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"Honey & Ash"
Hong Kong Email Alert
14 Sep 2010
China Auto Industry (OUTPERFORM) – On the reliability of industry data Event: On 1 Sep 2010, China Automotive Technology & Research Center (CATRC) announced that in Aug 2010, total automobile sales in China hit 1.22m units, representing a 15.09% increase MoM and a 55.72% jump YoY. The Mainland auto sector rallied on such upbeat figures. Then, on 10 Sep 2010, China Association of Automobile Manufacturers (CAAM) released data for the same month: national automobile sales tallied 1.32m units, up 6.3% MoM and 16.1% YoY. The disparity between the two sets of data is puzzling. Comment:  Reliability of CATRC data remains to be tested considering the short data history. CATRC was established in 1985 as the sole organization overseeing auto industry technology in China while providing technological consultation to industry regulators. In 2003, CATRC was placed under direct leadership of the State-owned Assets Supervision & Administration (SASAC) of the State Council. Although CATRC holds considerable authority, it has a relatively short data history. The institution only began to release auto sales and output data in Apr 2010 and held its first industry development information press conference in May 2010. By contrast, CAAM was founded in 1987, as a government-approved industry association, with monthly data release tracing back to 1998 and an even longer history of data collection. The association has been widely regarded as a key source of information for auto industry analysis in China.  Due to methodological defects, CATRC data are not sufficiently reliable as measures of absolute auto sales and growth. We learned that auto production and sales figures from CATRC are collected via different channels. While the output figure is based on the number of VIN codes and vehicle ex-factory certificates, the sales figure is based on the number of vehicle registrations with the Ministry of Public Security. We believe the tally of registrations does not reflect the whole picture, as it includes imported automobiles but excludes exported vehicles or those sold but not registered (such as military, farm and low-speed vehicles). As such, there is a gap between output and sales figures from CATRC (with an unlikely high auto inventory), which also explains the disparity between CATRC data and CAAM data. Considering the defects in CATRC’s data collection, it is currently not appropriate to use the absolute numbers from the CATRC as a base for our analysis of auto sales and sales growth.  Data from the two institutions will converge in the long run. While CATRC and CAAM differ in data collection methods, we believe that in the long run, both will trail the overall trend of domestic auto market. CATRC data still need to undergo the test of time. This relatively young institution releases auto industry data on the first of every month. So, even though the absolute numbers may still lack in reliability, the trend shown through the data should still be of reference value.  With another high season for auto sales around the corner, we forecast Sep 2010E demand to rise 10% YoY and increase estimated 2010E sales from 17m to 17.35m units. Given the “Golden September and Silver October” for the domestic auto market, we estimate that daily sales in Sep 2010E will tick up 15% MoM. Also considering the Mid-Autumn Festival holiday factor, we forecast total sales in Sep 2010E will rise at least 10% YoY. The upbeat prospects prompted us to revise our full-year 2010E auto sales forecast up 27%, to 17.35m units.  Reiterate our OUTPERFORM rating. We suggest focusing on three types of companies: (i) Mid/high-end passenger vehicle producers with steadily rising demand and capacity utilization rate as well as sustainable profitability, such as FAWAY, Huayu Automotive Systems, Fuyao Glass, FAW Car and Dongfeng (00489.HK); (ii) Heavy-truck makers whose earnings may surpass expectations significantly due to recovery-driven demand growth, such as Sinotruk (03808.HK), Weichai Power (02338.HK), Foton Motor and Weifu Hi-Tech; and (iii) companies featuring steady growth, which can be both offensive and defensive, such as Yutong Bus and Jiangling Motors. Enquiry Tel: (852) 2237 9250
E-mail: hkresearch@citics.com.hk
IMPORTANT DISCLOSURE AT THE END OF THIS REPORT
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Peers’ comparisons – China Auto Industry Yield (%)
10E 10E 10E
Hong Kong - average
17
14
12
0.9
2.5
1.7
21
Source: Respective companies, Bloomberg, CSI 14 Sep 2010
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