China Autos & Shared Mobility_ Meaningful industry consolidation in sight

Summary of Conference Call Notes on China Autos & Shared Mobility Industry Overview - The China auto industry has shown signs of consolidation since 2023, but remains highly segmented with intense competition [1] - A restructuring plan for central state-owned OEMs is anticipated to facilitate meaningful industry consolidation [1] Company-Specific Developments - Changan announced on February 9, 2025, that its ParentCo is planning a restructuring with other central SOEs, potentially altering controlling shareholders while maintaining ultimate ownership under the State-owned Assets Supervision and Administration Commission [2] - Dongfeng has made a similar announcement, suggesting a potential merger between their ParentCos or inclusion of other central SOEs [2] Implications of Restructuring - If the restructuring occurs, it could significantly impact the long-term dynamics of China's auto industry, given the annual vehicle sales involved: 2.7 million units for Changan and 2.5 million units for Dongfeng in 2024 [3] - Short-term impacts on daily operations are expected to be limited, indicating a gradual restructuring process starting at the ParentCo level, with business-level integration taking longer [3] - The restructuring is expected to lead to more disciplined investment by the involved central SOEs, better resource allocation towards competitive brands, and accelerated industry consolidation [3] Company Performance Insights - Changan is favored among SOEs for its growth potential and strong position in the smart EV segment [4] - Dongfeng is currently facing challenges with pressured joint venture sales and profitability erosion from local brands, but the restructuring could enhance its intrinsic value through centralized resource allocation and improved asset utilization efficiency [4] - Despite the potential benefits, Dongfeng may incur near-term restructuring costs due to inferior capacity utilization projected for 2024 [4] Market Outlook and Risks - The overall industry view remains in-line, with expectations of better-than-expected sales from both domestic and overseas markets, aided by an expedited NEV transition [6] - Risks include weaker-than-expected NEV sales amid competition, demand slowdowns, and potential profit volatility due to shrinking ICEV demand [12] Valuation Methodology - Changan's valuation is based on a DCF model with a WACC of 11.6% and a terminal growth rate of 2% [8] - Dongfeng's valuation also follows a DCF model, with a WACC of 10.8% and a terminal growth rate of 1% [9] Conclusion - The restructuring of central SOEs in the Chinese auto industry represents a significant shift that could enhance competitive dynamics and operational efficiencies in the long term, despite short-term challenges and risks associated with market competition and demand fluctuations [3][4][12]