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Even If China Returns Unscathed, Auto Profits May Be Peaking

Even If China Returns Unscathed, Auto Profits May Be Peaking.

“The market could turn a corner during the final quarter of 2015 to come back on track, and be followed by annual growth of a high single-digit during the course of 2016”

“In short, China’s automotive story is far from over”

As the dust settles on the China stock market debacle, car sales there are expected to recover, but doubts are mounting over the future of China as a serial money maker.

And despite what happens in China, the global auto sector is thought to be reaching an earnings peak anyway, with the Germans possibly starting to issue profit warnings as early as this month.

LMC Automotive, in its latest report on the China Automotive market, points out that the annual selling rate fell to 17.7 million in July, and asks “Is this the end of China’s automotive boom”.

LMC Automotive reckons despite the current fall in sales, pent-up demand will appear during the fourth quarter of 2015 and the first quarter of next year, thanks to the performance of smaller cities which have not participated in the economic boom yet.

“The Passenger Vehicle market could turn a corner during the final quarter of 2015 to come back on track, and be followed by annual growth of a high single-digit during the course of 2016. In short, China’s automotive story is far from over,” LMC Automotive said in the report.

This doesn’t mean that a return of strong sales will also lead to a restoration of the massive profits that the premium car manufacturers like VW and its Audi, Porsche and Bentley subsidiaries, BMW, Mercedes and Jaguar Land Rover have become used to.

Investment bank UBS hopes recent credit easing measures from the People’s Bank of China will give a significant support to potential auto lending. It believes the premium car makers will benefit “disproportionately” because of the higher proportion of credit used to buy their cars, but it is a bit nervous about the future.

“We remain generally cautious on autos. The recent decisions on lending less than two weeks after the negative change in the currency peg is a reminder of how public policy risks can undermine confidence in China related forecasts,” said UBS analyst Philippe Houchois.

Pessimism overdone
Fitch Ratings, in a general report on China’s economic prospects, said pessimism has been overdone, adding that the authorities still have significant room to loosen credit policy further. The devaluation of the Yuan which sparked the panic was 4.7 per cent against the U.S. dollar between August 10 and August 26, compared with its appreciation of almost 20 per cent since 2012. Fitch said the new normal for China’s economic growth is likely to be well below seven per cent and worried about the “enormous accumulation of debt following the 2008 global financial crisis, and over-investment in the residential real estate market” which will drag on the economy over the next few years.

Max Warburton, analyst with Bernstein Research, said the German premium manufacturers make 50 per cent of their profits in China but added sales aren’t collapsing.

“Pricing is horrible – as ambitious growth plans and capacity additions collide with weakening demand – with poorly capitalised dealers as the woefully inadequate buffer zone. But China is not yet a total bloodbath,” Warburton said.

Warburton used the example of China to make a broader point.

“Auto sector earnings have peaked and are now set to fall. Even if disaster is avoided in China and/or the contagion to the rest of the world proves modest – broader themes suggest global auto industry earnings have peaked and now set to moderate,” he said.

Warburton expects a plethora of profit warnings from the likes of VW and BMW, perhaps during the Frankfurt Car Show in the middle of this month, or later from Mercedes parent Daimler.

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