Last year was tough for global car manufacturers because of high oil prices and the economic turmoil. The road was still patchy for the auto sector in the first half of this year but there is light at the end of the tunnel in the mainland market.
Vehicle sales in China reached an all- time high last month as government incentives helped fuel demand. The China Association of Automobile Manufacturers said sales in June surged to 1.4 million units.
A number of incentives boosted the car sector. These included a tax cut for cars with an engine capacity of less than 1.6 liters and a rebate of up to 6,000 yuan (HK$6,806) for buying certain commercial vehicles.
Beijing is subsidizing farmers who buy environmentally friendly commercial vehicles.
Auto companies listed in Hong Kong have different niches. For example, Dongfeng (0489), through its joint ventures with Peugeot, Nissan and Honda focuses on sedans while Great Wall Motor (2333) has been moving into special utility vehicles and pick- up cars. Pick-ups are very popular in the countryside because of energy- efficiency and cost.
Geely Auto (0175) also produces such vehicles which sell from 80,000 yuan to 100,000 yuan. Great Wall's pick-ups sell for 55,000 yuan each.
Great Wall is the top brand in terms of sales volume and it has a 35 percent share of the pick-up market. Geely Auto has cornered 17 percent of the market.
The low-cost pick-up has become an income driver for Great Wall, which will benefit great
ly as farmers buy the vehicles in the wake of Beijing's incentive policy.
The new rural subsidies were announced in early June. Farmers purchasing a new light truck or a minivan can get a subsidy equivalent to 10 percent of the price, up to a maximum of 5,000 yuan.
I am not sure if Geely's pick-ups will be able to make further inroads in the market but one certainty is that Great Wall has successfully built a strong sales network with more than 1,000 outlets covering both urban and rural areas.
Comparatively speaking, Geely's pick-ups were developed recently and its sales network has just begun to develop. So I believe that Great Wall will be among the main beneficiaries of the recent auto incentives.
On the other hand, Geely has grabbed the opportunity in the midst of the financial crisis to acquire a great deal of steel to make vehicles.
It has been able to grant discounts to compete with other auto giants because of its storage of low-cost steel.
As for commercial vehicles, Geely produced 100p light trucks of Euro III emission standards in April at 86,000 yuan, which is 25 percent lower than the earlier Euro II emission light truck.
The competitive price proved to be effective as monthly sales rose 32 percent in April to 3,593 units, and 15 percent to 12,475 units in the first four months of this year.
This type of light truck used to be priced at over 100,000 yuan. Qingling (1122) sold 18,146 light trucks, a decrease of 10.5 percent year on year.
Sales revenue of light trucks recorded a 7.6 percent year on year drop.
With a price war on, I believe that other core market players like Dongfeng will begin to follow the price pattern.
Consumers will, of course, benefit from the discounts but I am sure that manufacturers' net profit margin will be squeezed to a new low.
I trust that keen competition in commercial vehicles is a major risk for investors buying auto stocks.
Apart from producing commercial cars, Dongfeng also successfully launched a wide range of new models in 2008 and 2009.
Last year, Dongfeng's revenue rose 19 percent year on year to 70.56 billion yuan. Its reported net profit increased slightly by 7.2 percent to 4.04 billion yuan.
Dongfeng's Nissan brand has grabbed a 5 percent share of the passenger car market and it is among the top five in terms of car sales in China.
It means that Dongfeng has consolidated its existing brand in the auto market but diversification of models can drive growth.
Dongfeng's Peugeot and Honda models, which will be launched in 2010, are expected to help the mainland firm grow.
If you prefer to buy a stock in this sector, I would think Dongfeng is a primary choice. With a price-earnings ratio of 15 times, I think it is still a good and stable pick.
If you put your faith in rural growth, then I trust that Great Wall will be your choice. With a price-earnings ratio of 14 times, I consider it slightly undervalued