Chinese auto sector tour --Days of luxury or cycle fatigue? ::Macquarie Research,

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Chinese auto sector tour
Days of luxury or cycle fatigue?
Event
 We recently conducted a comprehensive tour of automakers, truck, and
engine producers and car dealers in China, which provided colour on the
market potential while also shedding light on the recent cooling of demand.
Key points
 Assumptions cut: Based on market data we‘ve observed recently as well as
any anecdotes from the trip, we are cutting our CY10 passenger vehicle
growth estimate to 5% YoY, from 10%. Due to a tough base-year comparison
in 2H, even this modest number assumes a sequential stepped-up selling rate
due to government support and/or lower prices.
 Pressure points: The companies we spoke to indicate that pricing is already
eroding as the market has slowed, especially among local players threatened
with market share loss. This does not bode well for profitability. 2H11 orders
are likely to be soft for truck makers amid slowing construction orders, unless
government incentives again support demand.
 Luxury strength: Premium segment growth momentum remains extremely
strong and, unlike the volume segment, is actually accelerating. We also
believe longer-term structural prospects are favourable, despite some concern
that aspects of the market development feel like a ―bubble‖.
 The long view: It will take many years for local brands to become globally
competitive, in our view, but we believe that such a day will eventually come.
Occasionally tense relationships with JV partners and the role of the Beijing
government will ultimately determine how successful the global brands will be.
Investment conclusions
 The above mixed view of the market underpins our balanced view of the
stocks worldwide. In China, our top pick is Great Wall, which is the leader the
in fast-growing SUV market. We also like Dongfeng for its broad product
lineup and strong sales growth momentum.
 In Japan, we prefer Toyota for company-specific reasons not directly related
to China but we‘re slightly more cautious on Nissan, which has outperformed
post-quake but is relatively exposed to slowing China headline numbers.
Among suppliers, Toyota Boshoku is also highly geared to China demand.
 We reiterate our positive views on Korean automakers, and in particular
Hyundai Motor, which is operating above full capacity and building a third
plant in China, while increasing exposure to profitable larger car segments.
 China is a major part of our bullish stance on European premium
manufacturers, with BMW our top pick. The short-term momentum of this
segment in China remains strong, and is even accelerating.
 Reflecting China‘s size and importance, a sharp macro correction there
represents a meaningful downside risk to most of our positive ratings