China’s automakers may run out of gas
China’s passenger cars sales almost doubled in November, thanks to major government incentives. But these will be hard to replicate next year. Investors in automakers such as Geely Auto, whose shares have increased more than seven-fold in a year, and battery maker BYD, whose stock has risen five-fold, may have got ahead of themselves.
Last year, investors dumped Chinese auto stocks because they were worried about overcapacity. Geely’s shares fell to their lowest levels in a decade. This year, it’s a different story. Car sales are on track to surge 50 percent and to surpass 10 million units for the first time, thanks to the government’s tax cuts for small cars and rebates for
purchases by villagers.
The stimulus may draw out buyers who had been delaying their purchase, but it will be hard to keep the momentum going next year. Analysts now expect a relatively titchy 10 percent growth in industry sales next year, even if this year’s stimulus is repeated. Moreover, Beijing might put on the brakes. Until now, the government has tended to restrict new automotive investment in an effort to limit road congestion and
Auto stocks don’t seem to be pricing in such a return to normality. Exuberance is one reason; celebrity investors in some cases may be another. Goldman gave Geely a filip when it bought convertible shares worth $334 million earlier this year. The shares are now double the strike price on Goldman’s convertibles. BYD’s stock has quintupled since Warren Buffett bought a stake in the spring even though the company’s main attraction, a range of hybrid cars, has yet to hit the retail market.
Geely and BYD are now trading at 24 and 42 times estimated 2010 earnings, respectively, compared with multiples of just 10 for Hyundai and 20 for India’s Tata Motors. Goldman and Buffett will be pretty happy with that result. Unluckily for latecomers, however, the auto sector rally looks like it may soon run out of gas.