Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

<p>U.S. January light vehicle sales came in at 1.15m units, consistent with mid-month run rate and representing a 28% sequential decline but 1% YoY increase.  In SAAR terms, light vehicle selling rate came in at 17.12m units, down from 17.90m units observed in December.  Based on OEMs, Kelley Bluebook and JD Powers estimates, retail SAAR most likely fell to 13.7m units in January, down from 14.7m units in December.  Here are our initial impressions:</p><ul><li><div class="content-highlight">Industry average incentives saw a 6% MoM drop despite being 8% higher than in January 2017 and being 2% higher than the average incentive spending for FY17.  While incentives usually fall on MoM basis in January, we believe investors should follow incentive trends in 2018 to see whether incentive discipline comes into play or whether incentives continue to rise on an average basis.</div></li><li><div class="content-highlight">Average Transaction Price (ATP) for the industry also came down by 1.3% MoM to $36,270 in January from $36,756 in December according to Kelley Bluebook, but ATP nonetheless remained 3.9% higher than in January 2017.  Incentives as a percentage of ATP remained in the double digits at 10.3% which was consistent with the FY2017 average of 10.5%.</div></li><li><div class="content-highlight">Migration to light trucks continued to take place, although the rate at which car sales are weakening warrants continued monitoring, since the rate at which light trucks sales are rising may no longer mask the loss in car sales volumes in the coming months.  </div></li><li><div class="content-highlight">Retail inventory fell in absolute number terms in January, but the observation is consistent with production cuts seen through December.</div></li><li><div class="content-highlight">Noticeably, Japanese brands gained grounds against D3 in the light truck segment in January.</div></li></ul><div class="content-highlight"><p><strong>We believe investors should keep in mind that pre-Katrina SAAR in the U.S. had dipped to the 16m unit range between May and August of 2017. </strong> Katrina and the ensuing recovery months should be seen as an extraordinary event.  Despite consensus sellside forecast being made in the 17-17.2m unit SAAR range for FY18, we advise investors to keep in mind that U.S. light vehicle demand has been significantly above long term trend since 2013.  Incentive discipline in the industry or even a mild downturn in property prices can lead to a stronger than consensus expected demand in 2018 in our view.</p></div>

U.S. January light vehicle sales came in at 1.15m units, consistent with mid-month run rate and representing a 28% sequential decline but 1% YoY increase.  In SAAR terms, light vehicle selling rate came in at 17.12m units, down from 17.90m units observed in December.  Based on OEMs, Kelley Bluebook and JD Powers estimates, retail SAAR most likely fell to 13.7m units in January, down from 14.7m units in December.  Here are our initial impressions:Industry average incentives saw a 6% MoM drop despite being 8% higher than in January 2017 and being 2% higher than the average incentive spending for FY17.  While incentives usually fall on MoM basis in January, we believe investors should follow incentive trends in 2018 to see whether incentive discipline comes into play or whether incentives continue to rise on an average basis.Average Transaction Price (ATP) for the industry also came down by 1.3% MoM to $36,270 in January from $36,756 in December according to Kelley Bluebook, but ATP nonetheless remained 3.9% higher than in January 2017.  Incentives as a percentage of ATP remained in the double digits at 10.3% which was consistent with the FY2017 average of 10.5%.Migration to light trucks continued to take place, although the rate at which car sales are weakening warrants continued monitoring, since the rate at which light trucks sales are rising may no longer mask the loss in car sales volumes in the coming months.  Retail inventory fell in absolute number terms in January, but the observation is consistent with production cuts seen through December.Noticeably, Japanese brands gained grounds against D3 in the light truck segment in January.We believe investors should keep in mind that pre-Katrina SAAR in the U.S. had dipped to the 16m unit range between May and August of 2017.  Katrina and the ensuing recovery months should be seen as an extraordinary event.  Despite consensus sellside forecast being made in the 17-17.2m unit SAAR range for FY18, we advise investors to keep in mind that U.S. light vehicle demand has been significantly above long term trend since 2013.  Incentive discipline in the industry or even a mild downturn in property prices can lead to a stronger than consensus expected demand in 2018 in our view.

U.S. Auto Demand in January: SAAR Down, Incentives Down