Asia ex-Japan Passenger Car Sector
Comment of the Day

August 09 2012

Commentary by Eoin Treacy

Asia ex-Japan Passenger Car Sector

Thanks to a subscriber for this interesting report by Srinivas Rao and colleagues at Deutsche Bank which looks at the growth of the Chinese and Indian automotive markets from a fresh perspective. Here is a section:
Choosing between markets – segment mix matters more than just growth
Investors usually focus on growth rates, and sometimes simply invest in the auto markets that deliver faster growth. However, we argue that regional auto stock selection should be based more on segment mix than just market growth. China's higher per-capita GDP in PPP terms (USD8,400 vs. USD3,700 for India) and higher urbanization (50% vs. 32%), together with faster growth prospects in these two categories, suggest to us that the Chinese auto market will enjoy better-quality growth in the compact and luxury segments. Meanwhile, we think Indian auto demand, although having a slightly faster rate than China, will still be driven by the less profitable subcompact segment. This differentiates the profitability outlook, as seen for Hyundai, which has a c.10-11% EBIT margin in China vs. c.5-6% in India in recent years, on our estimates.

Hyundai, Kia and Brilliance most preferred across the region
We believe these companies have the right products to benefit from China's growing auto segments, which should allow them to gain market share and outperform their peers. Hyundai and Kia increased their Chinese market share from 6.7% in 2007 to 9.7% in 1H12. We have recently upgraded our aboveconsensus 2012-14E earnings on both, and their stocks offer the best 2012E P/E to growth metric in the region, in our view. Brilliance provides exposure to China's luxury market with its BMW JV. We expect the JV's sales momentum to continue, given the upcoming new 3-series sedans. Our target valuation (17x 2012E EPS) is justified by a 2011-14E EPS CAGR of 23%. On the other hand, Indian auto valuations are more expensive than those of their peers despite offering lower structural growth in the medium to long run. Mahindra trades at 15x FY13E EPS, despite an EPS CAGR (FY12-14E) of 7% following our recent earnings downgrade.

Eoin Treacy's view There is a great deal of variability in the performance of auto sector shares with luxury and cheaper brands pressuring mid-range manufacturers. Nevertheless, the evolution of China as the world/s largest auto market remains a game changer for the sector and the defining characteristic of some of the best performing shares reflects how well they have adapted to this changing environment.

India holds great promise as an automotive market given the rise of its own middle class. However, while more people may now be able to afford a car, the condition of the country's roads leaves a great deal to be desired. If the government actually comes good on its promises of infrastructure development this should act as a growth catalyst for automotive demand in India. (Also see Comment of the Day on July 5th 2012 for a comprehenisve review of the global automotive market).

Volkswagen has among the most interesting chart patterns in the sector. The share yields 2.25% and has held a progression of higher reaction lows since October. It is now testing the upper side of its more than two-year range and a sustained move below €120 would be required to question medium-term scope for additional upside.

Both Kia Motors and Hyundai lost momentum over late year but have held their respective progressions of higher reaction lows and firmed once more from the region of the 200-day MA over the last couple of weeks. Sustained moves below their trend means would be required to question medium-term scope for continued higher to lateral ranging.

Greatwall Motors hit a new all-time high last week and will need to hold above the 200-day MA during the current consolidation if the benefit of the doubt is to continue to be given the medium-term upside.

General Motors has returned to test the region of the October lows where it has found at least short-term support. A reversion towards the mean appears to be underway and a sustained move to new lows would be required to question potential for some additional upside. There is a great deal of variability in the performance of auto sector shares with luxury and cheaper brands pressuring mid-range manufacturers. Nevertheless, the evolution of China as the world/s largest auto market remains a game changer for the sector and the defining characteristic of some of the best performing shares reflects how well they have adapted to this changing environment.

India holds great promise as an automotive market given the rise of its own middle class. However, while more people may now be able to afford a car, the condition of the country's roads leaves a great deal to be desired. If the government actually comes good on its promises of infrastructure development this should act as a growth catalyst for automotive demand in India. (Also see Comment of the Day on July 5th 2012 for a comprehenisve review of the global automotive market).

Volkswagen has among the most interesting chart patterns in the sector. The share yields 2.25% and has held a progression of higher reaction lows since October. It is now testing the upper side of its more than two-year range and a sustained move below €120 would be required to question medium-term scope for additional upside.

Both Kia Motors and Hyundai lost momentum over late year but have held their respective progressions of higher reaction lows and firmed once more from the region of the 200-day MA over the last couple of weeks. Sustained moves below their trend means would be required to question medium-term scope for continued higher to lateral ranging.

Greatwall Motors hit a new all-time high last week and will need to hold above the 200-day MA during the current consolidation if the benefit of the doubt is to continue to be given the medium-term upside.

General Motors has returned to test the region of the October lows where it has found at least short-term support. A reversion towards the mean appears to be underway and a sustained move to new lows would be required to question potential for some additional upside.

Back to top