Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

July saw a dramatic sequential drop in both passenger and commercial vehicle sales in China. On a YoY basis, industry demand also fell by 4.2% compared with July 2017, with passenger vehicle sales decline leading the YoY decline in industry demand.  There was one more selling day in July vs. June, while the number of selling days remained constant from July 2017 to July 2018.  Here are some of our impressions on July demand statistics from China:<ul>
<li>July SAAR of 28.5m units represented a 3.1% sequential decline and a 3.9% YoY decline.</li>
<li>While YTD average SAAR of 28.5m units suggests 3.4% YoY growth in auto demand for the full year, it should be remembered that 2H17 represented a high base, with no tax subsidies for key segments going into 2H18.  </li>
<li>YTD average SAAR implies a 1.6% YoY decline compared with 28.9m unit FY17 actual demand.</li>
<li>Light truck sales remained sluggish compared with passenger vehicle sales, as we have been observing for the past several months.  While light truck mix improved slightly in July (48.8%) compared with June (48.6%), the high point for the year thus far has been 54.1% in February.  We continue to suspect that there may be a reversal in buyer migration in progress in China, unlike in the U.S. market.</li>
<li>CADA's Vehicle Inventory Alert (VIA) Index in the retail market came down to 53.9% in July from 59.9% in June.  However, this was achieved with further production cuts in July on an industry-wide basis.  By CADA's definition, VIA Index above 50% still represents further need for de-stocking.</li>
<li>Passenger vehicle NEV sales comprised 4.7% of passenger vehicle demand in July.  PV NEVs comprised 3.2% of YTD PV demand, up from 1.6% in the same period in 2017.  PHEV demand (+185.6% YoY) has been growing faster than pure EV demand (+89.6%).  This is a segment where domestic players, and BYD in particular, are positioned much better than foreign brands based on our observations.</li>
<li>Hyundai-Kia sales fell dramatically in July of all major foreign brands.  Hyundai sales fell 65.5% sequentially vs. 14.4%, while Kia's sales fell 29.7%. </li>
<li>Toyota sales increased by 7.4% sequentially, vs. Honda (-12.9%), Nissan (-29.5%) and Mazda (-10.0%).</li>
<li>VW Group and GM sales fell by 7.4% abd 7.5%, respectively.</li>
</ul>While consensus estimates look to low single digit annual growth in China's auto demand in 2018, we believe that 2H17 high based achieved on the back of government tax subsidy effect represents a major headwind.  July statistics have done nothing to allay our concerns on that front.<table class="table table-striped">
<colgroup></colgroup>
<tbody>
<tr><td colspan="15" style="text-align: center; width: 847px;">July 2018 China YTD Auto Demand Summary</td></tr>
<tr>
<td style="width: 59px;">(Mn Units)</td>
<td style="width: 46px;">Jul-18</td>
<td style="width: 50px;">Jun-18</td>
<td style="width: 64px;">MoM</td>
<td style="width: 46px;">Jul-17</td>
<td style="width: 56px;">YoY</td>
<td style="width: 49px;">YTD 18</td>
<td style="width: 49px;">YTD 17</td>
<td style="width: 51px;">YoY</td>
<td style="width: 65px;">July 18 SAAR*</td>
<td style="width: 70px;">July 2017 SAAR*</td>
<td style="width: 56px;">YoY</td>
<td style="width: 70px;">YTD 18 AVG SAAR*</td>
<td style="width: 70.5px;">YTD 17 AVG SAAR*</td>
<td style="width: 45.5px;">YoY</td>
</tr>
<tr>
<td style="width: 59px;">PV</td>
<td style="width: 46px;">1.6</td>
<td style="width: 50px;">1.9</td>
<td style="width: 64px;">-15.2%</td>
<td style="width: 46px;">1.7</td>
<td style="width: 56px;">-5.3%</td>
<td style="width: 49px;">13.4</td>
<td style="width: 49px;">12.9</td>
<td style="width: 51px;">3.4%</td>
<td style="width: 65px;">24.0</td>
<td style="width: 70px;">25.5</td>
<td style="width: 56px;">-6.0%</td>
<td style="width: 70px;">24.2</td>
<td style="width: 70.5px;">23.5</td>
<td style="width: 45.5px;">2.8%</td>
</tr>
<tr>
<td style="width: 59px;">CV</td>
<td style="width: 46px;">0.3</td>
<td style="width: 50px;">0.4</td>
<td style="width: 64px;">-25.0%</td>
<td style="width: 46px;">0.3</td>
<td style="width: 56px;">2.3%</td>
<td style="width: 49px;">2.6</td>
<td style="width: 49px;">2.4</td>
<td style="width: 51px;">8.0%</td>
<td style="width: 65px;">4.5</td>
<td style="width: 70px;">4.4</td>
<td style="width: 56px;">2.4%</td>
<td style="width: 70px;">4.3</td>
<td style="width: 70.5px;">4.0</td>
<td style="width: 45.5px;">7.2%</td>
</tr>
<tr>
<td style="width: 59px;">Total</td>
<td style="width: 46px;">1.9</td>
<td style="width: 50px;">2.3</td>
<td style="width: 64px;">-16.9%</td>
<td style="width: 46px;">2.0</td>
<td style="width: 56px;">-4.2%</td>
<td style="width: 49px;">16.0</td>
<td style="width: 49px;">15.3</td>
<td style="width: 51px;">4.1%</td>
<td style="width: 65px;">28.5</td>
<td style="width: 70px;">29.9</td>
<td style="width: 56px;">-4.8%</td>
<td style="width: 70px;">28.5</td>
<td style="width: 70.5px;">27.5</td>
<td style="width: 45.5px;">3.4%</td>
</tr>
</tbody>
</table><div class="content-caption">* SAAR calculated from known factors</div><div class="content-caption">Sources: CEIC, Marklines</div>

July saw a dramatic sequential drop in both passenger and commercial vehicle sales in China. On a YoY basis, industry demand also fell by 4.2% compared with July 2017, with passenger vehicle sales decline leading the YoY decline in industry demand.  There was one more selling day in July vs. June, while the number of selling days remained constant from July 2017 to July 2018.  Here are some of our impressions on July demand statistics from China:
July SAAR of 28.5m units represented a 3.1% sequential decline and a 3.9% YoY decline.
While YTD average SAAR of 28.5m units suggests 3.4% YoY growth in auto demand for the full year, it should be remembered that 2H17 represented a high base, with no tax subsidies for key segments going into 2H18.  
YTD average SAAR implies a 1.6% YoY decline compared with 28.9m unit FY17 actual demand.
Light truck sales remained sluggish compared with passenger vehicle sales, as we have been observing for the past several months.  While light truck mix improved slightly in July (48.8%) compared with June (48.6%), the high point for the year thus far has been 54.1% in February.  We continue to suspect that there may be a reversal in buyer migration in progress in China, unlike in the U.S. market.
CADA's Vehicle Inventory Alert (VIA) Index in the retail market came down to 53.9% in July from 59.9% in June.  However, this was achieved with further production cuts in July on an industry-wide basis.  By CADA's definition, VIA Index above 50% still represents further need for de-stocking.
Passenger vehicle NEV sales comprised 4.7% of passenger vehicle demand in July.  PV NEVs comprised 3.2% of YTD PV demand, up from 1.6% in the same period in 2017.  PHEV demand (+185.6% YoY) has been growing faster than pure EV demand (+89.6%).  This is a segment where domestic players, and BYD in particular, are positioned much better than foreign brands based on our observations.
Hyundai-Kia sales fell dramatically in July of all major foreign brands.  Hyundai sales fell 65.5% sequentially vs. 14.4%, while Kia's sales fell 29.7%. 
Toyota sales increased by 7.4% sequentially, vs. Honda (-12.9%), Nissan (-29.5%) and Mazda (-10.0%).
VW Group and GM sales fell by 7.4% abd 7.5%, respectively.
While consensus estimates look to low single digit annual growth in China's auto demand in 2018, we believe that 2H17 high based achieved on the back of government tax subsidy effect represents a major headwind.  July statistics have done nothing to allay our concerns on that front.


July 2018 China YTD Auto Demand Summary

(Mn Units)
Jul-18
Jun-18
MoM
Jul-17
YoY
YTD 18
YTD 17
YoY
July 18 SAAR*
July 2017 SAAR*
YoY
YTD 18 AVG SAAR*
YTD 17 AVG SAAR*
YoY


PV
1.6
1.9
-15.2%
1.7
-5.3%
13.4
12.9
3.4%
24.0
25.5
-6.0%
24.2
23.5
2.8%


CV
0.3
0.4
-25.0%
0.3
2.3%
2.6
2.4
8.0%
4.5
4.4
2.4%
4.3
4.0
7.2%


Total
1.9
2.3
-16.9%
2.0
-4.2%
16.0
15.3
4.1%
28.5
29.9
-4.8%
28.5
27.5
3.4%


* SAAR calculated from known factorsSources: CEIC, Marklines

July China Auto Demand: SAAR Weakens Sequentially and YoY