Automotive industry: good performance but pressure on profitability in the future

In 2006, the auto industry achieved sales of 7.216 million units, an increase of 25.13% year-on-year; of these, sales of passenger cars were 5.176 million, an increase of 30.02% year-on-year; sales of cars were 3.629 million, an increase of 36.89% year-on-year. The sales of passenger cars in the market are better than that of commercial vehicles. The year-on-year growth rate is 15.79 percentage points higher than that of commercial vehicles.

In the first quarter of 2007, the automotive industry continued its rapid growth trend in 2006, achieving sales of 2.237 million vehicles, an increase of 22.17% year-on-year. However, the product growth pattern has undergone significant changes. The rapid growth of commercial vehicles by 21.69% has become a new bright spot in the industry. Passenger car growth slowed to 22.36%, and car growth slowed to 30.14%. We believe that there is still a possibility that the growth rate of passenger vehicles in the future will fall.

The overall growth of listed companies in the automotive sector was good but the gross profit margin showed a downward trend. In 2006, the main business income and net profit of automobile and accessories listed companies, including 32 vehicle companies (including automobiles, special vehicles, agricultural vehicles, and motorcycles), and 32 auto parts companies, increased by 32.3%. , 61.12%. The weighted average earnings per share was 0.177 yuan, an increase of 0.048 yuan over 2005. Gross profit margin was 15.37%, down 0.21 percentage point year-on-year. In the first quarter, the automobile segment continued its growth trend in 2006, but its gross profit margin continued to decline to 13.72%.

The listed companies of parts and components, due to their poor industry representation, have some differences in their relative performance and their own industry trends. Most of the listed parts companies are worse than vehicles, but they are expected to improve. In the year of 2006, the EPS of listed companies was 0.196 yuan, an increase of 0.056 yuan over 2005; the EPS of listed parts and components companies was 0.132 yuan, a substantial increase of 0.074 yuan over 2005. In the first quarter of 2007, the gross profit rate of parts and components listed companies decreased slightly by 0.14 percentage points in the change in gross profit margin, while the total vehicle volume decreased by 2.12 percentage points.

In the segment segment, the listed companies in the truck and motorcycle sectors rebounded. In 2006, the main business income and net profit of truck-listed companies increased by 33.46% and 185.1% respectively year-on-year, reversing the negative growth of both companies in 2005. In the first quarter of 2007, the performance of truck-listed companies hit its best growth rate in four years: the main business revenue increased by 55.65% year-on-year; net profit was 491 million yuan, compared with only 0.387 billion yuan in the same period of last year.

In the first quarter of 2007, the listed companies of motorcycles achieved profitability, weighted average earnings per share of 0.034 yuan, and gross profit margin rose to 15.12%. We believe that the future of listed motorcycle companies is expected to come out of the trough of 2006.

Maintain an overweight rating on the industry. In addition, we remind investors to grasp the investment opportunities brought about by market fluctuations in the general increase in valuation.

1. Review of the Automotive Industry Operation in 2006 and the First Quarter of 2007

1.1 The first quarter continued the rapid growth trend in 2006, but passenger car growth slowed down the acceleration of commercial vehicles

In 2006, the automotive industry achieved a total sales of 7.216 million units, an increase of 25.13% year-on-year; of these, sales of passenger cars were 5.176 million, an increase of 30.02% year-on-year; sales of cars were 3.629 million, an increase of 36.89% year-on-year. The passenger car market is much better than commercial vehicles, which is 15.79 percentage points higher than that of commercial vehicles.

From the overall situation, we believe that China's auto industry is still in a period of rapid growth. Based on the output of 727.97 million vehicles in 2006, it is expected that China's vehicle output will reach 11 million units in 2010 at a compound annual growth rate of 11.2%, and will become the world's major automobile producer with the United States and Japan.

1.2 The entire vehicle industry is currently in a boom cycle, and future revenue and profit growth may slow down

In 2006, vehicle manufacturing companies realized revenue of 811.39 billion yuan, an increase of 26.86% year-on-year, and realized profits of 37.75 billion yuan, an increase of 44.17% year-on-year. In January and February of 2007, the growth rate of income and profit of vehicle companies was 30.09% and 58.52%, respectively, which continued the continuous growth trend.

In 2006, the gross profit rate of vehicle manufacturers was 15.66%, an increase of 0.53% over the same period last year. During the period, the cost rate dropped slightly to 9.69%, and the pre-tax profit rate increased by 0.65 percentage points to 4.65%. In the January-February period of this year, the profitability of vehicle manufacturers continued to rise, with the gross profit margin and pre-tax profit ratio reaching 16.86% and 5.22%, respectively, while the period expense rate fell to 8.73%.

We believe that the current vehicle manufacturing industry is still in the business cycle since 2005. However, with the release of relevant production capacity and the growth of industry production and sales, especially the decline in the growth of passenger vehicles, the future industry income and profit growth may slow down. The growth of related indicators in the second and the second half of the year is worthy of attention.

1.3 Parts and components industry revenue and profit growth higher than the entire vehicle and is expected to continue

In 2006, the revenue and profit growth rates of the parts and components industry were 34.71% and 46.79% respectively, which were 7.85 and 2.62 percentage points higher than that of the entire vehicle; and 6.97 and 31.52 percentage points higher respectively in the first two months of 2007.

We believe that the continuous expansion of the new car and after-sales market has provided a good external environment for the development of the spare parts industry. China's new car sales are expected to reach 11 million in 2010, and the number of car ownership is expected to reach 77 million units in 2010 based on 39 million vehicles in 2006. In addition, the expense control capability of the parts and components industry has been continuously enhanced, with the period cost rate ranging from 16.58% in 1998 to 9.13% in 2006, a total decrease of 7.45 percentage points. We believe that for the parts and components industries in both domestic and overseas markets, both supporting and after-sales markets, it is expected that the growth in revenue and profit growth rate in 2004 that is higher than that of the entire vehicle is expected to continue.

2. Automobiles listed companies: good growth but lower gross profit

Corresponding to the rapid growth of the industry as a whole, the overall growth of listed companies in the automotive sector also continued to bottom out. However, because the listed companies in the auto sector (especially listed auto parts companies) do not have the overall representation of the industry, the direction of the relevant indicators is not completely consistent with the industry.

2.1 The overall growth is good, operating conditions are the best since 01

In 2006, the main business income of 32 listed companies (including automotive, special vehicles, agricultural vehicles and motorcycles) and 32 auto parts companies, including 32 auto parts companies The net profits were 235.26 billion yuan and 6.217 billion yuan, respectively, a year-on-year increase of 32.3% and 61.12%. The net profit reversed the negative growth in 2004 and 2005. The weighted average earnings per share was 0.1766 yuan, an increase of 0.048 yuan over 2005. In the first quarter, the automotive sector continued its growth trend in 2006, with revenue and net profit achieving growth of 62.51% and 95.74% respectively, and a weighted average EPS of 0.082 yuan.

3. Most of the listed companies are inferior to vehicles in terms of indicators, but they are expected to improve.

There are more than 6,000 parts and components companies that can be counted in China. At present, there are 32 A-share listed auto parts companies. The poor representation of listed companies is particularly prominent in the parts and components industry.

3.1 Overall vehicle listed companies' bottom-up recovery rate in 2006, but gross margin has declined significantly in the first quarter

The weighted average earnings per share of listed companies for the entire vehicle category for the year 2006 was 0.195 yuan, an increase of 0.056 yuan over 2005. Gross profit margin increased slightly by 0.32 percentage points to 15.67%, and net asset yield and net profit rate improved markedly by 0.74 and 0.53 percentage points year-on-year respectively.

In the first quarter of 2007, the gross profit rate of listed vehicles of the entire vehicle category was 13.55%, which was a large decline. We believe that the competitive environment of the listed companies of the entire vehicle category will remain fierce in the future. There are pressures on listed companies to increase profitability.

3.3 Parts Listed Companies' Key Indicators are Better Than Whole Vehicles, but Expect to Improve

In 2006, the income from main business of vehicle listed companies increased by 35.78% year-on-year, which was 9.88 percentage points higher than that of parts-listed companies. The profit rate of main business was also 26.68 percentage points higher than that of parts-listed companies. However, in terms of net profit margin, the entire vehicle The listed company's net profit growth rate for parts and components was 69.62% and 135.32%, respectively, indicating that the listed companies had better performance growth under good cost control.

In the first quarter of 2007, the main business income of all vehicle and component listed companies achieved rapid growth, which was 75.18% and 42.4%, respectively. The growth of vehicle-listed companies was still higher than that of parts and components. Under the background of a large decline in the gross profit rate of listed companies of listed vehicles, the profit growth rate of the main business of parts-listed companies was 95.75%, which exceeded that of the entire vehicle.

In terms of net profit growth, the total number of vehicles and parts listed companies was 120.01% and 67.59% respectively, which maintained a similar trend in revenue growth.

In 2006, the gross profit rates of vehicles and parts listed companies were 15.67% and 14.44% respectively, and parts and components listed companies were inferior to vehicles. However, in the first quarter of 2007, the gross profit rate of the listed vehicle companies dropped to 13.55 and the proportion of parts and components listed companies was 14.30%. The gross profit rate of parts-listed companies was more stable.

3.4 Parts and Components of the Upstream Industry Listed company's operating indicators have long been inferior to the entire vehicle and will continue

As the upper part of the vehicle company, the parts and components company is inevitably bound by the vehicle company in terms of fund recovery and product supply. Correspondingly, the relevant operating indicators of parts and components listed companies have been inferior to vehicles for many years, and we believe this trend will continue.

4. Subdivision of listed companies: boom in trucks and motorcycles

4.1 The boom of the listed companies of trucks and motorcycles

Our list of passenger vehicle listed companies, including Shanghai Automotive, Changan Automobile, FAW Xiali and FAW Car, including Foton Motor, Dongfeng Motor, China National Heavy Duty Truck and S Xiang Torch (we have been absorbed by Weichai Power ) The list of trucks listed companies, including buses listed by Yutong Bus, Jinlong Motors, Shuguang, including China Jialing, Xindazhou A, Qianjiang Motor, Zongshen Power (Marketing Forum) The motorcycles listed in the company were analyzed separately and considered that:

The boom of listed companies in trucks and motorcycles sector, and the listed company of passenger cars, due to the overall listing of Shanghai Automotive in 2006, drove the growth of passenger car segment revenue and profits, but this high growth will lack follow-up extensions. Expansion, apparently does not have follow-up continuity.

4.2 Passenger car listed companies face pressure on profitability

In 2006, the listed company's main business income and net profit increased by 72.73% and 41.74% year-on-year, respectively, and the weighted average earnings per share was 0.24 yuan, which was basically the same as that of the same period of last year. In the first quarter, the main business income and net profit increased by 154.74% and 135.27% respectively, and the earnings per share was 0.13 yuan.

We believe that the rapid increase in revenue and profit of listed companies for passenger vehicles is mainly due to the increase in the scale brought about by Shanghai Auto's overall listing. Therefore, if there is no extended growth in subsequent years, it will make the growth of passenger vehicle listed companies unsustainable. . In the industry data, the growth rate of the passenger vehicle industry in the first quarter of 2007 has slowed from 30.02% in 2006 to 22.36%. We believe that such changes will ultimately be reflected at the level of listed companies.

4.4 The bus company entered the adjustment period

In 2006, the growth rates of main business income and main business profit of the three listed bus companies slowed down, which were 20.72% and 18.45%, respectively, down 38.75, 31.09 percentage points year-on-year, and net profit increased by 27.1%. Gross profit margin was 15.12%, a slight drop of 0.06 percentage points from the same period last year. The weighted average earnings per share was 0.5579 yuan, a decrease of 0.08 yuan over 2005.

In the first quarter of 2007, the weighted average earnings per share of listed companies in the bus market was 0.1317 yuan, gross profit margin and net profit margin decreased by 1.43 and 0.26 percentage points respectively, and the listed companies of passenger cars entered the adjustment period.

And in the context of the high growth of passenger vehicle listed companies, we noticed that the gross profit rate has continued its declining trend since 2004. In 2006, the gross profit rate of listed companies for passenger cars was 18.92%, a slight drop of 0.34 percentage points year-on-year. Gross profit margin in the first quarter fell to 13.30%. We believe that the listed companies of passenger cars face pressure on their profitability.

4.5 Motorcycle listed companies are expected to go out of the trough in 2006

In 2006, the income growth and performance of four listed motorcycle companies were all at low levels. In 2006, the main business income of listed motorcycle companies increased by 0.37%, while net profit decreased by 152.33%, which was the trough in the past five years. In the first quarter of 2007, main business income and net profit increased by 7.59% and 244.72% year-on-year, respectively, showing signs of bottoming out.

In 2006, the weighted average earnings per share of listed companies in motorcycles was negative 0.0391 yuan and gross profit margin was 11.54%, which was the lowest level in the past six years. In the first quarter of 2007, listed motorcycle companies achieved profitability, weighted average earnings per share of 0.0343 yuan, and gross profit margin rose to 15.12%. We believe that the future of listed motorcycle companies is expected to come out of the trough of 2006.

5. Investment advice

Looking at the development trend of the automotive industry in the near future, we believe that the investment focus should shift to companies with sustained growth momentum, related sub-sectors in the boom phase, and corresponding listed companies. With respect to the incremental growth, we propose to focus on the companies that have assets injection and merger and acquisition expectations.

For passenger vehicles, we believe that the overall growth rate of the industry may slow down, but under the background of the large-scale development of self-owned brand economy cars, and considering the equity investment in FAW Toyota, we recommend that we remain on FAW Xiali (000927). Focus on investment rating increase. Shanghai Automotive (600104) became the most powerful company in China's auto market after its overall assets injection. We are optimistic about the continued growth of its performance and its investment rating will increase.

Changan Automobile (000625) increased its investment rating.

The trucking industry is currently in a booming stage, and investment options are still dominant companies in the subdivision industry, such as Foton Motors (600166), China National Heavy Duty Trucks (000951) and Weichai Power (000338). With the merger of Weichai's absorption of the Hunan Torch (000549), Weichai Power's products cover heavy-duty vehicle engines, transmissions, axles, and complete vehicles. Its assets are highly competitive in the Chinese heavy-duty automotive industry. We believe that the relatively stable competitive landscape in the heavy-duty auto market may change. At present, Foton Motors has an investment rating of Buy, Sinotruk and Weichai Power increase their holdings.

For parts and components listed companies, we need to explain that because there are more than 6,000 parts and components companies that can be counted, and there are only 32 A-share listed companies, the representativeness of listed companies in the parts and components industry is very poor. We believe that the parts and components industry is in the stage of stable earnings growth, continuous export growth, and income growth exceeding the steady development of the entire vehicle.

At the listed company level, we propose to pay attention to five types of investment opportunities: enterprises with optimized product structure; companies with relatively large and rapid growth in exports; enterprises with asset integration and merger and acquisition expectations; companies with investment opportunities brought about by changes in industrial policies; Changes in companies that increase profitability. The corresponding major listed companies are: Fuyao Glass (Quote Forum), Ningbo Huaxiang, Wanfeng Aowei, Huanghai (Quote Forum), Aeolus, Wanxiang Qianchao, Weifu Hi-Tech. Investment ratings are overweight. The impact of changes in raw material prices on automobile tire companies is systematic, and individual stocks are advised to focus on Aeolus shares and tires.

In addition, we remind investors that due to the general increase in valuation, grasping investment opportunities in market fluctuations may be an important aspect of obtaining satisfactory returns.