Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

We have been arguing for some months now that on a seasonally adjusted basis China's auto demand in FY18 will face stronger headwinds than consensus expectations (see, e.g., <a href="https://www.smartkarma.com/insights/march-china-auto-demand-28-9m-saar-2h-could-face-some-headwinds" target="_blank" data-smartkarma-citation="insights:19323">March China Auto Demand: 28.9M SAAR - 2H Could Face Some Headwinds</a>).  The June numbers, if anything, reinforced this concern rather than allaying it:<ul>
<li><div class="content-highlight">1H18 Average industry SAAR was 28.5m, vs. 28.9m unit FY17 demand, so the industry would need to see an average of mid-29m unit SAAR in 2H18 to achieve flat YoY growth in 2018.
</div></li>
<li><div class="content-highlight">In June, there was one less selling day than May and June '17.  Hence, a marginal rise in raw sales and production figures saw a more prominent jump in SAAR terms.  PV SAAR in June represented a 9.8% YoY increase and 1H18 average SAAR is 5% higher than 1H17.  Yet, it should be kept in mind that 2H will actually represent a challenge, since if the 1H18 gains were achieved against a low 1H17 base, 2H18 gains will have to be achieved against a high 2H17 base.
</div></li>
<li><div class="content-highlight">Production has declined for 3 consecutive months, but CADA's Vehicle Inventory Alert (VIA) Index has not been responding favorably in our view.  Wholesale inventory in days supply terms have risen for the 4th consecutive month.  Generally speaking, to stabilize rising inventory more dramatic production cuts and/or price cuts would be needed.  What we have been seeing for the past 3 months is not a healthy pattern.</div></li>
<li><div class="content-highlight">Buyer migration to light trucks (SUVs, MPVs and Crossovers) continued to show a reversal pattern, and light trucks in the mix came down to 48.6% in June.  This represents the 4th consecutive month of trend reversal and the first time since September 2017 when light trucks in the mix was lower than 50%.  If this pattern persists, it will become difficult for analysts to argue that there is a structural global buyer migration to light trucks from sedans.
</div></li>
<li><div class="content-highlight">Key foreign brands' share of the Passenger Vehicle market rose to 63.8% in June, representing 4 consecutive months of gains.  Notable losers in market share have been Ford, Jeep, Suzuki and Fiat in 1H18.  Notable gainers have been Hyundai-Kia, Jaguar, Mercedes and Mitsubishi, of foreign brands.  Of the local brands, Geely stands out as a key share gainer in 1H18.</div></li>
</ul>We continue to believe that 2H18 will present challenges to the prevailing mid single digit industry demand growth scenario.  A key question going forward if trade tension continues to rise with the U.S., is whether Chinese consumers will lash back against U.S. brands as they did with Japanese and Korean brands at points of contention in the past. While Ford and Jeep brands seem like there may be some negative sentiment, the pattern of sales decline at GM and Tesla do not warrant a blanket statement at this point in time according to our observations.<table class="table table-striped">
<colgroup></colgroup>
<tbody>
<tr><td colspan="15" style="text-align: center; width: 705pt;">China YTD Auto Demand</td></tr>
<tr>
<td>(Mn Units)</td>
<td style="text-align: center;">Jun-18</td>
<td style="text-align: center;">May-18</td>
<td style="text-align: center;">MoM</td>
<td style="text-align: center;">Jun-17</td>
<td style="text-align: center;">YoY</td>
<td style="text-align: center;">YTD 18</td>
<td style="text-align: center;">YTD 17</td>
<td style="text-align: center;">YoY</td>
<td style="text-align: center;">June 18 SAAR</td>
<td style="text-align: center;">June 2017 SAAR</td>
<td style="text-align: center;">YoY</td>
<td style="text-align: center;">YTD 18 AVG SAAR</td>
<td style="text-align: center;">YTD 17 AVG SAAR</td>
<td style="text-align: center;">YoY</td>
</tr>
<tr>
<td>PV</td>
<td style="text-align: center;">1.9</td>
<td style="text-align: center;">1.9</td>
<td style="text-align: center;">-1.7%</td>
<td style="text-align: center;">1.8</td>
<td style="text-align: center;">2.3%</td>
<td style="text-align: center;">11.8</td>
<td style="text-align: center;">11.3</td>
<td style="text-align: center;">4.8%</td>
<td style="text-align: center;">24.4</td>
<td style="text-align: center;">22.8</td>
<td style="text-align: center;">7.1%</td>
<td style="text-align: center;">24.2</td>
<td style="text-align: center;">23.2</td>
<td style="text-align: center;">4.4%</td>
</tr>
<tr>
<td>CV</td>
<td style="text-align: center;">0.4</td>
<td style="text-align: center;">0.4</td>
<td style="text-align: center;">0.3%</td>
<td style="text-align: center;">0.3</td>
<td style="text-align: center;">17.5%</td>
<td style="text-align: center;">2.3</td>
<td style="text-align: center;">2.1</td>
<td style="text-align: center;">8.8%</td>
<td style="text-align: center;">5.0</td>
<td style="text-align: center;">4.0</td>
<td style="text-align: center;">25.2%</td>
<td style="text-align: center;">4.3</td>
<td style="text-align: center;">4.0</td>
<td style="text-align: center;">8.0%</td>
</tr>
<tr>
<td>Total</td>
<td style="text-align: center;">2.3</td>
<td style="text-align: center;">2.3</td>
<td style="text-align: center;">-1.3%</td>
<td style="text-align: center;">2.2</td>
<td style="text-align: center;">4.7%</td>
<td style="text-align: center;">14.1</td>
<td style="text-align: center;">13.4</td>
<td style="text-align: center;">5.4%</td>
<td style="text-align: center;">29.4</td>
<td style="text-align: center;">26.8</td>
<td style="text-align: center;">9.8%</td>
<td style="text-align: center;">28.5</td>
<td style="text-align: center;">27.1</td>
<td style="text-align: center;">5.0%</td>
</tr>
</tbody>
</table><div class="content-caption">Source: CEIC.  SAAR calculated by author from known factors</div>

We have been arguing for some months now that on a seasonally adjusted basis China's auto demand in FY18 will face stronger headwinds than consensus expectations (see, e.g., March China Auto Demand: 28.9M SAAR - 2H Could Face Some Headwinds).  The June numbers, if anything, reinforced this concern rather than allaying it:
1H18 Average industry SAAR was 28.5m, vs. 28.9m unit FY17 demand, so the industry would need to see an average of mid-29m unit SAAR in 2H18 to achieve flat YoY growth in 2018.

In June, there was one less selling day than May and June '17.  Hence, a marginal rise in raw sales and production figures saw a more prominent jump in SAAR terms.  PV SAAR in June represented a 9.8% YoY increase and 1H18 average SAAR is 5% higher than 1H17.  Yet, it should be kept in mind that 2H will actually represent a challenge, since if the 1H18 gains were achieved against a low 1H17 base, 2H18 gains will have to be achieved against a high 2H17 base.

Production has declined for 3 consecutive months, but CADA's Vehicle Inventory Alert (VIA) Index has not been responding favorably in our view.  Wholesale inventory in days supply terms have risen for the 4th consecutive month.  Generally speaking, to stabilize rising inventory more dramatic production cuts and/or price cuts would be needed.  What we have been seeing for the past 3 months is not a healthy pattern.
Buyer migration to light trucks (SUVs, MPVs and Crossovers) continued to show a reversal pattern, and light trucks in the mix came down to 48.6% in June.  This represents the 4th consecutive month of trend reversal and the first time since September 2017 when light trucks in the mix was lower than 50%.  If this pattern persists, it will become difficult for analysts to argue that there is a structural global buyer migration to light trucks from sedans.

Key foreign brands' share of the Passenger Vehicle market rose to 63.8% in June, representing 4 consecutive months of gains.  Notable losers in market share have been Ford, Jeep, Suzuki and Fiat in 1H18.  Notable gainers have been Hyundai-Kia, Jaguar, Mercedes and Mitsubishi, of foreign brands.  Of the local brands, Geely stands out as a key share gainer in 1H18.
We continue to believe that 2H18 will present challenges to the prevailing mid single digit industry demand growth scenario.  A key question going forward if trade tension continues to rise with the U.S., is whether Chinese consumers will lash back against U.S. brands as they did with Japanese and Korean brands at points of contention in the past. While Ford and Jeep brands seem like there may be some negative sentiment, the pattern of sales decline at GM and Tesla do not warrant a blanket statement at this point in time according to our observations.


China YTD Auto Demand

(Mn Units)
Jun-18
May-18
MoM
Jun-17
YoY
YTD 18
YTD 17
YoY
June 18 SAAR
June 2017 SAAR
YoY
YTD 18 AVG SAAR
YTD 17 AVG SAAR
YoY


PV
1.9
1.9
-1.7%
1.8
2.3%
11.8
11.3
4.8%
24.4
22.8
7.1%
24.2
23.2
4.4%


CV
0.4
0.4
0.3%
0.3
17.5%
2.3
2.1
8.8%
5.0
4.0
25.2%
4.3
4.0
8.0%


Total
2.3
2.3
-1.3%
2.2
4.7%
14.1
13.4
5.4%
29.4
26.8
9.8%
28.5
27.1
5.0%


Source: CEIC.  SAAR calculated by author from known factors

June China Auto Demand: Production Falling but VIA Index Rising