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Global Auto Horizons
September 2011
The highlight of last month was our Downgrade of Fiat SpA and PSA Peugeot
Citroen to Underperform (from Neutral in both cases), based on our even more
cautious outlook for the Western European light vehicle market and declining
volumes in Brazil over the next 12-24 months. At the same time, we upgraded
Suzuki Motor to Outperform (from Neutral), as we believe that the deterioration
in the company's relationship with VW offers a number of possible scenario
outcomes that are either positive or at worst neutral for the Japanese OEM.
High profitability level in Brazil at risk
For the Western European light vehicle market we further lowered our growth
estimates to -2.3% in 2012 (vs. -1.4%) and to +0.9% in 2013 (vs. +3.6%), driven
to a large extent by an even weaker expected car demand in France and Italy –
the home markets of the French OEM PSA Group and the Italian OEM Fiat SpA
– over the next two years.
More important for Fiat SpA, which besides Italy (30% of global unit sales) has a
major exposure to Brazil (35% of global unit sales), is that we now expect the
Brazilian car market to soften considerably in 2012 (MACQe: -2.5% vs. flat
before) and in 2013 (MACQe: -2.2% vs. +3.1% before) on the back of weakening
leading indicators for Brazil. The Brazilian car market currently still trades some
20-25% above the historical trendline and is expected to increase by 5.3% to
3.54m units in 2011 (vs. 3.36m in 2010). As almost all international OEMs have
aggressive growth targets for Brazil, we estimate that some 1.6m in additional
capacity will be installed until 2014/15. This means that the Brazilian light vehicle
demand will have to grow by 8-10% per annum over the 2010-2014/15 period in
order to ensure an acceptable capacity utilisation level. As we forecast declining
volumes for Brazil in 2012/13, the estimated double-digit EBIT margins of Fiat
SpA as well as the generally high profitability of the Brazilian market will likely
come under rising pressure in our view.
This month’s highlighted stocks
Stocks we like: BMW remains the European Automotive company with the
strongest product pipeline/cost savings momentum until 2013. In Japan, we
highlight Toyota, as in our view consensus is underestimating an operating
leverage-driven margin recovery at Toyota and the supplier Aisin Seiki is
expected to benefit from a significant recovery in Toyota’s global production this
quarter. The South Korean Hyundai Mobis has strong defensive characteristics
due to its after-parts business and Mahindra & Mahindra in India has a robust
product pipeline and exposure to rural Indian markets where demand remains
resilient. Finally, we like Great Wall in China, which is the local-brand leader in
the booming Chinese SUV market.
Stocks we don’t like: PSA Group and Fiat SpA are expected to struggle with
tougher markets like France, Italy and Brazil over the next 12-24 months. Risks
on Mazda have risen, as we forecast a slide back into losses and balance-sheet
strain. We still recommend staying away from BYD following the disappointing
1H11 numbers and from Maruti Suzuki, where EBITDA margins remain
pressured by rising interest rates, fuel prices and competition squeezing
volumes, while materials and R&D costs rise.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global Auto Horizons
September 2011
The highlight of last month was our Downgrade of Fiat SpA and PSA Peugeot
Citroen to Underperform (from Neutral in both cases), based on our even more
cautious outlook for the Western European light vehicle market and declining
volumes in Brazil over the next 12-24 months. At the same time, we upgraded
Suzuki Motor to Outperform (from Neutral), as we believe that the deterioration
in the company's relationship with VW offers a number of possible scenario
outcomes that are either positive or at worst neutral for the Japanese OEM.
High profitability level in Brazil at risk
For the Western European light vehicle market we further lowered our growth
estimates to -2.3% in 2012 (vs. -1.4%) and to +0.9% in 2013 (vs. +3.6%), driven
to a large extent by an even weaker expected car demand in France and Italy –
the home markets of the French OEM PSA Group and the Italian OEM Fiat SpA
– over the next two years.
More important for Fiat SpA, which besides Italy (30% of global unit sales) has a
major exposure to Brazil (35% of global unit sales), is that we now expect the
Brazilian car market to soften considerably in 2012 (MACQe: -2.5% vs. flat
before) and in 2013 (MACQe: -2.2% vs. +3.1% before) on the back of weakening
leading indicators for Brazil. The Brazilian car market currently still trades some
20-25% above the historical trendline and is expected to increase by 5.3% to
3.54m units in 2011 (vs. 3.36m in 2010). As almost all international OEMs have
aggressive growth targets for Brazil, we estimate that some 1.6m in additional
capacity will be installed until 2014/15. This means that the Brazilian light vehicle
demand will have to grow by 8-10% per annum over the 2010-2014/15 period in
order to ensure an acceptable capacity utilisation level. As we forecast declining
volumes for Brazil in 2012/13, the estimated double-digit EBIT margins of Fiat
SpA as well as the generally high profitability of the Brazilian market will likely
come under rising pressure in our view.
This month’s highlighted stocks
Stocks we like: BMW remains the European Automotive company with the
strongest product pipeline/cost savings momentum until 2013. In Japan, we
highlight Toyota, as in our view consensus is underestimating an operating
leverage-driven margin recovery at Toyota and the supplier Aisin Seiki is
expected to benefit from a significant recovery in Toyota’s global production this
quarter. The South Korean Hyundai Mobis has strong defensive characteristics
due to its after-parts business and Mahindra & Mahindra in India has a robust
product pipeline and exposure to rural Indian markets where demand remains
resilient. Finally, we like Great Wall in China, which is the local-brand leader in
the booming Chinese SUV market.
Stocks we don’t like: PSA Group and Fiat SpA are expected to struggle with
tougher markets like France, Italy and Brazil over the next 12-24 months. Risks
on Mazda have risen, as we forecast a slide back into losses and balance-sheet
strain. We still recommend staying away from BYD following the disappointing
1H11 numbers and from Maruti Suzuki, where EBITDA margins remain
pressured by rising interest rates, fuel prices and competition squeezing
volumes, while materials and R&D costs rise.
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