Red flags await auto stocks

Business | Ivan Tong 11 Jan 2019

Optimism that the United States would reach a trade agreement with China cheered investors and boosted the stock markets.

Meanwhile, investors who bought Chinese auto stocks near their bottom price and gained from their rebound the day after would be even more excited.

Over the past two days, Geely (0175) and Great Wall Motors (2333) have been on crazy roller coaster rides, especially the blue-chip Geely, which rebounded 8.4 percent after plunging 11 percent a day ago.

The rebound came after the National Development and Reform Commission's vice-chairman Ning Jizhe told CCTV in an interview that it would implement measures to stimulate the market's consumption of automobiles and electronics goods this year. This includes encouraging more motor vehicles to be used in rural areas, which means more villagers and farmers will enjoy the luxury of driving.

This led to the boost of auto stocks.

But how should we view the auto sector in the medium-term?

The reason for the recent rebound was based solely on the policy news, as the NDRC intended to hedge negative sentiment on national car makers, if China were to open its auto market as part of trade negotiations, which would intensify competition within the domestic market.

However, details of the policy are yet to be worked out.

Even if China were to subsidize the price of vehicles in the future, the United States will very likely to monitor the policy as US President Donald Trump would not stand back and do nothing if China were to open its market but at the same time subsidize its own auto sector to counter foreign competition.

Most importantly, it would be hard to resolve the cyclical and structural problems that the auto sector is suffering from as the decline of auto stocks earlier was mainly due to the downturn of the Chinese economy as well as worries over the expected reforms that would liberalize the auto sector.

Geely's market capitalization has shrunk by almost HK$170 billion over the past year, and it is currently valued below HK$100 billion. Nevertheless, the carmaker's sales in 2018 was not bad, with 1.5 million vehicles sold globally, only 80,000 less than its sales target.

Investors are more concerned about the Geely's future outlook rather than its past performance.

A Geely report showed that sales in December stood at 93,000 vehicles, a 40 percent plunge from the same month a year ago, and near a 16-month low.

But the most worrying fact is that Geely has set its 2019 sales target at 15.1 million vehicles, unchanged from last year. This is a very conservative target which could also reflect the carmaker's concern over market conditions.

I visited Wuhan over Christmas and found that, overall, consumption has worsened compared with the past one to two years.

My friend there has been driving a Chinese-made Honda for nearly a decade but has scrapped the idea of trading it for a new car because of all the economic uncertainties that lie ahead.

So, it is little wonder that major investment houses held bearish views on Geely and lowered their target prices on the stock.

Ivan Tong is Editor in Chief of The Standard.

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