Find attached the full note on the sector & The Peugeot note.
downgraded her forecasts for China auto demand from 8.5% in both 2015E and 2016E
to 1.7% and 5.2% respectively (China Autos). We have taken the opportunity to revise
down our China assumptions for both BMW (BMW: China risk priced in?) and PSA
(Peugeot SA: Ripe for a correction on China?) but note that we largely believe China
downside risk has already been incorporated at BMW, with the stock down 18% on a 3-
month view. Similarly we believe BMW’s German peers, while at risk of further nearterm
volume and margin declines due to the softening macro environment, have
already borne the brunt of the market’s worries on China. Similarly, EU auto suppliers
are clearly impacted by weaker Chinese volumes, but we believe their increased
penetration with domestic Chinese OEMs should protect them to some degree. In our
view it is PSA, with >50% of our forecast 2015E earnings from China, which we believe
is yet to feel the effects of China woes.
* China volumes downgraded: We see a strong correlation between passenger vehicle
sales in China and power consumption growth (which we view as a reliable indicator of
underlying economic activity in China). Given our concerns for economic recovery (FAI
growth decelerated 2.1ppt for 1H15 versus 1Q15), we have today downgraded our China
auto volume forecasts to 1.7% and 5.2% for FY15 and FY16E respectively. With
production capacity expansions set to outpace volume growth, particularly for foreign JVs,
and to date OEMs not appearing to contemplate any delays to construction or launches,
we worry that there may be further pricing pressure for passenger vehicles post 2015.
* Who is most at risk? With 30% of Auto EBIT exposed to China, BMW is viewed by many
investors as the China-proxy in the sector. However, China downgrades started at the
beginning of the year and we think China-risk is largely priced in. So too for VW. Nearterm,
suppliers like Valeo (OW, €176) and Conti (OW, €217) could feel the pressure but
we expect both companies to highlight strong China order backlogs with their Q2
results. In our view PSA remains the EU auto stock most exposed to further China risk.
* What does it mean for sector valuations? China softness leaves risk of near-term
earnings downgrades for most of our coverage universe in Europe but we wonder
whether this has largely been priced in already given the sector has fallen 9% from its
highs in the last 3 months and yet sector earnings have risen 15% over the same
period. We think summer trading is likely to be choppy given the risk of profit taking on
outperformance YTD and as lower China earnings are incorporated but we think for the
longer term the fundamentals ex-China still look rosy. European volumes have run
ahead of expectations YTD and the economic data (bar any Greek contagion) continues
to look promising. As hedging rolls off in 2016E, FX gains should accelerate, particularly
for US$ importer stocks and for the suppliers, tightening global regulations should
continue to drive increased penetration rates.