Recently released market study: China Autos Report Q1 2014

Sales

According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in September 2013 surged 19.7% y-o-y, to 1,935,800 units, bringing sales for the first nine months of the year to 15,882,449 units, an increase of 12.7% y-o-y.

Slowdown View Still There, Just Delayed

While we had originally said that auto sales will suffer a slowdown in H213, as a slowing economy would hurt consumer sentiment, we now believe the slowdown in the car market will come in 2014 when the current economic bounce gives way. This is because as our Country Risk team crucially points out, this latest surge in credit through the informal channels in the system will not be positive for economic growth in 2014, not least as it delays the painful but necessary rebalancing away from stimulus driven growth.

Passenger Car Segment Will Outperform

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As the Chinese economy rebalances over the coming years to one where consumption makes up a larger share, the outperformance of the passenger car segment vis-a-vis the CV segment will persist. Over our 2013-2017 forecast period, we expect car sales to grow 8.4% a year on average versus 4.8% a year average growth for the CV segment. Therefore, we believe there is greater value in passenger car brands, which are industry leaders, rather than pure play CV manufacturers.

Comeback Of Japanese Brands Aids Monthly Performance

The strong print in passenger car sales figures is attributable to broad-based strength in the sector. Besides the continued outperformance of the SUV and MPV segments, which is in line with BMI's long-held view, the recovery in Japanese automakers' sales also contributed to the surge.

Indeed, anti-Japanese sentiment generated by the Sino-Japanese dispute was at its peak during September and October 2012, leading to sharp sales declines for Japanese carmakers in those months (see 'Escalating China-Japan Tensions Spell Trouble', September 18 2012). We warned that the comeback for Japanese brands would take a while, due to the deep rooted cultural underpinnings of the dispute. True enough, consumer misgivings towards Japanese brands have started to abate 12 months later, and these carmakers are now enjoying surging growth rates from a low base (see 'Weakening Yen Possible Trump Card For Japanese Autos', January 17 2013).

Shanghai FTZ Could Be Positive For Exports

We believe the Shanghai FTZ could go on to boost China's auto parts exports. While exact details on the economic incentives within the zone still remain sketchy and it is likely that the FTZ's full potential will take years to materialise, its set up is a step in the right direction. According to CAAM, the gross value of auto parts exports rose 4.6% y-o-y in H113. If regulators manage to attract more suppliers to set up shop within the FTZ and take advantage of its preferential tariffs, component exports can be further boosted.

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