Ian Dong decided to buy a Roewe RX3 SUV in June, thinking it could help him avoid the huge crowds on public transportation amid the Covid-19 pandemic.
“Owning a car was not on my agenda this year, but it is important now since I do not want to take bus or subway during rush hours,” said the 35-year-old employee of a Shanghai state-owned financial institution. “The coronavirus prompted me to spend more than 100,000 yuan [US$14,306] on the SUV – and I think it’s worth it.”
China’s car making sector, one of the worst hit industries by Covid-19 in the first quarter of this year as production and sales were hammered by the disease outbreak, saw a ray of hope recently spurred by fresh demand from buyers like Dong.
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In June, China saw auto sales jump 11.6 per cent and total auto output rise by 22.5 per cent year on year, according to the China Association of Automobile Manufacturers.
Jefferies analyst Alexious Lee said the sales recovery was a blend of pent up demand and lack of components in the first quarter due to supply disruptions caused by the virus.
“But it also probably signals a new trend forming, like people might not want to be congested in public transportation, people might seek out alternative means of transportation like owning a car,” he said. “The market is very watchful: Is this a new trend altogether? If it is, then you might see big demand to be more sustainable.”
BYD, Geely Automobile Holdings and Great Wall shares in Hong Kong are rated as “buy” stocks by Lee, who sees significant gains ahead despite recent run-ups. BYD could go up 27 per cent to HK$87.60 over the next 12 months, Geely could gain by 42 per cent to HK$22.60, and Great Wall Motor could shoot up by 37 per cent to HK$9.20 from their Friday closing prices, according to Lee’s assessment.
An index by consultancy East Money Information that tracks 157 mainland-listed carmakers and auto component suppliers has jumped 7.2 per cent so far this month, against a gain of 7.7 per cent in the benchmark Shanghai Composite Index.
“The bull run on the overall market did benefit auto and auto-related stocks, but investors also saw positive signs that new demand would breathe new fire into the sector,” said He Yan, a fund manager with Shanghai Shiva Investment. “The fears about a second wave of Covid-19 remain, and it is expected that more families would consider buying a car for the first time for the sake of safety.”
In Hong Kong, Great Wall Motors – which makes SUVs and pickup trucks – has soared 39 per cent this month. Meanwhile, despite slides last week, Geely has jumped 30 per cent this month and Warren Buffett-backed BYD – which dominates the Chinese battery-development space – has shot up 15 per cent.
In Monday Hong Kong trading, BYD soared 12.3 per cent, Geely rose 1.4 per cent, while Great Wall climbed 3.3 per cent.
The worst time for China’s automotive sector – which, apart from the virus, has been in a two-year slump – was the economic stoppage in February to March. Industry volume began with an 80 per cent slump and the decline gradually narrowed. It was flat in the month of June.
Lee said the volume growth in the second half would go from zero to 10 per cent and that the bottom was already seen in the first quarter when China implemented lockdown and restrictive measures that severely disrupted manufacturing and commercial activities.
Kelvin Lau of Daiwa Capital Markets also expects the market will return to normal in the second half, though he only expects small, single digit growth year-on-year ahead.
“You see people getting out to buy stuff. People are getting back to life in China,” he said. “This triggers a sales comeback. There are big launches of models in the second half of the year [to further boost sales].”
Lau recently downgraded BYD to “hold” from “buy”, saying its huge run-up was a time to book profits and that its sales stand to be hurt by Tesla’s anticipated launch of a cheaper battery-operated sedan. He rates Geely a “hold” as well, while he gives an “outperform” to Great Wall.
Geely, one of China’s top carmakers whose parent also owns Volvo Cars and a stake in Daimler, was among the top gainers over the past two months.
Its H shares have 31 buys, 7 holds and two sells, with a 12-month target price of HK$17.53, according to Bloomberg. It closed at HK$15.90 on Friday.
“Geely has the product mix, good geographical distribution in the lower tier cities, so they will definitely benefit from the Chinese government’s push for rural development and faster urbanisation against poverty,” said Lee of Jefferies. “It is also well positioned in terms of technology and they are rolling out new models and they are one of the pioneers in most categories of new-generation technology.”
Geely’s year-on-year sales volume shot up 21 per cent in June. BYD sales in June dropped 13 per cent to 33, 725 units, but it is still liked by analysts because of its dominance in battery vehicles and battery development, which is the direction China is headed quickly. Great Wall climbed 29.6 per cent to 82,036 units.
BYD, China’s top electric vehicle and auto battery maker, has seen its A shares surge 42 per cent since June, ending at 81.59 yuan on Friday.
Its H shares advanced 66.5 per cent in the same period, closing at HK$69 on Friday, bringing the year-to-date gain to 77.9 per cent.
Analysts said that the market had priced in the fact that BYD would start to open up its supplies of new technology batteries to carmakers.
BYD is creating an ecosystem and more touch points to consolidate its relationship with automakers.
The move would cement its role as a major supplier for next-generation automobile-related technology, analysts say.
Companies that engage in technologies related to self-driving also need to be closely watched.
Navinfo, a Chinese digital mapping company working with all the major carmakers to help them conduct deep learning on situation analysis, is rated a “buy” by Jefferies. Beijing BDStar Navigation is also rated a “buy” by Jefferies. (Navinfo and Beijing BDStar trade on the Hong Kong-mainland Stock Connect.)
Wendy Kong, a Shanghai white-collar clerk who bought a Tesla Model 3 this month, said its automated driving technology was the key element that attracted her.
“For unexperienced drivers like me, the FSD (full self-driving) computer installed was the only reason that caused me to pick up a Tesla car,” she said. “Chinese carmakers have yet to convince me of their mature technologies.”
Car sales have tapered off in China, the world’s largest automotive market, since mid-2018 as US-China trade tensions led to weakened consumer sentiment.
The country’s deleveraging campaign and the Covid-19 pandemic also knocked the steam out of the once-buoyant market.
While demand is better, Daiwa’s Lau said he would not anticipate a significant rebound in the China market.
“Concern about the economy is not completely off yet,” he said.
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