HONG KONG, 24 February 2020. Pengyuan International has today published a piece of sector commentary on how the recent outbreak of COVID-19 in China would influence the fundamentals of passenger cars manufacturing industry in 2020. The commentary highlights our view that the sector would take a big hit if production cannot be completely normalised until early April and the creditworthiness among automakers would further diverge.
Here are some key takeaways from this report:
When the epidemic can be effectively controlled is a key factor in determining the full-year sales performance of China’s passenger cars in 2020. The longer the time span the epidemic will last for, the greater hit the sale volume of passenger cars will face, as production facilities needs to take longer time to get back to normal. If factories were not be able to resume completely ahead of early April the outlook for 2020’s passenger cars shipment growth would be gloomy.
We suggest that both central government and local governments need to step up efforts to prevent demand for passenger car from a huge contraction. Fiscally, purchasing tax cut and subsidy for auto consumption in the countryside can be adopted, while monetarily, stimulus such as tuning down the interest rate on auto loan can be considered. Additionally, license plates quotas in some cities can be scrapped or increased in order to release the pent-up demand due to this restriction. We are a bit conservative on the combined effect of abovesaid stimulus on auto consumption, with roughly additional 2.2-2.6 million passenger cars being created if the proposed stimulus can be carried out effectively in a due course.
Given our base-case scenario where we assume many production facilities can be resumed thoroughly before early March, 2020’s wholesale and retail volume of passenger cars are expected to fall by 7% and 8% year-on-year respectively; if the normalisation of production facilities cannot be achieved before early April, the wholesale and retail shipment of passenger car in 2020 would slump by 14% and 13% year-on-year. With respect to the retail price, we believe the overall trend in 2020 will be generally downward as dealers still have strong incentive to boost auto sales via big discount.
We stick to our view published in early this year that creditworthiness among automakers will diverge amid the sector downturn (See. Creditworthiness of carmakers to diverge amid shipment downturn). With a great proportion of the entire supply chain of auto manufacturing in China being hurt by the pandemic, tier-one carmakers, including Geely, Great Wall Motor, SAIC, GAC, Dongfeng Motor, BAIC, BYD and Chongqing Chang’an are more operationally and financially resistant to the epidemic, while small-scaled players are very vulnerable to this wide-spreading shock. We expect the sector leverage, measured by Debt-to-EBITDA ratio, to further rise in 2020.
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