Foreign media said that in most parts of the world, the growth prospects of the auto market seem to be very bad. In the United States, car sales are beginning to return to normalized replacement demand levels, which means growth is slowing. In Europe, the intermittent recovery of the economy has hampered sales growth. The report believes that the pattern of the Chinese market is different. Despite concerns about the recent slowdown in GDP growth and falling consumer confidence, it is still optimistic about the long-term growth prospects of China's auto sales.
According to the British "Financial Times" website reported on January 29, from 2005 to 2010, the Chinese auto market experienced a period of rapid growth, sales increased nearly six times in six years, from 2.5 million in 2004 to 1375 in 2010 Ten thousand cars. Since then, this unprecedented 35% compound annual growth rate has slowed to about 9%, but China, which sold nearly 18 million units in 2013, has surpassed the US and Western Europe to become the world's largest auto market.
At present, the annual growth rate of disposable income of urban households in China is 10% to 15%, making cars increasingly affordable. In 2005, the price of a mid-range entry-level sedan was 3.7 times the annual disposable income of urban households, but with income growth, the ratio has fallen sharply, down 1.4 times last year. As the price of the car declines, the ratio may reach 1.0 times in 2015, close to the possible turning point of car demand.
The report believes that rising income coupled with affordable prices should promote an adjustment in car penetration. At present, the number of Chinese autos is only 71, which is equivalent to the richer developed countries with 1,000 to 800 vehicles and the emerging economies such as Thailand and Brazil with 1,000 to 200 vehicles. More than the opposite.
A comparative analysis of South Korea's transition from an emerging economy to an advanced economy from the early 1980s to the late 1990s, and the corresponding changes in car ownership, and based on this forecast the potential growth of the Chinese market, the report believes that by 2020 China The number of cars in a thousand people may reach about 200. This means that from now until the end of this decade, the potential annual growth of Chinese car sales will reach 10% to 11%.
Another exciting factor in terms of opportunities in the Chinese auto market is the accelerated growth of car loans. Although it is difficult to obtain accurate data, according to our research, in the past years, loan purchases accounted for about 5% to 10% of total car sales. Since the second half of 2013, the volume of loan purchases has risen rapidly. This trend has accelerated throughout 2014 and currently accounts for between 15% and 25% of total sales, depending on the specific car manufacturer.
According to the report, there is still room for a significant increase in this proportion, which may rise to over 60% in the future. Automakers are expanding their credit branches in China to support the development of this trend. We believe this trend provides a significant opportunity to accelerate demand growth, which may further increase the above-mentioned 10% to 11% vehicle sales growth.
Of course, the Chinese auto market is not without risks. To achieve these growth targets, we need to see growth from coastal first-tier cities – due to congestion and pollution, many of these cities today restrict cars from being licensed – to smaller inland cities. In such inland cities, infrastructure is in place and car penetration is still low.
This kind of growth shift will almost certainly not be smooth. In addition, as a still-developing market, the Chinese auto industry has not yet built a large enough base to replace demand – which means that any business cycle shocks may be amplified as vehicle demand fluctuates dramatically.
More optimistic is that the growth potential of automotive interiors is another factor supporting China's prospects. Chinese car consumers are increasingly demanding advanced features or higher-end “interior levels†and are willing to pay for it. This can significantly shorten the acceptance curve of safety equipment and electronic systems. The installation rate that the United States and Europe have taken in 20 to 30 years will probably be achieved in China in only 5 to 10 years.
In addition, more security and electronic functions are beginning to become standard configurations, and globally unified emissions and fuel economy regulations may accelerate powertrain technology spending. Overall, we believe that in the Chinese automotive market, automotive interiors are expected to drive organic growth of around 3% to 8% in addition to sales growth.
The report believes that the current automotive suppliers are in a favorable position and can benefit from the trend of both Chinese auto sales and interior growth. Most of their products use off-the-shelf European and American technology, which does not require additional engineering or R&D, resulting in considerable profit margins. In addition, as auto suppliers expand across multiple brands, cars and product cycles, investing in them to gain exposure in the industry can help disperse “original equipment manufacturers†or brand concentration risks.
Although we believe that most of the global auto supplier stocks currently appear to be properly valued, the growth potential of several of them in China may not be fully recognized by the market. Furthermore, it is not difficult to imagine a mild adjustment in demand from the US, Europe or China, which may provide an attractive opportunity to increase exposure to the industry.
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