According to the latest statistics released by China Automotive Technology and Research Center, the auto production and sales volume keeps dropping in June, with month-on-month down by 1.41% and 5.25% respectively. Till now, the total inventory of the auto industry for the first half of this year reaches 1.3 million vehicles. Following the drop of sales volume and the increasing of inventory, the auto manufacturers are taking the production restriction and price maintaining measures and the profit in 3rd quarter will be not optimistic. However, at present the cost pressure of auto starts to relieve as a new round of sales boom season is ahead after September and the sales volume may rebound. In view of medium and long terms, according to the per capita auto possession and the unit area/highway possession, the Chinese auto consumption still has high growth space.
Both production volume and sales volume keep dropping in June
According to the statistics released by China Automotive Technology and Research Center (CATRC) on 5th, the production and sales volumes for June stood at 1.2942 million and 1.132 million vehicles respectively, month-on-month down by 1.41% and 5.25% respectively. In the first half of this year, the accumulative production and sales volumes in Chinese auto industry stood at 8.4722 million and 7.1853 million vehicles respectively, up by 44.37% and 30.45% respectively against the same period of the year earlier.
CATRC started to release the auto production and sales statistics under its statistics system since May and till now have released the statistics of three months. Compared with the same period statistics released by the China Association of Automobile Manufacturers (CAAM), the sales volume statistics of CATRC is obviously lower, with the difference of sales volume for April and May at 166,500 and 243,700 vehicles respectively.
The sales volume statistics of the CATRC can better reflect the retail sales volume as such statistics is based on the registration number of autos. In fact, the difference of sales volume between CATRC and CAAM can be understood as the difference between the retail sales volume and the wholesale sales volume and the increasing of such difference reflects the accumulation of inventory pressure of the dealers.
According to the data of CATRC, till September, the domestic auto inventory has reached 1.3 million vehicles and the inventory pressure is getting more obvious. In addition, the auto inventory period continues to lengthen from 41 days in February to 55 days in June, which brings disadvantageous influence over the capital turnover of the enterprises and the dealers. Since this year, the great increasing of auto inventory caused the manufacturers to intensify the proactive production reduction in recent months and the production volume has kept obvious dropping for three consecutive months. Following the implementation of production restriction and the price maintaining measures, the boom of the auto industry starts to drop and the profit in 3rd quarter is not optimistic.
Inevitable drop after hot market
Due to the influence of hot auto market in 2009, the production capacity of the auto market is continually expanded. However, the hot market in 2009 was mainly driven by the stimulation of the policy and can’t be maintained this year. At the same time, the sluggishness in the stock market and the real estate market leads to the weakened wealth effect and some consumers starts to be cautious in auto purchase as a double dip of economy is worried. The expansion of production capacity and the sluggish market demand resulted in the sharp price cut in the auto market and the link index of the auto price was slumping continually since the 2nd quarter. Under the ground of expected auto price cut, the number of the consumers waiting for purchase with cash at hand was increased, which accelerated the drop of sales volume. Influenced by the dropped sales volume, the auto stocks kept dropping since April.
In fact, the auto sales volume is closed related to the economic growth and the income level and therefore the short-term judgment in the auto industry shall pay close attention to the relationship between the auto sales volume and above two indexes. Based on the superposed graph from the growth of auto sales volume, the year-on-year growth of resident disposable income, and the year-on-year growth of GDP, the fluctuation amplitude of auto sales volume in 2009 was higher than that of resident disposable income and GDP. As the growth of auto sales volume is far beyond the economic and income growths, it inevitably dropped to the reasonable level.
If 2009 was the year with hot auto market, 2010 is the year to restore to normal status. As there is no rising power in the short term, the auto sales volume may encounter yielding point in 2nd quarter and hit the bottom in 3rd quarter. The oversupply situation will surely compromise the profit capability of the auto manufacturers and the industry profit may create the whole year low in 3rd quarter. However, the continually dropping of steel price since the middle of April will relieve the future cost pressure of the auto industry.
Bottomed evaluation value anticipating boom season
In view of the evaluation value, when calculated as per TTM method and eliminating the negative values, the present price earning ratio is 18.91 times for auto stocks, below the mean value of 31.01 times and the theoretical lower limit of 19.34 times, which means that the evaluation value is at the historic lowest point.
We believe that the continual anxiety over the profitability of the auto industry is the main cause for the continual drop of auto stocks. A large amount of newly built production capacity and a slow growth of market demand may lead to industry oversupply and thus compromise the profit of the auto manufacturers. We believe that, in the next quarter, the auto stocks will hardly realize the systematic surge, but the low evaluation value will emerge the defensive characteristic of the auto stocks.
What is noticeable is that, based on the principle of the auto sales season, the auto sales will enter a new round of boom season after September and on that occasion the industry investment is expected to gain the recognition from the investors. In a specific point of view, the production capacity of high-end auto manufacturers amongst the joint-stock brands is release steadily and there is rarely any large-scale production capacity completed for production by 2012. Therefore, the profitability of the joint-stock auto manufactures, represented by GM, VW, and Toyota, is expected to maintain at high level. At the same time, the commercial vehicle stocks and the pan-new energy vehicle stocks are also worthy of attention. CITIC Securities (11.84,-0.23,-1.91%) recommends to, at the time when the expectation is turned better and the boom season is coming, pay special attention to FAW (16.77,0.09,0.54%), FAW Faway (20.83,0.31,1.51%), Weichai Power (67.48,0.88,1.32%), Foton Motor (17.91,-0.18,-1.00%), and other stocks.