China Auto Sector. Manageable impact from reduction in import tariffs on domestic auto market. Equity Research Auto. Mar 28, 2018

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1 Equity Research Auto Mar 28, 218 China Auto Sector Manageable impact from reduction in import tariffs on domestic auto market Chongjing Deng SFC CE No. BEY With contribution from the GF A-Share research team. GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Consensus reached between China and the US on China gradually lowering auto tariffs On Nov 9, the Ministry of Foreign Affairs stated that a consensus had been reached between China and the US, with China agreeing to gradually reduce auto tariffs. In June this year, China will begin a pilot scheme aiming to relax restrictions on foreign ownership of new energy and special use vehicle businesses in free trade zones. Meanwhile, Ford Motor (F US) and General Motor (GM US) have obtained Chinese import trade orders, and Foton Motor (6166 CH) and TDG signed an agreement to develop intelligent public transportation systems. In 216, the US trade deficit with China reached US$347bn, accounting for 47.3% of its total deficit. The US autos & auto components industry had a large trade deficit, reaching US$199.8bn in 216, accounting for 26.6% of the total. For China s auto export market, 8M17 vehicle export volume totaled just 65k, accounting for 3.7% of domestic vehicle sales volume, of which only 34k units were exported to the US. Comparisons of auto import tariff rates across the world Imported cars to China will be levied with custom duty, a consumption tax and VAT. Custom duties are 25% for vehicles, and 1 for auto components. Consumption tax rates vary from 1%-4 based on engine displacement. The VAT rate is 17%. During 8M17, the proportion of imported PVs with engine displacements of 1.5L-2.L, 2.L-2.5L, and 2.5L-3.L was 27.6%, 29.6%, 28.3% respectively, with corresponding consumption tax rates of 5%, 9% and 12%. Based on the above figures, we estimate that China s aggregate auto import tax rates were 53.9%, 6.7% and 66.2%, substantially higher than those in the US (25%), Germany (26.2%) and Japan (5%). China s domestic passenger vehicles are also levied with consumption tax and VAT, with the same rules as imported vehicles. As for domestic PVs, vehicles with engine displacements of L account for the largest proportion, and have a corresponding consumption tax rate of 3%. Based on the above figures, we estimate an aggregate tax rate for domestically produced vehicles of 2. Manageable impact from reduction in import tariffs on domestic auto market From a volume perspective, the size of China s auto import market is relatively small compared to the size of the domestic auto market. If import tariffs decline, there will be a manageable overall impact on China s auto market. According to the China Association of Automobile Manufacturers (CAAM), China s vehicle imports totaled 87k units during 8M17, still relatively low compared with domestic auto sales volume. Among China s imported vehicles, 19.8% were from the US. The average price of imported passenger cars in China (excluding tax) is about US$4k, or around Rmb4k with an aggregate tax rate of 53.9%. With reference to China's existing tariff levels for South Korea, Asia-Pacific (2), and Australia (1) in free trade areas, if the import tariff rate is reduced by 5-1pp to 15-2, with a consumption tax of 5%, the aggregate tax rate for auto imports will fall to 35.5%-41.6%, and the average import price of vehicles will decline to Rmb365k-382k. A reduction in import tariff would narrow the price gap between imported vehicles and highend joint venture brands. Consumers with strong purchasing power may be more inclined to purchase good quality imported brands. Risks Economic growth falls short of expectations; weaker-than-expected policies. This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

2 Sector report Mar 28, 218 Figure 1: US trade balance (US$1m) 美国 US: Balance : 贸易差额 of trade Sources: U.S. Bureau of Economic Analysis, GF Securities Development & Research Center Figure 2: 9M6-9M17 US-China trade and US-China trade balance (US$1m) Value of China s exports to the US (LHS) Value of US exports to China (LHS) Trade deficit (RHS) 中国对美国出口额 / 左轴美国对中国出口额 / 左轴贸易逆差 / 右轴 Sources: U.S. Bureau of Economic Analysis, GF Securities Development & Research Center 2

3 Mar 28, 218 Figure 3: Imports, domestic production and trade balance of various US sectors in 215 Paper products Agriculture, forestry, farming, fishery Wood products Nonmetallic mineral Plastic & rubber Food & beverage Metal products Furniture & fixture Machinery Raw materials Other manufacturing Electronic equipment & parts Chemical products Petroleum & natural gas Textile, apparel & leather Auto & auto parts Computer & electronics Sources: Deutsche Bank, U.S. Bureau of Economic Analysis, GF Securities Development & Research Center Figure 4: 9M9-9M17 proportion of US trade balance in auto products as % of total merchandise trade balance (US$1m) 25 US auto & auto parts trade balance (LHS) 美国汽车及零部件贸易差额 / 左轴 Trade balance in US auto sector as % of total trade balance (RHS) 美国汽车行业贸易差额占贸易总差额比重 / 右轴 % 2 15% 1 5% Sources: U.S. Bureau of Economic Analysis, GF Securities Development & Research Center 3

4 Mar 28, 218 Figure 5: 8M9-8M17 China auto export vol and its proportion of total auto sales vol Figure 6: 8M17 China s auto export vol to US & its proportion of total US auto imports Auto 汽车出口销量 export / 左轴 sales vol (LHS) 占总销量比重 As % of total / 右轴 sales vol (RHS) 6% 5% 4% 3% 2% 1% 中国出口美国汽车销量 China s auto export / 左轴 vol to US (LHS) As 占美国进口车比重 % of total US / auto 右轴 imports (RHS) 3% 3% 2% 2% 1% 1% Sources: WardsAuto, GF Securities Development & Research Center Figure 7: 8M17 China PV sales volume by engine displacement Figure 8: 8M17 China imported sedans and SUVs by engine displacement 6.5% 小于等于 <=1L 1L <=1L 小于等于 1L 27% 1L-1.6L 1L-1.5L 1.6L-2.L 28.3% 27.6% 1.5L-2.L 2.L-2.5L 2.L-2.5L 2.5L-3.L 2.5L-3.L 69% 3.L-4.L 3.L-4.L >4.L 以上 >4.L 以上 29.6% Sources: CAAM, GF Securities Development & Research Center Sources: CAAM, GF Securities Development & Research Center 4

5 Sector report Mar 28, 218 Figure 9: 8M8-8M17 value of imported vehicle & auto parts (US$1m) and YoY growth Value 整车进口金额 of imported / 左轴 vehicle (LHS) Vehicle 整车同比 YoY / 右轴 (RHS) Value of imported auto parts 零部件进口金额 / 左轴 (LHS) 零部件同比 Auto parts / 右轴 YoY (RHS) Figure 1: 8M14-8M17 China imported vol of vehicles (1k units) and YoY growth Auto import vol (LHS) 汽车进口量 / 左轴 YoY (RHS) 同比 / 右轴

6 Mar 28, 218 Figure 11: 8M7-8M17 China PV import vol (1k units) and YoY growth Figure 12: 8M7-8M17 China commercial vehicle import vol (1k units) and YoY growth 乘用车进口数量 Imported vol of / 左轴 passenger vehicles (LHS) 同比 YoY /(RHS) 右轴 Imported 商用车进口数量 vol of / 左轴 commercial vehicles (LHS) 同比 YoY /(RHS) 右轴 Figure 13: 8M7-8M17 China imported vehicle vol by country 日本 Japan 美国 US 德国 Germany 英国 UK 其他 Others 6

7 Sector report Mar 28, 218 Figure 14: Jan 214 July 217 China imported value of auto parts (US$1m) and YoY growth 汽车零部件进口金额 Imported value of / 左轴 auto parts (LHS) YoY 同比 /(RHS) 右轴 Figure 15: 29-8M17 proportion of various auto products by value of imports to China 传动系统 Drive system Body 车身附件 accessories Engine 发动机零部件 parts Auto 汽车电子 electronics 发动机整机 Engine Steering 转向系统 system Traveling 行驶系统 system Brake 制动系统 system Others 其他 7

8 Mar 28, 218 Figure 16: 28-8M17 value of imported auto drive systems (US$1m) and YoY growth Figure 17: 28-8M17 value of imported car body accessories (US$1m) and YoY growth Value 传动系统进口金额 of imported / 左轴 drive system (LHS) 同比 YoY /(RHS) 右轴 Value 车身附件进口金额 of imported / 左轴 car body accessories (LHS) YoY 同比 /(RHS) 右轴 Figure 18: 28-8M17 value of imported engine parts (US$1m) and YoY growth Figure 19: 28-8M17 value of imported auto electronics (US$1m) and YoY growth 发动机零件进口金额 Value of imported / 左轴 engine parts (LHS) 同比 YoY / 右轴 (RHS) Value 汽车电子进口金额 of imported / 左轴 auto electronics (LHS) 同比 YoY / 右轴 (RHS)

9 Mar 28, 218 Figure 2: 28-8M17 proportion of various auto products by value of imports to China Drive 传动系统 system Body 车身附件 accessories 发动机零部件 Engine parts 汽车电子 Auto electronics 发动机整机 Engine 转向系统 c 行驶系统 c 制动系统 c 其他 c c Steering system Traveling system Brake system Others Figure 21: 8M17 proportion of auto parts imports from the US 发动机整机 Engine 发动机零件 Engine parts 传动系统 Drive system Body 车身附件 accessories 行驶系统 Traveling system 制动系统 Brake system 转向系统 Steering system 汽车电子 Auto electronics Semitrailer 半挂车及零件 & parts 其他零部件 Other components 9

10 Mar 28, 218 Figure 22: Import volume of vehicles (1k units), YoY growth and import tariff rates In 2, China joined the WTO and promised to gradually lower import tariff In 25, China canceled import quota and licenses, and implemented automatic registration Affected by the global financial crisis, import growth of vehicles declined YoY vehicle import growth declined in 215, marking the first decline in growth since 26, owning to high inventory at auto dealers Vol of imported vehicle (LHS) Custom duty of vehicle (RHS) YoY growth of vehicle imports (RHS) Sources: China Automotive Industry Yearbook, GF Securities Development & Research Center Figure 23: Total import costs for the BMW X6 with 4.4L engine imported from Germany Taking an example of BMW X6 with 4.4 engine displacement imported from Germany, assuming its dutypaid price is Rmb5k Import cost Duty-paid price Rmb5k + Custom duty Rmb125k + Consumption Tax Rmb416k + VAT Rmb177k Rmb 1218k Sources: General Administration of Customs, GF Securities Development & Research Center 1

11 Mar 28, 218 Figure 24: Distribution of prices of self-owned brands Figure 25: Distribution of prices of joint venture brands 12% 6% 2% 2 3k-5k 3-5 万 5k-8k 5-8 万 14% 3% 8% 3-5 3k-5k 万 5-8 5k-8k 万 8k-12k 8-12 万 12k-16k 万 26% 29% k-12k 万 12k-16k 万 26% 34% 16k-25k 万 Above 25 万以上 25k 2 16k-25k 万 25 Above 万以上 25k Sources: China Automobile Industry Newsletter of Production and Sales, GF Securities Development & Research Center Sources: China Automobile Industry Newsletter of Production and Sales, GF Securities Development & Research Center 11

12 Mar 28, 218 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1 Neutral Expected sector relative performance ranges between -1 and 1 Cautious Sector expected to underperform benchmark by more than 1 Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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