0. Introduction
Preface
Despite heavy discounting, sales in the Chinese automotive market were down in July, and August is expected to show only modest improvement, according to early indicators from the Chinese Passenger Car Association. While the press talks about a price war and its potential impact on sales, this discounting is actually a normal part of the market as manufacturer incentives replace government incentives in the new energy vehicle (NEV) market.
Cars are durable goods, and as they age, they face competition from newer models, resulting in price drops. Additionally, low-odometer used vehicles of the same model become available, further affecting prices. This is a common trend in the automotive market, and it is now impacting Chinese NEVs. Therefore, the current discounting should not be interpreted as a price war but rather as a normalization of the market.
Structure
In this article, we will provide an overview of recent market trends in the Chinese automotive industry, focusing on the NEV sector. We will also delve into the sales and financial performance of Guangzhou Automobile (GAC), particularly its Aion brand of NEVs. Furthermore, we will examine the potential impact of the Chinese economy on the automotive market. Finally, we will conclude with a summary of the investment case for GAC.
Aion, GAC’s NEV brand, achieved record sales in August 2023 and currently faces capacity constraints. This strong demand indicates solid profitability, but limits near-term growth potential.
Notes and disclaimers
It is noteworthy that GAC’s ADRs do not provide quarterly statements to the SEC, which hampers a credible rating. Additionally, our analysis of the Chinese automotive market is based on a comprehensive database of monthly model-level sales. However, our data do not include imports or commercial vehicles.
1. Chinese Automotive Market Update for 2023 Q2
Overview
Data from 2023 Q2 presents a mixed picture for the Chinese automotive market. While the market has shown strength compared to historical standards, it is currently experiencing a slowdown. The NEV market, in particular, has cooled down, with electric vehicles (EVs) not surpassing their November 2022 market share. This stagnation indicates a normalization of the market, with EVs losing their pricing power.
Additional Details
The market segments within the Chinese automotive industry are evolving similarly to those in the US and Europe. Small commuter cars and subcompact vehicles have experienced a decline in market share, while larger and more expensive vehicles become dominant. This trend supports the growth of luxury EVs. The share of EVs in the Chinese automotive market is declining, with plug-in hybrid electric vehicles (PHEVs) gaining ground. Additionally, regional differences in NEV market share and vehicle types exist, reflecting the varying preferences of Chinese consumers.
2. GAC and Its Aion EV Brand: Sales
Overview
GAC, the third-largest player in China’s EV market, has seen strong sales performance for its Aion brand. Both the Aion S and Aion Y models have achieved significant sales volumes, while the Aion V has shown promising growth. A recent addition to the Aion lineup, the Aion Hyper GT, represents the luxury segment and has gained traction. With a diverse range of EV models, Aion offers options for consumers from entry-level to luxury.
Joint Ventures: Honda and Toyota
GAC’s joint ventures with Honda and Toyota have contributed to its overall sales success. Toyota’s GAC RAV4 and Corolla Cross have remained popular choices, while Honda’s partnership with GAC has resulted in strong sales of the CR-V and Civic. The performance of these joint ventures is crucial for GAC’s profitability as it offsets the losses from its legacy “house” brand.
3. GAC: Financial Performance
Financials
GAC’s financial performance for the first half of 2023 shows stable revenue growth, primarily driven by the success of the Aion brand. However, the net profit margin has declined, highlighting the importance of profits generated by the joint ventures with Toyota and Honda. While GAC’s overall operating loss has been reduced, the profitability of the Trumpqi brand remains a challenge. Nevertheless, the IPO plans for Aion and GAC’s OnTime subsidiary, as well as a potential rebound of the Chinese yuan (RMB), could positively impact GAC’s share price.
4. Macroeconomic Trends: Downside Risks
China’s economic growth is facing challenges due to factors such as high personal savings, financial repression, and a slowing population growth. These factors contribute to a permanent slowdown in the country’s growth rate. Furthermore, the real estate market is experiencing a bubble, which could poteSchedule
5. Investment Case Summary
Based on the current evaluation of GAC’s financial performance and market dynamics, we rate GAC as a “hold” investment. While there are potential opportunities for a rise in profitability, uncertainties exist, and trading in GAC’s ADRs should be approached with caution due to their limited liquidity. Investors may consider trading GAC’s “H” shares on the Hong Kong Stock Exchange for better market access.
