GM Steps on the Gas in China

May 16th, 2011 by Trefis Team
-2.62%
Downside
42.70
Market
41.57
Trefis
GM: General Motors logo
GM
General Motors

GM’s (NYSE:GM) Chinese business contributes more than one-third of the company’s stock value by our analysis. GM registered sales of around 685,000 in Q1 at a growth rate of 10% from same period last year. This growth will likely accelerate GM’s share in China despite the expiration of government incentives (See: In Spite of Challenges, GM Continues to Ride China Growth Story). GM is consolidating its position in China and plans to double its sales in the next five years with its multi-brand strategy and focus on electric vehicles though increased competition from other global automakers like Ford (NYSE:F), Daimler AG (NYSE:DAI), Honda (NYSE:HMC), Toyota (NYSE:TM), Hyundai (SEO:005380) and Nissan (PINK:NSANY) could challenge these goals.

We see around 15% upside from current levels, but if China market share maintains or grows for GM, we could see additional 10% upside from our estimates.

Competition in Chinese Auto Market Heating Up

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China is seeing tremendous competition from both domestic and international vehicle makers across product segments. The Chinese automobile market has increased nearly 3x from 4.56 million units in 2003 to 13.64 million units in 2009. IHS Global Insight, a market research firm, forecasts the Asian automobile market will grow at just under 5% CAGR in the next decade and that 54% of this growth will come from China. [1]

GM’s Multi-brand Strategy, Focus on Electric Vehicles

Over the next five years, GM plans to introduce more than 60 new and upgraded models, nearly half of which will be in its two mainstream brands in China – Chevrolet and Buick. In Q1, GM saw an increase in units sales across all of its brands: Buick, Cruze, Cadillac, Excelle, and  Chevrolet. [2] GM is also in works with its joint-venture partner SAIC to develop next generation electric vehicle architecture. The company has plans to establish a lab in Shanghai to explore and develop battery technologies, and China will be one of the first markets where GM will offer its Chevrolet Volt extended-range electric vehicle. (See: GM’s 5-Year Plan to Double Sales in China Adds Upside to Our Bullish Forecast)

Impact on Shares

While we anticipate GM’s market share in China will decrease closer to 12%, Trefis members predict the decline will be smaller reaching 13.3% by the end of our forecast period, implying ~5% upside to our price estimate for GM stock.

We currently have a Trefis price estimate of near $35 for General Motors’s stock, or 13% upside but if market share stays flat, we could see an additional 7-10% for a total return of 20-25% upside.

Our complete analysis for General Motors’s stock is here.

Notes:
  1. Chinese Automobile Market, April 2011 [↩]
  2. GM sets new March sales record in China, April 5, 2011 [↩]