Luxury-Car Market Shifts Gear in China Ultra-High-End Has Ruled, but Now More-Affordable Is in Fashion

August 14, 2013 Leave a comment

August 13, 2013, 7:20 a.m. ET

Luxury-Car Market Shifts Gear in China

Ultra-High-End Has Ruled, but Now More-Affordable Is in Fashion

ABHEEK BHATTACHARYA

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In recent years, luxury-car makers have been all fired up over China. The likes of Ferrari, Rolls-Royce and Aston Martin rolled out models carrying images of dragons or other auspicious symbols. Lately, though, their fortunes have taken a turn for the worse. China’s economic slowdown and Beijing’s drive against conspicuous consumption are taking a toll. Ferrari’s China sales volume in the first six months of 2013 was down 12.5% from a year earlier. Bentley’s China sales were down 23%. At Lamborghini, sales growth has ground to a stop. While the top end of the luxury-auto market is stalling, though, less pricey cars are faring much better. BMW‘s BMW.XE +1.11% China sales volume for January-June was up 15% from a year earlier. At Jaguar-Land Rover, the increase was 16%; atAudi, NSU.XE -0.26% 17.7%.More-affordable premium brands such as BMW, Audi and Land Rover cater to China’s growing middle class, rather than the country’s uber-rich. McKinsey says the number of potential buyers for premium cars in China is set to grow rapidly as households with incomes above $34,000 more than triples to 23 million by 2020.

Investors looking to tap that market may run into trouble, with the likes of JLR-ownerTata Motors 500570.BY +4.20% and BMW, whose home markets of India and Europe are dragging down growth. Instead, Hong Kong-listed Brilliance China AutomotiveBCAUY +3.95% is an almost pure play on sales of premium autos in China.

Brilliance owns 50% of a joint venture with BMW to make and sell the German-brand autos, predominantly the more affordable 3-series and 5-series models. The Chinese company’s profit from the venture—substantially all of its earnings—was 2.1 billion yuan ($343 million) in the first half of 2013, up 60% from a year earlier.

Brilliance trades at about 12.7 times forecast earnings for the next 12 months, according to FactSet. BMW trades at about 9.2 times forward earnings. The potential earnings growth for the Chinese company is significantly higher. Bernstein Research analyst Max Warburton forecasts Brilliance’s profit will more than double by 2015, buoyed by rising demand and higher margins as increased output leads to lower cost of production per vehicle.

Ultra-high-end car makers have done well from riding the Chinese dragon in the past few years. But from here on, China’s broad middle class will breathe more life into auto makers that serve the more affordable slice of the market.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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