SAIC Results: Car Market Overheating
As we cruise into the final day of a hectic earnings season, let’s take a quick look at results from leading car makers SAIC (Shanghai: 600104) and Dongfeng Motor (HKEx: 489) that provide the latest evidence that China’s car market is rapidly overheating. I’ve described this looming problem before, most recently by looking at the ongoing rapid build-up of new capacity that is likely to exacerbate the current overheating. (previous post)I’ll come back to the capacity issue shortly, but first let’s have a look at the latest results from Shanghai-based SAIC, China’s largest automaker. In theory, SAIC should be posting exciting financial results, since its main joint venture partners, Volkswagen (Frankfurt: VOWG) and General Motors (NYSE: GM), are China’s top 2 car brands. VW saw its Chinese sales jump 19 percent last year, or more than double the broader market’s 8 percent growth. GM’s sales grew at a slower but still respectable 11 percent for the year, again outperforming the broader market.
And yet despite those strong sales figures, SAIC reported its profit only rose 2.6 percent in 2012 to 20.8 billion yuan, marking its slowest growth since the height of the global financial crisis. (English article) The profit was not only extremely weak, but was quite a bit below the average analyst forecast of a 22 billion yuan profit. The shortfall would indicate that competition probably intensified sharply in the last quarter of the year, since analysts would have already known SAIC’s results for the first 3 quarters of the year when they made their full-year forecasts. Thus most or all of the shortfall most likely came in the fourth quarter.
SAIC’s sales grew at a stronger pace of 10 percent for the year, rising to 478.4 billion yuan. But again, that figure also fell short of analyst estimates, indicating SAIC’s sales growth probably weakened significantly in the fourth quarter.
Meantime, Dongfeng also reported relatively weak 2012 financial results, even as its figures beat analyst estimates. Its net income actually fell 13 percent to 9.1 billion yuan, as sales also fell by 5.6 percent to 124 billion yuan. Dongfeng and Guangzhou Auto (HKEx: 2238) both have numerous joint ventures with Japan’s big 3 automakers, Tokota, Nissan and Honda. As a result, both companies were hard hit when Chinese consumers boycotted Japanese brand cars at the height of a territorial dispute between Beijing and Tokyo last fall.
Many of the Japanese automakers reported their China sales fell by 40 percent or more at the height of the crisis, though the numbers have been rebounding steadily since the end of the year. Dongfeng’s latest results appear to show the effects of the boycott are fading more rapidly than many originally believed, which could benefit both Dongfeng and Guangzhou Auto in the first half of the year.
But from a broader perspective, these results seem to reinforce a worrisome trend that is seeing China’s car market move dangerously close to overheating as major players all chase a bigger share and build up new capacity. China overtook the US to become the world’s biggest auto market in 2009, and vehicle sales continue to expand by 10-15 percent each year.
But many of the global car makers are expanding even faster, spending billions of dollars to build new capacity as they look to offset slowing sales in their home markets. Volkswagen became the latest to join that trend earlier this month, when it announced plans to nearly double its China capacity over the next 5 years. It joined a growing number of international brands to announce similar aggressive expansions in China, including Ford (NYSE: F) and Nissan.
These latest results from SAIC look particularly worrisome, especially since they continue a trend of weak growth for the third quarter when profit rose by an anemic 1.4 percent. With no signs that competition will cool anytime soon and all the new production coming on stream, I really don’t see anything good on the horizon for SAIC or any other major car makers in China in the next few years. Many may continue to post double-digit sales gains as they grow with the market and try to boost their share.
But I wouldn’t be at all surprised to see SAIC report a profit decline in the current quarter, and for most of China’s top car makers to see similar profit declines this year. If the trend continues, which looks likely, we could see the word “profit” drop from most companies’ earnings reports completely in the next 2 years. As that happens, we could see most firms dip into the loss column due to aggressive promotions and heavy costs from building new capacity.
Bottom line: SAIC is likely to see its profits start declining this year as China’s car market overheats, and could even slip into the loss column in the next 2 years.
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