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

May Global Auto Demand Tracker: EV Versus ICE in Western Europe - Implications for Push Marketing

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

Based on CAAM's data release, May SAAR in China came in at 27.5m units (-5.3% MoM, +0.6% YoY), with YTD average SAAR coming in at 28.4m units.  This is in line with long term trend demand of 28.4m units, but 2.0% below FY17 demand of 28.9m units.  Here are some preliminary observations:<ul><li>Unit sales declined by 1.3% sequentially while rising by 9.1% YoY.  However, May '18 had 2 more selling days than in May '17.  While cumulative YTD sales is still ahead by 5.4% YoY, it is the seasonally adjusted selling rate strength we are more concerned about, and YTD average remains 2.0% below FY17 demand, with a strong base coming up in 2H.</li><li>Light truck share of the PV market continued to fall for the 4th consecutive month, reaching 50.7% in May from 51.5% in April.  We now may be witnessing a reversal of the buyer migration to light trucks so will keep an eye out on industry mix in the coming years.</li><li>Key foreign brands recovered a bit of market share in May, up to 62.8% from 62.5% in April.  Korean share of the PV market has not been showing significant improvements from a selling rate perspective according to our observations.</li><li>Commercial vehicle SAAR remains at above long term trend demand, which has been a key support for a relatively stable SAAR YTD.</li><li>According to data from CADA, May VIA index fell slightly to 53.7% from 54.6% in April, but our observations suggest the fall had more to do with production cuts than retail demand strength.</li></ul>In 1H17, we predicted that FY17 demand was likely to beat what was at the time a bearish consensus outlook for China's full year demand.  YTD in 2018 we have been noting signs that FY18 demand may be weaker than CAAM and consensus forecast for a mid-single digit demand growth in the absence of any new stimulus plans from the government in 2H.  With a high base effect in 2H17, 2H18 is likely to provide a significant headwind for China to achieve positive growth in FY18 in our view.<div class="content-highlight">At current pace, we believe it is highly unlikely that NEV demand will be able to compensate for any weakening of ICE demand in the China market, which would be consistent with observations we have made in the European market last month (see <a href="https://www.smartkarma.com/insights/may-global-auto-demand-tracker-ev-versus-ice-in-western-europe-implications-for-push-marketing" target="_blank" data-smartkarma-citation="insights:20557">May Global Auto Demand Tracker: EV Versus ICE in Western Europe - Implications for Push Marketing</a>).</div><table class="table table-striped"><colgroup></colgroup><tbody><tr><td colspan="15" style="width: 705pt;"><h2>China YTD Auto Demand</h2></td></tr><tr><td>(Mn Units)</td><td style="text-align: center;">May-18</td><td style="text-align: center;">Apr-18</td><td style="text-align: center;">MoM</td><td style="text-align: center;">May-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;">May 18 SAAR</td><td style="text-align: center;">May 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;">-0.4%</td><td style="text-align: center;">1.8</td><td style="text-align: center;">8.8%</td><td style="text-align: center;">9.9</td><td style="text-align: center;">9.4</td><td style="text-align: center;">5.3%</td><td style="text-align: center;">23.3</td><td style="text-align: center;">23.3</td><td style="text-align: center;">-0.1%</td><td style="text-align: center;">24.2</td><td style="text-align: center;">23.2</td><td style="text-align: center;">4.1%</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;">-1.5%</td><td style="text-align: center;">0.3</td><td style="text-align: center;">15.5%</td><td style="text-align: center;">1.9</td><td style="text-align: center;">1.8</td><td style="text-align: center;">7.1%</td><td style="text-align: center;">4.2</td><td style="text-align: center;">4.0</td><td style="text-align: center;">4.2%</td><td style="text-align: center;">4.2</td><td style="text-align: center;">4.0</td><td style="text-align: center;">4.6%</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;">-0.6%</td><td style="text-align: center;">2.1</td><td style="text-align: center;">9.9%</td><td style="text-align: center;">11.8</td><td style="text-align: center;">11.2</td><td style="text-align: center;">5.6%</td><td style="text-align: center;">27.5</td><td style="text-align: center;">27.3</td><td style="text-align: center;">0.6%</td><td style="text-align: center;">28.4</td><td style="text-align: center;">27.2</td><td style="text-align: center;">4.2%</td></tr></tbody></table><div class="content-caption">Source: CEIC, SAAR calculated from known factors</div>

Based on CAAM's data release, May SAAR in China came in at 27.5m units (-5.3% MoM, +0.6% YoY), with YTD average SAAR coming in at 28.4m units.  This is in line with long term trend demand of 28.4m units, but 2.0% below FY17 demand of 28.9m units.  Here are some preliminary observations:Unit sales declined by 1.3% sequentially while rising by 9.1% YoY.  However, May '18 had 2 more selling days than in May '17.  While cumulative YTD sales is still ahead by 5.4% YoY, it is the seasonally adjusted selling rate strength we are more concerned about, and YTD average remains 2.0% below FY17 demand, with a strong base coming up in 2H.Light truck share of the PV market continued to fall for the 4th consecutive month, reaching 50.7% in May from 51.5% in April.  We now may be witnessing a reversal of the buyer migration to light trucks so will keep an eye out on industry mix in the coming years.Key foreign brands recovered a bit of market share in May, up to 62.8% from 62.5% in April.  Korean share of the PV market has not been showing significant improvements from a selling rate perspective according to our observations.Commercial vehicle SAAR remains at above long term trend demand, which has been a key support for a relatively stable SAAR YTD.According to data from CADA, May VIA index fell slightly to 53.7% from 54.6% in April, but our observations suggest the fall had more to do with production cuts than retail demand strength.In 1H17, we predicted that FY17 demand was likely to beat what was at the time a bearish consensus outlook for China's full year demand.  YTD in 2018 we have been noting signs that FY18 demand may be weaker than CAAM and consensus forecast for a mid-single digit demand growth in the absence of any new stimulus plans from the government in 2H.  With a high base effect in 2H17, 2H18 is likely to provide a significant headwind for China to achieve positive growth in FY18 in our view.At current pace, we believe it is highly unlikely that NEV demand will be able to compensate for any weakening of ICE demand in the China market, which would be consistent with observations we have made in the European market last month (see May Global Auto Demand Tracker: EV Versus ICE in Western Europe - Implications for Push Marketing).China YTD Auto Demand(Mn Units)May-18Apr-18MoMMay-17YoYYTD 18YTD 17YoYMay 18 SAARMay 2017 SAARYoYYTD 18 AVG SAARYTD 17 AVG SAARYoYPV1.91.9-0.4%1.88.8%9.99.45.3%23.323.3-0.1%24.223.24.1%CV0.40.4-1.5%0.315.5%1.91.87.1%4.24.04.2%4.24.04.6%Total2.32.3-0.6%2.19.9%11.811.25.6%27.527.30.6%28.427.24.2%Source: CEIC, SAAR calculated from known factors

May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H