汇丰银行-亚太地区-信贷策略-亚洲债券市场观察-2019.5-38页.pdf

Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Fixed IncomeAsia CreditBy:HSBC Asia credit research teamMay 2019The VIEWThe auto market is facing increasing challenges and a gloomy outlook globally.We see technology,capital and scale as the three most needed elements for Asia auto companies in this difficult environment.Also insideFor Credit Strategy,we stay with the agility theme and expect wider credit spreads for the rest of 2019.Asia credits seem to be running out of steam following the record returns in 1Q19;meanwhile,the primary market remained active in April with the highest monthly issuance in 2019 so far.Asias Bond Markets 1 Fixed Income Asia Credit May 2019 Technology,capital and scale The outlook for the global auto market is fairly gloomy.Challenges include increasing geopolitical risks,trade issues and soft sales growth.The ripple effect is likely to spread across the supply chain,impacting parts supply and dealers.At the same time,the rapid development of electric vehicles(EV)and governments tougher emission standards are also putting pressure on auto companies and parts makers to invest in technology and new models to meet the standards.Because of these factors,Moodys lowered its outlook on the global auto market to negative from neutral in March this year.We believe technology,capital and diversified operating scale are the three essential elements needed in this difficult environment.Auto companies and parts makers which possess all three will,in our view,be able to overcome current challenges and even grow their market share.Advanced technology and capital strength are required to make the necessary investment in product development.At the same time,companies need extensive operating scales,in terms of production bases,supply networks,customer mix and revenue streams to offset the market down cycle.In this report,we analyse Asian auto companies operational and financial profiles and assess how they are placed in terms of the current environment.Most of our covered Asian companies are in relatively stable positions,and some are partly cushioned by their Asia or China centric operations.We like Geely Auto and Nexteer Auto due to their improving operations,enhanced product portfolio and solid financial positions.However,we believe two companies face near-term difficulties Gajah Tunggal has liquidity concerns and Tata Motors is more exposed to trade issues and Brexit through its key subsidiary,Jaguar Land Rover.In terms of USD bonds,primary issuance has been subdued with only USD400m of supply year-to-date.We expect more supply in the coming months.Potential candidates include China Grand Auto and Tata Motors,which have existing USD bonds maturing soon.We also expect to see new issuers emerge in the next 1-2 years,if not sooner.At current valuations,we think Asian auto USD bonds range from fair to slightly tight,backed by technical support.In our view,trading opportunities will be based more on a tactical and relative value basis.We initiate with a buy trading call on Samvardhana Motherson Auto Systems MSSIN 21 and China Grand Autos CHGRAU Perp-19c,and we change the trading call on Gajah Tunggals GJTLIJ 22 to sell from hold.Asia Autos Geopolitical risks,higher emission standards,rising competition and soft demand all weigh on the global auto market Technology,capital and operating scale are the keys to success Overweight on Geely and Nexteer;Underweight on Gajah Tunggal and Tata Motors;buy MSSIN 21,CHGRAU Perp-19c;sell GJTLIJ 22 Louisa Lam,CFA Analyst The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6586 In this report,Louisa Lam assumes primary credit coverage of Geely Automobile Holdings,Nexteer Automotive Group and Tata Motors,and initiates coverage of China Grand Automotive Services,Samvardhana Motherson Automotive Systems Group,Weichai Power,Hankook Tire and Kia Motors.THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE“PRC”)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Fixed Income Asia Credit May 2019 2 Political risks and trade issues US Treasury Secretary Steven Mnuchin said the US-China trade talks have been“productive”(Bloomberg,2 May).However,this did not ease the markets broader concerns about geopolitical risks and trade issues.On 6 May,US President Donald Trump tweeted that he may increase the tariffs on USD200bn Chinese imports to 25%from 10%on 10 May,and may impose additional tariffs on another USD325bn in goods,per Bloomberg.The trade tension is not only between the US and China,but is also growing in Europe,Mexico,Japan and other countries,and Brexit has added another layer of uncertainty to the global auto sector.Apart from the import/export tariffs,auto manufacturers and parts makers face other challenges such as higher raw material costs,longer cross-border delivery times,softer consumer demand and potential delays in overseas market expansion.Despite this,most of our covered Asian auto companies have large global production networks that allow them to adjust production and logistics management in order to reduce the potential impact of these factors.Among auto makers,we see Tata Motors being more exposed to trade risks and Brexit.This is linked to the companys key subsidiary,Jaguar Land Rover,which has most of its plants in the UK and Europe.Fig.1 to 3 summarise individual companies manufacturing operations.1.Summary of companies production facilities Company Sub-sector in automobile Base country Brief summary of operations Geely Auto (GEELY)Automaker China 98%of its sales are in China;exports(2%)are mainly to emerging markets.Most of its production facilities are in China,including the production for Lynk&Co.It has 9 plants in China and 1 JV plant in Belarus.Kia Motors (KIAMTR)Automaker Korea Most of its manufacturing facilities are based in Korea,but about two thirds of production volumes are for exports.Kia also has 1 plant in the US,1 in Slovakia,3 in China,1 in Mexico and 1 in India.Tata Motors(TTMT)Automaker India,UK Tata Motors is one of the largest car producers in India,with a leading position in commercial vehicles.While its core market is India,its 100%owned subsidiary,Jaguar Land Rover(JLR)has accounted for c80%of total revenue in recent years.JLR has 4 production plants in the UK,3 in Europe,1 in China and 1 in India.Gajah Tunggal (GJTL)Tire maker Indonesia Gajah Tunggals manufacturing operations are based in Indonesia.Its exports accounted for 37%of total sales in 2018,including the off-take agreement with Michelin.Hankook Tire (HANKTI)Tire maker Korea Hankook Tire has 8 plants 3 in Korea,2 in China,1 in Hungary,1 in the US and 1 in Indonesia.The US plant has annual capacity of 5.5m tires which are mostly sold in North America.Nexteer Automotive(NEXTHK)Steering and parts maker US Nexteer,headquartered in Michigan,US,has 25 plants globally,including the US,Mexico,Brazil,France,Germany,Poland,Italy,China,Korea,Japan,Australia,Indonesia and India.New plants in China,India and Morocco are under construction.General Motors is the companys largest customer,accounting for 42%of its total sales in 2018 and 34%of its order backlog.Ford and FCA make up another 18%and 14%of the backlog,respectively.Samvardhana Motherson Automotive Systems(SMRP)Vision system,module and polymer marker The Netherlands SMRP is a member and an overseas arm of Samvardhana Motherson Holding in India.It has 68 manufacturing facilities across 24 countries.Weichai Power(WEICHA)Diesel engine and parts maker China,Germany Weichai Power is one of the largest suppliers of diesel engines in China.Weichai exports selected products to emerging markets in Asia Pacific,Africa,South Asia.It has also expanded overseas through its subsidiary,Germany-based KION,which has manufacturing bases in France,India and Thailand.China Grand Automotive Services(CHIGRA)Auto dealer China China Grand Auto is the largest car dealer in China,providing sales,auto maintenance,financing and agency services.Source:Company data 3 Fixed Income Asia Credit May 2019 2.Regional sales exposure breakdown *Revenue breakdown;*by unit sales of vehicles;*based on Weichai Power and KION disclosure Data as of 2018,except for MSSIN(for 9M FY19)and TTMT(for FY18)Source:Company data,HSBC estimates 3.Heatmap of companys manufacturing coverage Source:Company data,HSBC Auto parts makers have a worldwide manufacturing facilities that could potentially mitigate part of geo-political risks.The facilities are close to auto makers for close co-working on product development and logistics.However,the parts manufacturers may still face a ripple effect from trade disputes that could impact their customers,the car manufacturers.For example,Nexteer Automotive and Samvardhana Motherson Automotive Systems(SMRP)have high customer concentration risk.Nexteers top three customers accounted for 79%of total revenue in 2018.General Motors,the top client,accounted for 42%of sales.While Nexteer is expanding its customer base,GM remains key to the business,accounting for 34%of Nexteers backlog as of March 2019,followed by Ford(18%)and FCA(14%).SMRP generated 40%of its 9M FY19 revenue from Volkswagen Group,through brands like Audi,VW and Seat.In recent years,it has expanded its customer base to Daimler and BMW.0%20%40%60%80%100%GEELY*KIAMTR*TTMT*GJTL*HANKTI*NEXTHK*SMRP*WEICHA*CHGRAU*%of sales exposuresUSEuropeChinaAsia ex ChinaOthersAuto makersAuto parts makersDealerGEELYKIAMTRTTMTGJTLHANKTINEXTHKSMRPWEICHAUSEuropeChinaAsia ex ChinaOthersColor indexHighest intensityLowest intensityNot availableMedium intensity 4.Nexteers backlog breakdown by auto brands 5.SMRPs revenue breakdown by auto brands Data as of March 2019 Source:Company data Data as of 9M FY19 Source:Company data GM34%Ford18%FCA13%BMW12%PSA8%RNM4%SGMR2%Others9%Audi20%Daimler15%Volkswagen14%Seat7%BMW7%Porsche6%Renault/Nissan5%Ford4%Hyundai4%GM3%PSA2%Kia2%JLR2%Others9%Fixed Income Asia Credit May 2019 4 Stringent emission standards and EVs demand heavy investment Governments in major auto markets have established tougher fuel economy or greenhouse gas emission standards for passenger vehicles and light commercial vehicles/light trucks(see Fig.6).The initiatives have pushed auto makers to develop more advanced and fuel efficient auto technologies in order to stay compliant.This has led to a sharp rise in production of new energy and electrified vehicles(NEEV),changing the industry landscape.Auto companies and parts makers have had invested and have to continuously invest heavily in this area.The rapid development of the NEEV market has also attracted newcomers such as Byton,Tesla,Leap,Karma,NIO,Xpeng,WM Motor and many more.China is the biggest EV market and there are now 486 EV manufacturers registered in China(Bloomberg,15 April),more than triple the number two years ago.As EVs gain global market share,the competition is increasing quickly.Consumers now have higher expectations in terms of quality and performance(e.g.longer range per charge and faster charging).At the same time,governments are reducing the level of subsidies for lower-end NEEVs(China will wind down subsidies for EVs and plug-in hybrids by end 2020).These push auto makers to put more emphasis on smart functions,better design and autonomous driving functions.Likewise to auto parts makers.For instance,domestic car manufacturer Geely wants NEEVs to represent 90%of its sales by 2020.Nexteer has 21%of order backlog related to autonomous driving functions and 9%is linked to EV applications,as of March 2019.The market is starting to consolidate as small manufacturers with dated technology struggle to compete.Companies with advanced technology and the capital to invest are better positioned to succeed in this new industry environment.6.Governments are introducing more stringent emission standards *Note that Japan has already met its 2020 statutory target as of 2013 Source:The International Council on Clean Transportation(ICCT)4060801001201401601802002202000200520102015202020252030CO2 emission value(g/km),normalized to NEDCCanada ChinaEUIndiaJapanS.KoreaUSAHistorical performanceEnactedProposed 5 Fixed Income Asia Credit May 2019 M&A still a popular option Mergers and acquisitions is a common strategy to gain technology,products,manufacturing capacity and customers.This is unlikely to change,in our view.Among the names we cover,Weichai Power and SMRP have been particularly active on the M&A front.Truck maker Weichai expanded into the overseas market and forklift manufacturing by acquiring a 45%stake in KION AG.It recently invested in and formed strategic cooperation agreements with Ceres Power and Ballard in order to gain access to the development of new energy fuel cells.SMRP acquired Schere&Trier in 2015,Kobek Siebdruck GmbH&Co in 2017,and Reydel Automotive Group in 2018.Meanwhile,Hankook Tire is seeking M&A opportunities and strategic alliances that will extend its distribution globally.China is still a key market,especially for EVs China has a lower rate of vehicle penetration than the US and Europe.This made it a market that is full of growth opportunities and a magnet for global auto manufacturers in the past years.Although we expect Chinas auto market to have a slower growth in coming years(see Fig.7),it should remain a key auto market,especially in the NEEV category.Emerging markets would be the next growth driver,but their contributions towards global auto sales growth should be comparatively small.For China,despite soft sales in 2H18,the country recorded over 28 million unit sales of light vehicles in 2018,versus 16 million in Western Europe and 17 million in the US,as per ACEA1,CAAM2 and LMC3.7.EM is the next growth driver,but small;China to have moderate growth Source:IHS Markit,HSBC estimates For China,the growth potential is highly linked to the NEEV category,where CAAM expects sales to reach 1.6 million units in 2019,up 28%from 2018.In 1Q19,NEEV unit sales totalled 299,000,up 110%y-o-y.Full EV sales were up 121%y-o-y in the same quarter to 227,000 units(see Fig.8).Separately,the Chinese government recently released a series of stimulus policies to promote vehicle sales,including:1)encouraging the exchange of vehicles with older emission standards for new vehicles,and the purchase of new energy vehicles;2)shifting new energy vehicle subsidies to models with more advanced technologies;3)providing subsidies in rural areas for passenger and light vehicle replacements;and 4)promoting second-hand vehicle sales._ 1 ACEA:European Automobile Manufactures Association 2 CAAM:China Association of Automobile Manufacturers 3 LMC:LMC Automotive 5.2%5.1%2.5%1.4%0.5%-1.9%-3.2%-1.5%-1.4%9.6%6.1%13.6%1.3%-1.8%1.0%2.1%3.3%3.2%-3.8%-8.0%-1.7%4.9%3.2%4.6%7.2%6.6%6.6%-10%-5%0%5%10%15%201420152016201720182019202020212022Growth rate of vehicle salesDeveloped marketsGreater ChinaEmerging