China Auto Sector

Industrial/Transportation, Macro


Publicly traded companies mentioned herein: Geely Automobile Holdings (0175 HK), Bitauto (BITA), Autohome (ATHM) and Guangzhou Automobile Group (2238 HK).

Highlights

Over the past decade, the number of Chinese automotive OEMs has grown at an approximate 10-20% annual rate, with the total currently standing at roughly 50 OEMs at a minimum - and perhaps as many as 80, according to the presenter’s extensive due diligence. Demand was so strong over that period of time that all of this additional capacity was almost immediately absorbed by the market. Such massive demand has resulted in margins that are meaningfully higher than those of global automotive OEMs, with 11-12% EBIT margins versus a range of 2% at the low end and 8% at the high end. The supply chain, meanwhile, generates 400-500 bps more margin than global peers, and importers into China earn 2-3 times higher operating margins. With even more capacity coming online in the next few years and demand growth dramatically slowing, the presenter believes these metrics are poised to collapse.

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Idea Discussion

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