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CSCI-Auto-China Auto Sector： Headwinds from weak retail demand and cannibalisation of property sales rebound - 20180629

Headwinds from weak retail demand and cannibalisation of property sales rebound

• Although 5M18 ICE shipments posted a better-than-expected growth of 5.4% YoY, the growing discrepancy between domestic retail and wholesale growth in May-18 still point to weak demand in the mass consumption market, in our view.
• ICE PV sedan sales grew 12% YoY in May-18, outpacing that of SUVs of 7% YoY increase for the first time since 2012 and became the fastest growing auto segment.
• We anticipate the retail car market to come under more pressure in the short-term if the property sales market maintains its solid recovery going forward
• Weighed down by the trade conflicts and likely slowing retail sales ahead, both the auto OEM and dealer sectors had dropped by 15% and 20% respectively in the past two weeks. Nevertheless, albeit our concern of the potential of a market-wide decline, we remain positive on Geely (175.HK) and GAC (2238.HK) given their solid fundamentals and attractive valuation.

Likely weak retail auto sales ahead. According to CPCA, May-18 wholesale sales growth came in at 8.6% YoY, slowing down by 3.5 ppts from the 12.1% YoY growth in Apr-18 while May-18 retail sales growth of 3.5% YoY was 5.5 ppts lower versus the 9.1% YoY growth in Apr-18. The lower retail sales growth relative to that of wholesales suggested that actual demand in the mass market was not as strong as otherwise implied by the wholesales growth, whilst the sluggish retail sales in the first three weeks of Jun-18 may also indicate weak retail sales growth ahead, in our view.

SUV growth lags behind sedan growth in May-18 due to slowing domestic brand sales. PV sedan sales growth in May-18 has outpaced that of SUVs for the first time since 2012 and became the fastest growing auto segment, which was likely due to slowing domestic brand sales in the past few months. More specifically, domestic brands’ market share had slipped to a low of 41.6% in May-18 from a high of 48.8% in Dec-17, or down 7.2ppts, while that of Japanese and German brands had risen by 5.1ppts and 6.3ppts respectively over the same period.

Growth of retail consumer goods consumption in China hit a record low amid a rebound in property sales. The slowing sales growth of retail consumer goods in May-18, which was attributable to a slowdown in consumption growth of automobile goods, was likely led by a rebound in property sales in May-18 as the large expenditure had subsequently constrained mass market consumption. Thus, we anticipate the car retail sales market to come under pressure in the short-term if property sales remain on a solid recovery trend going forward