China Galaxy Securities: State-owned enterprise reform improves quality and efficiency, and the new energy sales volume of central state-owned enterprises is expected to enter a stage of rapid growth

The Zhitong Finance App learned that China Galaxy Securities released a research report saying that in the context of the current reform of state-owned enterprises entering a stage of deepening and upgrading, the State Assets Administration Commission proposed a separate assessment of the new energy business of the three major automobile central enterprises, which eliminated the uncertain return constraints faced by central enterprises during the new energy transformation phase and played an important role in stimulating the enthusiasm of enterprises to transform into new energy sources. The pace of reform of central state-owned enterprises in the automotive sector is expected to accelerate, and the new energy sales of central enterprises are expected to enter a stage of rapid growth. The potential for future performance growth is expected to drive the revaluation of state-owned enterprises.

The main views of China Galaxy Securities are as follows:

Central state-owned enterprises took the lead in breaking the game, from a difficult start to overtaking a corner

Central state-owned enterprises are an indispensable core component of the automobile industry. The commencement of construction of the FAW manufacturing plant in Changchun in 1953 was the starting point for the automobile industry in New China. By 1989, SAIC, FAW, FAW, and Tianqi, BAIC, and GAC “three small” car development patterns were proposed, and by around 2000, the joint venture model became dominant, and new energy vehicles developed and produced by China's independent innovation since 2015. Currently, the number of listed companies in the automotive sector (ZX) is 46, accounting for more than 1/4 of the market capitalization. In 2023, total revenue of 1.91 trillion yuan was achieved, accounting for more than 50% of the entire sector, mainly passenger car and commercial vehicle manufacturers.

Central state-owned enterprises are the main force driving the expansion and strengthening of China's automobile market in the fuel vehicle era. In the first three quarters of 2024, China's passenger car market rapidly expanded from 11 million to 24 million, with passenger car sales of central state-owned enterprises increasing from 9 million to 20 million units. However, since central state-owned enterprises mainly relied on joint venture brands to contribute sales and profits in the past, the enthusiasm and profitability of independent brands to innovate is weaker than private enterprises. In the first three quarters of 2024, the new energy penetration rate of central state-owned enterprises was less than 21%. It is lower than 75% of the level of private enterprises. Market space has been narrowed due to poor energy transformation, and the overall profit of central state-owned enterprises has declined. In 2023, private passenger car companies achieved net profit of 34.411 billion yuan to mother, surpassing central state-owned enterprises for the first time.

Looking forward to the future, on the path of the rise of domestic automobile brands, private enterprises are more flexible and can quickly adapt to market changes and launch innovative products, while state-owned enterprises are more stable and focus on long-term development and technological innovation. Private enterprises and state-owned enterprises will continue to develop in parallel, working together to enhance the international competitiveness of China's automobile industry.

Promote reforms through multiple means and strive to lead the world in new energy and intelligence

Central state-owned enterprises in the automobile industry promote reforms and enhance new energy and intelligent strength through multiple means: ① Optimizing the layout of state-owned capital: for example, China FAW, Dongfeng Motor and Changan Automobile have cooperated to establish T3 travel, expand into the intelligent field based on online car-hailing business, and plan to achieve commercial operation of 1,000 L4 autonomous vehicles by the end of 2026; Changan, Huawei, and Ningde jointly established Avita to position itself as a high-end technology brand, achieving sales volume of about 50,000 vehicles from January to October this year; ② Deep diversified cooperation: such as JAC cooperated with NIO, Volkswagen, and Huawei to join the first tier of intelligent connected vehicles; Cyrus used the Chongqing State-owned Assets Administration Commission to put the new M9 into production, and introduced the Chongqing State-owned Assets Administration Commission as an important shareholder.

③ National service strategy: for example, Changan comprehensively lays out R&D, supply chain, production bases, logistics, etc. in the Belt and Road market to enhance global popularity; ④ High dividends: the cash dividend ratio of 25 automobile central state-owned enterprises exceeds 30% in 2023; ⑤ Asset securitization: for example, the China Automobile Technology Research Center achieved an IPO through China Automobile Co., Ltd. to increase the layout of the intelligent connected vehicle testing ground; ⑥ Improving the governance mechanism: the State Assets Administration Commission The new energy business of the three major automobile central enterprises is assessed separately to eliminate the uncertainty of central companies' investment returns in the new energy transformation phase and stimulate the vitality of the enterprise's new energy transformation; ⑦ Effective employee incentives: strengthen the binding of employees and corporate interests through equity incentives, performance appraisals, etc.; ⑧ optimize the organizational structure: modernize the corporate governance system through organizational structure optimization and personnel appointment and dismissal system reform.

Reforms help central and state-owned enterprises continue to grow bigger and stronger, bringing about value revaluation

The transformation of new energy has brought new sales growth momentum to enterprises, forming market expectations for rapid growth in corporate revenue scale and continuous improvement in profitability. Therefore, private passenger car companies and parts companies leading the NEV transformation have obtained higher valuation levels during the rapid development of the new energy market, and their stock prices have risen rapidly. In comparison, central state-owned enterprises are generally large, and due to historical reasons, fuel vehicle sales account for a relatively high share. The effect of new energy on total sales and performance is not obvious. Therefore, the valuation level is relatively stable and has always been low, and the stock price performance is weaker than that of private enterprises.

In the context of the current reform of state-owned enterprises entering a stage of deepening and upgrading, the State-owned Assets Administration Commission proposed a separate assessment of the new energy business of the three major automobile central enterprises, which eliminated the uncertain return constraints faced by central enterprises during the new energy transformation phase, and played an important role in stimulating the enthusiasm of enterprises to transform into new energy sources. The pace of reform of central state-owned enterprises is expected to accelerate, the new energy sales of central state-owned enterprises are expected to enter a stage of rapid growth, and the potential for future performance growth will be stimulated, which is expected to drive the revaluation of central state-owned enterprises.

Investment suggestions: Passenger car companies recommend Changan Automobile (000625.SZ), Guangzhou Automobile Group (601238.SH), benefiting SAIC Motor Group (600104.SH) and JAC (600418.SH); commercial vehicle companies recommend Weichai Power (000338.SZ), benefiting Sinotruk (000951.SZ); parts companies recommend Huayu Automobile (), benefiting from Yap (USD), Guangdong Hongtu (600741.SH 603013.SH 002101.SZ), Lingyun Co., Ltd. (600480.SH); Auto service companies recommend China Automobile Co., Ltd. (301215.SZ) to benefit from China Automobile Research (601965.SH).

Risk warning: Risk that new energy sales of central state-owned enterprises fall short of expectations: Risk of state-owned enterprise reforms falling short of expectations.