Weekly: PV Sales Up 26% mom In 9-15 May 22; Shanghai To Reopen In June
China’s daily average PV retail sales volume grew 26% mom in 9-15 May 22, with auto
companies resuming production since late-April. Tesla aims to restore production
volume back to pre-lockdown levels by next week, one week later than it had planned,
but sooner than our estimates. Shanghai aims to fully reopen by June. The state is
mulling new stimulus measures for the auto industry. Maintain OVERWEIGHT. Top
picks: BYD, CATL, EVE Energy, and Ganfeng.
WHAT’S NEW
• CPCA: China’s daily average PV retail sales volume declined 22% yoy but rebounded
26% mom in 9-15 May 22, in line with expectations. This brings the numbers for the first
half of May (1-15 May 22) to -21% yoy and 27% mom. According to China Passenger Car
Association (CPCA), China’s daily average wholesale shipment of PVs plummeted by
29%/24% yoy and grew 47%/29% mom in 9-15 May 22 and 1-15 May 22 respectively. The
mom rebound in PV sales in the first half of May was due to the resumption of production by
auto companies since late-April under the state’s white-list policy. Further auto sales
recovery hinges upon OEMs resuming production and lifting of lockdown measures in the
various cities. On the demand side, residents in the cities being locked down (eg Shanghai)
have seen significant income drop, weighing on purchasing power. Stimulus policies are
required to boost auto sales.
• We maintain our estimates on 2022 China’s PV sales volume and EV sales volume
unchanged at 21.35m units (flat yoy) and 5m units (+42% yoy), based on a full sales
recovery by Jul 22.
• Shanghai aims to reopen from 1 Jun 22, after declaring that 15 of its 16 districts had
eliminated cases outside quarantine areas. Shanghai officials declared that the pandemic in
the city was under control, but also said that their goal until 21 May would be to prevent a
rebound in infections, implying that many restrictions will remain in place. The city plans to
gradually increase domestic flights and rail services, and will begin reopening certain retail
outlets from 23 May. We believe the reopening of Shanghai will speed up the restoration of
auto supply chain in the Yangtze River Delta.
• Tesla plans to restore production at its Shanghai plant to pre-lockdown levels by 23
May 22, one week later than previously planned but sooner than our expectations.
Tesla was targeting its Shanghai plant to get production back to pre-lockdown levels on 16
May, but the latest report indicated that Tesla has postponed this plan by a week. The
company plans to keep production at its Shanghai plant at one shift this week, with daily
output of 1,200 units. It now aims to increase production to 2,600 units a day from 23 May.
Nevertheless, if Tesla manages to restore production volume to pre-lockdown levels before
end-May, it would be sooner than our expectations. The challenge for Tesla to increase
production volume at the Shanghai plant lies in the compliance with the “closed-loop”
operation as required by the state and the parts supplies from within Shanghai and
nearby areas
• Tesla recalls 107,293 vehicles in China via OTA update. The recall is due to bugs in
the software, which can be restored via over-the-air (OTA) firmware update, and thus
customers do not need to go back to stores for repairs. Accordingly, some vehicles may
face a slower operation of the central processor and sluggish response of the central
touch display when preparing for or during DC fast charging. Tesla has conducted two
recalls in China since April, and it has become normal to recall vehicles and provide
rectifications via OTA updates. Looking back, Tesla’s recall did not have much impact on
its sales and the most urgent issue for Tesla is to resume production back to prelockdown levels. The bottleneck of Tesla’s China sales lies in supply rather than demand.
• China is planning to put forth new stimulus in early June to boost rural car sales,
and is considering extending EV subsidies beyond 2022. There have been rumours
of new stimulus measures, and the details have been announced. According to media
reports, the state will give a Rmb3,000-5,000/vehicle purchase subsidy to car buyers for
vehicles priced at Rmb150,000 or below, including both ICE-cars and EVs. Based on
history, this sort of “vehicles-to-villages” policy would benefit Chinese OEMs such as BYD,
Great Wall Motor (GWM) and Geely. Additionally, the state is considering extending the
EV subsidy policy (which was slated to expire by end-22) to beyond 2022. We think
subsidies have become less important in the decision of buying EVs, as subsidies now
only account for low single-digit percentage of car prices, vs 20-30% five years ago.
• Samsung is in talks to hike chip-making prices by up to 20%. Samsung Electronics
Co. is in discussions with foundry clients about charging as much as 20% more for making
semiconductors this year, joining an industry-wide push to hike prices to cover rising costs
of materials and logistics. The new pricing would be applied from the second half of this
year, and Samsung has finished negotiating with some clients, while it is still in
discussions with others. One week after TSMC announced to raise chip prices by 5-9% by
2023, Samsung indicated that it would be lifting prices by up to 20% this year. This may
imply a slower-than-expected recovery in chip supplies and rising manufacturing costs
(materials and labour) amid the lockdowns in China. The price move will translate into
additional pressure on automakers to lift the prices consumers pay, which will constrain
end-demand.
• BYD secures Rmb4b worth of lithium supplies from partner Chengxin Lithium. BYD
announced on 18 May 22 that it had signed an agreement with its local partner Shenzhen
Chengxin Lithium Group (Chengxin Lithium) (002240 CH), to procure an estimated
Rmb4b worth of lithium products in 2022. BYD has purchased Rmb436m worth of lithium
products from Chengxin Lithium ytd. Based on an assumed 1.35m units of EV sales and
16GWh in external EV battery sales in 2022, we estimate that BYD will need to procure
more than 42,000 tonnes of lithium carbonate in 2022, which translates into a total lithium
purchase cost of Rmb19.5b based on the current price of Rmb461,500/tonne. As such,
BYD will probably procure from Chengxin Lithium 20-25% of lithium carbonate it needs
this year. BYD’s deal with Chengxin Lithium will guarantee a steady supply of lithium
products at a more stable price.
• BYD’s JV with Daimler, Denza, launched a high-end large-sized electric MPV D9 on
16 May 22 with a price tag of Rmb335,000-460,000. D9 has both battery electric vehicle
(BEV) and plug-in hybrid electric vehicle (PHEV) versions built on BYD’s DM-i technology.
The D9 BEV deliver over 600km in range on a single charge, and the D9 PHEV delivers
fuel efficiency of 5.9L/100km. The D9 is aimed at the premium MPV segment occupied by
Buick GL8. BYD received over 3,000 units of orders for D9 within 30 minutes of debut.
The delivery will kick-start in Aug 22. Going forward, Denza will roll out two new models
this year, including a mid-sized electric SUV (3Q22) and a large-sized seven-seat SUV
(end-22). Denza has been making losses since its establishment in 2010. Hopefully, the
launches of these new products will enable Denza to turn around its bottom line.
• EVE Energy plans to build a 10GWh battery plant in Yunnan to tap on the
burgeoning energy storage system (ESS) market there. The investment for the new
plant is estimated at Rmb3b. The construction of the new plant implies that EVE Energy
has recently secured new battery supply contracts, as every new project is backed by its
orderbook. According to the announcement, the move is to seize opportunities in the ESS
market. EVE Energy sold 13.5GWh of motive batteries in 2021, and had 32GWh in annual
capacity for motive batteries as of end-21; it plans to expand the capacity to
99GWh/142GWh by the end of 2022/23. The addition of the Yunnan plant would boost the
total capacity to 152GWh by end-23.
ACTION
• Maintain OVERWEIGHT based on the burgeoning demand for EVs and appealing
valuation (PE at nearly 1SD below historical mean one-year forward PE). We prefer EV
companies for their stronger earnings momentum. Our following BUY calls are in order of
preference: BYD, CATL, Ganfeng, EVE Energy, Tinci, Ningbo Xusheng, Nexteer, GEM,
Minth, Fuyao Glass, Geely, GWM, GAC, Weichai, Zhongsheng and Meidong. Our top
picks are BYD, CATL, EVE Energy and Ganfeng.
RISKS
• China’s Zero-COVID policy, if enforced thoroughly, could cause frequent on-and-off
disruptions to the auto supply chain, as it is hard to contain the highly-transmissible
Omicron variant. If infections resurge after the lockdown measures are lifted, a new round
of lockdowns may kick in, and the draconian COVID-19-containment measures may
remain in place for a sustained period, eg people in big cities are required to show their
negative results for the certificate of polymerase chain reaction (PCR) COVID-19 test to
gain access to public places.