China’s car market is stuck in Beijing traffic
Investors hoping government will reintroduce tax breaks have been disappointed so far
China’s car market may not be getting too much worse, but things may not shift into a higher gear for a while either.
Car makers are still selling fewer cars at the wholesale level: Auto sales in China fell 15% from a year ago in the first two months this year, and have now logged eight consecutive months of decline. The latest drop, though, is partly due to car dealers trying to clear in- ventories, often by cutting sticker prices, that piled up last year.
While car dealers may be able to clear their inventory overhang, consumer appetite for new vehicles is unlikely to rise much again soon. A tax break in place from 2015 to 2017 frontloaded demand equivalent to roughly 7.4 million cars—or about a quarter of China’s annual auto sales—according to Goldman Sachs. Any sales growth will likely remain slug- gish, as the market readjusts to life without such support.
The signs are that Beijing isn’t coming to the rescue again, even though investors have been pinning their hopes on the government reintroducing tax breaks. Shares in domestic companies such as Geely and Great Wall Motor, which would benefit most from a government stimulus, have rebounded nearly 40% from recent lows. But so far nothing substantial that might directly support the car markets has emerged from the continuing National People’s Congress, where Beijing usually announces big policy moves.
Instead of betting on another government roadside rescue, investors ought to focus on companies with strong brands and products that can sell well even in a sluggish market, such as Guangzhou Automobile Group (GAC), a joint-venture partner with Honda and Toyota. Its Toyota-branded cars, like the Camry sedan, have proven popular even during the downturn: The GAC Toyota JV’s sales are up 57% in the first two months of this year, offsetting weakness in GAC’s own brands. Even so, GAC still trades at 6.6 times expected earnings, according to S&P Global Market Intelligence, lower than its fiveyear average of 8.9 times. Customers may get more picky about which car they buy in a downturn. Investors should do the same.