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Monthly Thematic Commentary - Sept 2023
China EV & Battery
Battery production to grow in July: According to the China Automotive Battery Innovation Alliance (CABIA), China's power battery installation reached 32.2GWh in July 2023, down 2% MoM and up 33% YoY. In the same month, China‘s power battery production reached 61GWh, up 1.5% MoM and 28.9% YoY. Battery installation for LFP batteries declined 4.7% MoM to 21.7GWh in July (67% share), while NCM battery installation grew 4.8% MoM to 10.6GWh (33% share). EV battery export volume expanded 12% MoM to 11.2GWh during the month.
Auto sales increase and EV penetration stays solid: Based on the announcements of individual auto companies, the August wholesale volume data stays solid. BYD, Li Auto, Xpeng, and Nio delivered +5%/+2%/+27%/+13% MoM, respectively. According to the China Passenger Car Association (CPCA) data, the August China passenger car vehicle wholesale volume was 2.24mn units (+8.5% MoM/ +6.5% YoY) and production volume was 2.24mn units (+7.1% MoM/ +5.3% YoY). China’s new electric vehicle (NEV) (excl. commercial vehicles) wholesale volume increased to 798k units (+8.2% MoM/ +25.6% YoY). Year-to-August NEV wholesale volume reached 5.08mn units (+38.5% YoY). The NEV penetration in August was 35.7% (flat MoM / +5.5ppts yoy).
Battery material costs have modestly declined: China spot lithium carbonate declined fairly sharply by around RMB60k/t or 10% MoM in August and reached a level around RMB206k/t. In the spot market, near-term demand still fails to outperform. In addition, having experienced the price rollercoaster in the past 2 years, downstream has become increasingly cautious on inventory management. We believe this can become a new norm in the near term, and do not expect to see much stock up more than what is absolutely required for production, especially with the expectation of sufficient supply next year; any restocking will likely come at a lower magnitude than we used to see.
Launch of fast charging LFP battery: On 16 August 2023, CATL launched Shenxing, the world’s first 4C superfast charging LFP battery, capable of delivering 400 km of driving range with a 10-minute charge as well as a range of over 700 km on a single full charge. Shenxing is expected to considerably alleviate fast charging anxiety for EV users, and opens up an era of EV superfast charging. This indicates CATL’s solid battery technology innovation and likely to keep the technology gap, in this case, LFP, with the other battery suppliers.
Positive endorsement of Chinese auto software by Volkswagen: On 26 July, Volkswagen announced that it would invest USD700 million for 4.99% of Xpeng and an observer’s board seat in the Chinese carmaker. The two companies plan to roll out two Volkswagen-branded midsize EVs in 2026 in China. This partnership will allow Volkswagen to expand its position in China, by tapping new customer segments and bringing new intelligent, fully connected electric vehicles to the ICV market more quickly. In China, already over 30% of newly registered vehicles are electrified. It is anticipated that in 2025, that figure will reach 50%. The partnerships also reflect the urgency for Volkswagen, searching for a remedy to increase its presence in the China market, where it has been outcompeted by Chinese start-ups such as Xpeng and Nio. Volkswagen’s EV sales have fallen in the first six months, despite the overall EV market growing 25%.
China Consumer Brand
China consumption recovery pace has been softer than expected in recent months. July retail sales growth was +2.5% year-over-year (yoy), missing the street expectation of +4%yoy growth. Sales deceleration was seen across different categories particularly with gold and jewelry, cosmetics, and home appliances which was partly due to front loading of consumption during 618. This chart shows that overall retail sales in orange is at 111% of 2019 level and staples sales are at 129% of 2019 level while 102% of 2019 for discretionary sales amid weak consumer sentiment.
China recovery has shown a divergence trend. A consumer survey by CLSA in July showed that consumers were expecting to increase their spending in the next quarter. It clearly showed travel was an obvious area where people were willing to increase their spending. In fact, a number of traffic for domestic tourism has reached 20% above the 2019 level while spending per tourist remained 16% below the pre-COVID level. Education and medical services were the ones that stayed relatively high throughout the period. While high-value goods such as home appliances, furniture, and other big-ticket items have come down amid an overall weak consumption environment.
Polarization trend so called K consumption has become more obvious in China. Consumer companies that benefit from either premiumization or trade down with strong value proposition reported better than expected 1H23 results. Premium baijiu such as Moutai continued to benefit from resilient high-end spending and delivered top-line and bottom-line growth of +20%yoy and +21%yoy respectively in 2Q23. Meanwhile companies such as Eastroc, Proya, PDD with strong value proposition benefited from consumers trading down and reported better than expected 2Q23 earnings results. Proya management shared that industry sales declined for unit price range of RMB 400 to RMB 1500 while mass (below RMB 400) and luxury (above RMB 1500) demand remained intact. Similarly, beer companies also delivered good results with the premiumization trend. The leading beer company, China Resources Beer, reported strong beer growth with premium beer volume growing +26%yoy and low end also registered a positive growth while mid-range volume was weak.
The government has set a more dovish tone at Politburo meeting in July and since then we have been seeing more policies being announced to support economy as well as property market. We believe the government is currently focusing on economic growth and thus expect more policies may be announced to support growth in coming months. Meanwhile valuation for many consumer companies have come down to more attractive levels thus we are becoming more constructive on China consumption theme.
China Semiconductor
Huawei Mate 60/Mate 60 Pro launch with Hsilicon chip: Huawei did not disclose any official information about the SoC on this new smartphone. Initial teardown shows the phone carrier an in-house designed Hisilicon SoC. Performance benchmark testing indicates CPU performance comparable to QC SD 888 (launched in December 2020 based on Samsung 5nm). Mobile internet connectivity testing indicates over 500mbps of download speed.
ASML to ship advanced chip tools to China till year-end: The company applied for export licenses to ship our NXT: 2000i plus systems. The Dutch licensing authorities have issued the licenses as of September 1 to be able to continue shipments of the NXT:2000i and subsequent systems this year. Under the new export control rules, ASML is able to ship these systems until the end of the year.
China Biotech
First domestic PCSK9 launched by Innovent
Innovent has commercially launched its innovative PCSK9 mAb tafolecimab (trade name Sintbilo), with the drug being supplied to hospitals and pharmacies across China.
The drug received China NMPA approval earlier this month as a treatment for adult patients with primary hypercholesterolemia (including heterozygous familial and non-familial hypercholesterolemia) and mixed dyslipidemia.
It became the first domestic PCSK9 inhibitor to be approved in China behind two imported products from Amgen and Sanofi.
Tafolecimab has the longest half-life among the marketed products, with a single dose capable of lowering LDL-C for 3 weeks. The drug also provides flexible drug regimens with three treatment intervals (Q2W, Q4W and Q6W), which can additionally reduce LDL-C rapidly by ~50% (with a maximum reduction of 66%) when used together with moderate doses of statins.
PCSK9 mAbs already on the Chinese market include Amgen’s Repatha (evolocumab) and Sanofi’s Praluent (alirocumab), while Junshi’s ongericimab (JS002), Akeso’s ebronucimab (AK102), and Hengrui’s recaticimab (SHR-1209) are under marketing review.
China prepares for 9th VBP round targeting 44 major drug types
China National Allied Procurement Office has released a notification initiating the 9th national VBP tender round.
A total of 44 chemical drugs across 195 different specifications have been selected. Hospitals will be required to provide details of volume usage for molecules involved. The 9th round is notable for targeting CNS drugs (9), followed by cardiovascular drugs (7), GI and metabolic diseases drugs (7), and infectious disease drugs (6).
A total of 7 molecules in this round have appeared in different specifications in previous rounds, namely: esomeprazole (4th and 5th rounds), aripiprazole (5th and 7th), lacosamide (7th), paroxetine (1st), sildenafil (3rd), azithromycin (2nd and 5th), and aciclovir (5th).
China MedTech
Impact of anti-corruption campaign
Background – as highlighted in our previous commentary for [2820/9820] China Biotech ETF, On 28 July 2023, the Central Commission for Discipline Inspection and the National Supervisory Committee held a meeting to open an investigation into corruption in the healthcare sector.
Mindray Bio-Med, one of the largest device manufacturers in China held a conference call in August 2023 to discuss the impacts of anticorruption efforts. Per management, 20% of its medical equipment sales, including patient monitoring and ultrasound businesses, being sold to public hospitals in China, will likely be delayed from Q323 to Q423 (20% of 25% of total sales). However, this could be offset by potential market share gains in the remaining 80% of ongoing tenders as it may be less risky for hospitals to purchase Mindray's products, which Mindray says are highly compliant. The company believes the severe impact on tendering will last till end-October 2023 given Shanghai will complete the self-examination and correction work on anti-corruption by then, which serves as a reference point for other parts of China.
Offsetting factors for delay include local governments support for medical infrastructure - In terms of financing for Medtech purchases, China's local governments are given a clear deadline to issue 100% of the budgeted specialised bonds (RMB380bn) by the end of September and guarantee the capital will be utilised by end-October for new medical infrastructure projects
China Clean Energy
Solar
Solar materials prices are overall stable in August with polysilicon prices slightly bottoming up to currently RMB80/kg and module prices as low as RMB1.1/w. Polysilicon inventory came down significantly when prices stopped further declining. Downstream resumed production and utilization in wafer, cell and module end are recovering. We are quite positive on demand uptick as close to the year end.
Most of solar companies reported super strong 1H23 earnings results, though it seems not meaningful to stock prices due to concerns on oversupply in the near term. We have seen some new projects delay recently. Sector downside might be limited from here given valuation corrected a lot from peak in 2H21. What is worthy highlight is, Longi’s management confirmed recently that xBC products could be the new mainstream of next-generation solar cell technology, on account of high technology moat, long life cycle and products differentiation. The yield of xBC solar cell production is still not perfect for some leading producers, 93-95% vs PERC 99% and Topcon 97-98%, which largely affect investors’ confidence on the long-term competition landscape. On the bright side, we will see the results soon in the next six to twelve months.
Wind
The latest monthly data points indicate that onshore wind tendering procurement pricing has dropped to RMB1850/kW in August, lower than the average RMB2000/kW in the past 3 months. Wind turbine installations in July were 332MW (+67% yoy). Year-to-July wind installation grew by 76% yoy and reached 26GW, still much below the tendering volume last year of 91GW. The China open market wind tendering volume in August was 4.1GW (-42% yoy). Year-to-July tendering volume was 45GW.
Companies’ results are mostly in line with market expectations: Many Chinese wind companies have reported their 1H23 earnings results. The 2Q wind power installation progress is weak, consistent to the monthly data points for both onshore and offshore projects. However, most of the part suppliers’ gross margin are holding up quite well. Many of the supply chain companies anticipate a recovery in parts demand in the latter part of the year.
China Robotics & AI
The latest monthly data points released by the National Bureau of Statistics reported on August 15 that China industrial robot production volumes were -13% yoy in Jul (+4% mom vs. Jun and past five years’ seasonality of +2% mom); China machine tool production volumes were -2% yoy in Jul (-17% mom vs. Jun and past five years’ seasonality of -11% mom). Manufacturing fixed asset investment (FAI) was +4% yoy in July (moderated vs. +6% in Jun). High-tech manufacturing FAI stayed at +12% yoy in July. Railway FAI continued the recovery trend with +25% yoy in July (vs. +21% yoy in June).
Order momentum bottoming in Japan/Europe/US: Based on the final machine tool order data released by the Japan Machine Tool Builders’ Association (JMTBA) on 24 August, global machine tool orders in July 2023 totaled JPY114.3bn (-20% yoy/-6% mom). This includes a decline in domestic Japan orders below the JPY40bn mark (-24% yoy/-4% mom). The yoy decline is lower than last few months but still remained at a low level. Overseas orders (ex-Japan) continued to decline on a yoy basis, and came in at JPY75.0bn (-17% yoy/-8% mom). Orders momentum is steadily approaching a bottom yoy in Japan, Europe, and the US.
China automation data are showing weakness: China July orders totaled JPY17.8bn (-36% yoy/-7% mom). Monthly order volume was the lowest since August 2020 (JPY17.0bn). As in June, orders were weak in areas such as EVs, batteries, and semiconductors, which had seen brisk orders through 2022. According to the JMTBA, capex appetite has been stagnating in all fields except solar panels, and this has resulted in a significant decline in machine tool demand.
Positive commentary from the supply chain leads to improving outlook: One of the key players in the robotic supply chain guided positively on their outlook to humanoid robot production during their analyst results presentation. The company guides that their production schedule is based upon the client production plan of 100 bots per week in 1Q24, 3,000 per week in 2Q24 and 10,000 per week in 3Q24. This progress, if true, is much faster than market expectation and hence lead to an improving sentiment and outlook to the robotic sector.
China Cloud Computing
July revenue growth for China software industry: China Software industry July revenues were +9% YoY, slowing down compared to June (+18% YoY), leading 7M23 revenues to increase by 13.5% YoY, lower than 6M23 growth of 14.3% YoY. IT services growth outpaced the industry at 15% YoY in 7M23, driven by cloud computing and big data analysis services, while EDA software growth slowed at 3% YoY, and e-commerce IT services growth was at 8% YoY, followed by embedded system software at +11% YoY, software products at +11% YoY, driven by industrial software at +13% YoY, and cybersecurity at +10% YoY. Net margin was up to 12.8% in July (vs. 10.5% in June). Source: MIIT, August 2023.
July revenue growth for China telecom industry: July telco rev grew 6.2% YoY, a strong recovery from 3.5% in June. Mobile revenue recovered from -10% in June to +2.5% in July, while fixed line revenue growth of 6.9% remained healthy. Telcos 1H23 reported cloud growth vastly exceeds the MIIT figures, indicating potentially a different reporting basis. Source: MIIT, August 2023
AI License granted to LLM developers: Eight generative AI applications have registered with China’s cyberspace authority, including Baidu’s Ernie Bot, ByteDance’s Doubao, Sogou founder’s Baichuan and chatbots built on the lab work of top research institutions like Tsinghua University and Chinese Academy of Sciences.
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