GM Drives Toward Profits in Growing China Market

GM Drives Toward Profits in Growing China Market
GM Drives Toward Profits in Growing China Market

The Chinese auto market is growing at a blistering pace despite concerns about the withdrawal of government incentive programs and the supply chain disruption from the tragic Japanese tsunami. We think GM (GM) will be one of the main beneficiaries of this growth, as it beat Toyota (TM) this year to become the second largest passenger car manufacturer in China after Volkswagen (VLKAY). Other automakers including Ford (F), Daimler (DDAIF), and Honda (HMC) also stand to benefit from the growing Chinese vehicle market.

As the Chinese economy continues to grow at between 8% and 10% annually, consumer demand for vehicles will remain elevated in the years to come. While we estimate the total vehicle sales in China will approach 36 million by the end of our forecast period, Trefis members predict the total sales will rise higher to around 42 million. The member estimates imply an approximately 6% upside to our GM stock price estimate of $34.95.

Strong Growth in China's Economy

The recent rapid growth in China's automobile market was largely because China was able to sidestep the global recession and continue its rapid economic growth. It also benefited from effective government economic stimulus packages, which attracted the world's largest automakers to the country. Now, although the Chinese government has withdrawn industry subsidies to curb inflation, strong demand for vehicles continues as middle-class incomes expand – not only in big cities like Beijing but also in fast-developing tier 2 and tier 3 cities. More than 3.3 million passenger vehicles were sold in China from January to March 2011.

GM a Key Beneficiary

China has already become GM's biggest market with sales of 2.35 million in 2010 compared with 2.21 million in the U.S. We estimate that GM's operations in China contribute around 34% of its stock value.

The company's sales in China outstripped estimated industry sales growth in the first quarter of 2011, growing 10% from the same period in 2010 to about 685,000 units. (See In Spite of Challenges, GM Continues to Ride China Growth Story.) The expanding Chinese market comes at right time for GM when it's sales growth in North America has begun to slow.

GM offers a wide range of products for its Chinese customers, from expensive, high-end Buicks to low-end Chevrolets. It also offers cheaper cars like Baojun 630 Sedan, priced as low as $10,800, which should attract middle-class customers in the market for their first cars.

Our price estimate of $34.95 for GM's stock implies a premium of around 15% to market price.

See our complete analysis for General Motors

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