Vehicle sales in China were 9.5% higher in December than one year ago.
December passenger vehicle sales were 9.1% higher than one year ago with fading support from the purchase tax reduction that began in October 2015. The tax rate on qualifying vehicles will rise from 5% in 2016 to 7.5% in 2017, still below the normal rate of 10%. Full year 2016 sales 370% were higher than 2006 and the long-term demand outlook remains favorable.
Commercial Vehicle sales improved led by Heavy Trucks +54% in December and +33% YTD. 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 reduced maximum truck weights and increased 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 (+19.4% YTD through September)
Commercial vehicle sales have been relatively weak in recent years due to the slowdown in heavy industry:
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 (example). 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. Recently reported 3Q16 results showed revenues up 39% (in USD) vs 3Q15. The company noted strong sales of premium products used extensively in luxury vehicles and new energy vehicles. Chinese media reported that XD will undertake a major expansion of its recently completed Sichuan facility. The local government announcement includes many details including a March 2017 start, but the company tells me the agreement is still just a non-binding letter of intent.
- ZX: China Zenix Auto is the country’s leading producer of commercial vehicle wheel rims. The company made a considerable investment in a new facilitycapable 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 company will also benefit from a long-term shift from hydraulic steering to electric power steering systems which cost about 50% more per vehicle. Recently reported 3Q16 results showed revenues up 4.1% (in USD) vs 3Q15. The company said production level is at an all-time high and gross margins have rebounded. They expect industry sales to increase about 10% in 2017 and mentioned strong demand for new cars in China’s Tier 3/4 cities. Export sales to North America may have some political risk with the new administration.
- 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. Recently reported 3Q16 results showed revenues -4% vs 3Q15. The company noted weakness in the bus and agricultural markets partially offset by a shift towards higher value engines.
- 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.
Share prices of the US-listed suppliers show rising investor awareness and interest in these companies:
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 current 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.