“Investors Network” Ge Fanmei

In March of this year, clearance price cuts for Dongfeng cars attracted attention. Among them, 56 models were subsidized, and the price drop was as high as 90,000. As a result, car manufacturers were “caught up” and the “price war” spread once again.

It is widely believed in the industry that Dongfeng Motor Group's move may be to “digest inventory.” As of the 2022 interim report, the inventory turnover ratio of Dongfeng Group Co., Ltd. (00489.HK), a Hong Kong-listed company of Dongfeng Motor, was 3.21 times, a new low for the same period in recent years.

Dongfeng Motor Group's sales have continued to decline in recent years, and price cuts may be a futile move. However, on March 22, the China Association of Automobile Manufacturers spoke out through official channels, calling on all parties to treat this round of automobile promotions rationally so that the market can return to normal order as soon as possible. The China Automobile Association pointed out that the price war is not a long-term solution; the government, enterprises, and media should view this rationally and jointly maintain market order.

Significant price reduction

According to the official website of Dongfeng Motor Group, the predecessor of Dongfeng Motor Group was the second automobile manufacturing plant founded in 1969 and is headquartered in Wuhan City, Hubei Province. The business covers a full range of commercial vehicles, passenger cars, military vehicles, new energy vehicles, key vehicle assemblies and parts, automotive equipment, travel services, automobile finance, etc., and its products are sold to more than 80 countries around the world. It currently has total assets of 537.7 billion yuan and 131,000 employees. 3.275,000 vehicles were sold in 2021. Dongfeng Motor ranked 85th in the Fortune 500 and 9th in China's top 500 manufacturing industry.

In March of this year, Dongfeng Motor Group drew widespread attention in the industry with the strongest limited-time car subsidy discount in history. On the evening of March 6, the official WeChat account of the Wuhan Economic Development Zone published the article “Promoting the implementation and effectiveness of a package of consumer promotion policies; the Wuhan Economic Development Zone makes every effort to activate automobile consumption potential”.

The article mentioned above: Recently, citizens can enjoy a “big gift” of 4,000 yuan to 90,000 yuan by purchasing 56 fuel and new energy models produced by Dongfeng's seven automobile brands, including Dongfeng Honda, Dongfeng Fengshen, Dongfeng Nissan, and Rantu.

Among them, the maximum discount is 90,000 yuan for Dongfeng Citroen, 68,000 yuan for Dongfeng Honda, 60,000 yuan for Dongfeng Nissan, 48,000 yuan for Dongfeng Peugeot, and 40,000 yuan for Dongfeng Fengshen. As an example, the market guide price for the Dongfeng Citroen C3-XR was 113,900 yuan. This time, the subsidy was 56,000 yuan. The price after the subsidy was directly reduced by 50%.

It is worth noting that this limited-time car purchase subsidy promotion is a comprehensive subsidy for the Hubei government and enterprise. It is a joint government and enterprise subsidy between Hubei Province and car companies. The car companies and the government are partly responsible for this round of government and enterprise subsidies. This round of government and enterprise subsidies is mainly for Dongfeng Motor, and the subsidy ends on March 31.

According to a sales person at a 4S store in Hubei, “You must buy and license a car locally in Hubei and issue the ticket before March 31; if you cannot get a loan, you must pay the full official guide price. The subsidy will be refunded to your bank account in half by the car company and the government within 15 working days.” According to information, in this round of government and enterprise subsidies, car purchases are limited to “people from Hubei, cars from Hubei, and purchases from Hubei.”

Stimulated by strong promotions, Dongfeng Motor sold well. According to a document issued by the Wuhan Economic Development Zone on March 9, in the 7 days since Dongfeng Honda launched activities to promote automobile consumption on March 1, the average daily order volume of Dongfeng Honda has increased fourfold compared to February. According to information, Dongfeng Honda will produce 75,000 vehicles in March. In addition, Dongfeng Fengshen reached a sales order of 730 vehicles from March 4 to 7, an average increase of 7 times over February.

Regarding this car purchase subsidy campaign, relevant people from Dongfeng Peugeot responded that this is normal market behavior, and that the NEV industry is cutting prices very vigorously. Meanwhile, a staff member from the investor relations department of Dongfeng Group Co., Ltd. told the media, “We are actually a normal promotion. Those models that are quite aggressive are mainly models that need to be replaced. Let's clear these inventory. Also, there are some countries that have 6A inventories, so we just took this opportunity to clear them out early.”

Interestingly, at a time when there was a boom in public opinion where the price of Dongfeng cars was drastically reduced, the stock price of Dongfeng Motor (600006.SH), an A-share listed company with 29.9% of the shares held by Dongfeng Group Co., Ltd., rose significantly. In response, the Dongfeng Group Co., Ltd. staff mentioned above said, “Some people may mistake Dongfeng Motor for us. The A-share Dongfeng Motor is actually a light truck company.”

Staff at Dongfeng Motor's directors' office also said that although the rise and stop may be related to Hubei Province's car purchase subsidy this time, the car purchase subsidy does not cover the company's products. Dongfeng Motor manufactures and sells commercial vehicles, and Hubei's car purchase subsidies target passenger cars.

Inventory removal is under pressure

According to data from the China Automobile Dealers Association, the inventory warning index for Chinese automobile dealers in February was 58.1%, up 2 percentage points from the previous year. The survey showed that 80.2% of dealers believed that February sales did not meet expectations, inventory pressure was high, and capital flow was poor. Due to intense market competition, many car companies sold at reduced prices, and dealers' business conditions declined.

For Dongfeng Motor Group, this round of subsidies and concessions can be described as unprecedented. Can inventory removal and slow turnover bring about improvements?

Currently, the latest financial report of Dongfeng Group Co., Ltd. only discloses the 2022 interim report. Data shows that in the first half of 2022, Dongfeng Group's stock inventory was 13.027 billion yuan, an increase of 14.08% over the end of 2021, the highest value in nearly 10 years.

The 2022 interim report of Dongfeng Group Co., Ltd. did not disclose the specific composition of the inventory. According to the 2021 annual report data, in the inventory of Dongfeng Group Co., Ltd., the inventory amount of manufactured products in the inventory of Dongfeng Group Co., Ltd. was about 8.997 billion yuan, a decrease of 7.37% over the previous year.

Furthermore, the inventory turnover of Dongfeng Group shares is also slowing down. According to the data, the number of inventory turnover days for Dongfeng Group Co., Ltd. at the end of the first half of 2022 was 61 days, an increase of 28 days over the previous year, and an increase of 19 days over the 42 inventory turnover days at the end of 2021.

Judging from the inventory turnover ratio, the 2022 interim report shows that the inventory turnover ratio of Dongfeng Group shares was 3.21 times, a new low for the same period in recent years.

In fact, under the influence of Dongfeng Group's price reduction promotions, many SAIC Motor brands have also joined the Hubei government and enterprise subsidy campaign. All subsidies end on March 31. Among them, SAIC MG, SAIC Roewe, and SAIC Volkswagen have special subsidies in Hubei Province. The maximum comprehensive discount after the subsidy is 40,000, 50,000, and 70,000 yuan respectively.

As for SAIC Motor Group, which is also promoting price cuts, its inventory has also risen. Data shows that at the end of the first half of 2022, SAIC Motor's inventory balance of products was 45.837 billion yuan, up 45.64% from 31,473 billion yuan at the beginning of the period, but down 13.81% from 53.179 billion yuan at the end of 2020.

However, before this round of price war, the gross margin of Dongfeng Group shares had already fallen to a new low for many years. Wind data shows that in 2020, 2021, and the first half of 2022, the gross margin of Dongfeng Group shares was 14.5%, 12.56%, and 11.74% respectively, falling year by year.

Looking at the first half of 2022, the gross profit margin of Dongfeng Group's shares of 11.74% was higher than SAIC Motor's 8.69% during the same period, and lower than the gross profit margins of Foton Motor 11.81%, BYD 13.51%, Great Wall Motor 18.38%, and Changan Automobile 16.96%.

Li Xiang, founder of Ideal Auto, once said that a gross margin of 20% is a red line for the long-term healthy development of an enterprise. If we look at it from this point of view, Dongfeng Group shares still need to establish a strong red line of development.

Poor sales

The reason behind the price reduction promotion of Dongfeng Group Co., Ltd. and the rush to remove inventory is mainly due to the dilemma of the company's automobile sales continuing to decline.

On March 8, Dongfeng Group Co., Ltd. stated in a disclosure announcement on the Hong Kong Stock Exchange that in January-February 2023, the company sold 262,300 vehicles, a year-on-year decrease of 48.48%. Sales are low, and Dongfeng Group shares are in urgent need of self-help, and price reduction promotions have become their main means.

In fact, sales of Dongfeng Group shares have been sluggish for a long time. As the leader of Dongfeng Group, Zhu Yanfeng has led the development of the company since 2015, but the company's performance has not been ideal. Dongfeng Group Co., Ltd. began to decline after sales peaked at 4.276,700 vehicles in 2016. In 2022, there were only 2,464,500 vehicles, a decline of more than 40% from the high point, down 11.19% from 2,7751 million vehicles in 2021.

Sales support has been lost, and the profitability of Dongfeng Group shares has also declined. According to the 2022 interim report, the operating income of Dongfeng Group Co., Ltd. was 45.986 billion yuan, a year-on-year decrease of 36.16%, and net profit of 5.156 billion yuan, a year-on-year decrease of 44.32%.

Passenger cars account for the majority of Dongfeng Group's automobile sales. In 2022, Dongfeng Group Co., Ltd. sold 2.153,200 passenger cars, accounting for 87%, down 4.4% from 2021. This is also the fifth year in a row that the company experienced a decline in passenger car sales, starting in 2018.

According to CPC data, the cumulative sales volume of passenger cars in China in 2022 was about 205.43 million units, an increase of 1.9% over the previous year. Judging from this, Dongfeng Group's sales growth was lower than that of the industry.

Sales growth is weak, profitability is declining steadily, and Dongfeng Group Co., Ltd. is also planning a breakthrough in the transformation of new energy vehicles. In 2022, Dongfeng Group Co., Ltd. sold a total of 346,600 new energy vehicles, an increase of 115.5% over the previous year of 166,600 vehicles in 2021. Among them, there were 3204,000 new energy passenger vehicles, an increase of 123.5% over the previous year of 143,300 vehicles in 2021.

Rantu Auto is a high-end new energy vehicle brand created by Dongfeng Group. It has accumulated losses of 1,444 billion yuan from 2021 to the first half of 2022. Despite its poor performance, it is still sought after by capital. It has recently completed a round A financing of nearly 5 billion yuan, with a total of 10 investors, mainly the “national team”. The joint investors are the State-owned Enterprise Mixed Reform Fund and Bank of China Assets. The investors include ICBC Investment, Agricultural Bank Investment, and BOCOM Yuanjiang, three local state-owned assets, Wuhan Economic Development Fund, Hubei High Quality Development Fund, and Zhongxin High Investment, Ganfeng Lithium and Xinwangda, two industries and private capital.

After this round A financing was completed, Rantu Auto's valuation was about 29.5 billion yuan, making it the largest first-round financing for China's NEV industry. After this round of financing, Dongfeng Group held 78.88% of the shares, Series A investors held 12.37% of the shares, and the Rantu employee shareholding platform held 8.75% of the shares.

However, Rantu Auto, which is popular for capital, does not seem to have gone smoothly on the road to high-end new energy. Rantu Auto sold less than 20,000 vehicles for the full year of 2022, reaching only 62% of the sales target set for that year. The completion rate was almost at the bottom of the new car builders. Furthermore, its annual sales volume is not the same as the annual sales of “Wei Xiaoli”, Zero Sports, etc., which exceeded 100,000 vehicles.

Entering 2023, sales of Rantu cars did not improve. In January 2023, Rantu delivered 1,548 vehicles; in February, Rantu's deliveries fell to 1107 vehicles, a decrease of 28.49% over the previous month. According to the NEV wholesale sales rankings published by the CPC, Rantu Auto ranked second to last.

Currently, Dongfeng Group Co., Ltd. has also experienced major personnel changes. On March 3, Dongfeng Motor Group Co., Ltd. announced that Zhu Yanfeng, chairman of the group and secretary of the Party Committee, will officially step down, and Yang Qing, director, deputy party committee secretary and general manager of Dongfeng Company, will preside over the work of Dongfeng Company. Now that Zhu Yanfeng, the head of Dongfeng Motor Group for about 8 years, has stepped down, where will Dongfeng Group's shares go in the future? (Produced by Thinking Finance) ■