Asia carmakers face challenging environment

Strangely, there were no significant spillover effects on other auto companies, even when there was a growing list of carmakers whose diesel cars were reported to emit more pollution than in regulatory tests[1]. Instead, the overall soft performance in the last couple of years was attributed to a challenging business environment.

The recent rally in global stocks were accompanied by a recovery of auto shares. However, the winds in the upward sail would appear to wane lately, as increased concerns that the world is primed for a reversal came forth. Likewise, the auto sector pulled back. The BI global automobile valuation index, which comprises 40 major carmakers, showed that the auto sector pulled back in late April.

Although the fortunes of carmakers are tied closely with global equities, auto shares have been underperforming the benchmark indices. Returns of Asian carmakers were lower than the broader stock universe in the region. In terms of returns, the BI Asia Pacific automobile competitive peers index was around 10 points lower than the MSCI Asia Pacific Index in 2016.

Winners and losers among Asia carmakers this year

Among the carmakers in Asia, Guangzhou automobile, Mahindra & Mahindra, and China Motor Corporation were the only companies to post a positive return. Other major Asian auto companies saw their share price under pressure, including the Japanese autos.

Mitsubishi Motors was the worst performer in the BI Asia Pacific Automobile competitive peers index, due to the news of the fuel-efficiency fraud. However, if you look at the returns in the past month, many Japanese carmakers were among the best performers, with Mazda Motors and Isuzu Motors right at the top. Auto giants Toyota, Honda and Nissan were also higher.

As you can see, valuations have come off by 40-50% in the last three years, which could make them seemed a bargain. For Toyota, a price-to-earnings ratio of 8 means it would take eight years to recoup your initial investment in the share. This is also a 2.3 discount to the 5-year average P/E ratio.

However, bear in mind that the world’s number two carmaker expects a 35% drop in net income in this fiscal year, significantly below analysts’ estimate[2], after enjoying large profits in the past four years. The recent Kumamoto earthquake may also affect profits. But their more pessimistic forecast was due to a stronger Japanese yen, which was estimated by the company to have a negative impact of JPY 935 billion (USD 8.9 billion).

Nonetheless, the prospects for car sales remain challenging, as global economic growth continues to splutter. The slowdown in China, the sluggish recovery in the US and Europe would keep the pressure on sale performance of auto companies. On an optimistic note, the need to replace old cars and improvements in economic conditions could help offset flattening demand.