• Take some profits on Geely, Great Wall Motor, BYD and Li Auto following the recent strong rally, which has delivered +21% to +72% share price gains since our sector report last month.
• Potential extension of NEV purchase tax exemption beyond end of this year bodes well for the 2H22 growth outlook of NEV players. Given our positive view on the NEV long term structural growth story is unchanged, preferred picks to add on pullback are maintained in BYD (1211 HK, vertically integrated business model) and Li Auto (2015 HK, better execution track record), the latter has strongly outperformed its pure EV peers such as Xpeng (9868 HK) and NIO (9866 HK) over the past month.
• With limited upside to fair values following the sharp rally, fresh investors will need to be nimble given the potential for profit taking pressures and China’s modest growth outlook this year (Macroeconomics: China’s turning point). The risk of disruptions and periodic lockdowns in 2H22 remain risks to keep in mind should there be further resurgence episodes this year as China remains committed to its zero Covid-19 policy.
• Sector names under coverage with remaining double-digit percentage upside to fair values are OEM manufacturer Great Wall (2333 HK) and Minth Group (2015 HK). Auto parts supplier Minth Group (425 HK) is also a potential beneficiary of the 2H recovery in downstream demand after severe disruptions experienced during the recent lockdowns in the Yangtze Delta region, although some near-term uncertainties remain from its ongoing search for a suitable CEO candidate and margin headwinds from higher raw material costs.
Since our report on 24 May 2022 highlighting an improved policy environment and preferred auto sector picks to position in (China Autos – Stimulus expectations), sector share prices have rallied strongly with original equipment manufacturer (OEM) policy beneficiaries Geely (175 HK) and Great Wall (2333 HK) rebounding +21% and +36% respectively, while our preferred new energy vehicles (NEV) picks Li Auto (2015 HK) and BYD (1211 HK) have also delivered stellar returns, gaining +72% and +22% respectively over the same period and have exceeded their fair values as of yesterday’s close (23 June 2022). With limited upside to share prices to our fair values and despite the likelihood of potential overshooting of share prices fueled by the ongoing momentum of the broad market, we believe it is prudent for investors
to start locking in some tactical profits, in line with investment discipline.
Share prices saw further gains yesterday after the Chinese state media Xinhua reported that authorities are considering the extension of the existing purchase tax exemption for NEVs that was scheduled to expire by end of this year, which should be supportive of NEV players such as Li Auto (2015 HK). The estimated consumption stimulus could reach over CNY200b, which should provide benefit the whole sector. The meeting also reportedly called for boosting the second-hand car market and improvement of select auto import policies, in order to support auto consumption recovery. While details are limited at this point, sector share prices have moved ahead quickly yesterday.
Following the quick rally, we highlight remaining names under our research coverage with potential upside to fair values are Great Wall (2333 HK) and Minth Group (425 HK), although fresh positions will need to be increasingly tactical in their positioning given potential for profit taking pressures. Auto parts manufacturer Minth Group (425 HK) should also benefit from an improvement in auto consumption given it supplies to various auto manufacturers including Tesla, Li Auto, NIO, XPeng, Geely, VW and BMW although some uncertainties near term remain. We prefer to accumulate key NEV picks such as Li Auto (2015 HK) and BYD (1211 HK) on pullback instead as our fair values have been reached. (Research Team)