The performance of China's auto and its component stocks lags behind that of the market in 2006. We believe the main reason is that most car manufacturers' profit growth rate is lower than expected because they are in a highly competitive environment and have high market value. Frequent price wars, weak pricing power from highly fragmented markets, high cost of new model launches, few signs of industry consolidation, and high cost of maintaining brand loyalty make car makers more committed to new models To drive sales growth. However, this makes it difficult to improve the profitability of the product. The predictability of profit growth is still poor, but car manufacturers must be able to share the high sales growth of the entire car market. Commercial vehicle manufacturers, especially big passengers, medium passengers and heavy truck manufacturers, are in a relatively good position because of the more orderly supply and demand in this area and the continuous growth of exports. We continue to be optimistic about leading commercial vehicle manufacturers and are not optimistic about the outlook of car manufacturers.
Major Hotspots/Problems The main risks affecting our views are for automakers:
China's auto sales will grow by 20% in 2007, and net exports will continue to grow rapidly.
Driven by strong domestic demand, the car market will grow by 25% in 2007; fierce price competition will continue.
The heavy truck market will increase by 25% in 2007; it will slow down in 2008.
Sales in China and the big passenger markets will increase by 10% in 2007.
For auto parts manufacturers:
Exports will continue to be the main driving force for supplementing domestic sales. The high cost of raw materials and the drop in product prices will put the product's profit margins under pressure.
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