- Pandemic lockdown and macro uncertainty are slowing vehicle sales; government stimulus action to stem further decline
- Anticipate local governments to rollout stimulus such as subsidies to support vehicle sales, especially NEVs
- Lowered our 2022 PV sales growth estimates to 6%, but expect NEV market to remain robust at 50% expansion
- BYD (1211 HK) is our top pick
Government actions to stem a slowing vehicle market. The slowing economy plus recent lockdown are expected to further drag the China PV market. The full impact of the lockdown has yet to be reflected in Mar-22 PV sales, which recorded a decline of only c.1% y-o-y. The current lockdown is affecting two major vehicle production hubs – Changchun and Shanghai (which houses the nation’s largest auto OEMs like SAIC Motor and FAW Group) and the supply chain disruption is also affecting auto OEMs in other regions. Plus, the slowing down of the Chinese economy (1Q22 GDP growth of 4.8%) is also unfavourable on consumption. Estimates show that the lockdowns could potentially shave 20% off total vehicle production. To stem the negative impact, the central government has announced broad directives to boost the vehicle market, and we anticipate local governments to release more details largely covering sales subsidies and incentives to boost vehicle sales and support EV charging infrastructure development.
Lowering vehicle sales assumptions for 2022. The lockdown and challenging macro environment have led us to cut our 2022 PV sales growth assumption to 6%, down from 7.5% previously. Foreign brands’ sales were down 15% y-o-y while the self-brand segment grew by 21% in Mar-22. High crude oil price continues to hurt the ICE vehicle market (sales contracted 6% in 1Q22), signalling greater challenges for the vehicle OEMs. Although auto manufacturers in the affected regions have resumed production, it could take some time to return to pre-lockdown levels. Hence, we estimate 2Q22 total PV sales to decline by 5-8% y-o-y.
NEV plays have better upside potential. BYD remains our favourite given its sterling 1Q22 NEV sales. The company is also the first auto OEM to exit from the ICE vehicle business to focus on NEVs, which should accelerate its valuation re-rating potential. The company’s financials is expected to remain healthy given the strong NEV sales outlook. BYD’s share price has recovered c.30% from its trough YTD. The stock is currently trading at 73x PE (FY22F), which is slightly above its historical average mean.