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CSCI-Auto-China Auto Sector：New subsidy policy to fuel NEV sales growth in 2H18 - 20180406

New subsidy policy to fuel NEV sales growth in 2H18

• Sluggish ICE shipments and restocking activities in Feb-18 might suggest a cautious outlook for the ICE market in FY18E, in our view.
• With solid NEV sales growth in Jan-Feb being largely attributable to the low base in 1H17 and strong PHEV shipments, we expect BEV models with a longer range per charge will see a pick-up in shipments in 2H18 benefiting from their eligibility for a higher subsidy.
• Upstream raw material suppliers in the lithium battery supply chain continued to see profitability improvement in FY17 albeit a broad-based margin squeeze.
• We remain positive on Geely (175.HK, Buy) given its attractive valuation, GAC (2238.HK Buy) given its upward cycle of prop brand and JVs, and BYD (1211.HK, Buy) on the back of its upcoming new models in 2H18 and strong FY17 PHEV shipments.

Sluggish sales and restocking activities in Feb-18 might signal a cautious outlook for the ICE market in FY18E. Aggregate sales in Jan-Feb posted a meagre 1.5% YoY growth, which was significantly lower than the same period in FY17 and FY16 due to (1) real demand has been withdrawn in advance during 2015-2017; and (2) OEMs’ concern regarding future growth which led to a slowdown in their restocking activities to avoid promotions.

Solid NEV sales growth in Jan-Feb thanks to a low base in 1H17 and strong PHEV shipments. Jan-Feb aggregate NEV shipments surged 213% YoY to around 72k units, thanks to (1) a low base in Jan-Feb 2017 weighed down by the 20% slash in NEV subsidy and pending list of green energy vehicles eligible for subsidies; and (2) PHEV shipments in Jan-Feb accounted for a substantial 33.8% of total NEV PV sales versus 18.9% in the same period last year. We expect NEV PV shipments to pick up more significantly in 2H18 after the new subsidy plan comes into effect, as models with a range of 300km or above will benefit most.

Profitability for Lithium and Cobalt suppliers continued to improve, albeit a broad-based margin squeeze. Based on the preliminary FY17 results of Chinese NEV manufacturers, we see a broad-based decline in their profitability when compared to FY16 due to the subsidy reduction. On the other hand, positive electrode suppliers, particularly those of cobalt and lithium materials, have generally managed to improve their net profit margins in FY17 albeit a broad-based margin squeeze. We believe NEV shipment growth will continue to drive motive battery demand in FY18E and positive electrode suppliers are likely to benefit more significantly than other parts suppliers and battery pack suppliers, in our view.