, sports utility vehicles, or SUVs, were the instrumental growth driver (up 13% year on year) amid ongoing consumer preference shifts, while demand for sedans (down 3% year on year) and multipurpose vehicles (down 17% year on year) remained subdued. We project this trend to continue into the near future, and estimate that the SUV segment will post annual sales volume CAGR of 11%-12% until 2021, which will offset the stagnating sedan segment and help boost annual passenger vehicle market sales growth to 4%-5%.Another noteworthy development in 2017 is the continuous rise of domestic private labels, which saw their market share by sales volume gaining nearly 70 basis points to 44% amid the roll-out of higher-quality products. Geely and GWM, in particular, were among the first domestic players to enter the mid-end segment, which has traditionally been dominated by joint-venture brands. In our view, this will have negative implications for the second-tier French labels, which still represent around 20% of sales volume for DFM. The inherent issue with PSA is that it is getting squeezed from two fronts: The best-value strategies in the low to mid-end market from major local rivals (Geely, GWM, and so on) are eating into its sales, while the brand is not prestigious enough to compete with mainstream luxury BBA brands (BMW, Benz, and Audi). While this is partially offset by the robust performance from the Honda/Nissan joint venture, we think DFM’s longer-term earnings growth upside is constrained unless PSA can meaningfully rebound, in terms of both volume growth and average selling price per unit.Analyst: John Hu

The domestic passenger vehicle market posted modest growth in 2017, with overall sales volume rising 1.4% year on year to 24.7 million units, broadly in line with our expectations. Domestic brands continue to gain market share amid ongoing product upgrades, while the trend of diverging performance among different joint-venture brands remains unchanged. In our view, the latest industry developments favor Great Wall Motor Company (H) (2333 HK), or GWM, which has made steady inroads into the higher-value added product segment, and post rising challenges for Dongfeng Motor Grp Co Ltd H (489 HK)'s, or DFM’s, joint-venture product lines. For now, we retain our fair value estimates of HKD 14 per share and HKD 12.5 per share for GWM and DFM, respectively. We consider both stocks to be currently undervalued relative to their medium term net earnings growth prospects.Despite virtually no growth in 2017, we still believe the overall consumer demand remains healthy. The 2017 sales growth would have been in the range of 3%-5%, in our view, after factoring the demand front-loading in 2016 that led to an artificially higher sales volume base in 2016. By vehicle category, sports utility vehicles, or SUVs, were the instrumental growth driver (up 13% year on year) amid ongoing consumer preference shifts, while demand for sedans (down 3% year on year) and multipurpose vehicles (down 17% year on year) remained subdued. We project this trend to continue into the near future, and estimate that the SUV segment will post annual sales volume CAGR of 11%-12% until 2021, which will offset the stagnating sedan segment and help boost annual passenger vehicle market sales growth to 4%-5%.Another noteworthy development in 2017 is the continuous rise of domestic private labels, which saw their market share by sales volume gaining nearly 70 basis points to 44% amid the roll-out of higher-quality products. Geely and GWM, in particular, were among the first domestic players to enter the mid-end segment, which has traditionally been dominated by joint-venture brands. In our view, this will have negative implications for the second-tier French labels, which still represent around 20% of sales volume for DFM. The inherent issue with PSA is that it is getting squeezed from two fronts: The best-value strategies in the low to mid-end market from major local rivals (Geely, GWM, and so on) are eating into its sales, while the brand is not prestigious enough to compete with mainstream luxury BBA brands (BMW, Benz, and Audi). While this is partially offset by the robust performance from the Honda/Nissan joint venture, we think DFM’s longer-term earnings growth upside is constrained unless PSA can meaningfully rebound, in terms of both volume growth and average selling price per unit.Analyst: John Hu

China's Auto Market Saw Modest Growth in 2017; Private Labels Rise at the Expense of French Brands