Healthy dividend growth projected for Chinese Automakers
- Future dividend growth is expected to be sustained by projected higher sales volume and booming sales of new-energy vehicles.
- Declared dividends from Chinese automotive companies grew by 25% year-on-year (YOY) to HKD 9.2bn for 2017.
- Majority of the companies adopt performance-linked payout policies, and we noted that some have lifted their payout ratio in 2017.
- Market competition however, could create some risks on forecasted dividends.
IHS Markit expects Chinese automakers to continue growing their payouts, with a well-sustained healthy growth rate in the forthcoming years. Aggregate dividends from the industry are forecasted to increase to HKD 16.2bn by 2020, representing an increase of 76% from the amount declared for 2017. We expect this growth to be underpinned by higher vehicle sales and flourishing new-energy vehicles (NEV) market.
Aggregate dividends from Chinese automotive sector (HKD bn)
Source: IHS Markit, FactSet. Dividends from H shares only. Excludes one-off payment
Positive momentum from 2017 is expected to continue into 2018
According to the latest filings, the automotive industry in China reported aggregate dividends growth of 25% YOY in 2017, with more than two-third of the companies paid higher dividends. We highlight that the majority of these companies have adopted a performance-driven payout practice, as reported DPS changes from 2016 to 2017 have been positively correlated to EPS changes during the same reporting period. We also discuss two companies - Geely and Dongfeng - who have increased their dividends payout ratios in 2017.
DPS change VS. EPS change from 2016 to 2017, 2017 dividend payout ratios
*Size of the bubble indicates company's full-year dividend payout ratio in 2017
Source: IHS Markit, FactSet.
New vehicle sales to continue to drive dividends growth
Unit sales from companies are expected to be well maintained beyond the current level, and to register steady growth in forthcoming years. Notably, IHS Markit is projecting light vehicle sales in China to grow by 2.6% annually on average over the next three years. This is likely to support growth in top line figures as light vehicle sales account for the lion share of total sales of top Chinese automakers highlighted in this report. We expect better sales to translate to higher earnings, which increase the capacity of these companies to pay higher dividends. According to our data and research, companies such as Great Wall, Geely and Brilliance are likely to lead the growth.
Fundamentals suggest higher payouts from NEV producers
Favourable policies would drive the demands for NEV and therefore eventually benefit bottom line performance and dividends payouts from companies with a focus on NEV. Two major companies are expected to benefit the most from the NEV boom - BYD and BAIC - each with several models leading the sales in Chinese market.
We will also discuss other factors in this report, such as China-US trade war and market competition that will have an impact on the sector's future dividends.
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Derek Fang, Senior Research Analyst at IHS Markit
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