China autos:Auto demand holds up in January

Conclusion

CAAM (China Association of Automobile Manufacturers) reported JanuaryChina auto wholesale shipment data during market hours on 13 February.

Overall Passenger vehicles (PV) demand was still solid, although shipmentsdipped 1% YoY due to the Chinese New Year effect, resulting in 15% fewerselling days, and the front-loading of demand in 4Q16 ahead of the rise in thepurchase tax from 5.0% to 7.5% for vehicles with engines ≤1.6L. Restockingfrom the record-low inventory level in December partly offset the negatives.

Commercial vehicle (CV) sales growth maintained a double-digit pace, rising11% YoY, mainly supported by solid sales of trucks.

Impact

Overall January PV sales are solid: We view the 1% decline in wholesaleshipments as better than expected, as it reflects: 1) the calendar shift of theChinese New Year holiday from February in 2016 to January, which resultedin 15% fewer selling days compared with January 2016; 2) the front-loading ofdemand in 4Q16 also created a headwind. Channel restocking partly offsetthe negatives – CADA reported China auto inventories were at a record-lowlevel of 0.82x in December. Demand for small engine vehicles (displacement≤1.6L, 1.6m units or 72% of total sales) remained solid, likely supported byOEMs’ extra subsidies to cover the higher purchase tax level.

German brand share gains: German brands (21.9%, +7.3ppt MoM) gainedthe most market share, supported by premium brands. Japanese brands’share also expanded off easy comps to 14.9% from 13.3% in January 2016.

Domestic brands (44.0%, -1.6ppt) lost share due to the front-loading ofdemand as they are favoured by more price-sensitive consumers in lower-tiercities. Korean and French brands’ share contracted due to channel stuffing inDecember. SUV sales remained on a growth trajectory with January sales up11% YoY though the share in the PV market fell slightly MoM to 39.7%. Weexpect SUV share to reach 40% in 2017.

We continue to like premium brands: Sales varied significantly amongdifferent players based on earlier reported January auto sales by OEMs.

Some OEMs, especially premium JVs like BAIC-Benz and Brilliance BMW,posted strong growth due to solid underlying demand coupled with backloadingof deliveries. Other OEMs like Changan-Ford and Dongfeng-PSA sawsales drop sharply after aggressive restocking in December. Overall, webelieve premium brands (Premium market will be a safe haven, November2016) will outperform the overall market in 2017.

CVs continue to post robust sales: CVs continued to post double-digitgrowth in January, supported by robust truck sales (+21% YoY). The ongoingCV growth recovery was mainly due to 1) cyclical truck replacement demand,which was further accelerated by tightened freight transportation regulations;2) increased freight demand amid the commodity business recovery andrising logistics activities from E-commerce; 3) the low base effect.

Outlook

We recommend investors buy BAIC Motor Corp (1958 HK, HK$8.30, OP, TP:HK$11.80), SAIC Motor (A-Share) (600104 CH, Rmb25.17, OP, TP:Rmb32.0) and Great Wall (2333 HK, HK$8.65, OP, TP: HK$13.0) and wait fora better entry point for Brilliance China Automotive (1114 HK, HK$12.16, OP,TP: HK$12.80) after its recent price rally.