• Flattish outlook for Chinese auto market
• Potential positive spill-over effects from Tesla
• Awaiting better entry point

Soft passenger car market propped up by SUVs

According to the China Association of Automobile Manufacturers (CAAM), 1.75m passenger cars were sold in May 2017, down 2.6% YoY. Sales of sedans, MPVs and minivans fell between 9.3% and 25.2% YoY, but the declines were partially offset by the growth in SUVs (+13.5%). This is largely in line with the passenger car market trend for this year, with a 1.5% YoY growth in sales for Jan – May 2017 supported by a 17.1% growth in SUVs. Notwithstanding the changing dynamics among the various vehicle subsegments, our expectation for a flattish performance for China’s automotive industry remains unchanged.

Tesla Developments Encouraging

Tesla recently announced that it is in exploratory talks with the Shanghai municipal government in relation to the possible establishment of a Chinese manufacturing plant. We believe that this would allow Tesla to be more competitive in the electric vehicle space, given the possible elimination of a 25% import tariff. Notwithstanding the overall passenger car market conditions, new energy vehicles still registered a better performance in May 2017 than gasoline ones - 45,000 electric cars, plug-in hybrids and fuel cell cars were sold, up 28.4% YoY. Therefore, we believe that Memtech stands as a direct beneficiary should Tesla make further inroads into the Chinese market.

Maintain HOLD

Overall, we believe that Memtech’s automotive segment should still have further room for growth. We have highlighted previously its potential to participate in platform projects, which involve rolling out new components to both existing and new car models. However, on a YTD (total return) basis, Memtech has returned 47.7%, outpacing the STI’s 13.9% increase, benefiting in part from the U.S. technology sector rally despite the recent pullback. As such, we would wait for a more opportune moment to accumulate and thus maintain our HOLD rating and fair value estimate of S$0.85.

Source: OCBC Research - 6 Jul 2017