Automotive industry: Looking for stronger companies from the status quo of the industry

First, the car market has huge capacity and long duration

The Chinese car market is currently dominated by private consumption and new car purchases. It has entered a period of rapid growth. Within the foreseeable five years, the sales growth rate of the car market will remain at a level not lower than 25%. China will Become the largest automotive consumer market. The slowdown in growth rate in 03-05 and the decline in market prices have not changed the fact that China's car market has entered a period of rapid growth. High-quality car companies are still good varieties worth investing. We believe that after the restoration of the Chinese car market in 2005, there has been a healthy development momentum in 2006.

The rapid development of the car market depends on the growth of the national economy. The main driving factors are the substantial increase in the purchasing power of urban residents and the upgrading of spending power. Based on the history of major automobile markets in Asia, Japan and South Korea, we believe that the Chinese car market has entered A steady period of rapid growth, this time will last 5-8 years. The growth rate during the period is basically maintained at more than 25%, and the end of the automobile production rate has reached a relatively high level of 70 vehicles/thousand people. The main factors promoted are the upgrading of consumption and the gradual increase in the degree of urbanization.

The auto industry is a cyclical industry, especially in the sub-sectors of cars, which always exhibit cyclical fluctuations along with factors such as market demand and production capacity that cannot be synchronized, but from the current stage of domestic car market development and From the perspective of market structure, this fluctuation will decrease with the more rational expansion plan and competitive behavior of the manufacturers, which will ensure the profitability of most enterprises. From the perspective of the general trend of economic development, it will benefit the development of the car market. There are many definite factors, and the rapid growth of the entire industry is expected.

The development of the Chinese car market has a good continuity. We have comprehensively compared the historical per capita GDP growth of China, South Korea, and Japan, with the current level of domestic per capita GDP of 1,700$, which is very close to the situation after South Korea’s explosive growth in the early 1980s and Japan’s early 1960s. Japan and South Korea entered the rapid economic growth cycle after the early 60s and the early 80s respectively. The automotive industries and markets of the two countries also started from this time and entered a decade of rapid growth and rapid growth. At present, China's economic development has entered a good stage of development. It is expected that the GDP growth rate will maintain even more than 10% within the next 10 years. Sustained economic growth capacity will bring a good foundation for the development of the Chinese car market.

Considering the current urban-rural dual economic structure in China; there is a large gap between the economic development of first-tier cities and second-tier provinces, cities and regions; the fact that the economic development of eastern and western regions, coastal and inland provinces, and urban and rural areas also has a certain degree of difference. We believe that under this echelon and diversified economic structure, the sustainability of the Chinese car market will surely exceed that of Japan and South Korea, and the period of sustained rapid growth may be as high as 15-20 years. Judging from this, the development of the domestic car market is similar to that of Japan and South Korea at the initial stage of development. However, there are bound to be significant differences in the phased development. After the first spurt growth in 2002, we did not rule out the possibility in 2009-11. The second spurt-type growth of the sedan market dominated by second-tier cities and regions has emerged. In addition, the urbanization process and the rural market will also be the driving force for the rapid growth of the industry.

Before the year 2006, due to the dealers backlog and other reasons, the timely statistics of vehicle sales sometimes did not accurately reflect the actual sales in the market. The actual situation of the domestic car market in recent years was explained in terms of production conditions. China's car market started on a large scale in 2002 (the increase in domestic car production was 55%, mainly due to the start of the family car market). Due to the positive performance of the market in 2002, manufacturers entered the market after 2003 to seize the market and expand their market share. They have expanded their production capacity and increased their output. The production growth has reached a historical high (the growth rate of car production is as high as 85.08%), and in 2004, Although output only increased by 14.73%, it has already formed a large number of inventories by the end of the year and affected the 2005 automobile market. It can be seen here that the 2003 sales growth data (74%) actually have a large degree of inflated, affecting the 2004 sales statistics. Considering the fact that the sales growth rate in 2004 was smaller than the existing statistics and the fact that the inventory was basically completed in 2005, we believe that the fact that the output growth rate in 2004 has experienced a substantial degree of decline actually cannot change the domestic car market has entered a period of rapid growth. The fact that in 2005 the price of products fell sharply but overall sales still maintained rapid growth and strong sales growth in 2006 and early 2007 can confirm this.

The Chinese car market has a huge capacity. According to the current car ownership of 20 million vehicles, according to 5% to calculate the replacement rate, the annual update of the market will guarantee the demand for 1 million cars. Compared with the world average, China's current low rate of autonomy, and the continued economic growth can determine China will be the world's largest auto market in recent years. In 1984, the number of 1,000-person vehicles in China was 2.5 vehicles, and in 2003, it was 20 vehicles/thousand. The current total domestic vehicle ownership is more than 37 million (of which 20 million are passenger cars), and the automobileization rate is 27 vehicles per 1,000 people. Although a certain amount of growth has been achieved, there are still many gaps compared to the average level of 120/1,000 people in the international community. The developed countries in the automobile industry, such as the United States, have more than 800 automobiles, and Germany had 588 vehicles in 2005. In 1960, when Japan started its market, the number of 1,000-person vehicles was 5, and after 10 years of development, it reached 75 in 1969 and is now close to 600. In 2006, the per capita GDP of China was close to 1,700 US$, and the per capita GDP of some cities and regions had exceeded 3,000 US$. The increase in purchasing power, consumption upgrades, and declining prices all created favorable conditions for the continued growth of the Chinese car market.

Second, the main factors affecting car consumption

The fluctuation of crude oil and gasoline prices is not a major factor affecting the market. The fluctuation of gasoline prices has less impact on commercial vehicles and will have a certain impact on the consumption of passenger vehicles, especially in private cars. However, we believe that the impact of gasoline price fluctuations on consumers' psychological effects far exceeds their impact on actual consumption. The impact on auto consumption is still the economic growth rate and consumption ability. Gasoline prices are not the determinants of auto consumption, and the fluctuation of gasoline prices. The impact on the overall demand growth of the entire industry is unimaginable.

The oil crisis of the 1970s did not affect the pace of development of the world's auto industry. Since 2003, domestic gasoline prices have reached record highs. OPEC crude oil prices rose from around 28$/barrel in October 2003 to a maximum of 73$/barrel in 2006 ( See Chart 7 International Crude Oil Price Index. The market price of 90# gasoline in East China was also increased from RMB 3,800/tonne at the beginning of 2004 to RMB 6,000/ton at the end of 2006 (see Figure 7). The price of gasoline rose by as much as 57.9% in just two years, but in 2006, when the price of crude oil rose sharply, the production and sales volume of automobiles rose by 27.56% and 25.69% year-on-year, of which the increase in production and sales of cars were all close to 37%. Gasoline prices are not a major factor in determining the size of the auto market.

The direct reason for the increase in gasoline prices is not caused by the limited oil reserves, but includes a comprehensive reflection of factors such as international politics and the international economy. In the long term, the rise in gasoline prices is an inevitable trend (for the automotive consumer market, this type of view is generally accepted as unnecessarily early digestion of the unfavorable factors of rising gasoline prices), but the sustainable development of the economy, the increase in spending power can partially offset the price The unfavorable factors of rising, and the emergence of alternative sources of new energy and alternative energy, such as raw material ethanol and bio-diesel, may also be offset. The recent drop in the peak price of crude oil has further contributed to the expansion of the auto market.

The rise in gasoline prices will change the auto consumption structure in the short term, which will lead to an increase in the sales of low-cost economic vehicles and a decrease in small-displacement vehicles (the most serious market segments will be affected by rising oil prices, mainly because the cost of gasoline is too high. However, this is short-term behavior; we think that the fundamental reason for the increase in the market share of low-end products in recent years is the structure of market demand, such as the slow development of second- and third-tier provinces and cities, relatively insufficient purchasing power, and the Consumption and the lack of understanding of the car culture, consumer psychology and other factors, not the impact of gasoline prices. As long as the price of gasoline is stable or even a steady increase, with the sustained development of the economy and steady increase in income, the focus of the automobile consumer market is still greater than the 1.0-liter displacement car. 1.6-2.5 displacement vehicles are still car consumption. The main body, in terms of market structure in 2006, is the fastest growing car market with mid-range cars of 1.6-2.0L, followed by 1.0-1.6L displacement of economical cars, and 2.0-3.0L displacement increase. The micro-vehicle market with a speed approaching 40% and a displacement of less than 1.0L experienced negative growth. The car market with a displacement greater than 3.0L is mainly based on imports. The significant increase in the high-end market and the negative growth in the mini-car market are enough to indicate that the impact on auto consumption is mainly economic growth, not the fluctuation of gasoline prices.

The traffic conditions in big cities need to be further improved. The rapid increase in the number of cars has exerted tremendous pressure on urban transport, and it has a restrictive effect on the further expansion of the car market. This mainly includes first-tier cities such as Shanghai, Beijing, and Guangzhou. However, the continuous improvement of traffic conditions and changes in driving habits have resulted in the availability of these cities. There is still much room for improvement. The increase in traffic pressure in large cities will lead to a gradual increase in the cost of vehicles. Under such circumstances, the proportion of the total cost of use of automobile body costs that will affect consumption will decline, and the market share of mid-to-high-class vehicles will gain room for further expansion. It determines the major development direction of the future car industry, and the gradual rise of most second-tier cities will minimize the impact of the slowdown in market growth in big cities.

The gap between the development and production levels of mid-to-high-end vehicles and low-end and mid-range products is still very clear. The development of domestic cars has been at a relatively low level for a long time, and it has been basically marginalized in the mid-to-high-class car market. In addition to the three major auto companies, since 1997, Brilliance, Geely, Chang'an, Lifan, Chery, JAC, etc. have joined the car production industry. Among them, Chery Automobile and Brilliance have tried to enter the middle and senior markets, but from the early development and The current results suggest that it will be difficult to achieve substantive breakthroughs in the short term, R&D forces will continue to accumulate, and manufacturing levels will still need to be improved. From the perspective of business strategy, the shift from low-end products to high-end products, in addition to a certain time difference in technology, the other inherently cheap and poor quality brand image positioning is to restrict the disadvantages of the company from low-end to high-end positioning transformation. factor. Simply relying on the design of a professional organization, from the very beginning, it is involved in the mid-to-high-end product field. Due to the lack of a full understanding of the car, it is difficult to maximize the manufacturing level of mid-to-high-end cars.

In general, despite the rapid development of the industry, most domestic companies themselves are engaged in the production of lower-end products, and it is difficult to share the profit growth brought about by the rapid growth of the industry. From the perspective of the entire industry and market development, despite the repeated setbacks of domestic companies in the mid-to-high-end market, the development and progress in the low-to-medium-size car market has still brought positive impact on the Chinese car market, including the domestic sales of foreign products. The decline in prices and the promotion of the development of the entire Chinese car industry and the benefits to Chinese car consumers are still very positive. However, most of them compete at a low level and determine that there will be few winners.

Comprehensively compare the operating strategies and processes of domestic related car companies, and according to the source of technology, we divide the domestic car enterprises into the following main types:

Classifying from the perspective of brand strategy, the first step is to develop from the low end to the high end, and the other is to cut in from the mid-to-high end market and expand to the multi-product series. The products developed by the basic self-developed products have a low starting point due to the horizontal restrictions, and the products are mostly positioned at the low end. In the continuous development, the product quality and brand image are in urgent need of improvement; the companies with higher positioning but totally relying on external designs are on the manufacturing level. Lack of effective long-term accumulation, product quality is difficult to achieve market expectations in the short term, damage to high-end image, but after 5-10 years of accumulated experience, it is entirely possible to occupy a place in the mid-level market (mainly for competitors Han Departments and Japanese mid- to low-end vehicles, but still need to accumulate experience in the mid-to-high-end market; after more than 10 years of long-term international cooperation and study, some companies have achieved comprehensive improvement in their overall strength through imitation through adequate technology and capital accumulation. The method of re-digestion and complete autonomy can potentially realize the production of localized mid- to high-level cars.

Judging from the current independent branded products, most of the company's level is still in the middle and low.

Fourth, market competition

The car market competition began to shift from low-level price wars to high-level product quality, service maintenance systems, and other competitions. Competition in recent years is no longer reflected in product prices, but also in performance-price ratio and new models launched to meet different cultures. At the level of demand.

The low-end economic and mini-car market is the arena for most domestic companies. Since domestic consumption levels are still low, the time for cars to enter the family is not long. Most people purchase cars for the first time (the current number of first-time car buyers account for 60-70% of the total number of car purchases). They do not understand the car itself, and they are also car-manipulative. The limited understanding of safety, performance, comfort and quality, coupled with the Chinese consumer psychology and other factors have led to a large demand for low-end and low-end economical cars (such as the analysis of domestic demand for low-end small-displacement products is not due to oil prices. Rising caused by). With strong market demand and limited domestic production levels, the selection of low-end products as the entry into the car market has become the preferred strategy for most companies. We believe that as the consumer’s awareness of cars increases, the market share of low-end economy and mini cars will gradually shrink, as shown in Chart 9, which is lower than the one-liter displacement in 2006 when the oil price rose. The car had a negative growth, and vehicle sales with a displacement of 1-1.6L also slightly fell below 1.6-2.0L.

Current major domestic companies competing at this level include: Geely Automobile, FAW Xiali (9.96, 0.01, 0.10%), Changan Automobile (14.18, -0.29, -2.00%), Lifan, Chery Automobile, Hafei Motors, Changhe (6.15, 0.56, 10.02%) etc. In addition, Jianghuai Automobile (8.54, 0.07, 0.83%) may join the competition.

The characteristics of its products are not high quality, but the cheap price is suitable for some of the current consumer demand.

The market share is relatively large, but the low threshold of entry and fierce competition are the main features of this level. Competition is not only between these major domestic manufacturers, but also from competitive pressures of joint venture brands such as Suzuki and Kia, among other potential competitors. This level of competition is mainly characterized by price wars. The passive decline in prices for many times makes it difficult for these companies to guarantee profitability or even lose money when they occupy a certain market. Being at the break-even point is the current reality of most of these companies. In the absence of other external funds, most companies do not have sufficient funds to accumulate in the development process. They have almost no energy to invest in technological development and continuous improvement, and the corresponding parts suppliers have been affected by the vehicle manufacturers. The pressure of profit, limited profitability, insufficient investment in development and continuous development planning, so the result of this highly competitive low-end product is the vicious cycle. With weak technical strength and insufficient capacity for continuous development, this sub-sector is most likely to undergo restructuring.

The mid-size car presents a certain degree of competitiveness. Including BYD, Chery, Brilliance, Haima and other companies in the mid-level car market has achieved a certain market share, mainly for the Korean competitors and Japanese mid-level cars. Although there is still a certain gap in product quality, its lower selling price still wins a certain market share. The profitability of most companies is relatively weak. When other joint venture brands start to enter this segment, how to improve product quality and improve independent design and development capabilities on the premise of guaranteeing market share is a difficult problem for enterprises.

The competition in the high-end car market will intensify, but profits will still be guaranteed. The consumption upgrade will guide the direction of consumption in the sedan market from low-end vehicles to mid-to-high-end vehicles, and competition in the mid-to-high-end car market will intensify. However, among the factors affecting the consumption of such products, there is no obvious impact on the low-end vehicle market. The competition is mainly reflected in product differentiation, consumer preferences, and geographical distribution (local protection). We believe that market demand is strong. Violent big price wars are unlikely to break out. Considering that at present more than 70% of the models are close to overseas markets, most companies will use the increased allocation to ensure prices, launch new products, improve product mix, release production capacity, increase localization rates, and other methods to maintain profitability. ability. The strong market demand and more assured profitability will bring certain development opportunities to domestic companies that have the ability to enter this subdivided region. One is to increase their R&D and manufacturing levels through market competition, and the other is to obtain certain profits. To ensure sustainable development.

The premium car market is still dominated by joint ventures and foreign companies. At present, with the exception of the HQ3 positioning of FAW Cars (8.29, -0.13, -1.54%), which is a consumer regional government procurement market, foreign brands BMW, Audi, Mercedes-Benz and other brands will still occupy domestic high-level markets for a longer period of time. Domestically produced cars are There is still a large gap in the technical level of high-grade cars.

V. Investment Strategy

China's car sub-sector is still in the investment period. Low level of technology, low capital accumulation, and strong international competitors determine that China’s car companies are still far from harvesting. Chinese car companies still have to hide their talents and require high-quality inputs.

Most domestic companies themselves are engaged in the production of lower-end products, and it is difficult to share the profit growth brought about by the rapid growth of the industry. We believe that in the current rapid growth of the industry, due to the generally low starting point of the industry, in the short term the profit growth of enterprises with better investment projects is faster, but it can not be simply the short-term good return as the only basis for investment, long-term investment needs Focus on companies with stronger overall strength. We believe that the overall strength of the automobile is mainly reflected in three areas: R&D capabilities, manufacturing capabilities, and sales channel construction. With reference to changes in the United States market in the world’s largest auto market since the new millennium, Japan, South Korea, and German companies have succeeded in achieving a market share of approximately 40% in the United States, as well as the strategies employed by these companies, research and development capabilities, and manufacturing capabilities. Paying close attention to the consumer market is the best manifestation of the overall strength of the current car companies. Whether the product quality is excellent and whether it meets consumer demand is the key factor that ultimately wins the market.

The pattern of global design resource sharing is beneficial to the development of Chinese companies. At present, the research level of most domestic companies is only a small change to the existing models, and the complete design capability still does not reach a higher level. However, due to the high degree of sophistication in the social division of labor, the design of some key components such as engines and shapes can be entrusted to professional design agencies. For example, many companies have models designed in Italy and engines designed in companies such as Germany and Japan. Such a method of outsourcing of design is not unique to Chinese companies, including Germany’s Volkswagen which outsourced 80% of its component design work in 2004. Many models of foreign companies’ models are also delivered to relevant professional design agencies. Therefore, From the source of technology, it is entirely possible to achieve global sharing. This globally shared technology source will help Chinese companies grow in the automotive market and constitute a substantive and favorable condition.

R&D strength determines the future of local companies. Imitation, learning, and digestion are currently effective ways for Chinese companies to catch up with the advanced level. Middle-to-advanced products are examples of capital-intensive and technology-intensive models, and the ability to develop such products currently represents the highest level of domestic companies. In the case of global production, although all companies can invest in the development of middle- and high-level products through purchases and imitations, there are still large differences in the specific digestion and absorption. Not all companies currently have Strength and swimming resources to develop and put into production of high-end products, many of which Chery and Brilliance Automotive invested large sums of money to develop and put into production the precedent of failure of middle and advanced products. We believe that this has a lot to do with the accumulation of mid-to-high-class cars in the development and production of enterprises, and it takes a long-term accumulation of 10 years or more.

Equipment and manufacturing capabilities need to be improved. Product quality can fully reflect the level of corporate management and understanding of automobile manufacturing. The production of automotive products and equipment can adopt a global procurement model, but the level of car manufacturing requires long-term accumulation, mainly reflected in product stability, quality reliability, and supplier quality control, cost control, etc., although joint ventures can be used to emulate Learning objects, but it still needs long-term accumulation. The majority of domestic products give people a rough and inferior image. We believe that the main reason is that the basic industry is still not sufficiently developed, and it still lacks sufficient experience to accumulate enough skilled workers.

Sales network construction is not currently a key element. The market demand in China is very strong. Under such a market environment, once the company has better products or products suitable for consumers' needs, the construction of sales networks and the cultivation of dealer teams are relatively easy. Although a better sales network helps to enhance the company’s image and is beneficial to the sales of the company's products, the sales network is far less important than the product development and manufacturing capabilities in the current market growth of around 25-30%. .

In February 2007, the sedan market maintained a relatively high growth rate. In 2006, the gross profit rate of automobile manufacturers showed signs of recovery compared to 2005. Due to the improvement of effective capacity utilization, the investment environment has improved, and the profitability of the entire industry has increased. In 2007, the industry profit will increase by at least 20%. We give the industry an investment rating that we recommend.

In terms of specific companies, we believe that after years of international cooperation between Shanghai Automotive (12.61, -0.14, -1.10%) (600104) and FAW Car (000800), the accumulation of capital and technology is more obvious than most domestic companies. The advantages, taking into account the launch performance of the two companies' mid-to-high-end products, the expected growth in performance, and a comprehensive consideration of the resource advantages of the two major domestic car companies (2400.154, 23.39, 0.98%) and the need for the country to develop the car industry , possible policy bias, give strong recommendation -A's investment rating. For Changan Automobile, in spite of the relatively high investment income brought by the joint venture brand of the Ford Motor Company in the short term, in fact, the company’s capital accumulation has only just begun. The company’s own R&D and manufacturing level in the car is still only reflected in the low-end product level, and it is necessary to achieve a comparative advantage. The high level will also require a certain amount of time and more capital investment. Therefore, the short-term investment income is hardly reflected in the actual performance. We believe that its current share price already reflects the value of the company itself and gives Neutral-A investment rating. FAW Xiali owns 30% of the shares of FAW Toyota, so it can share the rapid investment income of Toyota in China in the short term. Although it has no resources and capability to enter the mid-to-high-end products, the company has always been engaged in the production and sales of low-end products. Accumulated certain customer resources, if you can change the product image, improve product quality, increase product investment in R & D, still hope to obtain a certain profitability in the low-end market, the current stock price basically reflects the company's value, given neutral -A The investment rating. Hippocampus Haima Motor Co., Ltd. has cooperated with Mazda of Japan for many years. It has accumulated good management, manufacturing, and capital. After adopting its own brand, it has a good sales status. It gives an investment rating of -A, and the company's continuous product. The development capability still has not been tested by the market, and the sustainability of development capabilities will determine the company's development. Although the current sales of the Brilliance Jinbei Gold Cup under the ST Gold Cup are good, there is little profitability. The company's development prospects still need to be observed and no investment rating will be granted.

In terms of valuation, the valuation of auto stocks in foreign capital markets is relatively low. The main reason is that the growth of the auto market in these countries is very limited or even negative. The PE of most companies is between 10-15. We believe that the valuation level is not suitable for existing Chinese auto companies. In particular, in the car industry, the reasonable PE should be 20-25 times, which is basically equal to the average growth rate of the industry.

Sixth, risk analysis

For the growth of the entire car market, the biggest risk lies in the slowdown of uncertain economic growth and changes in the country's relevant policies. In addition, changes in the price of gasoline in the short term will cause some fluctuations. For enterprises, rising raw material prices (iron and steel) will have a certain impact on earnings; in addition, it will need to consider possible vicious price competition.

The price of steel products has limited influence on products above middle and high level. From the current point of view, the price of cold rolled plates and galvanized plates for automobiles is relatively stable, and the price for the entire year is increased by a maximum of 3-5%.

In accordance with the 11th Five-Year Plan of the National Automobile Industry, independent brand R&D has become the main content of work. The planning and possible supporting policies on the policy side will be beneficial to the growth of China's own brands; the merger of the two taxes (the unified tax rate of 25%) will be reduced The profit gap between self-owned brand companies and joint ventures in China, as most companies are within the scope of high-tech industries and enjoy a tax rate of 15%, the two tax mergers have little impact on corporate earnings in the short term.

We believe that the current steady economic growth can be sustained. It is unlikely that economic growth will slow down, and the growth of the industry will be guaranteed. We have discussed the changes in oil prices in detail in section II. As a result, the impact of price fluctuations is short-lived, and the impact on long-term development is limited, especially with the increase in gasoline prices and the increase in the cost of using vehicles. Will promote the market to high-quality high-end cars.

We believe that manufacturers' annual official price adjustments of 5-8%, and some products even reach 10% are actually normal behaviors, because the increase in scale, reduction in depreciation and amortization will lead to a decrease in costs, and due to the expansion of suppliers, the cost will also have a certain degree. Price cuts, active official price cuts on the one hand are recognition of distributors' behaviors, and on the other hand, they are necessary measures to improve the product structure to give up new product space. After April, it is the peak period for new product launches. We believe that Recent official adjustments to the prices of FAW-Volkswagen and other companies are in line with expectations. As the current mainstream manufacturers have better capacity utilization (according to the company's production schedule, the total capacity utilization rate of major domestic manufacturers is as high as 78%), there is no basic driving force for a vicious price war; in the case of strong market demand, existing The price system is unlikely to collapse. Even if a similar situation arises, we can refer to the situation in 2005 and select companies that are capable of maintaining a good profit under such circumstances, avoiding the risk of a vicious price war.