China’s 2 Hot Car Stocks

09/13/2011 7:30 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

China is a huge market for cars, but the competition is fierce and the story is very young…and small, local companies don’t have the advantages you may think, writes Jim Trippon of China Stock Digest.

Foreign automakers are among the biggest beneficiaries of the China car boom. Automakers from Japan, Europe, and America are competing furiously for a share of the world’s fastest-grow­ing auto market. Even America’s faltering automotive giants are making big money in China.

General Motors (GM) says car sales in China during the first half of the year rose 5.3% to record levels, thanks to a big push last month and another strong showing from Buick. The American auto giant and its local China ventures sold 1.27 million vehicles during the first half of 2011. Sales in June reached an all-time high of 193,878 cars and trucks, up almost 10% from a year earlier.

Sales of Buick, a big favorite in China, posted a 48.3% jump in June to 54,140 vehicles. Chinese-made Cruze and Sail small cars pushed Chevrolet sales up 34% to 51,312 ve­hicles. Shanghai GM, a venture with SAIC Motor Corp., posted a 25% increase in sales to 600,002 so far this year. In June, the company showed an accelerating pace of growth.

Ford (F) is also showing better sales growth than domestic Chinese auto companies this year. Ford’s first-half sales in China rose 14% from a year earlier to 274,510 units. The company attributed its growth to demand for the Ford Focus, which accounted for more than a third of sales in the first six months of the year.

Ford said its Changan Ford Mazda Automobile joint venture sold 35,929 vehicles in June, including Mazda brand cars, representing a 19% increase from a year earlier. Its commercial-vehicle venture, Jiangling Mo­tors Corp., sold 105,304 vehicles in the first half, also up 19% from a year earlier.

Foreign automakers must partner with Chinese firms in order to gain access to the Chinese market. GM and Ford have multiple partnerships to enable expan­sion with many brands.

To accelerate expansion in China, Changan Ford Mazda last month broke ground for a $500 million engine plant in Chongqing, which will increase its annual engine production capacity to 750,000 units by 2013.

Ford sold its Volvo unit to China’s Geely Automobile Holdings (HK: 0175) last year. Now Volvo/Geely is expanding its capacity to produce cars within China.

China’s Ministry of En­vironmental Protection says it has approved Volvo’s proposal to build an assembly plant in Daqing, a remote northwestern oil-field city. The city’s government provided a “significant” portion of the $2.7 billion that Geely needed last year to acquire Volvo.

Currently another Scandinavian auto firm, Saab, is seeking a Chinese buyout to rescue it from extinction. Several companies have expressed interest in acquiring Saab’s technology, which is worth more to Chinese auto companies than the brand name.

Every major automaker in the world is fighting for market share in China.

As a German stock analyst told Bloomberg, “China is VW’s undisputed Number One priority.” Juergen Pieper of Frankfurt-based Bankhaus Metzler calculates that a third of VW profits stem from China, and that is likely to increase rather than decrease. He calls it a goldmine.

Volkswagen AG (VLKAY) Chief Executive Martin Winterkorn has his sights firmly set on the rapidly-growing Chinese market. He says Volkswagen is on track to sell more than 2.2 mil­lion new cars this year.

The CEO says that VW is intent on keeping its 20% market share over the next eight years in China. To do so, VW will launch another new car brand with its two domestic-market joint ventures. VW will launch Chinese brands with its domestic partners, FAW and Shanghai Volkswagen.

J.D. Power estimates that sales of luxury cars will continue to grow more quickly in China than the industry as a whole. By 2015, Chinese luxury car sales will exceed 1.1 million vehicles.

Foreign brands are generally considered more luxurious and desirable among Chinese con­sumers, and usually command a higher price. Although GM is now introducing brands to ap­peal to lower-end buyers, brands like Buick and Cadillac remain the mainstays of profitability. (Yes, Buick is considered a luxury car in China.)

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European luxury brands continue to enjoy very healthy de­mand among affluent Chinese buyers. Sales in this segment rose 5.3% during the first half of the year.

So far this year, the more luxurious the car, the greater the sales increase. Sales of the Mercedes-Benz and Maybach jumped 59% year-over-year to hit a record 95,030 units during the first six months of 2011.

First-half sales of BMW models in China rose 61% to 121,614 vehicles. Audi sold 141,000 cars, representing sales growth of 28%. The company says Audi growth was lower because of limits on local production.

BMW (Frankfurt: BMW, BAMXF) is making money hand-over-fist thanks to China. In its second-quarter report, BMW said net profits more than doubled due to the soaring demand for luxury cars in major markets, especially China. BMW says the first half of 2011 has been the best in its history.

Mercedes-Benz and Volkswagen AG enjoyed similar profit increases. VW—which counts Audi, Bentley, and Bugatti among its brands—and Mercedes intend to expand aggressively, and have outlined nearly $20 billion in investments in China for the coming years.

Ford, which lags GM in China, is also committing to major investments, including a half-billion-dollar engine factory.

Most domestic Chinese carmakers are losing market share to global brands. During the first seven months of the year, Chinese brands saw their market share decline by 1.6% to 30.5%.

Domestic brands like FAW, BYD, and SAIC all have reported double-digit sales declines. Geely sales volume has fallen to its lowest point in two years.

Regardless, it’s a fast-growing market, and investors want access. But most Chinese automak­ers are listed in Shanghai’s A Share market, which is off-limits to foreigners, or in Hong Kong.

Investing in Hong Kong is relatively easy for North Americans, although few feel comfortable with listings so distant and 12 hours or more out of sync with local time zones.

Three Chinese auto supply and support companies are listed in New York. They are China Auto Logistics Inc. (CALI), China Automotive Systems, Inc. (CAAS), and Sorl Auto Parts, Inc. (SORL).

That said, we feel more comfortable with established brand names in Western markets. Amer­ica’s two auto giants, GM and Ford, appear to be recovering well in sales terms after their much-publicized bankruptcies and bailouts. They are beating much of the competition in the non-luxury sector in China in terms of growth, yet their valuation remains modest.

In the future, investors won’t be able to discount the importance of the Chinese auto market. It will continue to grow far beyond the US in size, and will remain the biggest sales in target in the world by far.

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