ACCOUNTING AND FINANCIAL

ANALYSIS (course ISF 6043-01)

Financial Analysis – Industry analysis

and auto industry (Part 2)

Professor Namuh Rhee

Yonsei University GSIS

April 20th and 27th, 2022

Readings

•  RP:
-  Page 263-268, Various articles on global car demand.
-  Page 269-282, CFA Institute, Automotive Manufacturing.
-  Page 325-333, Bank of America Merrill Lynch, Global Auto
OEM Primer 2016.
-  Page 334-341, Credit Suisse, Auto & Auto Parts Sector
Tips for industry analysis – “Less is more”
•  Visual: Chart and table displaying sales growth (% YoY),
margins trends, product composition are useful.

•  Correlation between key industry variables and

macroeconomic indicators are a good predicting tool.

•  Top analysts in Wall Street typically use only 2-3

variables in predicting sales/earnings and share price
movement. Selection of 2-3 key variables that drive
sales/earnings and stock price is critical.

•  In historic analysis, data should go back at least 2-3 cycles

(ie, minimum 10-15 years to understand long-term trend
and current position in a new cycle)
 Alphabet stock price vs. annual EBITDA or
cashflow (TTM): Good correlation  

A $1bn gain in Alphabet EBITDA boosts market cap by $20bn.

Agenda

•  Auto demand analysis

•  Graded mini project: Country auto demand analysis

Global LV sales dropped in 2008-09 and
rebounded sharply before peaking out in 2017

•  Eight consecutive years of demand increase in 10-17.

Auto stocks assumed sharp car demand
recovery
LV demand: China (26mn units) vs. US
(17mn) vs. Europe (21mn) vs. Japan (5mn)  
LV production by country

•  Three major exporters are Japan, Germany and Korea,

•  US is big importer and China is relatively self-sufficient.
Car exporting countries
Global LV top producers (2017)
 Long-term picture: Vehicle penetration strongly
correlates with GDP per capita (R2=0.92)
•  Flattening out of vehicle penetration at GDP per capita
of around $40,000 with exception of the US.
•  Good upside for India and ASEAN and, to a lesser
extent, China and other EM.

*Source: LMC, Bloomberg, BofA Merrill Lynch Global Research (2015 data)
Korea auto registration: 23.2mn units in
end-2018 or 455 cars per 1,000 population
(+674k net unit increase)
Secular growth in Chinese car demand has
reversed in 2018
Annual car demand: China vs. US
Car demand is determined by:
1.  Economic developments or “Consumer financial well-
being” (Change in real GDP or disposable personal income,
housing price, consumer sentiment, car affordability, interest
rate and financing)
2.  Government subsidies. (tax cuts)
3.  Replacement cycle (average age of fleet)
4.  Demographics (driving age population growth; women
workforce)
5.  Qualitative factors “stimulate” demand (new models,
styling, creativity, marketing) (Ex) Mercedez Benz

•  In mature markets (incl Korea these days), car demand is

growing only in cyclical upturns and then offset by declining
demand in cyclical downturns. Car demand in these markets is
essentially replacement demand, with only a small proportion of
sales being first-time purchases.
 US is mature auto market: “Early cycle” nature
of auto demand in trough and peak

R2 = 0.58
Car demand hit seriously during recession

In 2020, US
car sales to
decline 30%
to 12mn units.  
 Wealth effect plays too!

R2 = 0.57
 US car ownership peaked; younger people
less interested in car purchase

•  Average age of cars in the US approached 12 years (with a quarter more

than 16 years old) vs. 9.5 years in 2002, thanks to better durability.
Long-term trend in Chinese car demand
Chinese car demand highly affected by
government subsidies
Global LV sales growth expected to slow to 3% pa in
‘15-20 to 104mn units or 0.86x real GDP growth
(BAML estimate made in Nov 16)
•  Weak growth (“below normal”) due to slowdown in China and
other EMs (except India and SE Asia).
•  Growth = 0.90x real GDP since 1997.
•  Growth = 1.36x real GDP since 2010 post global financial crisis.
•  Despite slowdown, China is still a key growth driver, accounting
for 33% of global sales by 2020. (vs. 28% in 2015)

*Source:  LMC,  BofA  Merrill  Lynch  Global  Research  es<mates  

China real GDP growth vs. China car sales
growth (“good correlation”)
•  China contributed to nearly 70% of incremental global auto
volume growth between 2000-15.
•  China auto demand growth will decelerate sharply to 6.5%
pa in 2016-2020 (similar to real GDP growth) vs. 16.1%
annual growth since 2008.

*Source:  Bloomberg,  BofA  Merrill  Lynch  Global  Research  

Korea: Domestic passenger car sales grew 24%
pa between 1981-93 on rising income; 13% pa
growth in 1993-97 or 2x real GDP growth
Agenda

•  Industry analysis

•  Global car industry – overview

•  Auto demand analysis

•  Graded mini project: Country auto demand

analysis
 Auto demand analysis
•  Due: May 1st (Sun)

•  Write 2-page analysis on domestic “light vehicle” demand

in your home country focusing on:

1)  Historic annual growth rate (% year-over-year (YoY)

change) (min 5-yr growth and 10-15 yr is recommended)
and its sensitivity to real GDP growth rate (% YoY);
2)  Three principal growth drivers of auto demand (they
should be “priortized”)

•  If time horizon is 10+ years, you may break down into 2-3
growth phases.
•  Use charts and tables for illustrative purpose.
Graded mini project (continued)
•  If your country does not provide such data, choose data
from any other country. (=> Seek my approval by
email)

•  Korean students may choose other country (=> Seek my

approval)

•  Submit your report by e-mail to

cdc_advisor@yonsei.ac.kr

•  E-mail title should be “Auto demand analysis project:

Your name.”
Graded mini project (continued)
•  Click Korea Automobile Manufacturers Association
(KAMA) pdf file in YSCEC for data through 2015. You
need to collect your own data for 2016-19/20.

-  Focus on “Domestic demand” (or sales).

-  If such data is not available, use “Domestic demand
proxy = production – exports + imports”

•  Industry resources: RP 322-324.

•  Reproduction of tables/charts from the RP and lecture
notes is not permitted.

•  READ QUESTION CAREFULLY!