Regional Auto Sector: Why we still favour Chinese OEMs
- Forecast China, US and Europe vehicle sales to grow by 3-5% in 2024, with NEV strongly outperforming ICE
- Cost cutting measures and a sharp drop in EV battery lithium prices should alleviate margin pressure, with Chinese automakers doing the best given extensive control over their value chain
- Project FY24F net earnings growth of 14-35%/3-21% y-o-y for Chinese /US automakers, whereas market expects European automakers to post earnings decline of 7-14% due to a more challenging operating environment
- Favour China automakers BYD and Great Wall over foreign peers for 1) comprehensive supply chain to weather industry volatility; 2) decent FY24F earnings growth; and 3) compelling valuations at around 1 SD below 5-year historical average
NEV sales to post 20% growth or more in major markets even as demand normalises post covid. We forecast China’s PV sales growth to moderate to 4%/3% in 2024-25, compared to c.10.5% expansion in 2023. Sales growth in 2024-25 would be largely underpinned by the NEV market, which is projected to expand by c.20% CAGR over the same period. Vehicle sales in the US and EU are estimated to grow 3%-5%, with EV sales rising faster by >20% p.a. in 2024-25. Overall, we are seeing a normalisation of the global auto industry post Covid.
Chinese automakers can manage margin pressure better. We are seeing rising price competition and margin pressure in major auto markets. China was the worst hit in 2023 and the trend is expected to continue in 2024. Our metals team has forecast prices of key EV battery materials, such as lithium, to decline by 45%-55% y-o-y (vs. 38%-50% in 2023) and automakers are also taking steps to lower production cost (aided by scale effect), to alleviate the margin pressure. Chinese automakers’ gross margin estimates to range 18-20% in FY24 while the US / EU automakers at 12-20%
We favour Chinese automakers. We lean towards Chinese auto OEMs over global counterparts, given their robust EV strategy and resilience against supply chain disruptions from the Red Sea situation, as well as compelling valuations. We prefer Great Wall Motor (GWM; 2333 HK) for its improving EV sales mix to defend rising market competition and BYD for its deepening global strategy to drive earnings growth. GWM and BYD are trading at 0.5/1 SD below the 5-year historical average PE. Besides, FY24F net earnings growth is decent at around 25% each.
