Chinese passenger cars have downward pressure

I. There is room for decline in the future net profit margin of Chinese passenger vehicle companies

China's passenger vehicle companies, especially joint venture brands, have a potential for a decline in their net profit margin in the future. The current profit rate of China's mainstream joint ventures is between 5% and 10%, which is comparable to that of foreign counterparts. The profitability of self-owned brands is more differentiated. However, judging from the historical experience in the development of the profit margin of foreign passenger vehicles, the average annual profit rate of major manufacturers in the United States and Europe has been about 2% in the past 30 years, and the average annual profit rate of major manufacturers in South Korea has been about 3% in the past two decades. In the ten years, the average annual profit rate of major manufacturers is about 3%; the annual net profit rate of China's current joint-venture brand is about 7%, and that of self-owned brands is more than 3% per year, which exceeds the historical average of foreign passenger car manufacturers. We expect there will be room for decline in the profitability level of passenger vehicles in the future, and the influencing factors will mainly come from the increase in gross profit rate, increase in R&D expenses, and increase in manpower cost caused by capacity utilization and economies of scale.

Second, the future gross profit margin of the joint venture manufacturers will decline

Comparing the gross margin level of domestic and foreign mature manufacturers, the current level of gross margin of China's joint venture manufacturers is approximately 22%, which is similar to that of Japan, South Korea, and the United States. It is slightly higher than that of European passenger vehicle manufacturers; while China's own brands currently have balanced gross margins. The level is about 16%, which is similar to that of European passenger car manufacturers, which is lower than the historical average level of Japanese, Korean and American manufacturers. The main factors affecting the future changes in the gross profit rate of China's auto companies are the following factors: scale effect, fluctuations in capacity utilization, and increase in labor costs.

First, the sales volume of passenger cars in China reached 14.47 million units in 2011. Subject to the pressure of road resources, it is unlikely that the scale of production and sales of passenger cars will increase significantly. Therefore, the effect of economies of scale on the future gross profit margin of manufacturers will gradually weaken.

Secondly, the current labor cost of the automotive industry accounts for approximately 5% to 10% of the total production cost. Considering the current low labor cost in China, we assume that the future labor cost will have 20% room for improvement. This will correspond to the decline in the gross profit margin of joint venture and independent brand manufacturers. About 0.6 percentage points.

From the view of capacity utilization rate, the utilization rate of self-owned brand capacity is currently lower than 60%, which is already lower than the historical average level of international automobile manufacturers. In 2011, the utilization rate of joint venture manufacturers in China is still between 100% and 105%. According to the historical average of foreign automakers, we believe that there is still room for 20% decline in capacity utilization rate of joint venture brands. From the perspective of the relationship between pre-tax profitability and capacity utilization of Chinese companies, this means that the gross profit margin of joint venture brands is still 2%. Falling space. Based on the above analysis, we believe that the gross profit margin of the joint venture companies still has room to fall by 2.6 percentage points, while the margin for the decline of own brand gross margin is about 0.5 percentage points.

The increase in R&D expenses squeezes the profitability of the joint venture. From the perspective of overseas development experience, R&D expenditures of passenger vehicles manufacturers in the United States, Japan, and Europe accounted for about 4% of the total revenue. The models and technologies of Chinese joint ventures are derived from the introduction of foreign parent companies, and their R&D investment is relatively small. In recent years, the state has implemented tax deductions and exemptions for high-tech companies, one of which is that research and development expenses account for 3% of revenue. We expect that the investment in R&D expenses of joint venture manufacturers will gradually approach 3% in the future, which means that there is at least 2% improvement in the R&D expenses of joint venture companies.

The level of net profit margin of the joint venture manufacturers after tax has a space for decline of 3.5 percentage points, and there is little room for the decline in the profitability of independent brands. Considering the effects of economies of scale, capacity utilization, and manpower costs on the gross profit margin and R&D costs, we estimate that there will be a 3.5% drop in the net profit margin of joint-venture manufacturers in the future, while the profitability of self-owned brand after-tax will fall. Not much, about 0.5%.

Third, the joint venture capacity utilization and ROE have room for decline, but will still be higher than 24%

China's passenger car joint venture ROE has downward pressure, but our calculation shows that the bottom is about 24%. From the three factors that affect ROE:

The decline in capacity utilization rate, rising labor costs, and the drop in net profit margin brought about by rising R&D expenses will be the main driving force for the decline in ROE of joint ventures. We expect the net profit margin of joint venture manufacturers to have a 3.5 percentage point decline, corresponding to the bottom tax. After the net profit rate of about 4.5% to 5%.

Due to the low proportion of intangible assets of fixed assets in China’s joint venture companies and the “asset-light asset characteristics” of the company’s asset structure, the total asset turnover rate of China’s joint venture manufacturers is higher than the historical average of international passenger car manufacturers (US 84%, Europe 95). %, Japan, 95%, Korea, 107%). In 2011, the average total asset turnover rate of China's joint venture manufacturers was approximately 2.34. Looking ahead, we expect the total asset turnover rate of joint venture manufacturers to decline as capacity utilization declines, but still It will remain around 1.9.

Judging from the capital structure, China's joint venture companies are similar to Japanese and South Korean companies in terms of low utilization of liabilities and lower corporate equity multipliers. In 2011, the average equity multiplier of China's joint venture manufacturers was approximately 2.88, which is lower than the history of international passenger car manufacturers. The average level (United States 13.46, Europe 5.2, South Korea 4.6, Japan 3.3). On the other hand, the current low equity multiplier provides room for the company's future operations: that is, firms can adjust their capital structure and adjust their equity coefficients to ensure a higher level of ROE when net profit margins and ROE decline. In the future, ROE, a joint venture of passenger vehicles in China, will experience downward pressure, but it will remain at more than 24%.