The trend of parts continues to grow, with short-term profit pressure from raw materials and exchange rates. In 2Q24, the revenue increased by +9% year-on-year and +12% quarter-on-quarter, which continues to outperform the industry sales growth.
Zhī Tōng Finance has learned that Huachuang Securities released a research report stating that in 2Q, narrow passenger vehicle retail sales declined year-on-year, with incremental wholesale reliance on exports showing a slight increase. The new energy passenger cars reached 2.66 million, with a penetration rate of around 43%, an increase of about 9 percentage points both year-on-year and quarter-on-quarter. The demand for commercial vehicles remained steady, and after emerging from the low base of 2022, commercial vehicles have also entered a growth bottleneck. The trend of parts growth remains unchanged, with short-term profitability pressure from raw materials and exchange rates, outperforming the industry sales growth and in line with the trend of increasing market share of independent parts.
Industry: 2Q demand weakened year-on-year. In 2Q24, auto sales reached 7.33 million units, an increase of +2% year-on-year and +9% quarter-on-quarter; passenger vehicles reached 6.29 million units, an increase of +3% year-on-year and +11% quarter-on-quarter; commercial vehicles reached 1.04 million units, remained flat year-on-year and increased by 3% quarter-on-quarter. In 2Q of this year, narrow passenger vehicle retail sales declined year-on-year, with incremental wholesale reliance on exports showing a slight increase. The new energy passenger cars reached 2.66 million, an increase of +31% year-on-year and +37% quarter-on-quarter, with a penetration rate of around 43%, an increase of about 9 percentage points both year-on-year and quarter-on-quarter. The demand for commercial vehicles remained steady, and after emerging from the low base of 2022, commercial vehicles have also entered a growth bottleneck. The subsequent focus will be on observing the actual effects of policies.
Passenger vehicles: Independent market share is rapidly increasing, and profits continue to be realized, while pressure from joint ventures is significantly evident. In 2Q24, the revenue of passenger vehicle companies (excluding SAIC) totaled 33.23 billion yuan, an increase of +28% year-on-year and +29% quarter-on-quarter. The gross margin was 18.3%, an increase of 2.5 percentage points year-on-year and a decrease of 0.7 percentage points quarter-on-quarter. The expense ratio was 12.6%, an increase of 0.7 percentage points year-on-year and a decrease of 2.7 percentage points quarter-on-quarter. With the trend of electrification and smart technology, sales and R&D investment continue to increase. The sector's net profit was 14.3 billion yuan, an increase of +92% year-on-year and +61% quarter-on-quarter, with a net margin of 4.3%, an increase of 1.4 percentage points year-on-year and 0.9 percentage points quarter-on-quarter. Year-on-year, the net profit of the sector increased significantly, mainly benefiting from the growth of Great Wall Motors and BYD, as well as the evident net profit turnaround of Sokon Industry Group Stock under the backdrop of increased sales, despite being amidst a price war. Meanwhile, the profit capacity of other independent companies also remained relatively stable. Quarter-on-quarter, BYD and Sokon Industry Group Stock made significant contributions. SAIC's joint venture 2Q profitability performance was weak, and Japanese companies experienced a noticeable decline.
Parts: The growth trend remains unchanged, with short-term profit pressure from raw materials and exchange rates. In 2Q24, the revenue increased by +9% year-on-year and +12% quarter-on-quarter, continuing to outperform the industry sales growth, in line with the trend of increasing market share of independent parts. The gross margin was 20.4%, a decrease of 0.4 percentage points year-on-year and 0.3 percentage points quarter-on-quarter, with a slight decrease both year-on-year and quarter-on-quarter. It is estimated that negative impacts from raw materials, year-on-year declines, and the pace of new project production brought about some negative effects. The expense ratio was 12.3%, an increase of 0.7 percentage points year-on-year and a decrease of 0.3 percentage points quarter-on-quarter. Among these, sales, management, and R&D still reflect the economies of scale brought about by the increase in volume. However, in 2Q, exchange rates brought significant pressure on the financial expenses of some companies, resulting in an increase in the expense ratio (median method for financial expense ratio: 0.2%, an increase of 0.6 percentage points year-on-year and a decrease of 0.2 percentage points quarter-on-quarter). Ultimately, the sector's net profit increased by +7% year-on-year and quarter-on-quarter, with a net margin of 6.0%, a decrease of 0.8 percentage points year-on-year and 0.5 percentage points quarter-on-quarter.
Outlook for 3-4Q24: The annual sales volume is expected to remain stable, with relative strong profits for independent car companies and parts sectors. From the mid-year period, car retail and exports have not met expectations. Currently, Huachuang Securities expects the full-year narrow passenger car retail sales to reach 21.21 million units, an increase of +1.4%, and wholesale to reach 26.24 million units, an increase of +1.9%, both of which have been slightly revised down from the first half of the year. Correspondingly, the passenger vehicle growth rate is expected to fluctuate around 0% in the second half of the year, with the retail sales expected to decline by -1.6% and -0.6% quarter-on-quarter, and wholesale sales to decline by -0.3% and -2.3% quarter-on-quarter. However, at the same time, the expected continuous increase in independent market share and penetration rate in new energy vehicles is anticipated to reach 63%/+6.5 percentage points and 42%/+7.7 percentage points, respectively, for the full year.
In terms of profitability, although the entire vehicle sector is facing a price war that is stronger than the market's previous expectations, as seen from the 2Q sector profit of Huachuang Securities, the profits of independent car companies either reflect the improved profitability of strong companies such as BYD and Sokon, or they demonstrate the profit supplementation brought about by exports by second-tier independent companies such as Great Wall, Changan, and Geely. The current price war is still between the first-tier independent companies and the first-tier joint ventures. Huachuang Securities expects the full-year profitability of the passenger vehicle sector to increase by +3%. Parts, on the other hand, are relying on the increase in independent volume and new projects to offset unfavorable factors such as year-on-year declines, raw materials, and exchange rates. Huachuang Securities expects the full-year profit of the parts sector to increase by +17% year-on-year.
Investment advice: Vehicles: Continue to focus on the catalytic effect of new vehicles on investment opportunities in the vehicle sector. In the short term, the strength and duration of BYD's competitive advantage may continue to exceed expectations, and we continue to recommend it. In addition, we recommend paying attention to Geely Auto (00175) and Xpeng (09868), which have seen recent improvements in their fundamentals and new vehicle launches.
Auto parts: Due to the impact of high base numbers, the growth rate of automobile sales in the second half of the year may have a weaker catalytic effect on the investment in the auto parts sector. At the same time, the market is concerned about the risk of overseas tariffs. We suggest capturing opportunities for rebound and configuration, such as T-Link, which is relatively suppressed in terms of sentiment and valuation. Subsequent marginal changes in T may bring about a rebound. These companies themselves are also relatively outstanding, and their performance growth this year has support: Ningbo Tuopu Group (601689.SH), Jiangsu Xinquan Automotive Trim (603179.SH), Fasotec (301529.SZ).
Risk reminders: Macroeconomic conditions and domestic consumption may be lower than expected, automobile exports may be lower than expected, new energy vehicle sales may be lower than expected, raw material price fluctuations, Tesla's new models may be lower than expected, etc.