China Heads Global Auto Industry Revival: 4 Stocks in Focus

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The China auto market has finally risen from ashes. The auto sector in China had been battling a downturn since July 2018 owing to tighter emission standards, trade tensions, increasing popularity of ride-sharing platforms and sluggish economy. The coronavirus pandemic — originated in Wuhan — further added to the woes, as was evident from the biggest ever decline of around 80% year over year in February. However, with effective control of the virus, China is now at the forefront of global auto market recovery.

Being the first country to emerge out of the deadly coronavirus, lockdown in many cities in China got lifted when other cities in the world were either in the shutdown mode or entering it. Once business activities in China returned to normalcy after the authorities relaxed travel restrictions and lockdowns, vehicle sales in the country started picking up. Auto sales in China witnessed year-over-year growth in September for the sixth straight month.

In contrast, the markets in Europe, Japan and the United States are not appearing as sanguine as China. In fact, vehicle sales in the U.S. market witnessed its first year-over-year rise in September since February 2020. Notably, sales of many international brands have remained weak in the global markets outside China. Many industry watchers believe that the uptrend in China will bring about new opportunities for the country’s auto industry and have a positive impact on the global vehicle market.

China Auto Sales Rebound Continues in ‘Golden September’

Per China Association of Automobile Manufacturers (“CAAM”), auto sales for September rose 12.8% year over year to 2.57 million units. Sales of commercial vehicles and passenger cars for the month increased 40% and 8% year over year, respectively. Japan-based auto giants namely Toyota TM, Honda HMC and Nissan NSANY recorded year-over-year sales growth in China. China-based auto firms including Geely Automobile Holdings and Great Wall Motor Co. Ltd. booked double-digit growth in passenger car sales during the month.

Supportive policies by the local government, promotional events and the Beijing auto show seem to have boosted the rebound of vehicle sales, per a CAAM spokesperson. With the auto sector’s output being a key component of China’s GDP, the government has been ramping up stimulus measures for boosting auto sales. The measures include handing out cash subsidies to stimulate people for purchasing cars, encouraging sales expansion in rural areas, enhancing support for personal auto consumption credit and loosening purchasing restrictions.

Improvement in consumer confidence and the overall country’s economy are aiding sales. Notably, China’s GDP returned to growth in the second quarter. The economy grew 3.2% in the said period, following a 6.8% decline in the first quarter. The momentum is expected to continue. Per Caxin Global, China’s GDP is likely to have grown more than 5% year over year in the third quarter.

Demand for new energy vehicles (NEVs) have also been on the rise amid climate change concerns and favorable government policies. Sales of NEVs rose 68% year over year in September, marking the third straight month of sales increase after snapping a year-long slump in July. Total NEV sales came in at 138,000, comprising 112,000 electric vehicles (EVs) and 26,000 hybrids.

Industry watchers have been quite optimistic about China’s progress in the transition toward EV future. In April, the government of China announced plans to extend subsidies and tax breaks for NEVs such as electric or plug-in hybrid cars for another two years to spur sales. Higher sales by Tesla TSLA, NIO Inc. NIO, Xpeng Inc. and Li Auto stoked deliveries of EVs in September. While California-based Tesla does not provide a region-wise break-up of total vehicles deliveries, China-based EV makers including NIO and Xpeng delivered 4,708 and 8,578 vehicles in September, depicting year-over-year uptick of 133.2% and 145%, respectively. Li Auto sold 3,504 vehicles during the month, up 33% from August, marking the third consecutive month of growth.

Encouragingly, CAAM expects vehicles sales to maintain growth momentum in the upcoming months as well. As it is, this time of the year is coined by the industry insiders as “Golden September, Silver October” as they regard these months as the peak season for sales.Buoyed by favorable government policies, promotional efforts by automakers, and improving consumer confidence and economy, industry watchdogs expect the rebound in vehicle demand and sales to continue. Amid the encouraging scenario, let’s look at some key automakers that command a huge presence in China and are ramping up investments in the world’s largest car market.

4 Stocks to Keep an Eye on

General Motors GM: General Motors is the second-biggest foreign automaker in China in terms of number of units sold. The company has a joint venture (JV) with SAIC Motor, which is engaged in the development of Buick, Chevrolet and Cadillac vehicles. Another JV of General Motors, SGMW, with SAIC and Guangxi Automobile Group, produces no-frills mini-vans and higher-end cars. General Motors — which presently carries a Zacks Rank #1 (Strong Buy) — plans more than 40% of its launches in China to be NEVs in the next five years. The Zacks Consensus Estimate for 2021 earnings points to year-over-year growth of 73.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tesla: With China being the biggest EV market, Tesla’s ambitious plans to start production in the country bode well. Robust production from the new Gigafactory in Shanghai bodes well for its future growth. The Shanghai factory is ramping up well and commands a higher market share in the EV market in China. The Zacks Consensus Estimate for earnings for 2020 and 2021 points to year-over-year growth of 5,966.7% and 70.5%, respectively. Tesla currently carries a Zacks Rank #3 (Hold).

Volkswagen VWAGY: Germany-based Volkswagen is the largest foreign automaker in China in terms of number of vehicles sold. The company targets to invest 15 billion euros in e-mobility in China by 2024. In collaboration with its JV partners namely SAIC, FAW and JAC, Volkswagen aims to develop 15 different electric and plug-in hybrid models in China by 2025.  The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 132.1%. The company currently carries a Zacks Rank #3.

NIO: NIO’s strong standing with the government of China offers it an advantage in the massive China market.Rising demand of ES6 and ES8 models are enhancing the firm’s top line.NIO’s battery swap technology is a game changer and provides an edge to the firm over peers. The Zacks Consensus Estimate for the bottom line for 2020 and 2021 points to a year-over-year improvement of 54.9% and 28%, respectively. NIO currently carries a Zacks Rank #3.

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Honda Motor Co., Ltd. (HMC): Free Stock Analysis Report

Nissan Motor Co. (NSANY): Free Stock Analysis Report

Toyota Motor Corporation (TM): Free Stock Analysis Report

General Motors Company (GM): Free Stock Analysis Report

Tesla, Inc. (TSLA): Free Stock Analysis Report

NIO Inc. (NIO): Free Stock Analysis Report

Volkswagen AG (VWAGY): Free Stock Analysis Report

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