Weekly: June PV Sales Beat Estimates Due To Big Price Cuts On ICE-cars
China’s Jun 23 PV retail sales came in above estimates at 1.896m units (-2% yoy/+9% mom). The sales beat came from upbeat sales of ICE-cars at 1.258m units (-10% yoy/+8% mom), due to big promotions. Passenger EV retail sales missed estimates at 638,000 units (+19% yoy/+10% mom) while wholesale shipments met estimates on strong exports. We expect EV sales to accelerate in 2H23 on stimulus. Maintain UNDERWEIGHT on China’s auto sector, with a preference for the EV segment. Top BUYs: BYD, CATL and Li Auto.
WHAT’S NEW
• CPCA: June PV sales beat estimates, driven by price cuts on ICE-cars. According to China Passenger Car Association (CPCA), China’s passenger vehicle (PV) retail sales volume came in above expectations at 1.896m units (-2% yoy/+9% mom), vs CPCA’s previous estimate of 1.83m units, while PV wholesale shipment grew 2% yoy and 12% mom to 2.23m units. June’s PV sales beat came from ICE-cars, of which the retail sales volume and wholesale shipment reached 1.258m units (-10% yoy/+8% mom) and 1.486m units (-8% yoy/+12% mom) respectively. On a weekly basis, ICE-cars recorded a whopping 63% and 187% wow respective spikes in daily average retail sales volume and wholesale shipment during 26-30 Jun 23, due to big promotions by OEMs. GAC, Geely and Great Wall Motor (GWM) registered 15%/7%/1% mom growths in ICE-car sales in Jun 23.
• Passenger EV sales miss. As for passenger electric vehicles (EV), retail sales volume came in lower than expected at 638,000 units (+19% yoy/+10% mom), vs CPCA’s previous estimate of 670,000 units, while wholesale shipment came in as expected at 744,000 units (+30% yoy/+11%), by virtue of buoyant exports. EVs as a percentage of China’s PV retail sales volume soared by 0.3ppt mom to 33.6% in Jun 23.
• We keep our estimates on China’s 2023 PV sales and passenger EV sales at 23.8m units (+1% yoy) and 8.5m units (+30% yoy) respectively, implying 35.7% in EV penetration rate (+8.0ppt yoy). We expect China’s EV sales to be driven by: a) the country’s “EVs Going Rural” campaign, b) plug-in hybrid electric vehicles (PHEV) continuously taking market share from ICE-cars with the debuts of more attractive models in 2H23, and c) burgeoning exports. Our estimated 8.5m units in China’s 2023 wholesale shipment of passenger EVs will include 6.6m units in domestic sales and 1.9m units of exports.
• Leading EV companies in China delivered above-industry average sales growth in Jun 23, implying further industry consolidation. The combined sales of the nine major EV companies in China (BYD, Tesla China, Aion, Li Auto, Neta, Leapmotor, Zeekr, XPeng and Nio) grew 61% yoy and 9% mom to 479,600 units in Jun 23, representing 64% of China’s passenger EV sales during the month.
• BYD remained the largest EV manufacturer in China with Jun 23 wholesale shipment of 253,046 units (+89% yoy/+5% mom) and market share of 33.8% (+10.4ppt yoy/-1.7ppt mom). Looking ahead, we keep our estimates on BYD’s 2023-25 sales at 3.0m units/4.0m units/5.2m units respectively. BYD’s monthly sales will further grow to 250,000-350,000 units in 2H23, based on the kick-start of China’s “EVs Going Rural” campaign, the ramp-up of new models launched in 2Q23 (eg Song Plus, Song Pro, Seagull) and the debuts of new models in China (eg Denza N7/N8, Fang Cheng Bao Leopard 5, Yangwang U8, the Champion Version of Yuan Plus) and overseas markets (eg Seal, Dolphin).
• BYD’s fully-owned subsidiary Denza on 3 Jul 23 launched the N7 SUV equipped with the DiSus system and received 11,700 firm orders in 24 hours after launch, better than expected. Denza N7 is a five-seat B-segment SUV with a length, width and height of 4,860 mm, 1,935 mm and 1,602 mm, respectively, and a wheelbase of 2,940 mm. N7 comes in four versions, including two single-motor versions and two dual-motor versions, the former two with a peak motor power of 230kW, a single-charge range of 702km and prices of Rmb319,800/Rmb339,800, and the latter two with an additional peak motor power of 160kW, single-charge range of 630km and prices of Rmb349,800/Rmb379,800. All four versions of N7 are equipped with BYD’s proprietary DiSus (Yunnian in Chinese) electric-powered body control suspension system. Denza plans to add autopilot features to N7 via over-the-air (OTA) update by end-23, followed by an urban autopilot option in 1Q24.
• Denza N7 is aimed at the segment of Tesla Model Y which is priced at Rmb263,900-363,900. Denza will start to deliver N7 from mid-Jul 23 with estimated deliveries of 3,000 units/6,000 units in Jul 23/Aug 23 and targeted monthly order inflows of over 10,000 units from Sep 23. It received 11,700 firmed orders within 24 hours of the launch, beating expectations. With the addition of N7 to the product portfolio, Denza targets over 20,000 units in monthly sales for the company before end-23. We estimate Denza’s 2023-25 sales at 150,000 units/300,000 units/500,000 units, representing 5%/7.5%/10% of BYD’s total sales volume respectively.
• BYD’s first model under the Fang Cheng Bao brand will be equipped with DM-o technology, and it is expected to hit the market by Aug 23. BYD has officially named the model Leopard 5. The model is a plug-in hybrid electric off-road SUV equipped with BYD’s latest PHEV technology DM-o, which is known as the “master” of BYD’s hybrid technology and integrates “all advantages” of BYD’s hybrid technology. Leopard 5 will be a “longitudinal” engine model, so it can make more room for the cloud car system. Equipped with dual motors and three locks, the new car will also have a comprehensive range of 1,200km, with long running, strong power, and off-road capability (low-speed 4WD). Leopard is aimed at the premium SUV segment with a price of Rmb400,000-600,000. From the launch of the DM-i technology in Jun 21 and the debut of the DM-o technology in 2023, BYD is always leading its peers by one generation in plug-in hybrid technology. Its unrivalled leadership in the PHEV segment, together with its strong product pipeline, enables it to take market share continuously.
• BYD Yangwang U8 equipped with e4 technology expected to debut in Aug 23. As the first model under BYD’s premium brand Yangwang, U8 is a plug-in hybrid electric SUV equipped with BYD’s proprietary e4 quad-motor independent drive technology, the first massproduced platform of its kind in China, that enables the vehicle to achieve precise control of four-wheel dynamics. As such, U8 can make an angular diameter turnaround on spot on smooth concrete floor. U8 is able to run up to the 589-metre Bilutu Peak in Badain Jaran Desert, the world’s highest sand dune, non-stop, something that none of the other off-road SUVs can do, including Mercedes-Benz G-class and Land Rover Defender. Furthermore, U8 can drive on water, which is a practical feature for China’s market during the rainy season.
• BYD started the pre-sale of U8 at Shanghai Auto Show in Apr 23, offering two versions – Premium Version and Off-road Master Version – at an equal price of Rmb1,098,000. As of May 23, BYD had booked over 30,000 presale orders, with each involving Rmb20,000 in down payment. With unrivalled features, Yangwang U8 will likely take market share from other premium off-road SUVs like Mercedes-Benz G-class and Land Rover Defender.
• Tesla’s deliveries topped record in 2Q23, but sales may be hit by the SUA issue. Tesla registered a record delivery of 446,140 units (+75.2% yoy/+5.5% qoq) for 2Q23 and 869,000 units (+54% yoy) for 1H23. Tesla China’s shipments also grew 19% yoy and 21% mom to 93,680 units in Jun 23, close to the record of 100,291 units in Nov 22, bringing 1H23 shipments to 476,539 units (+62% yoy). Tesla targets 1.8m units in deliveries (+37% yoy) for 2023, and grow deliveries at 50% CAGR in the next few years with the launches of the revamped Model 3 and Model Y, Cybertruck and two compact vehicle models. Tesla’s Shanghai plant will start to produce the revamped Model 3 with CATL’s M3P battery by Sep. However, Tesla’s sales may be hammered by the sudden unintended acceleration (SUA) scandal.
• For quite some time, Tesla EVs have been accused by drivers of accelerating out of control without anyone touching the accelerator pedal, ie SUA. Still, investigations have concluded that almost every single case was caused by the drivers inadvertently pressing the accelerator pedal instead of the brake. However, on 29 Jun 23, National Highway Traffic Safety Administration (NHTSA) of the US received a new petition requesting a re-evaluation of the SUA cases. New information received by the NHTSA shows that SUA events with Tesla EVs were real and not driver errors. The report explains in detail what caused the cars to accelerate even when the accelerator pedal was not pressed. On 29 Jun 23, the NHTSA reopened an investigation into the SUA issue in Tesla vehicles. The investigation covers Tesla Model 3, Model Y, Model S, and Model X vehicles from the years 2013 to 2023, and an estimated 1.8m vehicles are expected to be affected.
• The SUA scandal, if proven valid, could tarnish Tesla’s brand equity and hammer its sales severely. The impact will not be limited to the US, as the authorities of other countries will probably follow up on the issue. The news has just come out, and the impact is yet to be reflected. Among the Chinese automotive part suppliers to Tesla, Ningbo Xusheng (603305 CH/BUY/Target: Rmb43.00) and Ningbo Tuopu (601689 CH/NOT RATED) have the highest exposure to Tesla, as the American EV company contributes over 30% and 50% of their revenue respectively.
• China tightens the standards for dual-credit policy by cutting the credits per vehicle by 40%, which will accelerate vehicle electrification. The Ministry of Industry and Information Technology (MIIT) on 6 Jul 23 issued amendments to the dual-credit policy, pursuant to which the number of credits for producing every EV will be cut by about 40% effective from 1 Aug 23. The dual-credit policy includes the Corporate Average Fuel Economy Credit (CAFC) policy and the New Energy Vehicle Credit (NEVC) policy, which were put in place in 2018. According to the NEVC policy, every carmaker in China would be required to meet a NEVC target based on the number of ICE-cars it produces during the year, and the target percentages for 2023/24/25 are set at 18%/28%/38%. To earn the NEVC, carmakers need to produce a certain number of EVs, based on a formula. Under the latest standard, the credit for producing each battery electric vehicle (BEV) is equivalent to 0.0034 x R + 0.2, with R being range in km and the maximum credit per vehicle not more than 2.3, vs 3.4 previously. For PHEV, the credit per vehicle is standardised at 1.0, vs 1.6 previously. The number of credit carmakers earn for producing each EV will be about 40% less than previously, making it more difficult to attain the targets. In other words, carmakers need to produce more EVs to earn the same number of NEVC.
• The tightening of NEVC standards will accelerate the vehicle electrification process in China, as those carmakers who fail to meet the NEVC would either buy the credits from other carmakers or receive penalties, which include being prohibited from launching new models and required to halt production of high-emission ICE-car models. This will also benefit those pure-play EV companies in China, eg BYD, Tesla, Li Auto, at the expense of the Sino-foreign JVs, who have less than 10% of sales from EVs.
ACTIONS
• Maintain UNDERWEIGHT on China’s auto sector, with a preference for the EV segment. Based on the expected decline in China’s ICE-car sales and intensifying price war in the ICEcar market, we maintain UNDERWEIGHT on China’s auto sector. However, based on the expected faster EV sales CAGR of 30% in 2023-25, we still like the EV segment. Given the declines in battery material prices due to increasing supply, we prefer the midstream and downstream EV plays.
• Our top BUYs include BYD (1211 HK/BUY/Target: HK$590.00), CATL (300750 CH/BUY/Target: Rmb390.00), and Li Auto (2015 HK/BUY/Target: HK$246.00). In particular, BYD is the most geared to tap the EV market growth, given its strong product pipelines, dominant position in the PHEV market and vertically integrated business model. We are also adding Li Auto to our top BUY list again, as we have just upgraded the stock’s target price to HK$246.00 based on stronger earnings growth and sales growth in 2023-25. Our BUY calls are in the following order of preference: BYD, CATL, Li Auto, Yadea, Fuyao Glass, Minth, Ningbo Xusheng, EVE Energy, Nexteer and Weichai Power. Maintain SELL on Ganfeng Lithium, Tinci Materials, GEM, Great Wall Motor, Guangzhou Auto and Zhongsheng.