• China sales up MoM and YoY
• China’s tax cut to expire
• Fair value at S$0.48

China and EU sales up; US sales down

We estimate that roughly 50% of the automobile parts Memtech produces end up in cars sold in China, while 25% each go into cars exported to the US and Europe. According to the China Association of Automobile Manufacturers (CAAM), China’s passenger car sales in Aug were up 26.3% YoY, and also up 11.9% MoM, to 1.8m, halting the consecutive MoM decline for the preceding three months.

For the Jan-Aug period, passenger car sales were up 12.8% YoY. In the US, passenger car sales fell 12.6% in Aug and were down 8.4% YoY for Jan-Aug, according to Autodata.

In Europe, passenger car registrations in Jun increased by 6.9% YoY while those for 1H16 were up 9.4% YoY, according to the European Automobile Manufacturers Association. Given the MoM increase in Chinese sales and decline in US sales, we find our current forecast of ~7% growth reasonable for Memtech’s automobile segment’s FY16 revenue.

More than 70% of cars sold in China qualify for tax cut

According to Shi Jianhua, the deputy secretarygeneral of CAAM, more than 70% of cars sold in China qualify for the tax cut. As we head into Sept and Oct, YoY growth posted for passenger car sales are likely to be more muted as they will be compared against a higher base of sales last year. Nonetheless, we find it reassuring that the MoM decline in passenger car sales has halted, perhaps due to time pressure stemming from the expiry of the tax cut at the end of the year.

Considering the significance of the automobile segment in China’s economy, we find it possible that the government will renew the tax cut, or introduce another form of tax at the end of the year.

Maintain HOLD

We note that Memtech caters to suppliers serving major consumer markets that are subject to global economic health, especially that within the US and China. The IMF forecast for global and Chinese growth currently stands at 2.2% and 6.6%, respectively. Given the challenges facing Memtech’s consumer electronics and telecommunications segments, we maintain our HOLD rating with a fair value of S$0.48.  

Source: OCBC Research - 13 Sept 2016