China Auto Sector:JV brands positioned for profit

JV brands gaining market share

Market share of China JV car brands has expanded from 57% at the end of 2013to 65% by the end of July 2014according to CAAM. Judging by their recent success, China’s JV car brands are better positioned than domestic own-brands, likely because they tend to offer a wider variety of entry-level models at competitive prices. In short, JVs are still in the sweet spot of the competitive China auto market. We look for Hong Kong-listed JV names like GAC, DFM and Brilliance to generate solid sales growth momentum in 2014F/2015F.

Customer pool for luxury brands expanding

Luxury vehicles have shown good sales momentum. We estimate China’s top-ten luxury players have recorded 22% unit sales growth YTD, outperforming the overall market by 11ppt. China luxury vehicle makers are seeing robust end demand responding to an ever expanding range of price competitive entry luxury models catering to a customer base that is growing due to the country’s rising affluence. We expect luxury vehicle makers like BMW and Mercedes, which have managed to gain a strong foothold in local markets, to perform better than international peers with a limited local presence.

“I want my, I want my, I want my SUV”

SUV sales growth slowed from 35% YoY in 1H14to 25% in July 2014. Nevertheless, we expect the SUV sub-segment to be the growth driver for foreign JVs. In July 2014, market share of the domestic SUV market reached 21.6%, a record level, largely due to a rising number of new launches and the appeal of off-road capabilities. An increasing number of new SUV models are being introduced by foreign JVs. We expect them to remain market leaders of the RMB150k-300k ASP category. Further, we expect the RMB150k-and-under ASP mini-compact SUV category to drive volume growth for mid-end foreign JVs.

We still like GAC and DFM

Although Hong Kong-listed JV stocks had an impressive YTD run, we think there is still a lot of price performance to go in 2H14F and suggest investors accumulate on weakness. GAC’s multi-year growth story has legs owing to better sales from existing JVs and potential upside from new operations, notably Jeep/Acura. We direct investors seeking a value play to DFM’s undemanding valuation and solid growth momentum. Both GAC and DFM have impressive new model line-ups and offer potential upside from recently established operations.