Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

<p>May SAAR of 16.9m units came below 17.0m units for the first time since August 2017, just prior to Hurricane Harvey.  With Memorial Day weekend coming in earlier this year, industry watchers had been anticipating a very strong SAAR but not over 17.0 units, so the results should have been unsurprising from consensus expectations perspective.  There are several emerging signs, however, pointing to a YoY SAAR erosion which reinforces our own expectations for a mid-high 16m unit full year demand in 2018:</p><ul><li><div class="content-highlight">Thus far, the continuing buyer exodus to light trucks are eroding volume loss in the car segments at least on a YTD basis, but rising gasoline prices at the pump of over $4.00 warrants closer observations, going forward, because of a possibility of trend reversal becomes higher as fuel costs rise in our view.</div></li><li><div class="content-highlight">Rising interest rates are likely to add between $10-20 per month for prime borrowers seeking to finance new vehicle purchases and this condition is likely to worsen with further rate hikes to be expected in the coming quarters.</div></li><li><div class="content-highlight">Higher interest rate environment is likely to impact sub-prime borrowers first, in our view, with expected migration to used vehicles especially in the lower segments.</div></li></ul><p>Thus, we are now becoming more concerned about the impact of inflationary forces and Fed tightening, which we will explore in further detail in this month's <em><strong>Global Auto Demand Tracker</strong></em> which we will post in the 3rd week of June.  Initial observations of May industry figures based on data releases on Friday that we have are:</p><ul><li><div class="content-highlight">In raw market share terms, Ford, FiatChrysler, Honda and Hyundai-Kia saw higher market share in May than their YTD market share.  Others saw lower market share in May than their YTD market share.</div></li><li><div class="content-highlight">Light Trucks in the industry mix in May dipped to 66.8% from 67.5% in April.</div></li><li><div class="content-highlight">Incentives inched up industry-wide on sequential basis, but the May rise can be attributed to Memorial Day weekend related sales campaigns in our view.  It is, however, important to note that Incentives / Average Transaction Price (ATP) has not shown any signs of moderating YTD, despite strong performance by D3 in the light truck segment.</div></li><li><div class="content-highlight">According to our estimates, retail SAAR was down sequentially in May but up on YoY basis.  This retail sequential weakness can become especially pronounced in 2H, since the proportion of fleet mix in 1H has generally tended to be higher than in 2H in the past.  </div></li><li><div class="content-highlight">Days inventory for the industry was down by 3 days on YoY basis and 7 days sequentially.  The YoY improvement for the industry should be attributed primarily to D3, as Asian brand days inventory stayed stable on YoY basis while coming down by 9 days sequentially.  Given this reality, we believe investors should continue to expect production cuts for the U.S. domestic market as we head into 2H.</div></li></ul><p>As macro headwinds continue to become more apparent, we believe investors have been shifting focus into non-top line related stock themes, such as autonomous driving and vehicle electrification.  The problem with such themes, while exciting to discuss at an emotional level and providing short term catalysts for individual stocks, are still years away from becoming meaningfully accretive forces for automotive OEM bottom lines at a fundamental level.</p>

May SAAR of 16.9m units came below 17.0m units for the first time since August 2017, just prior to Hurricane Harvey.  With Memorial Day weekend coming in earlier this year, industry watchers had been anticipating a very strong SAAR but not over 17.0 units, so the results should have been unsurprising from consensus expectations perspective.  There are several emerging signs, however, pointing to a YoY SAAR erosion which reinforces our own expectations for a mid-high 16m unit full year demand in 2018:Thus far, the continuing buyer exodus to light trucks are eroding volume loss in the car segments at least on a YTD basis, but rising gasoline prices at the pump of over $4.00 warrants closer observations, going forward, because of a possibility of trend reversal becomes higher as fuel costs rise in our view.Rising interest rates are likely to add between $10-20 per month for prime borrowers seeking to finance new vehicle purchases and this condition is likely to worsen with further rate hikes to be expected in the coming quarters.Higher interest rate environment is likely to impact sub-prime borrowers first, in our view, with expected migration to used vehicles especially in the lower segments.Thus, we are now becoming more concerned about the impact of inflationary forces and Fed tightening, which we will explore in further detail in this month's Global Auto Demand Tracker which we will post in the 3rd week of June.  Initial observations of May industry figures based on data releases on Friday that we have are:In raw market share terms, Ford, FiatChrysler, Honda and Hyundai-Kia saw higher market share in May than their YTD market share.  Others saw lower market share in May than their YTD market share.Light Trucks in the industry mix in May dipped to 66.8% from 67.5% in April.Incentives inched up industry-wide on sequential basis, but the May rise can be attributed to Memorial Day weekend related sales campaigns in our view.  It is, however, important to note that Incentives / Average Transaction Price (ATP) has not shown any signs of moderating YTD, despite strong performance by D3 in the light truck segment.According to our estimates, retail SAAR was down sequentially in May but up on YoY basis.  This retail sequential weakness can become especially pronounced in 2H, since the proportion of fleet mix in 1H has generally tended to be higher than in 2H in the past.  Days inventory for the industry was down by 3 days on YoY basis and 7 days sequentially.  The YoY improvement for the industry should be attributed primarily to D3, as Asian brand days inventory stayed stable on YoY basis while coming down by 9 days sequentially.  Given this reality, we believe investors should continue to expect production cuts for the U.S. domestic market as we head into 2H.As macro headwinds continue to become more apparent, we believe investors have been shifting focus into non-top line related stock themes, such as autonomous driving and vehicle electrification.  The problem with such themes, while exciting to discuss at an emotional level and providing short term catalysts for individual stocks, are still years away from becoming meaningfully accretive forces for automotive OEM bottom lines at a fundamental level.

May U.S. Auto Sales: SAAR Below 17.0m Units, Back to Pre-Hurricane Harvey Levels