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Morningstar | Relaxation of EV Buying Restriction in China Does Not Move the Needle for Automakers Under Coverage

The National Development and Reform Commission, or NDRC, China’s economic planning body, recently announced a plan to remove license plate quotas and road space rationing on alternative fuel vehicles across the country. Although the scrapping of purchase restrictions will undoubtedly boost short-term demand for new energy vehicles, or NEVs, we believe the resulting impacts on automotive names under our coverage are negligible. As a result, we do not plan to change our fair value estimates for Great Wall, Dongfeng, or Hyundai.

Among the cities that have license quotas on passenger vehicles, Beijing has by far the longest wait line on NEV plates. To date, the capital city has more than 400,000 outstanding applications for electric vehicle, or EV, plates, against the current annual quota of 60,000. Assuming Beijing follows the central government’s announced plan and removes restricting measures, the outstanding 400,000 applications (about 2% of the number of passenger vehicles sold in China) should result in the same number or more of EV purchases in the capital city. Other cities in China either do not have license plate restrictions or have a very short wait line.

On a company level, however, we do not think the NDRC’s move will lead to material impacts on the fundamentals of Great Wall, Dongfeng, and Hyundai. Despite our expectations for Great Wall and Dongfeng to generate a larger share of sales from EVs, neither of the two firms has reaped much profit from these cars. Furthermore, with car buyers in first-tier cities like Beijing having a strong preference for higher-end vehicles, we do not see mass market automakers benefiting much from the relaxation. In the case of Hyundai, the Korean automaker has minimal exposure to NEV sales in China, and we do not expect its volume to pick up anytime soon given its brands’ weak value proposition to Chinese consumers.

In the short-term, U.S. trade conflict continues to dampen consumer sentiment. We think the market is postponing purchases in the hope that government stimulus will reduce auto prices. While the NDRC has published documents that propose more auto stimulus, action has not yet been taken. At the same time, we do not see several provinces’ early enactment of the State 6 emission rule as resulting in a material pre-buy of State 5 emission vehicles in June (as these cars will no longer be allowed to be sold after State 6 is implemented). With almost 70% of surveyed dealers reporting they will not be able to clear out inventory of State 5 emission cars at the end of May, we expect the majority of these vehicles will be returned to manufacturers for emission reconfiguration, rather than discounting at unreasonable levels.

For the first four months of 2019, passenger vehicle sales in China have posted a 15% year-over-year decline. Preliminary figures from China Association of Automobile Manufacturers suggest sales are down 9% in May. Assuming no change in government policy, we now see 2019 China light vehicle demand will be down 3% to 5%, from 1% to 3% forecast previously.