- Stimulus policies boosted sharp recovery in passenger vehicle (PV) sales in June
- Anticipate stronger PV sales in 2H to drive sector valuation higher, currently trading at 8x-10x FY22F PE
- Raw materials and logistics cost pressure have eased recently, positive on manufacturers
- New energy vehicle proxies GAC (2238 HK), GWM (2333 HK) and Geely (175 HK) stand out given decent earnings growth and attractive valuations
Strong stimulus boosting vehicle market recovery. The latest vehicle tax cut on new passenger vehicles (PV) with a selling price of not more than Rmb300k and within the 2L engine size is a powerful tool to boost sales recovery. PV sales surged c.42% y-o-y in June to 2.2m units. As the vehicle tax cut covers a large segment of the PV market, the premium car market finally turned around last month, recording a 26% y-o-y growth after 12 consecutive months of contraction. The introduction of subsidies on new energy vehicles (NEVs) by certain local governments plus promotion of NEVs to lower tier cities have also accelerated sales, chalking up sales growth of 133%/116% for June and 1H22 respectively.
Positives to support 2H outlook. Apart from the stimulus measures, raw material and logistics costs have eased recently, which should be positive for manufacturers. Certain auto steel products and aluminium prices have fallen 25-40% from the peak levels while logistics cost has dropped by c.35%, positive on the manufacturers. Considering stimulus and seasonality factors, we estimate PV sales to grow by about 8% y-o-y in 2H, stronger than 3.5% in 1H.
Recommend switching to NEV proxies. We anticipate BYD’s share price to trade sideways on disposal concerns by its major shareholder, which could dampen the share price in the near-term. Most NEV proxies have achieved over 100% increase in NEV sales in 1H, implying their strategy is taking shape and in the process of ramping up production. NEV proxies are projected to record FY21-23F earnings CAGR of 20-40% and currently trade at 7-15x FY22F PE.
