- Expect a quick rebound in vehicle sales post pandemic lockdown; 2M22 sales were healthy
- NEV segment gaining market share from ICE vehicle market, especially under a high crude oil price environment
- Dealership sector is a safe harbour under a tight vehicle supply environment given their favourable pricing strategy
- Our preferred picks are BYD (1211 HK) and Zhongsheng (881 HK)
Temporary impact from pandemic lockdown. The recent lockdown due to the COVID-19 outbreak in China is expected to slow sales momentum. We anticipate a quick rebound in vehicle sales once the restrictions are lifted. So far, 2M22 passenger vehicle sales have remained healthy, growing by c.15% y-o-y. While there could be a short-term supply disruption, this should be positive for auto dealerships given their favourable pricing strategy. In FY21, auto dealerships were able to rake in higher vehicle sales margins of 1-1.5ppts.
High commodity inflation and impact on ICE vehicle sales. High crude oil price is expected to worsen the internal combustion engine (ICE) vehicle sales outlook, apart from rising competition from the electric vehicle players. The ICE vehicle market has been losing market share to NEVs since 2018. We anticipate ICE makers to intensify their vehicle electrification strategy to keep vehicle sales rolling. Certain NEV makers have also increased their product prices to cover part of the metal price inflation. Recently, the Chinese government announced lower taxes and fees to help Chinese manufacturers to combat cost pressures. For 2M22, the NEV volume sales climbed by 165% y-o-y.
Auto dealership are a safe haven together with dominant NEV players.The recent wild stock market swings have not spared auto stocks. With the risk aversion sentiment still high, we prefer safer havens like the auto dealerships and dominant NEV players. Our top picks are BYD and Zhongsheng. BYD is one of the few automakers that is able to manage the risks stemming from rising commodity inflation and supply chain disruption. Zhongsheng is expected to enjoy a robust new model cycle till 2024 for the Mercedes Benz dealership business, in which it has the highest exposure in China at 18%.