Chinese auto makers are expected to report strong earnings in 2010, but while analysts are expecting some deceleration in 2011, they are divided on the extent of the anticipated slowdown.

Chinese passenger car deliveries rose 29.3% to 1.34 million in November, setting a new record, according to data from the China Association of Automobile Manufacturers.

Auto sales have benefitted from measures introduced by the Chinese government to boost spending, including tax relief on smaller cars.

Against this backdrop, and with a boost to wealth from resilient stock and property markets, the auto sector should report strong 2010 earnings, noted Deutsche Bank auto analysts. See video on electric cars

However, next year might be a bit tougher for the sector, the analysts said.

“With a higher base for comparison and dissipation of stimulus effects, we expect China vehicle sales growth to slow to 11% in 2011,” they said.

Still, the Deutsche Bank analysts expect longer-term China auto sales growth to be sustainable at the low-teens level due to low penetration, especially in inland regions.

“A key upside risk to our neutral sector stance is stronger-than-expected sales supported by government incentives. A key downside risk is macro-economic weakening, which could dwarf auto consumption sentiment,” they said.

Analysts at UOBKayHian were more negative on the sector’s prospects and downgraded the sector to underweight from marketweight on Friday, citing a slowdown in demand and increased new capacity as key risks.

“We believe the upward cycle of China’s automobile industry, in terms of corporate profits, will peak by 2011,” they said.

Escalating inflation and a roll-back in policy stimulus are key risks for the sector, as is intensifying competition, they believe,.

“With the supply-demand dynamics losing momentum, we expect margins of Chinese auto makers to return from super-high levels in the first half of 2010 to average levels in the second half of 2010 and in 2011,” they said.
Different views

Divisions were more striking at the stock level.

Deutsche Bank upgraded Geely Automobile Holdings Ltd. /quotes/comstock/22h!e:175 (HK:175 3.81, +0.11, +2.97%)   /quotes/comstock/11i!gely.y (GELYY 9.75, -0.01, -0.10%)  to buy from hold on Friday.

“Together with the government’s support for local brands and small-engine passenger vehicles and Geely’s planned launches of more models with automatic transmission, we expect the company’s growth to outperform the sector average in 2011-2012,” the analysts said.

However, the UOBKayHian analysts cut their stance on the firm to sell from hold on Friday “on the back of slowing earnings momentum.”

“Geely, along with other small car producers, is facing two problems – a glut in inventories and over-capacity,” they said. Geely shares were trading down 0.8% in Hong Kong on Friday

The UOBKayHian analysts also downgraded Dongfeng Motor Group Co. Ltd. /quotes/comstock/22h!e:489 (HK:489 14.54, -0.04, -0.27%)   /quotes/comstock/11i!dnfgf (DNFGF 1.84, 0.00, 0.00%)  to hold from buy on Friday, saying they believes the firm’s joint venture operations with Honda, Nissan and PSA Peugeot Citroen will come under increasing pressure from existing rivals and new entrants.

Deutsche Bank, in contrast, has a buy rating on Dongfeng Motor, with the broker citing a below-sector-average valuation and solid fundamentals for the firm. Dongfeng shares lost 1.8% on Friday.

Still, both brokers were agreed on a sell recommendation for BYD Co. Ltd. /quotes/comstock/22h!e:1211 (HK:1211 43.60, -1.10, -2.46%) /quotes/comstock/11i!byddy (BYDDY 11.38, -0.26, -2.23%)  trading down 3% on Friday.

Deutsche Bank downgraded its rating on the firm to sell on Friday, citing near-term earnings disappointment risk.

The UOBKayHian analysts reiterated their sell recommendation on the firm noting “cut-throat price reduction” and cut net profit estimates for the firm by 9% for 2010, by 19% for 2011 and by 15% for 2012.

Across Asia, Hong Kong’s Hang Seng Index /quotes/comstock/08s!i:hsi (HK:HANGSENG 23,163, -8.89, -0.04%)  declined 0.6%, while China’s Shanghai Composite index /quotes/comstock/16k!i:000001 (CN:SHCOMP 2,841, +30.09, +1.07%)   edged up 0.2%. Chinese inflation data is due out over the weekend.

Elsewhere around the region, South Korea’s Kospi (XX:$SEU 1,986, -2.82, -0.14%)   edged down 0.2%, Japan’s Nikkei Stock Average index /quotes/comstock/11b!i:ni225 (JP:NI225 10,212, -73.93, -0.72%)  declined 0.4% and Australia’s S&P/ASX 200 index /quotes/comstock/27w!i:xjo (AU:XJO 4,746, +4.64, +0.10%)  rose 0.1%.