Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

South korea Automobiles / Thematic (Sector/Industry)

<p>June SAAR in the U.S. came in stronger than consensus expectations at 17.47m units, up 3.3% sequentially and up 5.9% YoY.  While we currently expect to see sequential QoQ decline in 3Q18, the current selling rate strength may lead to stronger than the mid 16mn range SAAR we have been expecting in 3Q.  Below are some summary impressions from the figures released today:</p><ul>
<li><div class="content-highlight">Based on monthly sales discussions at Ford and Cox Automotive, <em><strong>retail SAAR seems to have remained stable on an industry basis, with fleet strength driving overall SAAR gains.</strong></em> Light truck selling rate strength drove industry SAAR gains, which continues to favor D3 over Asian brands. </div></li>
<li><div class="content-highlight">Based on our estimates, 1H18 retail SAAR should be at 13.5m units, or up 1.6% YoY from 13.3m unit average 1H17 retail SAAR.  </div></li>
<li><div class="content-highlight">Total retail inventory, while stable from a sequential standpoint, has been creeping up.  </div></li>
<li><div class="content-highlight">
<em><strong>Average Transaction Price (ATP) has been rising at a slower pace than the rate at which incentives have been rising</strong></em>.  While incentives have been strategically used by OEMs in specific models and segments as opposed to a blanket, across the board increase, we note that incentives as a percentage of ATP continues to rise.</div></li>
<li><div class="content-highlight">
<em><strong>Light truck mix in the industry in June reached 68%, the highest achieved at least since 1967</strong></em>.  Light trucks accounted for 66.9% of light vehicles sold in 1H18, up from 62.1% of light vehicles sold in 1H17.  Incrementally, this has allowed D3 to increase its share of the light vehicle market to 45.3% in 1H18 from 44.9% in 1H17.  J3 and Hyundai-Kia have lost share, while non-J3 Japanese brands have gained share in 1H18.</div></li>
<li><div class="content-highlight">
<em><strong>Hyundai-Kia has been able to raise its light truck mix to 39.6% in 1H18 from 33.3% in 1H17</strong></em>, with the Hyundai brand primarily driving the mix shift.  Hyundai has been able to increase its share of the Crossover segment with the <em>Kona</em> in 1H18, based on our observations.</div></li>
</ul><p>Both Ford and Cox Automotive noted availability of credit as a continuing source of selling rate strength especially in the $100k+ income brackets.  While anecdotal evidence suggests that there are at least some moves by captive finance companies of Asian OEMs to tighten credit extension, consistent with ongoing rate hikes by the Fed, we believe overall credit conditions must become much tighter before substantial impact on SAAR can be felt.  Nevertheless, we continue to believe that average 2H18 SAAR is likely to be weaker than 1H18, and look to the high 16m unit range for FY18 light vehicle demand in the U.S.  <em><strong>We continue to believe D3 are best positioned to benefit under market conditions in the U.S. market.</strong></em></p>

June SAAR in the U.S. came in stronger than consensus expectations at 17.47m units, up 3.3% sequentially and up 5.9% YoY.  While we currently expect to see sequential QoQ decline in 3Q18, the current selling rate strength may lead to stronger than the mid 16mn range SAAR we have been expecting in 3Q.  Below are some summary impressions from the figures released today:
Based on monthly sales discussions at Ford and Cox Automotive, retail SAAR seems to have remained stable on an industry basis, with fleet strength driving overall SAAR gains. Light truck selling rate strength drove industry SAAR gains, which continues to favor D3 over Asian brands. 
Based on our estimates, 1H18 retail SAAR should be at 13.5m units, or up 1.6% YoY from 13.3m unit average 1H17 retail SAAR.  
Total retail inventory, while stable from a sequential standpoint, has been creeping up.  

Average Transaction Price (ATP) has been rising at a slower pace than the rate at which incentives have been rising.  While incentives have been strategically used by OEMs in specific models and segments as opposed to a blanket, across the board increase, we note that incentives as a percentage of ATP continues to rise.

Light truck mix in the industry in June reached 68%, the highest achieved at least since 1967.  Light trucks accounted for 66.9% of light vehicles sold in 1H18, up from 62.1% of light vehicles sold in 1H17.  Incrementally, this has allowed D3 to increase its share of the light vehicle market to 45.3% in 1H18 from 44.9% in 1H17.  J3 and Hyundai-Kia have lost share, while non-J3 Japanese brands have gained share in 1H18.

Hyundai-Kia has been able to raise its light truck mix to 39.6% in 1H18 from 33.3% in 1H17, with the Hyundai brand primarily driving the mix shift.  Hyundai has been able to increase its share of the Crossover segment with the Kona in 1H18, based on our observations.
Both Ford and Cox Automotive noted availability of credit as a continuing source of selling rate strength especially in the $100k+ income brackets.  While anecdotal evidence suggests that there are at least some moves by captive finance companies of Asian OEMs to tighten credit extension, consistent with ongoing rate hikes by the Fed, we believe overall credit conditions must become much tighter before substantial impact on SAAR can be felt.  Nevertheless, we continue to believe that average 2H18 SAAR is likely to be weaker than 1H18, and look to the high 16m unit range for FY18 light vehicle demand in the U.S.  We continue to believe D3 are best positioned to benefit under market conditions in the U.S. market.

June US Auto Demand:  17.47m Unit SAAR Stronger than Expected, but Looks May Be Deceving