China Auto Sector: Another boost from stimulus measures
- Chinese government announced to remove restrictions on pre-owned car market, accelerating the development of the used car market. Policy is also positive on the new car market as replacement rate rises
- Potential extension of NEV vehicle tax waiver is another booster to the NEV market. Currently, NEV car buyers enjoy 10% tax savings
- Coupled with earlier positive policy launched, anticipate 2H22 vehicle market to post stronger performance
- Anticipate favourable policy to be positive on the overall vehicle market
The Chinese government again released some positive measures to further encourage vehicle consumption. It includes the followings:-
- Removal of restrictions on pre-owned car transactions w.e.f. from August 1st. This will accelerate the development of pre-owned car industry following the lifting of used cars cross-region transfers restriction, which currently is one of the roadblocks on the pre-owned car market development. This policy not only drives the pre-owned car market, but also a booster to the new car market as car replacement rate rises.
- Consideration to extend the current NEV tax waiver policy. This is a crucial catalyst as NEV buyers will enjoy 10% vehicle tax savings on their purchase
- Improve the vehicle parallel import market to increase the volume transaction. Parallel imports are largely pertaining to the ultra premium car segment.
The above measures supplement the earlier package announced by the Chinese government. Earlier, the government cut the purchase tax on ICE vehicles from 10% to 5% for vehicles below 2L and ASP not more than Rmb300k/car.
A speed up on the development of the pre-owned car market is essential to further stimulate new car sales. In 2021, total used car transaction amounted to about 17m units, while 26m new vehicles were sold that year, translating to a ratio of 0.65:1. In developed markets, the used car market transaction could be 3-4x that of the new car market.
Extension of the purchase tax saving policy is a major driver to the NEV market. The existing scheme will expire after Dec 2022. The Chinese NEV market has enjoyed robust growth with positive support from the government. Moreover, NEV purchase tax saving extension could mitigate the impact from the removal of the NEV subsidy scheme after Dec 2022.
We forecast the passenger vehicle market to post 6% expansion this year and the NEV market by 50% y-o-y. Due to the pandemic lockdown in Shanghai, passenger vehicle sales slipped 3.5% in 5M22, while the NEV market remains robust with 110% growth.
We believe the stimulus measures to be positive on the overall vehicle market. Our top pick is BYD (1211; TP HK$390).