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UOB Kay Hian: China Auto Sector Accelerating; Buy Dong Feng
Aspire, Hot Picks | 03 June 2015
By: Lim Si Jie
Articles (169) Profile

China is currently the leading car manufacturing country in the world. It is expected that the Chinese automotive market will continue to grow in the next decade, becoming as big as Europe and US combined. With such growth expected in the automotive sector and A-shares booming, is it the right time now for investors to get in?

New Innovations From Mercedes-Benz; BMW Lacklustre

According to UOB Kay Hian, Mercedes-Benz is currently grabbing market share away from BMW and Audi due to its younger range of products. Sales of the new C-class (long wheelbase) launched by Beijing Benz in 2014 grew significantly year-to-date (YTD) after significant improvement in configurations. This took away some market share from BMW Brilliance 3-Series L.

BMW Brilliance will not have new models this year before the launch of the 2-Series by this year-end. Moreover, UOB Kay Hian expects BMW Brilliance sales to “remain lukewarm”. BMW Brilliance previously guided for a ten percent Year-on-Year (YoY) growth. However, BMW Brilliance has cut its sales target for 2Q15 such that there will be no YoY growth upon the request of dealers.

Japan Brands To Recover

Although sales of DF Honda and Nissan in Shanghai remained flat in 1Q15, retail sales were actually better. This was mainly attributed to the significantly improved relationships between the Original Equipment Manufacturer (OEM) and dealers with a halt in channel stuffing, drawdown of channel inventory and increase in incentive rebates.

Both Nissan and Honda are preparing to launch new models that are set to revive sales momentum. The dealers are optimistic of the CR-V facelift (compact SUV) that was launched last week and the XR-V (small SUV) that was launched at end-14. A new compact sedan model will be launched in 4Q15.

Auto Sector Sales To Spur In 2015

New policies have a strong impact on the automobile sector. In particular, the announcement of car licence quotas by more cities will dampen investment sentiment on the sector. However, the booming A-share market could create a wealth effect for car consumption, spurring car sales this year.

On the other hand, severe credit tightening will hit the automobile sector hard. It would possibly cause a decline in bank loans and will affect sales of carmakers. This would affect the sales of premium cars the most, especially when car dealers generally have long bill receivable days.

Amongst the players in the automobile sector, Dong Feng Motor Group is UOB Kay Hian’s top BUY pick while Brilliance is UOB Kay Hian’s top SELL pick.

Source: UOB Kay Hian, Bloomberg

Dong Feng Motor Group (0489.HK)

UOB Kay Hian maintains a BUY rating on Dong Feng Motor Group (DFM). UOB Kay Hian believes that DFM’s cheap share price shows potential to appreciate and very limited room for depreciation anyway.

Although 1Q15 profits may drop YoY due to lower than average sales, UOB Kay Hian expects earnings momentum to pick up in the next few quarters. Sales will be boosted by the launch of new models.

Recommendation: BUY, TP HK$15

Brilliance China Automotive (1114.HK)

UOB Kay Hian is giving a SELL rating to Brilliance as sales and margins of BMW in the next three quarters will likely be pressured by competition given its old product range. Despite UOB Kay Hian holding a long-term positive rating on Brilliance, UOB Kay Hian recommends a SELL call in the short run.

Recommendation: SELL, TP HK$12

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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