Finance and Economics APP learned that Soochow Securities released a research report stating that in 24Q3, the overall prosperity of the automotive sector improved. In terms of single Q3, despite the overall good performance of the automotive sector in the Hong Kong stock market, it still achieved high excess returns. The core reason is the favorable industry prosperity brought about by the policy of 'scrappage for replacement,' coupled with improvements in the companies' own operations. Retail sales growth in the automotive sector in Q3 was 3% year-on-year (initial expectations were -2.6% at the beginning of the quarter), mainly driven by the intensive introduction of the 'scrappage for replacement' policy in late August in various provinces and cities, which significantly boosted in-store transactions. In addition, Q3 heavy truck sales volumes fell short of expectations, with weak domestic demand and the impact of reducing inventory through channels, resulting in wholesale sales declines both month-on-month and year-on-year (-18.2%/-23.0%), while the export performance remained relatively stable and outperformed domestic sales.

The main viewpoints of Soochow Securities are as follows:

Automotive Sector: In Q3, the industry's prosperity improved, with overall individual vehicle profits showing a general improvement compared to the previous quarter.

Overall Industry: 1) Rise and fall - Since the beginning of the year, Chongqing Sokon Industry Group Stock, Geely Auto, BYD Company Limited, and BAIC Bluepark New Energy Technology, four automotive companies, have recorded positive excess gains. In terms of single Q3, despite the good overall performance of the automotive sector in the Hong Kong stock market, it still achieved high excess returns. The core reason is the favorable industry prosperity brought about by the policy of 'scrappage for replacement,' coupled with improvements in the companies' own operations.

2) Volume - Retail performance exceeded expectations with support from the 'scrappage for replacement' policy. In 2024Q3, the industry's overall retail sales growth was 3% year-on-year (initial expectations were -2.6% at the beginning of the quarter), mainly driven by the intensive introduction of the 'scrappage for replacement' policy in late August in various provinces and cities, significantly boosting in-store transactions. Meanwhile, in terms of exports, Chery, Geely, and Great Wall Motor, among other car manufacturers, saw a notable quarter-on-quarter increase in Q3, with a 0.09 million unit quarterly increase in exports to the Commonwealth of Independent States, contributing significantly to the industry's export growth. Part of the reason is the increase in Russia's official scrappage tax in October. Some manufacturers actively adjusted inventory to reduce end-customer pressure, leading to a significant industry destocking, hence, the high industry prosperity in Q3 was not fully reflected in the financial statements.

3) Structure - Retail/wholesale penetration rates continue to increase, with retail penetration breaking 50% in a single quarter.

Comparison: 1) ASP: Overall, the ASP of Q3 auto companies remained stable, with few discount changes, mainly due to the impact of model structure changes (e.g. increasing L6 proportion/decreasing M9 proportion/increasing DM5.0 proportion), etc., affecting the ASP of a single quarter. In addition, the export support trend since 23Q4 continues to impact ASP, with Great Wall achieving a historical high ASP in a single quarter in Q3 under the circumstances of export growth, performing well.

2) Gross Margin: In 2024Q3, auto companies' gross margins showed no consistent trends on a quarter-on-quarter basis, with Chongqing Sokon leading the industry in gross margin once again. The main reasons for the increase in gross margin include supplier rebates (Idean)+significant scale effects from increased sales (BYD)+product structure improvements (BYD; Changan)+accounting standard changes (Changan); the main reasons for the decrease in gross margin on a quarter-on-quarter basis include accounting standard adjustments (Chongqing Sokon)+product structure adjustments (Great Wall)+increased corresponding discounts due to terminal inventory clearance (Guangzhou Automobile Group).

3) Expense-to-Revenue Ratio: Excluding the impact of accounting policy changes (Changan), the expense-to-revenue ratios of most auto companies declined on a quarter-on-quarter basis in Q3, actively controlling costs and reducing costs, with only BYD experiencing an increase in expense-to-revenue ratio during the period. In addition, due to exchange rate fluctuations, auto companies such as Great Wall/BYD with a higher proportion of exports in Q3 generated more exchange losses, affecting the current period's profits.

4) Per Vehicle Profit: Overall, the increase in per vehicle profit on a quarter-on-quarter basis comes from the slowing of price competition & proactive cost control by companies, showing a relatively consistent trend in Q3: 24Q3 auto companies' per vehicle net profit generally improved quarter-on-quarter.

Outlook: With continuing supportive policies, the economic outlook for 24Q4 is expected to continue improving, benefiting from scale effects and cost reduction impacts in terms of prices, with the potential for per vehicle profitability to stabilize and rise.

Components: Overall, the performance of sector components in 2024Q2 met expectations, and differentiation within the sector has begun.

Review: Overall, the performance of component companies in 2024Q3 met expectations. Price Changes: In 2024Q3, the automotive components sector as a whole rose, with targets such as Jingwei Hengrun/Huizhou Desay SV Automotive/Ningbo Jifeng Auto Parts showing good increases. Revenue: Core supporting component companies of independent/core new energy automobile companies (Tesla, Huawei Intelligent Selection, Ideal Industry Chain, etc.) generally realized higher revenue in 2024Q3. Profitability: Intensified competition in downstream complete vehicles has led to differing profit levels in the component industry, with component companies having a strong structure, good customers, and good management achieving higher profitability under the demand for component chain cost reduction, and being able to more effectively absorb the impact of external factors such as raw material prices, freight, etc.

Outlook: Soochow Securities believes that the trend of indigenous development/new energy growth from 2024 to 2025 will continue, with the leading component targets identified in the past two years expected to remain strong, continuing to benefit from domestic electrification/intelligence dividends, coupled with accelerated overseas market expansion, quality leading targets will continue to grow.

Heavy Trucks: Domestic demand declines, exports remain stable, Q3 performance is generally under pressure, with leading companies outperforming the industry.

Review: 1) Sales: Q3 industry sales below expectations, weak domestic demand + reduced inventory due to channel destocking impact, wholesale sales down by -18.2%/-23.0% month-on-month, exports relatively stable and better than domestic sales, Russian export market shows signs of recovery, potentially leading to increased export profits.

2) Stock Price: Q3 heavy truck companies' excess returns are all negative, with Weichai experiencing the largest decline, while Sino Truck's A/H excess returns have been positive since the beginning of the year; 3) Revenue / Expenses / Profits: Q3 industry revenue down by -18.7%/-20.3% month-on-month, consistent with the decline in sales, average gross margin increased by +0.38/+0.86 percentage points month-on-month, but net margin declined, Q3 expenses decreased significantly year-on-year, with monthly pressure also decreasing, but the significant decline in revenue still puts substantial pressure on expense ratio.

4) Performance: Overall sector performance below expectations, Sino Truck A exceeded expectations, Weichai met expectations, while others fell short of expectations; 5) Sino Truck A: improving exports + cost reduction driving significant increase in gross margin, with the company's cost control being the best in the industry, Q3 net income attributable to shareholders increased by 97.9% year-on-year, exceeding profit expectations; Weichai: KION manages stable and smooth heavy truck business cycles, Shaanxi Auto's sales outperformed the industry, revenue decline was lower than the industry average, gross margin improvement driven by optimized product structure + cost reduction, Q3 performance met expectations.

Outlook: Patiently await profit elasticity from the recovery of domestic demand. October PMI index exceeded expectations, and high-frequency indicators such as logistics index improved month-on-month. Looking ahead, expect the demand in the freight market to recover under the stimulation of macroeconomic policies; the effects of current scrappage incentives are not yet clear, with localities gradually holding policy briefings in October, the policy effects may become evident, and Q4 '24 is expected to see a rebound in domestic heavy truck demand.

Buses: Overall demand in '24 Q3 under pressure, with leading companies showing relatively better performance.

Review: In '24 Q3, adjustments in domestic and international demand, with significant month-on-month improvements reflected in public transportation tenders. Despite a decrease in scale, industry leader Yutong achieved performance that exceeded expectations due to good quality export orders. Among second- and third-tier enterprises, Zhongtong met export expectations, while Jinlong slightly underperformed expectations.

Outlook: Soochow Securities believes that in Q4 '24, both domestic and international demand is expected to rebound strongly. Domestic bus tenders are expected to accelerate under the impact of scrappage incentives, with continuous dividends from exports and new energy exports. They are optimistic about leading companies seizing industry opportunities to realize stable sales and performance growth.

Investment advice

Sector Outlook: Supported by the policy of trading in old for new, the automobile sector's outlook remains resilient. Predicted sector outlook: For passenger vehicles in 2024Q4, production, wholesale, retail, and exports are expected to be 795/7.93/6.37/1.51 million units respectively, with year-on-year changes of +2.3% / +2.7% / +1.6% / +20.5%; For new energy vehicles in Q4, wholesale, retail, and exports are projected to be 3.85/3.25/0.48 million units respectively, with year-on-year changes of +29.8% / +36.5% / +57.9%. For heavy-duty trucks, wholesale, insurance sign-ups, and exports in 2024Q4 are estimated at 0.245/0.195/0.064 million units respectively, with year-on-year growth rates of +19.9% / +38.9% / -2.9%; For buses, wholesale, insurance sign-ups, and exports are expected to be 0.043/0.03/0.011 million units respectively, with year-on-year growth rates of +58% / +99% / +23%.

In 2024Q4, the primary theme for intelligentization is choosing XPeng and Anhui Jianghuai Automobile Group Corp.,Ltd.. Preferred complete vehicles include XPeng (09868) / Huawei Group (including Anhui Jianghuai Automobile Group Corp.,Ltd. (600418.SH) + Chongqing Sokon Industry Group Stock (601127.SH) + Chongqing Changan Automobile (000625.SH) + BAIC Bluepark New Energy Technology (600733.SH)). Preferred parts include domain controllers (Huizhou Desay SV Automotive (002920.SZ) + ForYou Corporation (002906.SZ)) + wired chassis (Bethel Automotive Safety Systems (603596.SH)) + Tesla's industry chain (Jiangsu Xinquan Automotive Trim (603179.SH) + Ningbo Tuopu Group (601689.SH)) etc.

The primary theme for globalization in 2024Q4 is selecting Yutong Bus Co.,Ltd. and Fuyao Glass. Key catalyst: Continued realization of quarterly performance. Preferred buses include Yutong Bus Co.,Ltd. (600066.SH). Preferred heavy-duty trucks include Sinotruk (000951.SZ,03808). Preferred passenger vehicles include BYD Company Limited (002594.SZ) + Geely Auto (00175) + Great Wall Motor (601633.SH) + Leapmotor (09863). Preferred parts include Fuyao Glass (600660.SH) + Ningbo Joyson Electronic Corp. (600699.SH).

Risk Warning: Global economic recovery weaker than expected; L3-L4 intelligentization technology innovation lower than expected; Global new energy penetration rate lower than expected; Increased geopolitical uncertainty risks.