Can China fuel investor demand for the Autos Industry?

The China automobile industry is booming and the nation has maintained its title for the world’s largest auto market for the second year after overtaking the US market. The FT notes that even the car-carrying ships are struggling to find capacity for export to China. However, demand in China has been artificially enhanced by government stimulus packages and incentives which have now been scrapped. We look at investor sentiment in the leading auto companies; Daimler (ETR:DAI), Volkswagen (ETR:VOW), Toyota (TYO:7203), General Motors (NYSE:GM), Mitsubishi (TYO:8058), Mazda 9 TYO:7261) and Kia Motors Corp (TYO:7203).

Outside of Asia, particularly China and India, the outlook for sales of new cars is far from rosy. And yet, it is not clear how long the global manufacturers can rely on the region. GM's China Group President, recently quoted at the Detroit Auto Show, is anticipating a “more sustainable” rate of growth and a slow down with the maturation of the Chinese market.

Germany’s Daimler has experienced rapid growth in demand for its Mercedes-Benz cars in China. While the Beijing Automotive Industry Holdings’ predicts that China’s automobile market will account for half of world production by 2020, the FT notes there is a current preference towards cars built in Europe over the same cars built in China. Yet this could change if rising costs and bottlenecks in exports to China affect supply and drive up costs. Short interest in Daimler has increased since November from 3.8% to 4.6% of total shares outstanding on loan. One way of gauging investor sentiment towards the future profitability of Daimler is to observe how much is in the hands of large, long term investors and whether this is changing. We are able to view a proxy for such daily institutional ownership by looking at the holdings of funds who lend their shares which has increased since November by 13% to 215 million shares. Investor sentiment following Daimler’s announcement of an increased stake in Mitsubishi Fuso Truck and Bus Corp, further reinforces the company’s focus on emerging economies, will be interesting to monitor over the coming days.

Volkswagen replaced Chrysler as the host of the Detroit Auto Show this year and boldly aims to become market leader by overtaking Toyota by 2018, according to the FT. Volkswagen recently reported a 114% surge in imports to China last year according to The Wall Street Journal. Investors have almost halved their short positions in the company over the last quarter, to 0.6% of total shares, in what is a thinly traded stock in securities lending. Institutional ownership over the period has decreased marginally and currently stands at 4.3 million shares.

General Motors has been reported in the Wall Street Journal as being on the path to stability but its future business plans raise concerns, especially with increased competition in emerging markets. GM claims a 13% market share in China and plans to build small battery electric cars in China within two years. Since floating on the NYSE in November, its share price has performed well, currently standing at $38. Short interest is low at under 1% of total shares outstanding and institutional ownership has increased since the flotation, from 80 million to 112 million shares.

Aside from skewed demand towards US and European global luxury car makers in China, Asian car manufacturers face challenges from falling demand for new passenger cars in Europe. Toyota was one of the few global auto companies to see a fall in US sales coupled with a modest 17% increase in sales in China. Securities lending interest in Toyota is low at 0.3% of total shares outstanding on loan and falling, but we do observe an increase in institutional ownership of 11% to 310 million shares over the past quarter. Japanese car maker Mitsubishi has seen an increase in short interest over the past quarter from 2.8% to 3.6% of total shares. A similar pattern is evident in Mazda, where short interest has increased from 0.6% to 1.6% of total shares outstanding on loan over the last quarter. Korean car maker Kia Motors has a very low short interest of 0.2%, but this has doubled over the last quarter.