Why General Motors’ Positive Guidance On China Should Please Its Investors?

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According to our estimates, China is the most valuable segment for General Motors (NYSE:GM), accounting for more than 50% of its valuation. We expect total vehicle sales in China by the company to increase steadily over our forecast period and reach nearly 34 million by 2024. Hence, the recent announcement by General Motors that it witnessed an 18% increase in sales in China in July 2016 compared to the same month last year is significant. Furthermore,  the company’s positive guidance on China, by which it expects the market to grow to 30 million vehicles by 2020, ensures that General Motors is on track to witness significant volume growth in the region in future. General Motors’ investment in local budget-car joint-ventures gives it the competitive edge in China’s emerging auto landscape, where demand is shifting from mega cities such as Beijing and Shanghai to smaller cities and rural areas.

Well Positioned To Capture Growing Demand From Tier 3 and Tier 4 Cities

General Motors’ management stated that while, demand from China’s Tier 1 cities is near saturation, basic affordable cars are seeing double digit growth from tier three and tier four cities. Other foreign automakers have ignored this low-margin segment, but General Motors is well positioned to capture this growing demand, given its joint venture SAIC-GM-Wuling Autos (SGMW). Two low cost brands of this venture — Wuling and Baojun — sell nearly two million vehicles every year.

We expect General Motors’ average net equity income per vehicle sold in China to go gradually from around $560 in 2016 to nearly $600 by the end of our forecast period.

This gradual increase is primarily due to the dominance of low margin models such as Baojun in its vehicle portfolio, as the growth in future is likely to come from Tier 3 and Tier 4 cities.  However, we expect a steady increase in the total vehicles sold by General Motors in China, from 26 million in 2016 to 36 million by the end of our forecast period.

While our price estimate for General Motors is slightly lower than its current market price, a faster pace of increase in the number of vehicles sold in China can lead to an upside in our price estimate.

China is critical region for General Motors, accounting for a significant portion of its valuation, as per our estimates. Growth in this region can ensure that revenues for the company grow at a steady pace in future. The company’s positive guidance for China is already in line with our estimates, though we will reassess our model as we go forward.

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