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Monthly Commentary on Key Themes – September 2024
China Electric Vehicle and Battery
Industry Update
- Strong August EV Sales; NEV penetration exceeded 50%: According to CPCA estimate, August passenger NEV wholesale volume reached 1.05mn, +32% YoY.1 By individual brands, BYD reported August NEV sales of 373k units, +36% YoY, with PHEV continuing to record strong growth. Overseas sales grew by 5% MoM to 31.4k. 2 Li Auto delivered 48k units in August, +38% YoY. Nio (+4% YoY) and Xpeng (+3% YoY) recorded weaker sales momentum in August. Xiaomi SU7 delivery exceeded 10k units in August, marking the third consecutive months over 10k deliveries after its launches in March. (for reference only. Based on insurance registration, new energy vehicle (NEV) penetration was 52% in the last week of August. 3
- Tariff: European Commission announced a new draft decision on final countervailing duties on BEV imports from China, which are marginally lower than those disclosed in early July. Notably, tariff on China-made Tesla would be cut to 9% from previously planned 20.8% (on top of the 10% existing tariff). In addition, Canada says it will impose a 100% tariff on imports of China-made EVs.4
- Auto trade-in program upgraded: The trade-in stimulus has been doubled to Rmb20k (from Rmb10k) per NEV, and Rmb15k (from Rmb7k) per eligible ICEV, 5 following central government’s indication that long-term government bonds could be used to fund consumer goods trade-in.6
- Battery material costs further declined: China’s spot lithium carbonate price declined by 8% MoM to around RMB 81 k/t at early August. 7 Battery materials prices have decreased by over 80% from its peak in 2022, supporting the continued cost optimization for battery makers and EV manufacturers.
Stock Comments
BYD’s stock price was up 1% in August. BYD reported in-line 2Q24 and 1H24 results on 28 August. 24Q2 net profit came in at Rmb9.1bn, up 98% q/q and 33% y/y with 63% q/q and 45% y/y volume growth. 8 Management believed 4mn units of sales target is achievable this year, and looked for 5mn unit target in 2025, with upside coming from overseas and high-end sales. 9 BYD launched the Song L DM-i and Song Plus DM-i in July, followed by the launch of the new Seal EV and Seal 07 DM-i in early August, adopting LiDAR for the first time
Li Auto’s stock price was down 3% in August. Li Auto reported 2Q24 results on 28 August, while overall results and guidance was solid and in-line with expectation, its share price dropped over 15% overnight, which should be attributable to non-fundamental reasons and fragile investor sentiments. 10 Outlook for Li Auto remains positive due to solid 3Q guidance, improving market pricing environment, and undemanding valuations.
Preview
We remain positive on the long term growth potential for EV and battery value chain, along with the upward EV penetration trajectory. Domestic old car replacement demand, as stimulated by scaled-up auto trade-in program, together with export sales, should support China’s resilient auto momentum and benefit leading domestic brands. We expect the China auto market to stay competitive in 2024 with strong new product line-up and technology innovations from leading EV and battery brands, and new entrants such as Xiaomi. Geopolitical tensions remain the key risks, but China EV models will still remain competitive under new tariff landscape thanks to its cost advantages. Localized production will be the longer term solution for Chinese brands.
China Consumer Brand
Industry Update
Following NDRC’s arrangement of Rmb300bn treasury bonds to support equipment upgrade and consumer trade-in in July, several local governments have started to unveil their trade-in details for consumer goods throughout the month. On August 10, Hubei province became the first region to kick off the trade-in program. More regions have followed to disclose their plans, namely Qinghai, Jilin, Ningxia, Hainan, Chongqing, Hunan, Guangdong, Beijing and Shanghai (which announced over Rmb4bn subsidies). We expect policy impact to become more apparent after September with local governments progressively rolling out their programs.
In July, China retail sales growth stood at +2.7% YoY (vs +2.0% YoY in June), largely in line with BBG consensus of 2.6% YoY. By region, rural areas (+4.6% YoY) continued to outperform urban areas (+2.4% YoY). The performance varies across categories. Sports and Entertainment Equipment (+10.7% YoY) and Soft Drinks (+6.1% YoY) experienced robust growth acceleration, likely fueled by the Olympic Games. Within staples, Food showed decent growth of 9.9% YoY. However, more discretionary goods faced challenges amid macro weakness. Jewellery experienced a widened YoY decline of -10% YoY despite a low base. Apparel, Shoes & Textile, and Electronics & Appliances remained in negative growth territory. Cosmetics continued to lag post the 618 online promotion, although YoY decline narrowed to 2.4% YoY vs. Jun.
China retail sales YoY growth (%)
Source: NBS, Mirae Asset, data as of July 2024
Stock Comments
- Trip.com Group (TCOM US): Trip.com achieved a 9% return in August. 2Q24 revenue grew by 14% YoY to Rmb12.8bn, in line with consensus. Domestic room nights experienced robust double digits growth in 2Q and throughout the summer. The YoY decline of Hotel ADR stabilized in 3Q driven by higher leisure travel mix. Outbound air and hotel volume rebounded to 100% of 2019 levels in 2Q and is at 110-120% during the summer holiday. Non-GAAP OP reached Rmb4.2bn, with an OPM of 33.1%, beating consensus by 1.7ppt, mainly from opex savings. Management expects non-GAAP OPM continue to improve modestly going forward through enhanced efficiency and operating leverage.
- Anta Sports (2020 HK): Anta recorded gain of 8% in August on earnings beat and stock buyback initiatives. 1H24 sales grew by 14% YoY, with ANTA brand, FILA, and Descente/Kolon up 13%, 7% and 42%, respectively. GPM expanded 0.8ppt to 64.1% driven by GPM improvement across all core brands thanks to reduced discounts. NP (excl. Amer’s impact) rose by 17% YoY. Although sales in June and July were weaker, August witnessed an improvement. In addition to a 50% dividend payout ratio in 1H24, Anta announced a share buyback plan with up to HK$10bn in next 18 months, c.5% of its market cap on Aug 27 (announcement day) closing.
- Haier Smart Home (600690 CH): 2Q24 results is a mixed bag. Total revenue/net profit in 1H24 grew by 3%/16% YoY to Rmb135,623/10,420mn, implying flattish/13% YoY in 2Q24. By region, domestic/overseas revenue increased by 2.3/3.7% YoY in 1H24, indicating a largely similar YoY growth in overseas market but LSD-MSD% YoY decline in domestic market in 2Q24. GPM/OPM expanded by 0.2/1.1ppt YoY to 32.3/9.8% in 2Q, helped by improved mix, enhanced supply chain efficiency and digitalization. In 2H24, execution of consumer goods trade-in policy is in focus for domestic market.
Preview
China consumer is still facing uncertainties in the short term. As a late play of recovery story, the rebound of consumer sector still awaits more macroeconomic supportive signals. However, long term trends such as the ascendance of local brands and premiumization remain intact in our view. Quality leading players are better positioned to navigate through uncertain macro conditions and provide stability. While the recent policy supports have injected some positivity into the sector, their effects are yet to be apparent. For many consumer companies, 3Q is the peak season and sales performance during this period is vital for achieving their annual targets. We suggest to closely watch the policy impact roll out and 3Q performance of consumer companies.
Electric Vehicle and Battery Active
Industry Update
- 7M24 global EV sales ended at 8 million units, in which non-China markets accounts for nearly 3 million units. 7M24 global EV penetration arrived at 19%, +4.7ppt YoY. In July 2024, global EV penetration hit 20%, up by 4.1ppt YoY, largely driven by China EV sales surge to 53%, up by 18.1ppt YoY. Chinese brands’ EV sales dominated more than half of global market share. In non-China markets, Chinese EV makers are continuously gaining market share in ASEAN, Oceania, the Middle East regions, Central and Eastern Europe, and Central and South America, while a little lost market share in Western Europe and North America this year.
7M24 global EV battery installations reached 434GWh, +22%yoy. CATL led with 163GWh, +30%yoy, expanding its market share to 38%, +2ppt YoY. BYD and LG Energy Solution are No.2 and No.3 battery producers, with 70GWh and 54GWh sales, and market share stable at 16% and declining to 12%, respectively. Lithium carbonate prices have come down to below Rmb80,000 per ton, which is much close to most lithium producers’ production cost.
Renesas’ 3Q sales guidance was weak, which showed the slowdown of auto semiconductor and initiated people’s concerns on valuation correction of AI-related stocks, coupled with great volatility of the US tech sector recently. Demand for automotive chips may weaken because of slower-than-expected inventory adjustment at customers in the near term.
Auto exports comparison between Chinese and Japanese leading automakers
Source: Mirae Asset, Companies data, June 2024
Stock Comments
- Fuyao Glass Industry Group Co., Ltd. Class H: The company delivered solid Q2 results recently. As the global leading auto glass producer, company is gaining market share globally by product mix upgrading and cost cutting.
- BYD Company Limited Class H: The company delivered strong Q2 results with double-digits growth in top line and bottom line. BYD is gaining market share in and outside China, with price-competitive xEV models. They also guided up their auto sales to 5 million units in 2025.
- EVE Energy Co. Ltd. Class A: The company’ 2Q results is a miss on margins due to battery oversupply and price war, though they are the few players who are still making money. Company expects margin improvement going forward, driven by product mix upgrading and utilization improvement.
Preview
Global electric vehicle sales remain in the uptrend despite price war in the near term due to weak global macro. We are positive on global EV penetration which is a visible decade growth story in most of the major economies such as Europe, China, ASEAN, South America and the Middle East regions. Some of Chinese leading EV makers have shown the early signs of competitiveness in global competition and continuously gained market share from legacy automakers in China and outside China. As one of the key beneficiaries, the worst time is behind for battery sector, though it takes time for bottom-out. We expect more M&As and capacities exit in battery and battery materials industries. Auto semiconductor industry would be another key beneficiary in spite of slowdown in the near term. Leading companies’ technology competitiveness remain solid in the foreseeable future. Yet, we have also seen some early signals of new entrants’ catch-up.
China Robotics and AI
Industry Update
- China factory automation demand remained sluggish and pricing pressure persists. The processing industry saw more resilient demand than the OEM market. Leading companies are able to maintain their top line relatively better than industry average by gaining market share but margins declined due to prices cut in 2Q24 results. Similarly, industrial robotics suffered from weak demand and fierce price competition. The top Chinese players also witnessed revenue growth under pressure or sharp margin contraction. Feedback from the industry experts showed no improvement in demand in July and August and the situation will likely persist in 2H24.
China automation players’ 1H24 GPM comparison
Source: Macquarie, September 2024
Stock Comments
- NARI Technology Co., Ltd. Class A: The company delivered stable strong Q2 results recently. They are also one of the key beneficiaries from UHV power grid capex in China in 2023-2026E.
- SUPCON Technology Co., Ltd. Class A: The company delivered a strong Q2 result. During the period, Supcon expanded into some new segments such as hydrogen production from wind and solar power, smart laboratories, smart coal mines and industrial parks, to seize more growth opportunities.
- Zhongji Innolight Co., Ltd. Class A: The company delivered solid Q2 results actually, with revenue up by 175%yoy and net profits up by 271%yoy. Management reiterated a strong demand outlook for 2H24, as they will continue to expand capacity to meet the downstream demand. The stock may be negatively impacted by the US tech correction.
Preview
We remain positive on the long-term trend of China industrial automation market growth. Domestic manufacturers continue gaining market share on the back of customized products across emerging industries, fast delivery and advanced post-sale services, while foreign brands keep losing market share in China. However, in the near term, the drag from renewables and electric vehicles will last for the whole year of 2024, which cannot be fully offset by the demand growth in traditional industries. Additionally, it takes time to see the positive impact on demand pickup from the current stimulus policies on large-scale equipment replacement.
China Clean Energy
Industry Update
- China solar installation ended at 123.5GW as of July 2024, +27%yoy, with five consecutive months YoY growth. Domestic large-scale solar farm projects and solar module exporting to Europe are accelerating despite heat wave, driven by competitive solar panel cost and energy storage cost. China wind installation ended at 29.9GW as of July 2024, +14%yoy, in which July installation was 4.1GW, +23%yoy. We witnessed offshore wind projects tendering accelerating recently. China State Grid also significantly increased the investment in power grids to Rmb600bn in 2024, to better utilize the power generation by renewables.
Renewables-related manufacturing players remain suffering from mismatch between supply and demand in the near term. Most of the major players booked poor 1H24 earnings recently. Supply chain prices are still sluggish due to oversupply. Power grid related companies, on the other way around, have better performance due to strong power grid capex.
Stock Comments
- Sungrow Power Supply Co., Ltd. Class A: The company delivered strong Q2 results with energy storage sales much better than feared. Sungrow is a global leader in solar inverter and ESS integration business with great exposure to exporting.
- Ningbo Sanxing Medical Electric Co., Ltd. Class A: The company is a leading power-related equipment manufacturer in China, who benefits from power grid capex accelerating. Similarly, company delivered a strong Q2 result.
- China Three Gorges Renewables (Group) Co., Ltd. Class A: Solar power prices came down due to oversupply in a short period of time. Company still have a strong pipeline of solar installation in the near future which may negatively impact on profitability.
Preview
We remain constructive on the global clean energy growth and the trend of energy transition. However, we also must admit the near-term broad mismatch between supply and demand along solar/wind supply chains, which led to poor earnings for a couple of months or maybe even longer. It takes more time than expected for the small players to exit and demand to catch up, especially when China solar value chain are faced with geopolitical pushback from the United States. On the bright side, we have seen strong demand from some emerging markets like ASEAN, Middle East regions, Africa and South America, but it still needs more time.
AI and Innovative Technology
Industry Update
- Nvidia see no change in demand outlook for 2025 despite delay in Blackwell
FY3Q (October) revenue guidance of $32.5bn (+8% qoq, +79% yoy) at the mid-point came in 2% above BBG consensus, but at the low end of buy side expectation at 32-36bn. Non-GAAP gross margin (excl. SBC) was guided to 75%, non-GAAP opex to $3bn (+12% qoq), other income and expenses to ~$350mn, and non-GAAP tax rate to 17%. This guidance implies a FY3Q non-GAAP EPS (excl. SBC) of ~$0.73 slightly ahead of BBG.
Blackwell: Production ramp is scheduled to begin in FY4Q (start to ship) and continue into FY26. Change of Blackwell mask is completed, with no functional change. Management expect several billion dollars of Blackwell revenue in 4Q, demand continue to be well above supply. Nvidia expect next gen AI model requires 10-20x more compute to train with significantly more data, which translates to significant growth in data center business next year. (Company data, Mirae )
Stock Comments
- Tencent + 2.38%
The company delivered solid 2Q24 results. Domestic games revenue was Rmb34.6bn (+9% YoY vs -2% YoY in 1Q); international game revenue was Rmb13.9bn (+9% YoY vs +3% YoY in 1Q). Non-IFRS NP Rmb57.3bn (+53% YoY), NPM 35.6% (+11.3ppt) was a solid beat vs Rmb47-48bn consensus driven by share of profits from JV and Associates.
China Cloud Computing
Industry Update
- China software industry growth in July was weak at 9.4% YoY (vs. June at +10.9% YoY), further deteriorated from June, leading 7M24 revenues +11.2% YoY (vs. 7M23 at 13.5% YoY), due to weaker-than-expected client budgeting, and delay of certain large-scale SOE projects, especially slower software products and security software growth, while the profitability improvement continued, with net margin up to 12.7% in July (vs. 11.8% in 7M23) on slower headcount expansion and cost control.
- For telecom industry, July industry revenue growth rebounded to 3.3% YoY (vs -0.2% YoY in Jun 24) helped by uptick in traditional business. Mobile decline narrowed to -1.3% YoY vs -4.2% YoY in Jun 24 and fixed service improved to 4.6% YoY vs 2.7% YoY in June 24. New business growth moderated slightly to 8.1% YoY.
Software companies registered in China: aggregate revenues and YoY
Source: MIIT, as of September 2024
Software companies registered in China: aggregate NI YoY growth and net margin
Source: MIIT, as of September 2024
Stock Comments
- Alibaba Group Holding Limited Sponsored ADR: Alibaba’s share price performance remained solid for this month, mostly driven by market anticipation of a potential inclusion in South Bound Connect. Companies' eligibility for Stock Connect would be confirmed as of two trading days before the first Friday of September. In this year's case that would be September 4 and September 6. If confirmed eligible, the Southbound inclusion should be completed after the close on Friday (September 6) and trading would start on the first trading day thereafter. if included, there could be potentially US$12bn inflow which is equivalent to ~6% of market cap. (according to Morgan Stanley Research).
- Tencent Holdings Ltd.: Stock price was relatively resilient vs. other index names attributable to Tencent’s strong fundamentals. Online game rev. growth accelerated for 1H24 in both domestic and overseas market driven by release of DnF Mobile and revived popularity of existing games.
- iflytek Co., Ltd. Class A: The Company posted 1H24 preliminary results with both sales and bottom line missing consensus. Worsened profitability in 1H24 was mainly due to LLM investments, increasing bad debt provisions and less other income. Spark LLM v4.0 was launched end June-24, with eight areas said to beat GPT-4 Turbo, according to the management.
- Netease Inc Sponsored ADR: 2Q results were a slight miss on revenue/earnings. Cash revenue and deferred revenue -13% QoQ respectively (ex-Youdao and Music basis) due to adjustments to FWJ PC on May 21 and Eggy Party in April. Market remained concerned on 3Q as the impact of FWJ PC will only see full-quarter impact.
Preview:
China software industry’s growth remained subdued with no meaningful inflection seen in growth, due to the late cycle nature. Companies have been adapting cost control measures to reduce operating deleverage. AI LLMs continue to iterate with new feature/upgrades but monetization progress remains slow.
India
Market Update
- India's market saw a drawdown of 5% (MSCI India in USD terms) during early August amid the global sell-off in July-August, but has recovered 6% from the bottom thanks to domestic-driven nature of economy as well as the market. Volatility picked up during the drawdown and defensive sectors like IT, Telco, and Pharma outperformed during the month. GDP growth moderated to 6.7% in 2QCY24 from 7.8% in 1QCY24 but was largely in-line with expectations. Private consumption grew a seven-quarter high of 7.4%yoy and gross fixed capital formation also further improved to 7.5%yoy growth during the quarter. India economy is showing more broad-based growth momentum with improving private consumption and robust capex.
- Within consumption, we have witnessed mass consumption picking up in 1QFY25 with rural outpacing urban demand. The acceleration in growth across FMCG categories was largely driven by a pickup in rural demand. In addition, we have seen the strongest volume growth in high-penetration categories such as detergents, toothpaste, and biscuits. Within investment, we are seeing private capex showing green shoots with increasing order books and improving private sector investment intentions which would further support capex growth driven by government and household. Government expenditure softened in 2QCY24 due to general elections but we expect this to also improve in coming quarters.
Trend in GDP Components, Indexed 4Q19=100. SA
Source: CEIC, Morgan Stanley Research. August 2024
Stock Comments
- Bharti Airtel (BHARTI IN) was the major contributor in August thanks to its strong growth outlook post tariff hike. The company reported steady 1QFY25 results with revenues up 3%yoy and EBITDA up 1%yoy. India revenues grew 10%yoy while international revenues were down 15%yoy. Strong net adds of subscribers (2.3mn) and ARPU of Rs 211 (+5%yoy) as well as strong additions in postpaid (+0.8mn) and data subs (6.3mn) supported strong growth in India. Moderating GAPEX with rising EBITDA will lead to strong FCF generation, and enable the company to deleverage its balance sheet and support shareholder returns in the next few years.
- Maruti Suzuki India (MSIL IN) was the major detractor in August due to concerns on subdued demand amid rising discounts and channel inventory. The company shared that they also raised discounts in June quarter in order to support end market demand to 3.5% of ASP. While the company expects SUV mix in the industry continue to move higher, they haven’t seen a small car demand recovery yet. First time buyers are still not coming back either, with this cohort contributing around 40% of the market. The market is still waiting to see whether overall private consumption improvement may also translate into improvement in demand for small car segment.
Preview
- This confluence of strong GDP growth, moderate inflation, and recovery in consumption suggests a buoyant outlook for the Indian equity markets, and we believe these conditions will be conducive to capitalizing on potential growth opportunities during this fiscal year in India. We remain constructive on India market.
September 26, 2024
1 CPCA, August 2024
2 Morgan Stanley, September 2024
3 Goldman Sachs, August 2024
4 BBC, August 2024
5 NDRC, July 2024
6 Morgan Stanley, July 2024
7 UBS, August 2024
8 UBS, August 2024
9 Morgan Stanley, September 2024
10 UBS, August 2024
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Authors: Ahn Sol, Chan Tsz Wang Edward, (Licensed by the Securities and Futures Commission for Types 4 and 9 regulated activities under the Securities and Futures Ordinance). And Zijun Liu (Licensed by the Securities and Futures Commission for Types 1 and 4 regulated activities under the Securities and Futures Ordinance) The authors and their associate(s) do not hold the securities/fund mentioned in the article.