Dongfeng Motor October 2014: Still No Love For Japan, But Plenty For France

| About: Dongfeng Motor (DNFGY)
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Summary

DFM reported October sale that showed continued weakness in its PV and CV segment.

Japanese brands, Honda and Nissan, both underperformed while PSA continue to see robust growth.

Prefer Geely and Great Wall as my top two China auto plays.

Event

Dongfeng Motor (OTCPK:DNFGY) reported its October sales data that showed an incremental recovery for the passenger vehicles but commercial vehicle shipments remain weak. Similar to the prior month, both Honda (NYSE:HMC) and Nissan (OTCPK:NSANF) continue to remain weak, suggesting that competition may be intensifying. October sale of 231k units was a -2.6% y/y decline. Commercial vehicle's decline accelerated to -18.5% vs. -14%, while passenger vehicle was flat vs. a slight decline in the prior month. Particularly, DF Honda is challenged by the intensifying competitive environment, with shipments down -28% y/y in October, dragging down DF's overall volume growth. I recommend investors to avoid DF and focus on the better names that have superior medium-term growth profile, namely Great Wall (OTCPK:GWLLY) and Geely (OTCPK:GELYY).

Highlights

No love for Japan. Japanese brands such as Honda and Nissan are facing a challenging environment with both brands seeing negative sales in Q3. While inventory adjustment may have negatively impacted Honda, demand is still lukewarm with Honda CR-V sale picking up slightly to 14k units in October (vs. 8k in September) but this is still below the normalized 16k monthly shipments. In addition, Spirior sedan sale has been nil for the past three months and management has carried out price cut to stimulate demand but I do not expect this to have any impact given the soft demand. Nissan is also facing competitive pressure in the compact sedan segment in which its top three popular models (Sunny, Livina and Tiida) saw October sale down -41% y/y. Competition from the local OEMs and from compact SUVs may have resulted in this decline.

Plenty of love for France. Similar to the prior month, Peugeot and Citreon models are selling well with shipments up +27% in October. Citron Elysee continues to be the popular model with 10k/month volume vs. 6k in 2013. SUV from PSA is also doing well with volume at 5k/month.

Conclusion

While I like DFM's pipeline and gradual margin recovery, I am skeptical of a near-term rebound in its shipment volume from Honda and Nissan. In addition, CV demand remains weak in both the medium and heavy-duty trucks, and I do not expect a recovery here in the near-term judging by China's soft economy. I continue to prefer Geely and Great Wall as my top two China auto picks.

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