By Tony Munroe and Ben Blanchard
HONG KONG/SHANGHAI, Sept 24 (Reuters) - With cars rolling off Chinese production lines faster than manufacturers can sell them and billions of dollars in additional capacity still to come on line, the country's auto stocks are showing signs of overheating.
Many carmakers in China have slashed sticker prices this year as the market grows increasingly competitive, and watchers say further price cuts lie ahead.
"Car plays have risen so fast this year, in line with the boom in sales, it's natural to see some correction now as there's a feeling sales in the second half will slow," said analyst Gu Qing at Haitong Securities in Shanghai.
After vigorous gains fuelled by a 89.7 percent increase in passenger car sales in the first eight months of the year, shares of Chinese automakers are loosing steam as investors grow increasingly worried about overcapacity.
"Investors will be more cautious for more upside from this level," said Nomura International analyst Phoebe Wong.
Shares of Hong Kong-listed Brilliance China Automotive Holdings have more than doubled over the past 52 weeks, although the stock skidded this week even after the firm posted a forecast-beating 98 percent gain in first half profit.
Rival Denway Motors Ltd , the Chinese joint venture partner of Japan's Honda Motor Co , saw its share price rise 78 percent in the last 52 weeks, although the counter has fallen four percent in the last month.
In Shanghai, auto stocks have led a fall in the wider market since mid-July, due also to heavy new share issuance and tighter lending rules. Shanghai markets have been the worst performing in Asia so far this year, although car stocks have sharply outperformed up until the last month.
STOCKPILES RISING
Investors are worried about rising stockpiles of unsold cars.
Car inventories rose by more than 60,000 units in the first seven months of this year, the State Statistical Bureau said earlier in the month, a rise that has never been seen in any comparable period.
This left 14 of China's most important car makers sitting on goods worth 22.08 billion yuan (US$2.66 billion), the State Information Centre added, without naming the companies.
Merrill Lynch analyst Grace Mak said shares have tracked the "phenomenal" performance of the sector over the past year.
"That's very much a reaction to the demand expansion," she said. "But their share prices, I would say, have not yet reacted much to what is happening in the supply situation."
Beijing has said it will soon unveil policies to cool perceived over-investment, perhaps by implementing stricter requirements on the building of plants and measures to restructure smaller players.
Merrill Lynch said Chinese sedan production in August rose by 62 percent from a year earlier to 163,214 units, while sales rose just 49 percent to 158,646 units.
Last week, consultants KPMG released a report warning that overcapacity in the China car market looms within two years, with the sedan sector most vulnerable.
"People are worried that China's car market may be over-heating," Haitong's Gu said. "There's also a problem with selling off older models, and many companies are cutting prices to try and shift these cars, especially FAW Tianjin's Xialis."
CONSOLIDATION LOOMS
Since mid-April, the Shanghai composite index has fallen 15.9 percent. Meanwhile index heavyweight Shanghai Automotive Co Ltd's A shares have fallen 12.3 percent since mid-May. But they are still up 69.6 percent since the beginning of the year.
While the stock trades at 27 times historic earnings, that valuation is lower than the 35 times average price/earnings ratio for A shares, which until recently were limited exclusively to domestic Chinese investors.
Chongqing Changan Automobile Co Ltd's hard-currency B shares have dropped 14.8 percent since mid-July, but still have risen 102 percent since the start of the year. The shares, which trade at a trailing P/E of 11 times, are cheaper than the market average of about 20 times for B shares.
By comparison, Hong Kong-listed Brilliance and Denway trade at historic P/Es of 14.2 and 13.4 times earnings, respectively.
China is home to more than 120 auto makers, but only two -- FAW and Shanghai Automotive Industry Corp -- make more than 500,000 vehicles a year. Eight local firms make more than 100,000, but 95 others failed to crank out even 10,000 in 2002.
Many watchers expect smaller vendors making obsolete models will be driven out of business, which could ease overcapacity.
Vendors with attractive models, such as Denway's popular Honda Accord, are seen as relatively well positioned.
ING's So said that the P/E ratios of both Denway and Brilliance are in single digits based on forecast 2004 results -- "which is quite attractive compared to other stocks."
(US$=8.28 yuan)