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CSCI-Auto-China Auto Sector：Tepid ICE sales in 1Q19, despite retail sales rallied in Jan-19 - 20190228

Tepid ICE sales in 1Q19, despite retail sales rallied in Jan-19

Retail growth rallied in Jan-19 due to the overall destocking. Dealers’ average inventory days had risen to 1.72months as of end 2018 due to sluggish retail sales during 2H18. And despite having improved to 1.4months in Jan-19, we anticipate dealers’ inventories will return to more relatively healthy levels towards the end of 1Q19 at the earliest, on anticipation retail sales to remain weak in both Feb and Mar due to the holiday effects with the restocking process to begin to kick off in 2Q19 as a result.

Economic concerns remain an overhang for the retail sales market. Since auto sales are more correlated with economic growth (GDP) relative to changes in personal incomes, we anticipate auto sales would be still undermined by macroeconomic uncertainties led by the trade disputes between China and the U.S., in particularly post the extended deadline for trade negotiations. As such, we continue to hold a cautious view regarding the prospect of a rapid pick-up in domestic vehicle consumption in China in the near term, which in our view requires total elimination of concerns over China’s economic interests.

Incentive policies to stimulate car consumption may start to bear fruit in FY19E. NDRC has rolled out a series of incentive policies in Jan-19 in a bid to drive vehicle consumption in the domestic auto market after experiencing a sales slump for the first time in 2018 by way of encouraging the local governments to increase the subsidy to facilitate vehicle owners to replace their sub emission standard vehicles with new ones that comply with the revised emission standards as well as subsidise buyers in the rural areas in purchasing PVs with displacement below 1.6L and trucks below 3.5 tons. We anticipate the effects of such a rather extensive coverage incentive plan relative to the one launched in 2009 will start to kick in gradually in the coming months of 2019, and subsequently drive vehicle consumption to more desirable levels albeit the current dire financial status of the local government bodies.