• The upcoming round of vehicle tax reduction stimulus should be more favourable for auto manufacturers with higher exposure to ICE passenger vehicles with smaller engine sizes below 1.6 litres,
given that NEV vehicle purchases are already tax-exempt.
• Auto manufacturers that are likely to see relatively higher benefit for this round of stimulus include Geely,Automobile and Great Wall Motor.
• Overall sector impact is expected to be smaller compared to previous stimulus rounds in 2009 and 2015, given the ongoing impact on economic activities from China’s Covid-19 Zero policy, softer consumption
appetite which will take time to recover and higher auto penetration levels.
Auto sector share prices are seeing a relief bounce today on the back of announcements that the China State Council will be providing a temporary vehicle tax reduction of CNY60b for passenger vehicles, which comes amongst the basket of thirty-three comprehensive measures announced across six categories to stabilise the economy that has been battered by the pandemic.
The vehicle tax reduction reported of ~CNY60b accounts for about 17% of 2021’s CNY325b total purchase tax receipts. At this point, policy details are pending, although an initial assessment is that the vehicle tax reduction this round looks likely to benefit smaller size internal combustion engine (ICE) passenger vehicles, since new energy vehicles (NEV) are currently exempted from vehicle purchase tax in China, which is also supportive of “common prosperity” objectives.
In China’s previous auto sector stimulus programs in 2009 and 2015, the vehicle purchase tax rate was cut in both cases from 10% to 5% for vehicles with smaller engine size (below 1.6 litres). This supported a rebound in new car wholesales growth from 7.2% year on year (YoY) in 2008 to 47.2% YoY in 2009 (post global financial crisis), aided by low car ownership penetration in early 2009. Following continuous months’ decline during June-August 2015 (1.5% YoY growth in August 2015), which marked the first three-month period decline since January 2009, the next round of vehicle purchase tax cut boosted new car wholesales YoY growth to a more modest 17.6% in 2016.
Assuming the purchase tax this round is also reduced from 10% to 5% (similar to previous stimulus periods in 2009 and 2015) and the average selling price of vehicles is around CNY120k, Haitong Securities believes that a bullish estimate could imply a potential vehicle sales volume benefit of about 10m units, which compares favourably against the ~21m unit passenger vehicle sales volume achieved in 2021.
For this round of stimulus however, our base case is for a relatively smaller impact on demand recovery
for passenger cars compared to previous periods of vehicle purchase tax cuts in 2015 and 2009. This is due to the current pandemic related mobility restrictions, softer consumption appetite which will take time to recover and higher auto penetration levels. Nevertheless, auto manufacturers which look positioned to see some benefit from the upcoming consumption stimulus include Geely and Great Wall,
which have about 50-60% exposure of their cars sales with engine sizes below 1.6litres. (Research Team)