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Industry deceleration set to continue

ANALYSTS at several major brokerage houses remain cautious about prospects for China's auto industry in the second half, with some predicting the current slowdown in sales could see the year out.

Still, amid the gloom overhanging the industry, there still are a few bright investment spots for stock buyers who do their homework, brokers said.

To find them, an investor first has to understand the dynamics underpinning the current industry downturn: slowing economic growth in China, the expiry of government incentives for car purchases, auto registration curbs in some cities, inflation pinching household budgets and a global auto industry wounded by a severe parts shortage triggered by the March earthquake and tsunami in Japan.

What a dramatic turn of the wheel from last year, when China car sales were the envy of the world, posting breathtaking growth of 32 percent that cemented the nation's position as the top global auto market.

Dong Yang, chairman of the China Association of Automobile Manufacturers, admitted earlier last week that his group's 2011 forecast of sales growth between 10 percent and 15 percent is too optimistic.

Guotai Junan Securities Co., which is among the most bearish brokers in the auto sector, has cut its sales growth forecast in half to 5 percent. The brokerage is forecasting that car sales won't start to pick up until the end of the year.

Indeed, once-invincible car sales growth in China has actually turned negative.

In May, mainland car sales dropped almost 4 percent from a year earlier to 1.38 million vehicles, according to the automobile manufacturer's association. That followed a 0.25 percent dip in April, the first decline in 27 months.

The downward trend is likely to continue at least through the third quarter because China will still stand firm on its tighter monetary policies in face of stubbornly high inflation, Guotai Junan, Sinolink Securities, China Merchants Securities and Northeast Securities all agreed in recent reports.

With household budgets strained by rising costs of necessities, many consumers are likely to delay car purchases, Sinolink said. Businesses, too, may curtail expansion of commercial fleets.

Production costs rise

Sluggish demand comes as the cost of manufacturing vehicles is on the rise. A global boom in commodity prices has meant that prices of raw materials like steel, rubber, copper and plastics are heading higher.

The steel index compiled by the China Iron and Steel Association has jumped so far this year to a range of 128 to 136, compared with a range of 109 to 126 last year. Rubber has risen to as much as 42,000 yuan (US$6,492) a ton, up from a high of 25,000 yuan last year, according to Guotai Junan.

Highly publicized curbs on new vehicle registrations in some cities choked by traffic gridlock haven't helped the car industry's prospects.

In Beijing, for example, only 240,000 new vehicle registrations will be allowed this year, compared with the 800,000 new automobiles that took to the streets in 2010.

Does all this mean that smart investors should turn their backs on auto and auto-related stocks?

Not quite, according to Chinese brokerage houses. Investing in the sector just requires some careful stock-picking.

One area worth consideration is the green car segment. The government is still pinning its hopes on the development of cleaner, more efficient cars and allocating resources to help the sector along.

Guotai Junan said companies like Weifu High-Technology Group Co. could be a profitable investment.

Shenzhen-listed Weifu, which manufactures fuel injection pumps for diesel engines, may offer investors earnings per share of 2.67 yuan this year, up from 2.36 yuan last year. In 2012, that EPS may rise to 3.34 yuan, Guotai Junan predicted.

China Merchants Securities said in a report that Weifu, a Chinese partner of Germany's Bosch, has state-of-the-art technology that gives it an edge over rivals and helps it maintain dominance in the market.

The brokerage gives Weifu an "A-level" rating, which is a strong "buy" recommendation, noting that the company's price-to-earnings ratio is expected to remain at about 10.

Weifu's net profit margin rose to 17.97 percent in the first quarter from 9.60 percent a year earlier. Average net profit margin among all the 60 auto-parts makers listed on the Shanghai and Shenzhen stock exchanges fell 0.52 percent to 7.01 percent in the same period, according to Gasgoo.com, an auto website.

Weifu has lost 7.65 percent so far this year, closing at 34.54 yuan on Friday.

Other favorites on broker buy lists are SAIC Motor, Changchun Faway Automobile Components Co. and Huayu Automotive Systems Co.

Partnership benefits

SAIC Motor and Huayu, subsidiaries of Shanghai Automobile Industry Co. (Group), stand to benefit from their parent's partnerships with General Motors and Volkswagen, China's leading investment bank added.

SAIC Motor reported a 56.6 percent surge in net profit for the first quarter. EPS is expected to advance to 1.78 yuan this year and 2.05 yuan next year, from 1.49 yuan in 2010, Guotai Junan said.

Shares of SAIC Motor have climbed 1.53 percent this year to close at 16.55 yuan on Friday.

Huayu's EPS is expected to rise to about 1.14 yuan this year and to 1.30 yuan next year, from 0.97 yuan in 2010, Guotai Junan said.

Shares of Huayu have declined 0.43 percent this year to close at 10.05 yuan last Friday.

Changchun Faway, which makes motor vehicle parts and specialized trucks, may also be a bright spot in the auto sector this year, analysts said.

Faway is under the China FAW Group umbrella, which also houses FAW Toyota. If the supply chain for Japanese parts is restored more quickly than expected, as most are predicting, Faway is expected to benefit from production returning to normal.

Toyota China has already pledged that its operations will be back to normal sometime this month.

Faway shares have tumbled 10.69 percent this year, amid concerns about the fallout from the Japanese earthquake.

Weichai Power Co. could be a winner in the heavy truck segment, China Merchants noted. The EPS for this leading supplier of auto parts is expected to rise to 4.89 yuan this year and 5.41 yuan next year, a nearly 25 percent jump from 4.07 yuan in 2010, China Merchants added.

Weichai shares have skidded 19.63 percent this year to 43 yuan last Friday.

Zhengzhou Yutong Bus Co., the biggest bus maker in China, is also on China Merchants' "A-level" list.

Yutong is expected to report higher sales in the second half, helped by lavish events such as Universiade 2011 in Shenzhen in August.

The sales increase is likely to extend into the fourth quarter, a traditional season for new model launches and strong sales for the auto industry.

Yutong car sales in the first quarter rose 15.2 percent, and sales of buses shot up 26 percent from a year earlier.

Its share price has added 1.6 percent this year to close at 20.68 yuan by last week.




 

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