Bump ahead for China's luxury carmaker stocks as economy slows
A dip in demand for high-end luxury vehicles following the recent mainland market rout is prompting analysts to cut estimates for the earnings and profitability of domestic carmakers.
“Cancellation of purchase orders by potential buyers in the last week of June when the A-share market corrected was one of the major factors of weak auto sales in the second quarter of this year,” Barclays equity analyst Song Yang wrote in report to clients.
The benchmark Shanghai and Shenzhen indices have retreated by more than 20 per cent from their June 12 peaks, with turnover on the two bourses sliding from bull-run levels.
There is a strong correlation between passenger vehicle sales and power consumption growth
In the report, Song, however, said the real problem behind slowing auto sales was more related to the wider economic conditions than the stock market. “There is a strong correlation between passenger vehicle sales and power consumption growth, which we view as a good indicator of underlying economic activity,” he said. “The correlation between these two variables is 83 per cent.”
The China Association of Automobile Manufacturers said June passenger-car sales fell 3.4 per cent year on year, marking the third month of year-on-year decline since September 2012.
The mainland’s gross domestic product expanded 7 per cent year on year in the three months to June, according to government data, unchanged from the first thee months of the year and beating the market consensus of 6.8 per cent.
Thanks to a battery of government measures to boost domestic consumption, retail sales grew 10.4 per cent year on year to 14.16 trillion yuan in the first half of 2015. In June alone, retail sales went up 10.6 per cent, accelerating by half a percentage point from May, even though the stock market see-sawed.
With the economy slowing, Song lowered his earnings forecast for four mainland carmakers – Dong Feng Motor, Guangzhou Automobile, Great Wall Motor and Geely – by between 6 per cent and 14 per cent and cut their price targets by 6 per cent to 22 per cent.
Hong Kong-traded shares of Dong Feng Motor, Guangzhou Automobile Group and Brilliance have dropped more than 30 per cent in the past year, compared with an increase of more than 20 per cent for Geely, which manufactures inexpensive compact cars.
Song said premium carmakers had been the worst hit as their sales were driven more by replacement demand, which was sensitive to economic conditions.
Analysts at Macquarie agree, saying disappointing sales in high-end models may continue in the next two months.
“We think Great Wall Motor should continue to benefit from a favourable structural change in the market as more customers opt for SUVs over sedans,” said Janet Lewis of Macquarie.
In contrast to carmakers offering affordable models, luxury-focused Brilliance China Automotive, which makes BMW cars for the China market, said on Monday its profit for the first six months might drop 40 per cent due to a slowdown in the industry and the wider economy.
“We estimate net margin at the joint-venture unit between Brilliance and BMW to come in at 9.1 per cent in the first six months of 2015, down from 11.7 per cent in 2014 and 9.4 per cent in 2013,” analysts at JP Morgan wrote in a report. “Brilliance’s key models including [cars] and SUV all suffer from elevated discounts.”
