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Nikkei Markets

Slowdown bites China's auto industry as inventories pile up

Analysts see more downside for car sales this year after a pullback in 2018

Geely, which earlier this month gave a weaker-than-expected sales forecast for this year, is expected to be among those hurt by high stocks at dealerships.   © Reuters

HONG KONG  (Nikkei Markets)-- Shares of Geely Automobile Holdings and Great Wall Motor slumped to lead a broad decline for Chinese automakers on Tuesday as piling inventory levels and a slowing domestic economy clouded the outlook for demand in the world's largest car market.

Auto sales including passenger and commercial vehicles fell 2.8% to 28 million units last year, the first contraction in more than two decades, as Beijing phased out tax cuts on smaller cars and the Sino-American trade war helped dampen economic growth. While policy makers have signaled an intent to support the industry by subsidizing new energy vehicle purchases, increasing stocks at dealers have many worried.

"We expect another challenging year for the Chinese auto industry in 2019," analysts at Bernstein wrote in a report this week.

Bernstein, which reckons first-time auto insurance give the most accurate view of actual retail sales, expects industry sales to decline 4% this year following what it calculated as a 7.1% contraction in 2018. The industry started 2019 with channel inventory at record high levels, and vehicle prices and margins are likely to remain under pressure amid declining volumes, it added. The brokerage expects tepid retail demand and an early Chinese New Year pose the risk that dealers may continue to focus on reducing their inventory, weighing on fresh sales by automakers.

Geely, which earlier this month gave a weaker-than-expected sales forecast for this year, is expected to be among those hurt by high stocks at dealerships.

Morgan Stanley analysts wrote in a report released on Tuesday that based on their channel checks, the average inventory for the Geely brand was around three months after discounts and around two months for its Lynk & Co brand, forcing dealers to offer discounts directly or indirectly.

The analysts said it is very likely that Geely, whose parent group also owns the Volvo and Proton brands, will report a year-on-year sales decline of as much as 30% in January from a high statistical base. In January 2018, Geely's sales had increased by about 51% to 155,089 units.

Last week, Great Wall Motor had predicted its sales volume will increase 14% to 1.2 million units this year, a forecast that some believe to be too optimistic.

Analysts at BoCom International said the target was "unrealistic" given the lack of new hit models in its portfolio for 2019. They cited their own channel checks as suggesting widening discounts on the company's models and that the guidance raised the prospect of a contraction in margins.

In Tuesday's trading in Hong Kong, shares of Geely tumbled 4.1%, while those of Great Wall Motor gave up 4.4%. Among their industry rivals, Guangzhou Automobile Group shed 3.3%, BAIC Motor retreated 1.3% and BYD lost 1.8%, while the city's benchmark Hang Seng Index slipped 0.2%.

The government, meanwhile, has been attempting to spur purchases of consumer durables as part of broader efforts to shore up the world's second-largest economy.

On Tuesday, top planning agency National Development & Reform Commission announced a series of measures to spur sales of cars and home appliances, while also laying out plans to loosen restrictions on the second-hand auto market. The NDRC left it to local authorities to detail specifics based on conditions in their own jurisdictions.

But some remain skeptical.

"Consumption power in China has not been very good. So I think the sector won't rebound a lot, even with policy help," said Cynthia Tam, a research analyst at CASH Financial Services Group. "I think the impact from favorable policies won't be as strong as a few years ago" as more consumers already own cars now, she added.

-- Benny Kung

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