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Weekly: Demand Capped By Lockdowns, Supply Shortage Eased

In the first week of November, PV retail sales were still capped by lockdowns, and wholesale shipment recovered strongly mom on the easing chip shortage. Going forward, auto sales are set to recover with the abating pandemic and easing chip shortage. Guangdong has just kick-started a new round of local stimulus, and we expect other provinces to follow suit. Maintain MARKET WEIGHT. Top picks: BYD, CATL, EVE Energy and Ningbo Xusheng.

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WHAT’S NEW

CAAM: China auto wholesale volume dropped 9% yoy and grew 13% mom to 2.333m units, in line with estimates, according to China Association of Automobile Manufacturers (CAAM). This compares with the 19% yoy drop and 15% mom growth in wholesale volume in Sep 21. In 10M21, China auto wholesale volume grew 6% yoy to 20.941m units. The passenger vehicle (PV) segment and the commercial vehicle (CV) segment respectively registered a 5%/30% yoy drop and 15%/3% mom growth in wholesale shipment to 2.007m units and 326,000 units in Oct 21, bringing the 10M21 wholesale volume to 16.855m units (+9% yoy) and 4.086m units (-3% yoy).

CPCA: October PV sales up 9-14% mom and down 5-14% yoy, in line with estimates. According to China Passenger Car Association (CPCA), retail sales volume of passenger vehicles (PV) (sedans, SUVs and MPVs) in China grew 8.6% mom to 1.717m units, still 13.9% below that in the same period last year, while wholesale volume of PVs grew 13.9% mom and dropped 4.8% yoy to 1.978m units. In 10M21, retail sales volume and wholesale volume of PVs respectively grew 8.7% yoy and 9.1% yoy to 16.227m units and 16.581m units.

Chinese brands continued to outperform the overall PV industry, growing 11% mom and 4% yoy in retail sales volume to 770,000 units, representing 45.6% market share (+8ppt yoy). The non-luxury JV brands saw a 12% mom growth and 24% yoy drop in retail sales volume to 770,000 units. The luxury brands’ retail sales volume tumbled 11% mom and 27% yoy to 180,000 units. Dongfeng Motor (DFM), Geely, Great Wall Motor (GWM) and Guangzhou Auto (GAC) respectively registered 3%/7%/12%/17% growth and -21%/- 20%/-17%/-8% drop in wholesale volume in Oct 21.

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China EV wholesale volume grew 138% yoy and 7% mom to 383,000 units in Oct 21, beating estimates, according to CAAM. This brings 10M21 EV wholesale volume to 2.542m units (+181% yoy), beating the consensus full-year estimate for 2021. Segment wise, the wholesale volume of passenger EVs and commercial EVs respectively grew 146%/45% yoy and 7%/12% mom to 366,000 units and 18,000 units in Oct 21, and grew by 194%/55% yoy to 2.413m units/129,000 units in 10M21. EVs as a percentage of total auto sales in China reached 16.4% (+10.2ppt yoy/-0.9ppt mom) in Oct 21 and 12.1% (+7.7ppt yoy) in 10M21, vs the state target EV penetration rate of 20-25% for 2025.

BYD remained the largest passenger EV maker in China, growing 263% yoy and 14% mom in wholesale volume to >80,000 units in Oct 21 (22% market share/+7ppt yoy/+2ppt mom). That was followed by the number two player Tesla, which posted a 348% yoy growth in wholesale volume to 54,391 units in Oct 21 (including 13,725 units of domestic sales and 40,666 units of
exports). Other OEMs (eg SGM Wuling, SAIC, GWM, GAC Aion, Xpeng, Li Auto etc.) also saw buoyant EV sales growth (please see the table on the right hand side).

In the first week of November, PV retail sales were still capped by lockdowns, and wholesale shipment recovered on the easing chip shortage. Daily retail sales volume of PVs in China dropped 9% yoy and 7% mom to 32,707 units in the first week of November (1-7 Nov 21). CPCA attributes this to the lockdowns in certain cities amid the new rounds of COVID- 19 outbreaks recently. Daily average wholesale volume of PVs in China rebounded by 27% mom to 29,997 units in 1-7 Nov 21, still 35% below that from a year ago. The mom recovery of PV wholesale volume in the first week of November was due to the easing chip shortage.

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Production volume loss from chip shortage decreased by the third week in a row. According to AutoForecast Solutions (AFS), global vehicle production volume loss as a result of chip shortage narrowed by 46% wow to 34,000 units in the first week of November (1-7 Nov 21), much lower than 63,000 units in the last week of October (25-31 Oct 21), 114,000 units in the week ending 24 Oct 21 and 280,000 units in the week ending 17 Oct 21. Of the 34,000 units of production volume loss in the week ending 7 Nov 21, 20,400 units or 61% were seen in North America, while South America and Asia ex-China respectively accounted for 9,200 units and 3,400 units. Europe, the Middle East/Africa and China have all cut production by less than 1,000 units due to the chip shortage.

COP26’s pledge to phase out fossil fuel by 2040 positive for EV industry. 11 automakers and over 30 countries pledged to phase out fossil-fuel vehicles by 2040, according to a statement issued by the British government in connection with the 26th United Nations Climate Change Conference (COP26). Most major automakers, eg Volkswagen (VW), Stellantis, BMW, Toyota, Nissan, Honda, Hyundai etc., and the major automobile manufacturing countries like the US, China and Germany did not sign the pledge. However, there are still six big automakers – GM, Ford, Mercedes-Benz, JLR, Volvo and BYD – that signed the pledge. Other OEMs like Toyota, VW and BMW also have ambitious EV plans. China targets 20-25% of EV penetration rate by 2025, and the number will probably rise above 30% by then. The European Commission has proposed an effective ban on fossil-fuel vehicles by 2035. We remain positive on the outlook of the global EV industry, with a projected 30% CAGR of market size in 2022-25.

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Guangdong kick-starts a new round of local stimulus. On 9 Nov 21, the provincial government of Guangdong announced its plans to gradually ease car licence quota restrictions in Guangzhou and Shenzhen to unlock auto demand. Guangzhou adds 50,000 units of extra quota for new car licences starting from Nov 21, raising the total number to 200,000 units. Shenzhen will further relax the application requirements for new energy small cars and remove the requirement for buyers to pay social security locally to promote sales of new energy small cars. China’s auto demand has recently been dampened by the lockdowns amid the resurgence of COVID-19 cases and slowdown of the economy. Guangdong has just kickstarted the new round of stimulus for the auto industry. We expect other provinces to follow suit. Having said that, a full recovery of auto sales will hinge upon the removal of the lockdown measures along with the abating of the pandemic.

NIO’s (NIO US) 3Q21 results miss expectation with net loss increasing 141% yoy and 334% qoq to Rmb2,859m, vs the consensus range of Rmb293m-1,467m. The results miss was due to: a) the Rmb2,024m in accretion on redeemable non-controlling interests to redemption value, b) the disappointing gross margin for vehicle sales (18%/+3.6ppt yoy/-2.2ppt qoq), c) higher-than-expected R&D expenses (12.2% of revenue/-0.9ppt yoy/+1.7ppt qoq), and d) SG&A expenses (18.6% of revenue/-2.2ppt yoy/+0.9ppt qoq). Revenue from vehicle sales grew 102% yoy and 9% qoq to Rmb8,637m in 3Q21 on 85% yoy/5% qoq growth in sales volume and 9% yoy/4% qoq hike in ASP. Revenue from other sales grew 351% yoy and 118% qoq to Rmb1,169m, mainly driven by the sales of automobile regulatory credits and battery upgrade services.

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ACTION

Maintain MARKET WEIGHT. Based on the prospective recovery of chip supplies, we now prefer OEMs, EV companies and auto parts companies. Our BUY calls are in the following order of preference: BYD, CATL, EVE Energy, Ningbo Xusheng, GAC, Geely, Nexteer, Fuyao Glass, Minth, Weichai, Sinotruk, Zhongsheng, Yongda and Meidong.

RISKS

Chip shortage. If the impact of the chip shortage turns out to be bigger than expected, 2021 earnings would be lower than our estimates.
The possible resurgence of COVID-19 cases in China would dampen consumption.