Passenger Vehicle sales in China were 11.3% higher in May than one year ago. Year over year comparisons should remain favorable in coming months due to the slowdown last summer. The long-term outlook remains mildly positive due to the country’s low level of vehicle ownership and rising personal incomes.
Commercial Vehicle sales in China continued their rebound in April with sales 1.4% higher than one year ago Truck sales rose while buses declined. The outlook for truck demand has improved due to strong government led infrastructure investment, rising ecommerce deliveries, and an emerging rebound in residential construction.
The US listed auto suppliers have varying exposure to these segments:
- CXDC: China XD Plastics makes modified plastic compounds tailored to satisfy customer requirements for flexibility/rigidity, strength, and resistance to heat/cold and corrosion. In many applications plastic parts can replace metal components at lower cost and lighter weight. Penetration of larger commercial vehicles is limited due to greater strength requirements. The company has a long-term goal of expanding sales to railways, aircraft, medical devices, and 3-D printing. Rising demand for Electric/Hybrid vehicles is favorable for CXDC as these use more plastic parts than traditional models. Electric car sales in china are up 176% YTD vs 2015 and hybrid car sales are up 65%. Auto parts makers see potential for global plastics used per vehicle to double over the next 10 years (LINK) due to continued pressures for lighter weight.
- ZX: China Zenix Auto is the country’s leading producer of commercial vehicle wheel rims. The company made a considerable investment in a new facility capable of producing forged aluminum wheels. Alcoa estimates that such wheels will eventually capture 50% of the international market due to their lower maintenance cost and the fuel savings created by their lower weight. Zenix disclosed during its 3Q conference call that the aluminum wheel facility has achieved a production capacity of 180000 wheels/year and the company gave guidance for 2016 sales of 100000 wheels. This is a major corporate milestone that should lead to improved operating results in 2016. Diesel exhaust from commercial vehicles is one of the largest factors in China’s smog problem and the government currently provides significant incentives for “new energy” vehicles incorporating a full range of energy efficient components (including aluminum wheels). The company noted in its 1Q conference call that its sales have lagged the overall truck market YTD because demand has been weighted towards trailers (where ZX has lower penetration) rather than construction trucks (where ZX is dominant. NBS data showing Fixed Asset Investment in Infrastructure up 20% YTD vs 2015 should be a leading indicator for increased heavy truck demand in coming months.
- CAAS: China Automotive Systems is the country’s leading producer of steering systems. Most of the company’s operating subsidiaries were developed as joint ventures with major auto companies ensuring close corporate relationships. The company also has a strong supplier relationship with Chrysler North America. The recent announcement of a share buyback plan appears well-timed with a rebound of the passenger vehicle market not fairly reflected in the current share price. During the recent earnings conference call the company disclosed that it expects to begin production in 4Q16 for significant new sales contracts with Ford and Fiat that will bring “noticeable improvement” to company results. The company will also benefit from a long-term shift from hydraulic steering to electric power steering systems which cost about 50% more per vehicle.
- CYD: China Yuchai International is a leading domestic producer of diesel engines (primarily for commercial vehicles) and has an emerging product line of natural gas-powered engines. The diesel market is relatively weak, but the company sees opportunity through continually improving the emissions control of its engines to exceed increasingly strict standards in China. The company recently announced a large annual dividend for the 8th consecutive year – a highly admirable record of delivering value to shareholders.
- SORL: SORL Auto Parts (English site – Chinese site) is a leading domestic producer of braking systems. Related party transactions raise concerns over the whether public shareholders will ever benefit from the earnings and value of the company’s business. In 2010 the Chairman’s private company sold a group of businesses to SORL at a premium to their book value (LINK). In 2015 the Chairman offered to acquire the entire company for just 28% of book value (LINK). In 2016 the Chairman’s private company has just sold a large land parcel to the company at its full market value (LINK) – a price approximately equal to all of SORL’s cash and short-term investments. The company has never paid a dividend, repurchased shares, and insiders have never bought stock. SORL’s cash has been extracted through related party acquisitions at full value, but the Chairman offered to acquire the businesses back only at a huge discount to fair value. Commentary on trends in the company’s business will be meaningless until the company demonstrates that shareholders will benefit from its achievements.
CXDC and CAAS are the main beneficiaries of the continued strength in the passenger market while ZX and CYD are reliant on the commercial vehicle market. If truck sales continue the year-to-date gains then these companies should see improved results in 2016. CXDC and ZX are indirect beneficiaries of government incentives for “New Energy” electric vehicles.