China May Auto Sales - SUV Leading The Way

|
Includes: F, GWLLF, HMC, TTM
by: WestEnd511

Summary

CAAM reported May auto sales up 10% y/y driven by SUVs and a rebound in commercial vehicles.

Japanese brands taking share but quality domestic brands should withstand the onslaught.

Prefer Great Wall Motors, Tata Motors, Honda and Toyota.

China Automotive Association of Manufactures reported May auto wholesale shipments that showed a +10% y/y growth to 2.1m units driven by a +11.3% y/y growth in passenger vehicles. Within the segment, SUVs remain the clear beneficiary of China's existing auto market and I would remain overweight on OEMs that is leveraged to this trend, namely Tata Motors (NYSE:TTM), Great Wall Motors (OTCPK:GWLLF), Honda (NYSE:HMC), Toyota and Ford (NYSE:F).

Consolidated wholesale shipments remain solid driven by the steady growth in PV and a rebound in commercial vehicle. The wholesale shipment growth of +11.3% was consistent with the +11.4% growth in the retail market and when coupled with low inventory level, I think we can safely conclude that China's auto market remains robust. SUVs remain the bestselling segment with monthly sales up +36% y/y, accounting for 34.6% of the total PV market. Although sedan was able to turn positive with a +1.6% y/y growth in May, it was partially driven by lower comp from the previous year. What we can conclude is that China's first time buyers and those who are looking to trade up will continue to prefer SUVs over sedans and those companies that have the greatest leverage towards SUVs are better positioned.

Amongst my picks, I prefer TTM due to the JLR brand. I note that JLR China saw sales +28% y/y to 9.3k units in which Land Rover model grew +29% and Jaguar grew +22%. This is particularly impressive given the maturing auto market in China and highlights the brand leverage JLR has in the SUV and luxury sedan segments. Going forward, I believe that the new model cycle could once again translate to sales momentum with the new Discovery and the new mid-size Range Rover model. Additionally, the new E-Pace compact SUV could be a hit globally given the trend towards smaller SUVs for the urban setting.

When looking at the brands that have outperformed, it was evident that the Chinese consumers continue to prefer the Japanese brands due to their reliability and value proposition. Japanese brands saw their market share up almost 2% to 18% in the month at the expense of domestic brands. Notably, Honda's Vezel and XR-V, and Nissan's Qashqai and X-Trail are well received by the consumers and I would remain bullish on HMC on the back of this news. Although the strength in the Japanese brands could pressure the domestic brands, I believe the quality ones such as GWM should withstand the competition due to the superior value propositions from its H6 models and the H2 models. Additionally, the H7 (priced at Rmb150-170k) is highly attractive to the mid-income buyers and we should see ongoing momentum in this segment.

Finally, commercial vehicles were up +5.2% after multiple months of decline due to the economic weakness in China. The rebound is partially due to a lower base but the rising ecommerce penetration and the demand for logistics services have also helped this segment. This is certainly a good read-through to Alibaba (NYSE:BABA) and other ecommerce players, in my view.

I remain bullish on China's auto market, particularly TTM and GWM (see - Tata Motors: Jaguar Land Rover May Sales).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.