Vehicle sales in China were 26.6% higher in September than one year ago.
September Passenger vehicle sales were 28.9% higher than one year ago with continued support from the purchase tax reduction that began last October and will continue until the end of this year. Year-over-year comparisons may weaken in coming months.
Commercial Vehicle sales improved led by Heavy Trucks +27% . Factors supporting the rebound in truck volumes are:
- Booming ecommerce delivery volumes
- Replacement cycle as the high volume of vehicles purchased in 2010-13 reach the end of their useful lives
- New Ministry of Transport regulations issued in September will reduce maximum truck weights and increase penalties for violations. More vehicles will now be needed to move the same freight volumes. Modern lightweight vehicles will be needed to move volumes more efficiently (i.e. a savings of 100kg in basic vehicle weight means an extra 100kg of cargo can be carried while still remaining under the load limit)
- Ongoing strength in infrastructure spending (+19.7% YTD through August)
The rate of growth in New Energy Vehicles slowed due to a government crackdown on fraudulent subsidy claims in this sector (see Bloomberg article).
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. 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. 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 has noted that its 2016 sales have lagged the overall truck market because demand has been weighted towards trailers (where ZX has lower penetration) rather than construction trucks (where ZX is dominant), but the strong infrastructure spending, new weight regulations, and replacement demand all bode well for ZX.
- 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. 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.
Investor awareness of the US-listed suppliers remains very low. Share prices have lagged the improvements in industry outlook and price returns of comparable Hong Kong listed companies (data as of 10/13/16)
CXDC and CAAS are the main beneficiaries of the continued strength in the passenger market while ZX and CYD should see improved results from the 3Q surge in truck sales. CXDC and ZX are indirect beneficiaries of government incentives for “New Energy” electric vehicles. Strength in SORL’s brake sales for commercial vehicles is offset by governance problems.