9 Oct

Could China’s Auto Sector Soon ‘Bottom Out’?

WRITTEN BY Anuradha Garg

As reported by Barron’s, Citi Research analyst Jeff Chung thinks China’s auto sector could soon “bottom out.” Chung shared his opinion in a note to clients yesterday after analyzing US auto market sales cycles. His analysis shows down cycles have lasted 18 months.

Barron’s reports Chung wrote, “China is not in any critical recession or financial crisis.” He added, “Auto consumption accounts for a big portion of China’s gross domestic product spending and the government will likely provide policy support in event of [a] prolonged downcycle…and the downcycle in China has been nearly 18 months. … We believe the sector should bottom out soon.”

Carmakers waiting for China’s auto sector turnaround

Automakers are waiting with bated breath for China’s auto market to recover. August marked the 14th month of auto sales decline in China in 15 months.

Legacy automakers Ford (F) and General Motors (GM) have made big bets on China. However, China’s sagging auto sales only added to their challenges in the weakening US auto sector. Last year, Ford’s sales fell 14.3% YoY (year-over-year) in China, while General Motors’ sales fell 9.8%. Ford plans to launch 18 new models in China by 2021 in a bid to reverse the slowdown.

China’s new energy vehicle sales join the decline

Until June, China’s NEV (new energy vehicle) sales were the only bright spot in the country’s decelerating auto market. Last year, NEV sales rose 62% YoY. However, as China rolled back its subsidies, NEV sales also slowed. NEV sales fell 4.7% YoY in July. The slowdown deepened in August as sales fell 15.5% YoY.

NIO reeling from electric car market slowdown

The slowdown has sent Chinese electric car makers reeling. NIO (NIO), China’s equivalent of Tesla, has lost more than two-thirds of its stock value year-to-date. NIO’s Q2 2019 results were weaker than expected, and its cash burn rate and growing competition have created concerns about its viability.

However, the company’s third-quarter delivery report, released yesterday, was better than expected. With 4,799 vehicle deliveries, the company topped its own guidance of 4,200–4,400 deliveries. As a result, its stock rose. China’s auto market recovery could improve NIO’s fortunes.

Tesla to benefit from China’s auto sector turnaround

Tesla (TSLA) also stands to benefit if China’s auto market turns around. The company currently imports all of the cars it sells in China. However, it’s building a Gigafactory in China, which will produce Model 3s and Model Ys locally. In addition to avoiding tariff-related uncertainty, Tesla will have lower production costs in China than in the US, helping the company achieve its profitability goals.

Chinese government to boost the auto sector

In August, Reuters reported Chinese authorities had asked local governments to explore gradually relaxing or removing restrictions on auto sales. It also suggested that governments should encourage NEV purchases. Despite these efforts, the Chinese auto market hasn’t changed significantly so far.

China’s auto sector doesn’t show signs of turning around

While Citi Research’s prediction of China’s auto market bottoming out may bode well for automakers, evidence of a turnaround has yet to present itself. Reuters reports China Association of Auto Manufacturers official Shi Jianhua said, “The sales in the second half of the year should become better, but we are not sure to what extent the sales would be.” He added, “Perhaps the next three years will be at a low or small negative growth. We’re all looking forward to sales picking up, but it’s normal if we don’t get that.”

A US-China trade truce could boost the auto sector. However, a truce doesn’t seem likely, given the Trump administration’s blacklisting of Chinese tech companies and other tensions.

Latest articles

Is the technology sector due for a correction? Twitter (TWTR) and Intel Corporation (INTC) will release their Q3 2019 stock earnings on October 24.

The Dow Jones Industrial Index (or DJIA) is trading just 2.2% below its all-time high. But is the stock bubble about to burst?

Renaissance Technologies had a strong investment in the healthcare sector in Q2 2019. The healthcare sector makes up 18.16% of the firm's total portfolio.

This week, semiconductor equipment suppliers Teradyne Inc. (TER) and Lam Research (LRCX) will report their quarterly earnings.

Major chip companies Texas Instruments (TXN) and Xilinx (XLNX) released their earnings last week and saw their stocks fall.

On October 18, CNBC reported Bill Gross top picks. His top stock picks were Annaly Capital (NLY), Invesco (IVZ) and Allergan (AGN).