Contraction in Turkey’s domestic auto sales hits 76% y/y in October

Contraction in Turkey’s domestic auto sales hits 76% y/y in October
By bne IntelliNews November 5, 2018

Vehicle sales in Turkey shrank 76% y/y to 21,571 units in October after plunging 68% y/y in Septemberthe Turkish Automotive Distributors’ Association (ODD) reported on November 2.

“While the recently announced tax cuts might bring some relief, we believe that the market will continue to fall in the coming months,” Vladimit Bespalov of VTB Capital Research said on November 2 in a research note.

Vehicle sales have contracted on an annual basis for seven consecutive months since April and at an escalating pace, with consumer demand in Turkey weakening as the country slips towards what might be a heavy recession.

Weighted average interest rates (WAIR) on lira-denominated vehicle loans declined to 26.04% as of October 26 from 31.06% as of October 19, according to the latest data obtained from the central bank. WAIR on vehicle loans were as high as 33.73% as of October 5.

In January-October, Turkey’s overall vehicle sales were down 33% y/y to 485,027 units.

Sales were slightly up 1.5% in Q1 but then contracted by 20% y/y in Q2 and by 51% y/y in Q3.

Sales of passenger cars fell by 31% y/y to 379,274 in the first 10 months while the light commercial vehicles (LCV) market shrank 39% y/y to 105,753.

Unexpected tax cuts
On November 1, Turkish President Recep Tayyip Erdogan’s son-in-law and finance minister, Berat Albayrak, unexpectedly announced tax cuts on several sectors, including cars, white goods, housing and furniture, until the end of the year.

Accordingly, VAT on commercial vehicle sales was cut to 1% from 18% and the special consumption tax levied on vehicles with engines with less than 1,600cc was cut by 15pp.

Ford Otosan and Tofas shares gained more than 7% d/d following the tax cut announcement while the daily gain on Dogus Otomotiv shares passed 17%.

Tofas shares rose further by 0.57% d/d to TRY21.04 on November 2 at the close while the benchmark BIST-100 was up 1.88% to 94,123. The annual loss on Tofas shares stood at 32% versus 18% on the BIST-100.

Dogus Otomotiv shares lost 0.21% d/d to stand at TRY4.69 on November 2, bringing the annual loss to 38%, while Ford Otosan gained 2.82% d/d to close the week at TRY61.95. Ford Otosan shares were also up 17% y/y.

VTB’s current forecasts imply that Turkey's light vehicle sales will fall 38% y/y in 2018, although the risks remain on the downside.

In this environment, VTB prefers Ford Otosan (Buy; 12-mo TP TRY 70; ETR of 23%) and Tofas (Buy; 12-mo TP TRY 30; ETR of 52%) due to their strong export exposure to Dogus Otomotiv (Hold, 12-mo TP TRY5.50; ETR of 17%), which is a pure domestic play.

Meanwhile, VTB notes potential short-term headwinds for the Tofas share price, which might result from the company's possible exclusion from the MSCI Turkey in November. 

The October decline in light vehicles sales of Ford Otosan (-77% y/y) and Tofas (-77% y/y) was broadly in line with the market, while Dogus Otomotiv (-83% y/y) underperformed.

Likely focus is on margins
VTB believes that in the current environment the key players will likely focus on margins rather than volumes, but will still face challenges in shifting in full the effects of the recent lira depreciation onto consumers. “From this perspective Ford Otosan and Tofas are also better positioned, as they are local producers, although their share of FX-linked costs is still quite high and they also sell imported vehicles in Turkey.”

Tofas’ net income rose 10% y/y to TRY311mn in Q3 while turnover also grew 14% y/y to TRY4.3bn, the company said on October 31 in a bourse filing.

Dogus Otomotiv said on October 31 in a bourse filing that it signed an agreement to sell its 100% stake in its Switzerland unit D-Auto Suisse SA to Orchid Swiss Development (Pte) Ltd. ve Juglans Regia.

D-Auto operates with a paid-in capital of CHF12mn. Loussene-based D-Auto is a distributor and service provider for Porsche in Switzerland.

The ODD announced on October 17 that it cut its domestic vehicle sales forecast for 2018 to 6000,000, a 39% y/y contraction, from a previous forecast of 925,000-975,000. It expects sales to fall further to 450,000 units in 2019. Total vehicle production is expected to decline by 5% y/y to 1.59mn in 2018 while vehicle exports in units are expected to decline by 2.5% y/y.

Tofas was to suspend production at its Bursa plant for nine days in October given the contraction in demand seen in its domestic market, the company said on September 26 in a bourse filing.

Recently, Tesla reportedly pulled the handbrake on a plan to expand into Turkey with stores and service centres due to new trade war tariffs.

Across January-September, total vehicle production in Turkey declined by 5% y/y to 1.17mn units while export revenues rose by 13% y/y to $24bn despite a 1% y/y decline to 972,208 units in sales abroad, data from the Turkish Automotive Manufacturers’ Association (OSD) showed on October 12.

Confidence lowest since January 2009
Statistics institute TUIK said on October 31 that Turkey’s economic confidence index fell further by 5% m/m to 67.5 in October, the lowest level seen since January 2009.

Turkey's consumer sentiment index fell by another 3% m/m to 57.3 in October, marking the lowest level seen since December 2008, data released by TUIK showed on October 23.

Turkey's vehicle sales decreased by 2.8% to 983,720 units in 2017.

In 2017, Turkey’s auto production increased by 13% y/y to a record high of 1.67mn units thanks to rising exports.

In 2016, the country’s automotive output increased by 9% to 1.49mn units.

Units Oct.17 Oct.18 YoY Chng 10mo17 10mo18 Chng, YoY Market share, October 2018 Market share, 10mo18 Market share, FY17
Total market                
PC 70,488 16,807 -76.20% 547,109 379,272 -30.70% 100% 100% 100%
LCV 21,264 4,762 -77.60% 171,986 105,753 -38.50% 100% 100% 100%
Light vehicles 91,752 21,569 -76.50% 719,095 485,025 -32.60% 100% 100% 100%
Ford Otosan                
PC 3,312 779 -76.50% 30,828 19,731 -36.00% 4.60% 5.20% 5.50%
LCV 6,237 1,432 -77.00% 50,639 32,969 -34.90% 30.10% 31.20% 30.50%
Light vehicles 9,549 2,211 -76.80% 81,467 52,700 -35.30% 10.30% 10.90% 11.60%
PC 5,745 1,558 -72.90% 49,766 31,529 -36.60% 9.30% 8.30% 8.90%
LCV 5,532 1,052 -81.00% 42,133 22,508 -46.60% 22.10% 21.30% 25.10%
Light vehicles 11,277 2,610 -76.90% 91,899 54,037 -41.20% 12.10% 11.10% 12.80%
Dogus Otomotiv                
PC 16,192 2,641 -83.70% 114,683 74,390 -35.10% 15.70% 19.60% 21.10%
LCV 2,538 499 -80.30% 21,794 13,424 -38.40% 10.50% 12.70% 11.90%
Light vehicles 18,730 3,140 -83.20% 136,477 87,814 -35.70% 14.60% 18.10% 18.90%
Source: ODD, VTB Capital Research