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China Consumer Discretionary

4 January 2016

China Autos Sector

Running on fumes in 2016; refill needed for 2017

Positive investor sentiment on the sector should persist in 1Q-3Q16, but concerns are likely to resurface as we get closer to 2017

We prefer domestic brands to foreign brands, but expect SUV margins to continue to deteriorate over our forecast period

Positive on Geely, BAIC and DFM; negative on GWM; initiating on DFM with an Outperform (2) and Brilliance with an Underperform (4)

Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]

China Autos Sector: 4 January 2016

Table of contents

Running on fumes in 2016; refill needed for 2017 ................................................. 5

Tax cut should boost sales volume growth in 2016 ........................................................... 5

Strong industry pipeline in 2016 ........................................................................................ 6

Domestic brands should keep outpacing foreign brands ..................................................10

Accelerating investment in NEVs in 2016-20 ...................................................................14

Balance sheets remain healthy ........................................................................................18

Hard to see any recovery for CVs ....................................................................................18

Valuations and recommendations ........................................................................ 20

Not that cheap anymore ...................................................................................................20

Recommendations ...........................................................................................................20

Risks to our Neutral sector view .......................................................................................21

Company Section

Geely Automobile ............................................................................................................23

BAIC Motor ......................................................................................................................32

BYD .................................................................................................................................41

Dongfeng Motor Group ....................................................................................................52

Guangzhou Automobile Group .........................................................................................71

Brilliance China Automotive .............................................................................................78

Great Wall Motor ..............................................................................................................93



What's new: We expect investor sentiment on the China Autos Sector to

stay strong in 1Q-3Q16 on robust new PV sales resulting from the

purchase tax cut and a rich pipeline. However, we believe new PV sales

growth will slow in 4Q16, due to the high base in 4Q15 and because, as we

step into 2H16, we expect concerns on new-car unit sales to resurface in

2017. In light of this, we maintain our Neutral rating on the sector.

What's the impact: Strong sales volume growth in 1Q-3Q16E but YoY

decline in 2017E. We expect a 12% YoY rise in new passenger vehicle

(PV) sales volume in 1Q-3Q16 due to the tax policy and a strong pipeline

(see p. 8-9). We expect the YoY growth to be strongest in 2Q16-3Q16, up

17-18% YoY, but for it to slow to flat YoY in 4Q16. In 2017, we expect new-

car unit sales to fall by 3% YoY, due to the high base effect and because

our base case assumes the end of the supportive tax rate – ie, that the

purchase tax cut won’t be extended beyond end-2016 and the tax will

actually rise again to 10% in 2017. Meanwhile, we expect strong SUV sales

volume growth, but see SUV margins continuing to deteriorate due to rising

competition.

Growth opportunities remain, in lower-tier cities and NEVs. While

overall car ownership in China’s lower-tier cities remains low, we stick with

our view that this offers local OEMs good sales-volume growth

opportunities. In addition, we expect local OEMs to produce more NEV

models over our forecast period, prompted by China’s commitment to NEV

infrastructure investment from 2016. On this theme, we see the key players

as Geely (175 HK, HKD4.23, Buy [1]) and BYD (1211 HK, HKD42.40,

Outperform [2]). Meanwhile, for luxury brands, we reiterate our view that

overall sales performance will outperform the broader China autos market,

at least in 2016-17.

What we recommend: Geely is still our top pick, due to its strong pipeline

in 2016 and what we view as its long-term rerating story. We also expect

strong sales-volume growth in 2016E for BAIC Motor (1958 HK, HKD7.77,

Buy [1]) and Dongfeng Motor (DFM) (489 HK, HKD10.64, Outperform [2]),

as they also both have rich pipelines. But we remain negative on Great

Wall (GWM) (2333 HK, HKD9.14, Underperform [4]) as it has failed in its

bid to upgrade its brand and its 2016 pipeline looks unexciting. The outlook

for Brilliance China (1114 HK, HKD9.84, Underperform [4]) also looks

uninspiring. The major risks to our Neutral sector view would be if new car

sales were either weaker or stronger than expected.

How we differ: We are one of only a few firms to expect a YoY decline in

PV sales in 2017, making us more cautious than the market.

4 January 2016

China Autos Sector


Positive investor sentiment on the sector should persist in 1Q-3Q16, but concerns are likely to resurface as we get closer to 2017

We prefer domestic brands to foreign brands, but expect SUV margins to continue to deteriorate over our forecast period

Positive on Geely, BAIC and DFM; negative on GWM; initiating on DFM with an Outperform (2) and Brilliance with an Underperform (4)

Key stock calls

Source: Daiwa forecasts

China Autos sector: TP valuation summary

Company Target price

(HKD) Target PER

2016E

Geely 4.90 11x

BAIC Motor 9.40 9.5x

BYD 47.00 SOTP

Great Wall 8.40 7.5x

GAC 7.00 8.5x

Dongfeng Motor 12.20 7.0x

Brilliance China 8.90 10x

Source: Daiwa

Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]

New Prev.

Geely Automobile (175 HK)

Rating Buy Buy

Target 4.90 4.90

Upside p 15.8%

BAIC Motor (1958 HK)

Rating Buy Buy

Target 9.40 9.40

Upside p 21%

Dongfeng Motor Group (489 HK)

Rating Outperform

Target 12.20

Upside p 14.7%

Great Wall Motor (2333 HK)

Rating Underperform Underperform

Target 8.40 8.90

Downside q 8.1%

Brilliance China Automotive (1114 HK)

Rating Underperform

Target 8.90

Downside q 9.6%

4


Sector stocks: key indicators

Source: Bloomberg, Daiwa forecasts

China Autos Sector: key assumptions

Sales Volume (units, YoY %) 2013 2014 2015E 2016E 2017E

2013 2014 2015E 2016E 2017E

Geely 549,000 418,000 500,000 600,000 645,000

13.6% -24.0% 19.6% 20.0% 7.4% Beijing Brand 202,000 309,000 314,000 420,000 480,000

159.3% 53.0% 1.3% 33.9% 14.3%

Beijing Benz 116,000 145,000 249,000 323,000 372,000

12.6% 25.4% 71.0% 30.0% 15.0% Beijing Hyundai 1,031,000 1,120,000 1,042,000 1,152,000 1,226,000

19.9% 8.7% -7.0% 10.6% 6.4%

GAC Honda 435,000 480,000 570,000 650,000 661,000

37.7% 10.3% 18.8% 14.0% 1.7%

GAC Toyota 303,000 374,000 409,000 439,000 439,000

21.2% 23.4% 9.4% 7.3% 0.0%

GWM 771,000 733,000 803,000 855,000 945,000

24.0% -4.9% 9.6% 6.4% 10.6%

BYD - Conventional 470,000 373,000 386,000 395,000 423,000

11.9% -20.6% 3.5% 2.4% 7.0%

BYD - NEV 3,000 21,000 68,000 123,000 149,000

-6.0% 563.9% 226.8% 79.9% 21.2%

Dongfeng Nissan 926,000 952,000 981,000 1,144,000 1,202,000

19.8% 2.8% 3.0% 16.7% 5.0%

Dongfeng PSA 550,000 704,000 699,000 713,000 691,000

25.0% 28.0% -0.7% 1.9% -3.0%

Dongfeng Honda 321,000 308,000 398,000 458,000 455,000

13.8% -4.1% 29.1% 15.1% -0.7%

Brilliance BMW 207,000 279,000 290,000 332,000 370,000

28.5% 34.7% 4.2% 14.6% 11.4%

ASP (CNY, YoY %) 2013 2014 2015E 2016E 2017E

2013 2014 2015E 2016E 2017E

Geely 52,246 52,024 56,706 61,243 65,530

5.8% 1.8% 9.0% 8.0% 7.0% Beijing Brand 33,852 40,178 36,160 33,267 32,269

-25.0% 18.7% -10.0% -8.0% -3.0%

Beijing Benz 286,364 302,036 314,118 314,118 314,118

-0.6% 5.5% 4.0% 0.0% 0.0% Beijing Hyundai 100,084 97,938 93,530 90,725 88,003

10.8% -2.1% -4.5% -3.0% -3.0%

GAC Honda 134,191 124,586 118,357 112,439 112,439

37.6% 10.2% 12.0% 10.0% 8.0%

GAC Toyota 172,842 144,020 136,819 136,819 136,819

21.2% 23.4% 12.0% 8.0% 8.0%

GWM 69,809 80,964 85,822 89,254 91,039

6.5% 16.0% 6.0% 4.0% 2.0%

BYD - Conventional 53,568 66,680 80,016 96,019 105,621

-0.2% 24.5% 20.0% 20.0% 10.0%

BYD - NEV 488,612 345,747 328,459 312,036 296,435

n/a -29.2% -5.0% -5.0% -5.0%

Dongfeng Nissan 138,391 128,173 125,609 124,353 121,866

n/a -7.4% -2.0% -1.0% -2.0%

Dongfeng PSA 96,326 91,840 90,003 88,203 85,557

n/a -4.7% -2.0% -2.0% -3.0%

Dongfeng Honda 149,927 133,302 130,636 128,024 124,183

n/a -11.1% -2.0% -2.0% -3.0%

Brilliance BMW 353,954 339,445 325,867 325,867 325,867

1.4% -4.1% -4.0% 0.0% 0.0%

Net profit (CNY m, YoY %) 2013 2014 2015E 2016E 2017E

2013 2014 2015E 2016E 2017E

Geely 2,663 1,431 2,604 3,366 3,894

30.5% -46.3% 82.0% 29.3% 15.7%

BAIC 2,714 4,511 5,057 6,324 7,221

-20.6% 66.2% 12.1% 25.1% 14.2%

GAC 2,653 3,185 3,891 4,533 4,670

133.9% 20.1% 22.2% 16.5% 3.0%

GWM 8,224 8,042 8,497 8,624 8,956

44.5% -2.2% 5.7% 1.5% 3.8%

BYD 553 86 1,327 2,512 3,674

579.6% -84.5% 1443.0% 89.2% 46.3%

Dongfeng 10,528 12,845 12,021 13,201 13,591

15.8% 22.0% -6.4% 9.8% 3.0%

Brilliance 3,374 5,403 3,340 3,873 4,405

46.6% 60.1% -38.2% 15.9% 13.7%

Gross margin (%, YoY pp.) 2013 2014 2015E 2016E 2017E

2013 2014 2015E 2016E 2017E

Geely 20.1% 18.2% 18.3% 18.2% 18.2%

1.6 (1.9) 0.1 (0.1) (0.0)

BAIC 3.2% 15.9% 17.4% 18.5% 18.7%

8.0 12.7 1.5 1.1 0.2

GAC 10.6% 11.4% 11.6% 11.6% 11.7%

5.3 0.8 0.2 0.1 0.0

GWM 25.9% 25.0% 23.3% 22.1% 21.2%

1.9 (0.9) (1.6) (1.2) (1.0)

BYD 13.1% 13.8% 13.9% 13.8% 14.5%

1.5 0.7 0.1 (0.1) 0.7

Dongfeng 12.6% 13.2% 12.0% 12.0% 12.0%

6.7 0.7 (1.2) - (0.0)

Brilliance 11.2% 10.2% 7.0% 7.5% 8.0%

(0.5) (1.0) (3.2) 0.5 0.5

Net margin (%, YoY pp.) 2013 2014 2015E 2016E 2017E

2013 2014 2015E 2016E 2017E

Geely 9.3% 6.6% 9.2% 9.2% 9.2%

1.0 (2.7) 2.6 (0.0) 0.1

BAIC 21.2% 8.0% 5.7% 5.5% 5.5%

(75.9) (13.2) (2.4) (0.2) (0.0)

GAC 14.1% 14.2% 13.5% 10.1% 9.4%

5.3 0.1 (0.7) (3.4) (0.8)

GWM 15.0% 13.3% 12.1% 11.1% 10.3%

1.3 (1.7) (1.2) (1.0) (0.9)

BYD 1.1% 0.2% 1.6% 2.3% 3.0%

0.9 (0.3) 2.4 (0.9) 0.7

Dongfeng 28.3% 15.9% 9.7% 11.4% 12.4%

(121.0) (12.4) (6.2) 1.7 1.0

Brilliance 55.3% 98.0% 65.7% 69.9% 80.0%

16.4 42.7 (32.3) 4.2 10.2

Source: Companies, Daiwa forecasts

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

BAIC Motor 1958 HK 7.77 Buy Buy 9.40 9.40 0.0% 0.674 0.674 0.0% 0.842 0.842 0.0%

Brilliance China Automotive 1114 HK 9.84 Underperform 8.90 0.662 0.767

BYD 1211 HK 42.40 Outperform Outperform 47.00 56.00 (16.1%) 0.522 0.529 (1.3%) 0.918 1.089 (15.8%)

Dongfeng Motor Group 489 HK 10.64 Outperform 12.20 1.395 1.532

Geely Automobile 175 HK 4.23 Buy Buy 4.90 4.90 0.0% 0.296 0.296 0.0% 0.382 0.382 0.0%

Great Wall Motor 2333 HK 9.14 Underperform Underperform 8.40 8.90 (5.6%) 0.931 0.931 0.0% 0.945 0.945 0.0%

Guangzhou Automobile Group 2238 HK 6.94 Hold Hold 7.00 6.40 9.4% 0.605 0.580 4.2% 0.704 0.636 10.8%

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2

5



Tax cut should boost sales volume growth in 2016

Raising our 2016 sales volume growth forecast, but cutting it for 2017

On 29 September 2015, China’s State Council announced new measures to support the

automotive industry. As well as its policies to support new-energy vehicles (NEV), it also

implemented a cut in the purchase tax, from 10% to 5%, for cars with engines of 1.6L or

less. This policy came into effect on 1 October 2015 and will last until 31 December 2016.

China: details of automotive stimulus policies

Subject Policy details

Cars with engines of <=1.6L Purchase tax reduced from 10% to 5%

NEVs Restriction on new NEV car sales removed in all cities

Old cars with excessive emissions To be replaced by NEVs by 2017

Source: State Council

We estimate that the 2015 tax cut policy will boost the sales of 68% of all the models in the

China market. However, we expect the impact in 2016 to be much milder than when a

similar policy was implemented in 2009. We now forecast 2016 sales volume growth of

12% YoY, compared with our previous forecast of 4% YoY. However, this still would be far

below the 50% YoY increase in 2009, due to differences in the macro environment (see

following table).

China: impact of stimulus policy on automotive sector, 2009 vs. 2016

2009 2016E

Daiwa’s GDP growth forecast 9.2% 6.5%

Daiwa’s M2 Growth 28.4% 10.5%

China PV market size, sales (m units) 10.3 23.5

- YoY growth 52.9% 11.6%

China new PV sales market size as a % of the US’s PV market 114.5% 163.1%

SUV sales as a % of PV sales 8.8% 35.6%

Other stimulus policies Subsidies to farmers in rural areas Removal of purchase restrictions on NEVs; Provide subsidies to encourage the

replacement of old models that with high emissions

Source: State Council, Daiwa forecasts

In 2009, apart from the purchase tax being cut from 10% to 5%, other supportive policies

were also in place, including the CNY4tn stimulus package, which helped to boost the

country’s economic growth through infrastructure investment, and by encouraging the

replacement of vehicles in rural areas (boosting both the PV and CV segments). Also, the

new car sales base was much smaller then, and China was seeing higher GDP growth.

Further, compared to 2009, we have been seeing a gradual slowdown in the China

economy since 2010. Daiwa’s economics team forecasts GDP growth to slow to 6.9% in

2015 and 6.5% in 2016. Given the backdrop of a slowing China economy, we believe this

could curb demand and consumption of PVs, and thus, even with the boost of the

purchase tax cut, we expect a 12% YoY increase in PV sales in 2016, after a 7% YoY rise

in 2015.

Meanwhile, our base case assumes that the current tax-cut policy will not be extended into

2017, and that the rate will go back up to 10% then. Accordingly, we expect PV sales to

decline by 3% YoY in 2017, given the high base in 2016.

From our sensitivity analysis, we do see a chance of the government first raising the

purchase tax to 7.5% in 2017, and then 10% in 2018, as was the case in 2010. If this were

to happen, we estimate that the new car sales volume would be flat YoY in 2017.

We are positive on the

purchase tax cut, but

expect the impact to be

much milder than that

for the 2009 cut

We currently assume no

extension in the

purchase tax cut after

the end of 2016; we see

it increasing to 10% in

2017, and this is our

base case

6


2017 China PV sales scenario analysis

Purchase tax on new cars China PV sales YoY change

Base case: Full reversal of the tax cut 10% 3% decline

Alternative case: gradual increase in the tax cut in 2 tranches 7.5% Flat


China: PV sales estimates by quarter China: PV sales estimates by year

Source: CAM, Daiwa forecasts Source: CAM, Daiwa forecasts

Strong industry pipeline in 2016

We expect strong SUV segment sales growth, but see margins continuing to deteriorate due to fierce competition

Apart from the purchase tax reduction, we think overall industry sales volume growth in

2016 will be driven by a strong pipeline, as many new models are being launched over the

2H15-1H16 period. We estimate that around 91 new models will be launched by the major

brands, much higher than the 30 or so new models in 2H14-1H15.

Of these new launches, SUVs should remain the major driver, with one-third of the new

models launched in 2H15-1H16 being these types of vehicles. We estimate that SUVs will

account for around 50% of total new model sales volume over this period. In November

2015 YTD, SUVs saw 54% YoY sales volume growth. We forecast a 54% YoY increase in

SUV sales volume in 2015, as we assume a total of 1.5m SUVs will be sold in China in

November-December.

We estimate that SUVs will account for 30% of total PV sales volume in 2015, which is

below the US number of 40% (see the following chart). And as we believe purchasing

patterns in China will follow those in the US, we see room for further growth in 2016, with

many new SUV models arriving over the same period. In 2016, we forecast SUV sales

volume growth to remain strong, although it is likely to start to slow, to 33% YoY (from 54%

in 2015). And, based on expected weak sales volume growth for the other segments in

2016, we look for new SUV sales to account for 35% of total new car sales for the year.

But we look for the pace of SUV sales growth to slow as we move into 2017, to 10% YoY,

by which time, SUVs should account for 41% of total new-car sales.

SUV penetration rate in US and China

Source: Wards, CAM, Daiwa forecasts

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

0

1

2

3

4

5

6

7

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E

1Q16

E

2Q16

E

3Q16

E

4Q16

E

1Q17

E

2Q17

E

3Q17

E

4Q17

E

China PV S ales Volume (LHS) YoY Growth (RHS)

(Quarterly sales, m units) (YoY % )

13.8 14.5 15.5

17.9 19.7

21.0

23.5 22.7

33.2%

5.2%

7.1%

15.7%

9.7%7.0%

11.6%

-3.3%

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 E 2016 E 2017 E

China PV S ales Volume (LHS) YoY Growth (RHS)

(Yearly sales, m units) (YoY % )

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

US: SUV and Cross Utility Vehicle to PV sales China: SUV to PV sales

Strong SUV pipeline in

2016

We expect SUVs sales

volume growth of 10-

30% YoY in 2016-17

7


On the margin side, as we expect competition to intensify in 2016, we look for SUV

margins (net and gross) to continue on their declining trend in 2016-17, although the

overall gross margin should remain above the 20% level, which is better than the margin

on sedans. We expect the automotive OEMs that have reported high gross margins over

the 2012-15 period, such as Great Wall, to experience margin erosion in 2016 and even in

2017 due to the high base.

Margin erosion to

continue in 2016-17

8


H-share listed OEM: model pipeline for 2H15-2016 Other OEMs: model pipeline for 2H15-2016

Company Model Type Launch date

Geely

Emgrand EV* Sedan 2H15

NL-3 SUV 2H15

Compact SUVs SUV 2016

Emgrand Cross Vehicle Cross 2016

Emgrand 4-door Sedan Sedan 2016

BAIC

Beijing Benz C350eL* PHEV Sedan 2H15

GLC SUV 2016

New E-class Sedan 2016

Beijing Hyundai Tucson* SUV 2H15

Elantra Lingdong Sedan 2016 (Mar)

Sonata PHEV ver. PHEV Sedan 2016

Equus Sedan 2016

Beijing Brand Senova X25* SUV 2H15

Senova X55 SUV 2H15 (Dec)

Senova X35 SUV 2H15 (Dec)

EV-260 EV Sedan 2016

BJ40 5-door ver SUV 2016

BJ80 SUV 2016

BYD

Song* PHEV SUV 2H15

Yuan PHEV SUV 2H15

Qin EV EV Sedan 2016

Great Wall

C30-classic (Facelift)* Sedan 2H15

Haval H1 Red badge* SUV 2H15

Haval H7 SUV 2016

A new SUV smaller than H2 SUV 2016

Haval H6 Blue badge SUV 2016

Haval H5 Blue badge SUV 2016

Facelift of H8 SUV 2016

GAC

GAC Honda New City* Sedan 2H15

Crider (Facelift) Sedan 2H15 (Dec)

Crosstour (Facelift) Sedan 2H15 (Dec)

Acura SUV SUV 2016

GAC Toyota Levin HEV* Hybrid Sedan 2H15

Lingzhi EV EV Sedan 2016

GAC Fiat-Chrysler Cherokee SUV 2H15

GAC Mitsubishi Outlander PHEV PHEV SUV 2016

GAMC GS4 EV EV SUV 2016

GA3S PHEV PHEV Sedan 2016

Brilliance

Brilliance BMW 3-series (Facelift)* Sedan 2H15

2-series Sedan 2016

X1 SUV 2016

Dongfeng

Dongfeng Peugeot-Citroën Citroën C5* Sedan 2H15

Peugeot 3008 (Facelift) SUV 2016

Dongfeng Nissan Venucia R50X* Sedan 2H15

Venucia T70X* SUV 2H15

Lannia* Sedan 2H15

Murano* SUV 2H15

Qashqai* SUV 2H15

Maxima Sedan 2016

Infiniti QX30 SUV 2016

Dongfeng Honda Greiz* Sedan 2H15

Civic Sedan 2016

Elysion MPV 2016 (Jan)

Dongfeng Renault Kadjar SUV 2016 (Mar)

Dongfeng Passenger Vehicle Fengshen A60* Sedan 2H15

Fengshen AX3 SUV 2H15

Dongfeng Liuzhou Motor S500* MPV 2H15


Changan

Changan Ford Focus* Sedan 2H15

Explorer* SUV 2H15

Taurus Sedan 2H15

Tourneo MPV 2016

Changan PSA DS 5* Sedan 2H15

DS 4S Sedan 2016

Changan Suzuki S.Cross* SUV 2H15

Swift* Sedan 2H15

Vitara* SUV 2H15

Changan Motor CS15 SUV 2016

Jiangling Landwind X7* SUV 2H15

SAIC

Shanghai Volkswagen Skoda Yeti* SUV 2H15

Skoda Octavia* Sedan 2H15

Skoda Superb* Sedan 2H15

Gran Lavida Sedan 2H15

Passat (Facelift) Sedan 2016

Touran L MPV 2016

Shanghai GM Buick Verano Sedan 2016

Shanghai GM Chevrolet Trax* SUV 2H15

Malibu* Sedan 2H15

Lova RV MPV 2H15

Shanghai GM Cadillac ATS-L (Facelift)* Sedan 2H15

CT6-40T Sedan 2H15

SAIC Motor Roewe 360* Sedan 2H15

MG5* Sedan 2H15

MG3 SW* SUV 2H15

Roewe E950 PHEV Sedan 2016

FAW Car

Besturn B70* Sedan 2H15

Besturn X80* SUV 2H15

Besturn B30* Sedan 2H15

FAW Toyota

Crown* Sedan 2H15

Prado (Facelift)* SUV 2H15

Land Cruiser (Facelift) SUV 2H15

FAW Volkswagen

FAW Volkswagen CC* Sedan 2H15

Golf GTI* Sedan 2H15

Bora Sedan 2H15

Golf SportsVan Sedan 2016

Magotan Sedan 2016

FAW Volkswagen Audi Q7* SUV 2H15

A6 (Facelift) Sedan 2016

Chery

Chery Tiggo 5* SUV 2H15

Arrizo 5 Sedan 2016

Chery Jaguar Land Rover Discovery Sport SUV 2H15

Dongfeng Yueda KIA

K5* Sedan 2H15

KX5 SUV 2016

Zotye

SR7 SUV 2H15

Z700 Sedan 2H15

Source: Companies, various media Note: *Already launched

Source: Companies, various media Note: *Already launched

9


H-share listed OEMs: model pipeline for 2H14-1H15 Other OEMs: model pipeline for 2H14-1H15


Geely

EC7 Sedan Jul-2014

GC9 Sedan Apr-2015

Vision Sedan Nov-2014

GWM

H2 SUV Jul-2014

H5 SUV Nov-2014

H1 SUV Nov-2014

H9 SUV Nov-2014

H8 SUV Apr-2015

BAIC

Beijing Brand Senova D20 Sedan Nov-2014

Senova X65 SUV Feb-2015

Wevan 007 SUV Jan-2015

Senova CC Sedan Apr-2015

BJ 40 SUV Apr-2015

EV-200 EV Sedan Mar-2015

Beijing Benz C-class Sedan Aug-2014

GLA SUV Aug-2014

Beijing Hyundai Verna (facelift) Sedan Mar-2015

Elantra Langdong (facelift) Sedan Oct-2014

ix 25 SUV Oct-2014

ix 35 (facelift) SUV Jan-2015

Sonata 9 Sedan Mar-2015

GAC

GAC Honda Accord (facelift) Sedan Mar-2015

Vezel SUV Oct-2014

GAC Toyota Camry Sedan Jan-2015

Levin Sedan Jul-2014

EZ MPV Dec-2014

GAC Fiat Viaggio Sedan Nov-2014

GAC Mitsubishi ASX (facelift) SUV Aug-2014

GAMC GA5 EV Sedan Nov-2014

GA6 Sedan Dec-2014

GS4 SUV Apr-2015

Brilliance

Brilliance BMW X1 (facelift)

Oct-2014

Dongfeng

Dongfeng Nissan Venucia R30 Sedan Jul-2014

Venucia E30 Sedan Sep-2014

Sunny (facelift) Sedan Feb-2015

Teana (facelift) Sedan Apr-2015

March Sedan Nov-2014

Venucia T70 SUV Jan-2015

Q50L Sedan Nov-2014

QX50 SUV Mar-2015

Dongfeng Honda Spirior Sedan Nov-2014

CR-V (facelift) SUV Apr-2015

XR-V SUV Nov-2015

Dongfeng PSA 308S Sedan Mar-2015

508 Sedan Jan-2015

C3-XR SUV Dec-2014

DS6 SUV Oct-2014


Changan

Changan Ford Edge SUV May-2015

Escort Sedan Jan-2015

Kuga (facelift) SUV Jan-2015

Changan Suzuki Alivio Sedan Dec-2014

Changan Mazda Mazda 3 Sedan Sep-14

Changan Motor Eado Sedan Mar-15

Yuexiang V7 Sedan Nov-14

SAIC

Shanghai Volkswagen Skoda Fabia Sedan Apr-15

Tiguan SUV Jul-14

Lamando Sedan Jan-15

Touran (facelift) MPV Aug-14

Shanghai GM Buick Envision SUV Oct-2014

Excelle GT Sedan Mar-2015

Shanghai GM Chevrolet Sail Sedan Mar-2015

Shanghai GM Cadillac ATS-L Sedan Aug-2014

SAIC Motor Roewe 350 Sedan Jun-15

FAW Car

FAW Mazda CX-7 SUV Jul-2014

FAW Toyota

Crown Sedan Mar-2015

FAW Volkswagen

Sagrita (facelift) Sedan Mar-2015

Dongfeng Yueda KIA

K2 Sedan Nov-14

K4 Sedan Sep-2014

KX3 SUV Mar-2015

Sportage R SUV Sep-15

Chery

Tiggo 3 Sedab Nov-2014

Zotye

Z500 Sedan Nov-14

Z100 EV Sedan Oct-14

Source: Companies, various media Source: Companies, various media

10


China Autos Sector: key SUV model 4S store price trends

Source: CAM Note: 4S refers to “Sale, Spare parts, Service, and Survey”

China sedan sales expected to be flat YoY in 2016

For sedans, on the other hand, we expect sales volume growth to remain weak in 2016,

although better than our forecast of a 6% YoY decline in 2015. Due to the purchase tax cut,

sedan sales should increase by 2% YoY in 2016. But in 2017, when we expect the

purchase tax to be raised again, and based on the high base effect we foresee from 2016,

we look for sedan sales to return to a downward trend and decline by 10% YoY. We saw

this declining trend in 2015 until the purchase tax cut was implemented in October 2015.

China Autos Sector: PV sales growth estimates by segment

Source: CAM, Daiwa forecasts

On the margin side, we expect the rate of decline in sedan margins to be slower than that

for SUV margins, as the sedan business is a lower-margin business and there are fewer

new models competing for business. For an OEM such as Geely, which has been able to

successfully upgrade its brand, we expect its sedan gross margin to remain at the current

level in 2016-17.

Domestic brands should keep outpacing foreign brands

Opportunities in lower-tier cities

While the overall automobile penetration rate (see tables on page 11) in China is still low,

after close analysis, we note that penetration in top-tier cities, such as Beijing and

Shenzhen, has already reached 200-300 cars per thousand people, which is comparable

to mature markets like Japan, Korea and Taiwan. However, in lower-tier cities, penetration

is still mild at around 100 cars per thousand people. This level of penetration is comparable

to developing countries like India, where we see more sales growth opportunities, as they

are often the major market for domestic brands as customers there are price-sensitive. We

believe this stronger sales growth trend for domestic brands will continue in 2016 and into

2017. As such, we continue to prefer domestic brands to foreign JV brands.

Among domestic brands, independent brands like Geely and GWM are posting better

profitability, on cost control and brand improvement, than domestic brands developed by

100,000

150,000

200,000

250,000

300,000

350,000

100,000

150,000

200,000

250,000

300,000

350,000

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15

(4S Price, CNY)(4S Price, CNY)

BAIC Hyundai IX35 GAC Honday CR-V SAIC VW Tiguan FAW VW Audi Q3 GWM H6

-50%

0%

50%

100%

150%

200%

-50%

0%

50%

100%

150%

200%

2010 2011 2012 2013 2014 2015 E 2016 E 2017 E

Sedan MPV SUV Cross

(YoY %) (YoY %)

Sedan sales expected to

remain weak, with flat

YoY sales volume in

2016 and a 10% YoY

decline in 2017

Domestic brands should

continue to benefit from

strong sales growth in

low-tier cities

11


automakers that rely on JVs with foreign brands. In comparison, the profitability of

domestic brands developed by BAIC Motor, Brilliance and Dongfeng, for example, is often

weak due to a lack of technological independence or know-how. Their heavy reliance on

profit from foreign JV brands means they focus more on foreign brands and less on their

own brands. This situation leads to them to strive for more technological transfers from JV

partners to capture the best technology at as low a cost as possible.

However, expectations to derive technology from a JV partner are becoming more

unrealistic, as foreign JV partners often only share old model platforms and their

components are usually expensive. Therefore, we are in favour of the long-term

development of local brands such as Geely, which has high technological independence.

Ownership growth rate against ownership per 1,000 capita Automobile ownership: China vs. other countries, by end-2014

City/Region/Country Population (m) Auto Ownership per 1,000 capita

China 1368 107 China PV only 1368 90 Beijing 22 247 Tianjin 15 181 Zhejiang 55 184 Shandong 98 138 Shanghai 24 105 Guangdong 107 124 Chongqing 30 79 Shanxi 36 116 Sichuan 81 82 Guizhou 35 70

USA (PV only)* 319 404

Japan (PV only)* 127 463

S. Korea (PV only)* 50 300

Taiwan (PV only)* 23 315

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China, Statista Note: as of end of 2012

Key model comparison: sedan

Automotive OEM Model Length

(mm) Price range

(CNY k) Launch date Launch date of facelift /

new options Avg sales units

per month in 2015

Geely GC9 4956 115-230 Apr-2015 n.a. 3,090

SAIC Motor Roewe 950 4996 184-323 Mar-2012 Jul- 2015 (Facelift) 158

GAC Toyota Camry 4850 185-330 Dec-2011 Mar-2015 (Facelift) 10,727

Beijing Benz E-class 5024 398-780 Jun-2010 Aug-2013 (Facelift) 4,896

Source: Companies, various media

Key model comparison: SUV

Automotive OEM Model Length

(mm) Price range


new options Avg sales units

per month in 2015

GWM H6 4640 100k - 159k Oct-2012 May-2015 (Facelift) 29,037

Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551

Dongfeng Honda CR-V 4585 180-250 Feb-2012 Apr-2015 (Facelift) 11,995

FAW VW Audi Q5 4629 359-572 Mar-2010 Apr-2013 (Facelift) 9,241


Demand for luxury still strong

Among foreign JV brands, we still prefer luxury brands, as we believe rising disposable

incomes and licence restrictions in some cities have encouraged customers to skip mid-range

cars, such as Korean and Japanese brands, and buy luxury European cars, particularly

German-made cars. In 2015, sales of Beijing Benz cars outperformed sales of peers

significantly, and in 2016 we expect the outperformance to continue as the pipeline for Beijing

Benz in 2016 is strong, with the forthcoming launch of the GLC and new E-class model.

On the other hand, we expect sales volume for BMW Brilliance to pick up, as the strong

sales growth generated by its 3-series facelift is likely to continue in 2016 and it is due to

launch the new X1 SUV and 2-series models in 2016. Even though the design for the X1

SUV is yet to be finalised (ie, 5-seater or 7-seater), we believe this SUV model will still be

welcomed by customers. For the 2-series, even though we do not think it can replace sales

of the 3-series or 5-series, we believe this model will offer customers an additional choice,

especially those looking for an entry model luxury brand.

R² = 0.6753

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 20 40 60 80 100 120 140 160 180 200

(Ownership annualised growth in 2010-14, %)

(Auto Ownership per 1,000 capita in 2010)

Tianjin

Gansu

Zhejiang

Guangdong

Shanghai

Hunan

Ningxia

Beijing

Luxury cars still sell well

in China, especially

Beijing Benz

12


Overall, we do not see the anti-corruption campaign as having a big negative impact on

luxury car sales growth in China, which we see still outperforming the broader China autos

market at least in 2016-17. If there is any impact, it would likely be on FAW Audi, which

used to be a popular brand favoured by government ministers.

Sales of luxury auto brands in China German auto OEM pipeline for 2H15-2016


Beijing Benz C350eL* Hybrid Sedan Nov-2015

GLC SUV 2016


Shanghai Volkswagen Skoda Yeti* SUV Aug-2015

Skoda Octavia* Sedan Aug-2015

Skoda Superb* Sedan Oct-2015

Bora Sedan 2H15

Passat (Facelift) Sedan 2016

Touran L MPV 2016

FAW VW CC* Sedan Oct-2015

Golf GTI* Sedan Nov-2015

Golf SportsVan Sedan 2016

Magotan Sedan 2016

FAW VW Audi Q7 SUV Dec-2015


Source: CAM Source: Companies, various media Note: * Already launched

Market shifting away from Korean and Japanese brands

Due to their aggressive sales strategies and greater number of entry-level models

available in the market, German brands, including Audi and BMW and recently Benz, have

been gaining market share over the past few years, with their share having risen from

16.5% in 2011 to 20% in October 2015 YTD. Japanese brands have been losing market

share, due to the aggressive sales strategies of German brands as well as rising

disposable incomes and licence restrictions in top-tier cities.

Given the licence restrictions in several top-tier cities (see the following chart), we expect

car buyers to favour luxury brands (such as BMW, Benz and Audi) over mid-range brands

(such as Korean and Japanese brands) given the expensive new licence-plate fee and

because the total number of new licences is limited depending on the city they are

allocated in. This means that if a family can afford a luxury car, it would probably jump

straight to it rather than buying an entry-level (ie, domestic brand) or mid-level (ie,

Japanese or Korean brand) model, in our view.

China new car licence restrictions in various cities Luxury brand sales in China

Cities Plate issuance through Implementation date Quota (annual)

Shanghai Bidding 1994 132,000

Beijing Lottery 12/23/2010 150,000

Guiyang Lottery 7/11/2011 24,000

Guangzhou Bidding and lottery 6/30/2012 120,000

Tianjin Bidding and lottery 12/15/2013 100,000

Hangzhou Bidding and lottery 3/25/2014 80,000

Shenzhen Bidding and lottery 12/29/2014 100,000

Source: Local governments, various media reports

Source: CAM

(20%)

0%

20%

40%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

(YoY %)(Sales unit)

Luxury brands monthly sales (LHS) Luxury brands YoY (RHS)

China overall PV YoY (RHS)

(20%)

0%

20%

40%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

(YoY %)(Sales unit)



German cars are gaining

market share from

Japanese brands

13


The market share for Japanese brands shrank from 20% in 2011 to 16% YTD in October

2015, and we expect it to be flat YoY in 2016 due to rich pipelines from Nissan and Honda

in China. However, we remain concerned about 2017 onward, as we expect to see more

competition from German cars and even local Chinese brands.

Meanwhile, Korean brand market share rose from 8% in 2011 to 9% in 2014, but fell back

to 8% in October 2015 YTD, due partly to weak sales volumes for Beijing Hyundai and

Dongfeng KIA, as a result of intense competition in the China market and the Korean

brands’ slow pricing adjustments. We look for the sales growth of Beijing Hyundai to

recover in 2016 due to its improved product quality and more attractive models being

launched, while its overall market share should remain at around 8%. In the longer term,

we are concerned about the Korean brands in China as they may be the first victims of the

emergence of local brands.

Local brands have also lost a lot of market share, which contracted from 42% in 2011 to

38% in 2014, due mainly to the loss in market share from the sedan segment, which

declined from 29% in 2011 to 22% in 2014. As such, rising disposable incomes led to more

second-time buyers shifting to luxury German cars, while the local brands pushed fewer

sedan models (and more SUVs) due to declining profitability on sedans. However, with

SUVs comprising a growing proportion of the China autos market, the combined market

share of the local brands returned to 40% in October 2015 YTD. We expect the market

share of the local brands to gradually improve over the next 3 years, in line with the

growing proportion of SUVs in new-car sales.

Among domestic brands, the outlook seems mixed. We see selective brands like Geely

continuing to gain market share due to better pipelines in 2016, and GAC Motor’s GS4 still

selling well. On the other hand, GWM may continue to lose market share to foreign brands,

while we believe BAIC Motor’s Beijing Brand is unlikely to be profitable in the next 3 years.

China PV market share by originating country China Sedan market share by originating country

Source: CAM Source: CAM

China SUV market by originating country China PV market, market shares of selected domestic brands


0%

10%

20%

30%

40%

2011 2012 2013 2014 YTD-2015

China Domestic Germany JapanKorea US Others

(Market share, %)

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 YTD-2015

China Domestic Germany Japan

Korea US Others

(Market share, %)

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 YTD-2015

China Domestic Germany Japan

Korea US Others

(Market share, %)

0%

1%

2%

3%

4%

2011 2012 2013 2014 YTD-2015

Geely Beijing MotorBYD GWMGAMC Dongfeng proprietary brandsBrilliance Jinbei

(Market share, %)

Sales volume growth for

the Korean brands

should recover in 2016,

but long-term growth

remains a concern

Mixed outlook for local

brands

14


Accelerating investment in NEVs in 2016-20

Government and OEMs becoming more serious

According to the NDRC, by the end of 2014, there were only 780 charging stations which

provided 31,000 charging poles to serve more than 120,000 EVs owned in China. The ratio

of EVs to charging poles is way below the targeted 1:1 level. According to a 2012 study by

TÜV Rheinland regarding major concerns about purchasing EVs, 22% of Chinese

interviewees were most concerned about the limited driving range, while 19% worried

about the lack of charging facilities. The situation did not improve in 2015, when the major

obstacle for the Chinese government to promote EVs was insufficient charging facilities.

However, the policy guidelines regarding the development of charging facilities in China for

2015-20 announced on 17 November seemed to indicate a stronger commitment from the

government to push the development of NEVs over the next 5 years in order to reduce

pollution and prepare for future competition in this global growing segment. Also, the

coming 5-year plan for automotive OEMs places a greater focus on EVs for the next 5

years, in order to help China meet fuel efficiency requirements by 2020.

The government estimates that the total number of NEVs owned will reach about 5m units

by the end of 2020, consisting of 4.3m electric PVs, 0.3m electric taxis, 0.2m electric buses

and 0.2m electric trucks and other vehicles. We think this target is achievable, as we expect

many new model launches over the next 5 years. We expect new-car sales of NEVs to

increase by 70% YoY in 2016 and 40% YoY in 2017, and by 20-30% YoY in 2018-20.

NEV strategies for major China automotive OEMs

Company Plans

Geely NEV sales targeted to reach 90% of total sales by 2020, 65% of which would be PHEVs and hybrid EVs while the remaining 35% would be pure EVs.

GWM According to market news, GMW's first EV sedan, C30EV, targeted to be launched in 2016. The company also aims to launch its first hybrid SUV model in 2017.

GAC For the next 5 years, GAC will invest CNY2bn to develop NEVs and launch 5 new NEV models including sedans and SUVs.

Changan Has invested CNY1bn to develop NEVs since 2001 and plans to invest CNY18bn more in the next 10 years. The company aims to introduce 34 new NEV products to the market over the next decade and targets accumulated NEV sales of 100,000 units and 2,000,000 units by 2020 and 2025, respectively, with NEVs accounting for 10% of total sales.

SAIC The company will invest CNY20bn to develop EV products and aims to launch 30 NEV products consisting of 13 pure EV models and 17 hybrid EV models. It targets sales volume of NEVs to reach 600,000 units in 2020, of which 200,000 will be its self-owned brand.

Source: cnstock.com

China: NEV sales (2011-17E)

Source: CEIC, Daiwa forecasts

8,000 13,000 18,000 75,000

300,000

510,000

714,000

63%38%

317%300%

70%

40%

0%

50%

100%

150%

200%

250%

300%

350%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2011 2012 2013 2014 2015E 2016E 2017E

NEV sales (LHS) YoY growth (RHS)

(units) (YoY % )

Charging facilities still

the major bottleneck

Government and OEMs

more serious on NEVs

for next 5 years

5m NEV ownership

should be achievable

15


Summary of fuel-efficiency targets for major markets

km/l (mpg) US EU Japan China S. Korea

2005 12.4 (29.0) 15.8 (37.2) 16.7 (39.3) 11.0 (25.9) 12.3 (28.9)

2010 13.9 (33.0) 18.0 (42.3) 19.6 (46.1) 14.4 (33.9) 14.8 (34.8)

2015 15.4 (36.0) 19.7 (46.3) 21.0 (49.4) 15.7 (36.9) 16.7 (39.3)

2020 19.9 (47.0) 25.8 (60.7) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3)

2025 23.9 (56.0) 30.8 (72.4) ~ 35.0 (82.3) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3)

5-YOY (%) US EU Japan China S. Korea

2010 12.1% 13.9% 17.4% 30.9% 20.3%

2015 10.8% 9.4% 7.1% 9.0% 12.8%

2020 29.2% 31.0% 11.4% 35.7% 0.0%

2025 20.1% 19.4%~35.7% 0.0% 0.0% 0.0%

Improvement (%) US EU Japan China S. Korea

2010-25 71.9% 71.1%~94.4% 19.4% 47.9% 12.8%

2015-25 55.2% 56.3%~77.7% 11.4% 35.7% 0.0%

Source: ICCT Note: No official fuel efficiency guidance have been provided for Korea (from 2015), Japan (from 2020), or China (from 2020)

Forecast of EVs owned by China Government at end-2020

Source: NDRC, Daiwa

Tackling infrastructure bottleneck

To support the ownership of 5m NEVs in China, the government has set a target to build

4.8m distributed charging poles and 120,000 charging stations. Apart from setting a

charging pole construction target, the NDRC has also revealed a plan to establish a

nationwide charging network to connect the charging facilities. At this stage, the

government plans to speed up the construction of charging facilities in the more developed

eastern part of the country due to that area’s more serious air pollution problem, with the

middle and western parts to follow. In the longer term, the government plans to link its

charging stations with the expressway network, to build a “4 Vertical, 4 Horizontal” inter-city

fast-charging network to facilitate the interprovincial use of NEV vehicles. Construction target for charging stations by vehicle usage by 2020

Source: NDRC, Daiwa

4.3

0.2

0.30.2

Electric passenger vehicles

Electric buses

Electric taxis

Electric Sanitation and logistics vehicles

An estimated 5m EVs owned

3850

2500

2450

2400

800

Bus-only charging stationsTaxi-only charging stationsSanitation and logistics vehicles-only charging stationPublic charging stations - PVsInter-city charging stations

Total 120,000charging stations

Better plan for charging

network

16


Target for distributed charging poles by 2020

Source: NDRC

China: construction target for charging facilities for 2015-20

Source: NDRC, Daiwa

Plan for nationwide inter-city fast-charging network

Source: NDRC Note: red line: charging network built before 2015; blue line: network to be built in 2016-20

2.8

1.5

0.5

Residential area

Parking areas in commercial buildings, indust rial

parks and government bu ildings, etc.

Other public a reas

Total 480m distributted charging

poles

17


Besides improving the related infrastructure, the government has announced other

supportive measures, such as lifting purchase restrictions and traffic controls on NEVs,

requiring property developers to reserve spaces to build charging poles in the future.

Hence, we believe the problem of inadequate charging poles, one of the biggest concerns

for potential EV buyers, will be gradually solved by 2020.

Latest supportive measures by China Government to promote NEVs

Policy Details

Licence & traffic restrictions Lift purchase restrictions and traffic controls for NEVs but retain curbs on vehicles with conventional internal combustion engines (ICE).

Charging stations New residential complexes must be built with chargers or reserved spaces for future installations.

At least 10% of public parking facilities should be built with chargers or spaces reserved for future installations.

Every 2,000 EVs owned should be matched by 1 public charging station.

In Beijing, 18% of parking spaces in all new residential complexes should be built for EVs.

To build a nationwide charging network for up to 5m electric vehicles by 2020.

Source: CAAM

Customer subsidies to be phased out

According to a notice issued in April 2015 by the Ministry of Industry and Information

Technology (MIIT) regarding subsidies on NEVs, the government plans to cut subsidies to

customers by 20% in 2017-18 from the 2016 level, and by 40% in 2019-20 from the 2016

level, except for fuel-cell vehicles. As the price of an NEV is still higher than that of a

conventional PV, even with the subsidy, we see the cut on subsidies as being only slightly

negative for NEV sales, as most of the sales in the near term would focus on corporates or

car companies, which are required to buy more NEVs to achieve government fuel-

consumption standards. Also, subsidies on EVs and PHEVs are only a small amount

compared to the price of an NEV.

On the other hand, the local government subsidies on NEV R&D should continue, which

would provide incentive and support for OEMS to push more NEV models. We see the

current constraint on charging facilities being solved or improved significantly by 2020. We

expect public transportation and corporates to be the first to switch from more conventional

cars to NEVs in the early stages, and therefore expect BYD to benefit more in the near

term, while new brands such as Geely should also benefit on EV launches in the long term.

China: 2016E NEV subsidies

Subsidy (CNY/vehicle) Pure electric driving range (in km), R

100 ≤ R < 150 150 ≤ R < 250 R ≥ 250 R ≥ 50

Pure EV 25,000 45,000 55,000 ／

Plug-in hybrid electric vehicle ／／／ 30,000

Source: NDRC

China: 2016E fuel-cell vehicle subsidies

Vehicle type Subsidy (CNY/vehicle)

Fuel-cell PV 200,000

Fuel-cell light CV 300,000

Fuel-cell mid-large CV 500,000

Source: NDRC

Price comparison of selected NEV and comparable ICE models

Company Model Type Price (Before subsidy, CNY '000) Price (After subsidy, CNY '000)* Comparable ICE model Price range

BYD Qin PHEV 210 - 220 144 - 153 Geely Vision, BYD F3 52 - 73

Tang PHEV 251 - 280 220 - 248 Changan CS75, FAW Besturn X80 110 - 182

Song PHEV 280 212 Soueast Motor DX7, GWM Haval H6 87 - 140

e6 EV 310 - 370 200 - 256 DF Fengxing S500, Chery Arrizo M7 61 - 110

Denza EV 370 - 400 262 - 292 GAC Trumpchi GA5, BAIC Senova D60 110 - 220

Geely Emgrand EV EV 229 - 250 121 - 142 FAW Besturn B30, DF Fengshen A60, Roewe 360 71 - 130

BAIC e-series EV 177 - 247 87 - 157 Chery Fulwin 2, Changan CX20 43 - 66

Dongfeng Nissan Venucia E30 EV 243 - 257 153 - 167 Changan CX20, BAIC Senova D20 36 - 83

Zotye Z100 EV EV 159 69 Geely Panda, Chery QQ 37 - 51

Changan Eado EV EV 235 - 250 145 - 160 FAW Besturn B30, DF Fengshen A60, Roewe 360 70 - 130

Chery eQ EV 160 - 165 70 - 75 Geely Panda, Chery QQ 37 - 51

JAC iEV4 EV 158 - 160 63 - 65 Geely KingKong, Chery E3 37 - 65

Source: Companies, Autohome, Sohu Auto and Diangdong Note: Subsidies subject to different provincial policies

Other supportive

measures also important

We expect subsidies to

be maintained in coming

years and scaled back

gradually

Geely and BYD the

potential leading NEV

brands

18


Balance sheets remain healthy

On the balance-sheet side, the industry is in good shape, with net gearing levels for the A-

share and H-share automakers of 23-26% in 2014, appreciably better than levels in

Europe and Japan. Therefore, unless we see a major rally in the H-share or A-share

markets that prompts companies to raise more capital for future R&D (especially for

NEVs), we see a limited possibility of China OEMs raising equity in 2016.

In terms of 2014 ROEs, China automakers reported ratios of 2-36%, with a weighted

average of 15%, and on this measure we expect them to be stable over our forecast

horizon. However, although their balance sheets remain strong, we expect dividends to

remain low, as we believe the OEMs will seek to preserve cash for R&D and product

development. In other words, we do not expect China automakers to be yield plays in the

near term.

Global major auto OEMs: net debt-to-equity ratio (2010-14) Global autos OEMs: ROE (2011-17E)

2010 2011 2012 2013 2014

China H-share listed 11 8 13 28 22

China A-share listed 3 3 15 27 21

US net cash net cash net cash net cash net cash

Europe net cash 25 26 119 55

Japan 81 64 63 66 62

Korea 59 47 32 21 23

Global 26 20 22 41 30

Source: Bloomberg Source: Bloomberg

China: H-share listed auto makers: yield (2010-17E)

Name Bloomberg code 2010 2011 2012 2013 2014 2015E 2016E 2017E

BAIC 1958 HK n.a. n.a. n.a. n.a. 4.2 3.9 4.6 5.2

GEELY 175 HK 0.8 1.6 1.1 2.5 1.0 1.0 1.3 1.6

DFM 489 HK 1.6 1.7 1.6 1.9 2.3 2.4 2.7 2.8

BYD 1211 HK n.a. - - 0.2 - 0.1 0.1 0.1

GAC 2238 HK 2.2 3.8 1.6 2.4 2.8 3.0 3.6 4.2

GWM 2333 HK 2.5 3.3 2.9 2.5 2.3 3.9 4.2 4.4

BRILLIANCE 1114 HK - - - - 0.9 0.9 1.0 1.2

Weighted average 1.2 1.7 1.1 1.4 1.8 2.2 2.5 2.7

Source: Bloomberg Note: Historical yield calculated by DPS/share price on last trading day of corresponding year

Hard to see any recovery for CVs

We expect trade data in China to remain subdued in 2016. Daiwa’s Chief Economist Kevin

Lai forecasts China’s exports to decline by 3.4% YoY and imports to decline by 6.4% YoY

in 2016. In this context, we believe the overall profitability of the logistics companies,

especially the freight forwarding and transportation players, will remain weak in 2016. At

the same time, with new emissions standards set to come into effect in the near term, and

with large replacement orders having been made in 2014, we do not expect commercial

vehicle (CV) sales to pick up in 2016 — despite the fact they have been weak for 3 years

now. Overall, we forecast a 10% YoY decline in CV sales volume in 2016 and a 5% YoY

contraction in 2017.

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015E 2016E 2017E

China H-share listed China A-share listedUS EuropeJapan Korea

(% )

Little possibility of

equity-raising unless

there is another A-share

or H-share market rally

We expect CV sales

volume to decline by

10% YoY in 2016

19


China: emissions standards for heavy-duty engines

Standard Test Cycle CO HC NMHC CH4† NOx PM Smoke

g/kWh 1/m

China III ESC + ELR 2.1 0.66 - - 5 0.10/0.13** 0.8

ETC 5.45 - 0.78 1.6 5 0.16/0.21* -

China IV ESC + ELR 1.5 0.46 - - 3.5 0.02 0.5

ETC 4 - 0.55 1.1 3.5 0.03 -

China V ESC + ELR 1.5 0.46 - - 2 0.02 0.5

ETC 4 - 0.55 1.1 2 0.03 -

Source: transportpolicy.net Note: *: Natural gas engines only, **: For engines with a per cylinder displacement of < 0.75 L and rated speed > 3000 rpm

China: monthly CV sales and growth (2014 – October 2015)

Source: CEIC

China: yearly CV sales and growth (2010-14)

Source: CEIC

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

0

100,000

200,000

300,000

400,000

500,000

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Monthly sales (LHS) YoY growth (RHS)

(units) (YoY %)

4,292,933

4,035,386

3,809,841

4,065,346

3,788,647

30%

-6% -6%

7%

-7%

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

3,500,000

3,600,000

3,700,000

3,800,000

3,900,000

4,000,000

4,100,000

4,200,000

4,300,000

4,400,000

2010 2011 2012 2013 2014CV sales (LHS) YoY Growth (RHS)

(units) (YoY %)

20


Valuations and recommendations

Not that cheap anymore

The China Autos Sector has been rerated since the sales recovery in August 2015, with

the reduction in purchase tax in October providing a boost. The weighted index for the H-

share automakers is trading currently at a 2016E PER of 8x (excluding BYD, which is an

outlier as it trades at a significant premium to the other automakers), below its past-3-year

range of 7-10x (excluding BYD).

However, based on the expected slower EPS growth of the automakers vs. their past 3-

year trading average, we see limited scope of a further rerating, particularly as the

purchase tax reduction is essentially a one-off event. We look for car sales volume growth

to continue to slow from 4Q16 into 2017, with sales volume contracting by 3% YoY in 2017.

In this context, we expect market sentiment on the sector to weaken as 2017 approaches.

Hence, we remain Neutral on the China Autos Sector as a whole, and recommend a

selective approach to investment in the OEMs.

PER comparison: automakers vs. market

Source: Bloomberg

Recommendations

Top buys: Geely, BAIC and DFM

In general, we prefer local brands. However, we would avoid GWM, which we think is set

for overall margin deterioration in the face of intense competition and a subdued consumer

response to the H8 and H9 models so far.

On the other hand, Geely’s new model, the GC-9, looks to have been well received and

has already hit the company’s sales target of 5,000 units/month. In 2016, we expect

Geely’s new SUV NL-3 (to be launched in December 2015) and NL-4 (to be launched in

mid-2016) to have a positive impact on the bottom line, as the GC-9 should cover the fixed

costs of the Chunxiao plant, which will also start production of the NL-3 and NL-4 SUVs

using the company’s A-segment sedan platform.

For BAIC, we expect a recovery for Beijing Hyundai on sales of the Tucson and the new

Elantra, as well as strong sales performance for Beijing Benz due to the new E-class

sedan and GLC, to be share-price drivers in 2016. On a longer-term view, however, we are

concerned about the competitiveness of the Korean brands in China.

For DFM, we believe the company stands to benefit in 2016 from the strong product

pipeline of Dongfeng Nissan (including SUV models, such as the Qashqai, Murano and

T70X), which should have a full-year impact in terms of sales in 2016. Also, the new

Lannia sedan has been well received since its launch in October 2015, and we expect it to

be another sales volume driver in 2016.

0x

5x

10x

15x

20x

25x

30x

2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cap-weighted H-share listed auto makers MSCI China H IndexMSCI China Financials Index MSCI China Utilities GICS Sector IndexMSCI China Consumer Discretionary Index

We prefer local brands,

with Geely as our top

pick

21


Top sell: GWM

We remain sceptical on GWM’s prospects over our 12-month investment horizon on

intense competition for its SUV models. Most of the models that GWM plans to launch in

2016 are SUVs, a segment where many foreign JV brands are offering bigger discounts.

Against this backdrop, we think it could be hard for GWM to raise its ASP or sell more

expensive models such as the H8 or H9 (or even the H7, which is to be launched in 2016).

Separately, we are not confident in GWM’s red badge/blue badge differentiation strategy,

as we are not convinced that consumers will detect a material difference between the 2

offerings.

Risks to our Neutral sector view

Weaker- or stronger-than-expected demand

The major downside risk to our view on the sector would be weaker-than-expected sales

volumes and margins. In this regard, we believe the risk for the foreign JV brands is

greater than for the local brands, as we have already seen many foreign JV brands cutting

prices. While we expect margins to remain under pressure across the sector, we look for

12% YoY growth in sales volume in 2016. If the macro environment turns to be weaker

than we expect, there is a risk that sales volumes and margins would fall short of our

expectations.

On the other hand, if sales volume and margins turn out to be higher than we expect, they

would constitute the major upside risks to our call. According to our base-case scenario,

the government would raise the purchase tax back to the 10% level in 2017. However, if

the government were to decide to extend the tax cut to boost the auto industry further, in

order to stimulate the slowing economy, the increase in sales volume could beat our

expectations.

Political risk

We believe the major political risk to the sector would be the state of Sino-Japanese

relations. In 2012, when political tensions between China and Japan were fueled by a

dispute over the Diaoyu Islands, sales of Japanese OEMs, such as GAC and DFM, slowed

significantly. If the political relationship between China and Japan were to deteriorate

again, we think the sales performance of the Japanese brands would be adversely affected

while their domestic competitors would benefit. Separately, political instability in other

countries could have a bearing on demand for the China brands, especially as most of the

local OEMs are exporting to emerging countries, which tend to be less politically stable

than developed markets.

Currency risk

The depreciation of the Renminbi relative to the Yen and Euro would be negative for

foreign JV OEMs such as BAIC, Brilliance, GAC and DFM, as it would raise the price of

imported components. In 2014, most of the foreign JV OEMs recorded exchange gains

due to the weakening of the Yen and Euro against the Chinese currency. However, Daiwa’s

Chief Economist Kevin Lai expects the Renminbi to depreciate by 14% YoY against the US

dollar by the end of 2016, which serves as our base-case scenario. And in this case, we

would expect foreign JV OEMs to be negatively affected.

However, if the government decides to defend the CNY or if there are any other sudden

events that cause the Euro or Yen to weaken vs. the CNY, the JV OEMs would benefit

from a strengthening in this currency, which would pose another upside risk to our call.

We have a cautious

outlook on GWM due to

intensifying competition

and resulting margin

erosion

22


Global automotive OEMs: valuation comparison

Name

Bloomberg Trading Share price Rating

12-mth Target PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%)

code currency 28-Dec-15

Price FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E

China H-share listed

Geely Automobile Holdings Lt * 175 HK HKD 4.23 Buy 4.90 11.9 9.2 1.6 1.4 6.0 4.6 1.0 1.3 14.1 15.8

BAIC Motor Corp Ltd-H * 1958 HK HKD 7.77 Buy 9.40 9.7 7.7 1.4 1.2 6.6 5.1 4.5 5.6 14.6 16.6

BYD Co Ltd-H * 1211 HK HKD 42.40 Outperform 47.00 67.8 38.6 2.3 2.1 13.3 11.2 0.0 0.0. 3.9 5.7

Great Wall Motor Company-H * 2333 HK HKD 9.14 Underperform 8.40 8.2 8.1 1.8 1.5 5.7 5.5 3.7 3.7 23.3 20.3

Guangzhou Automobile Group-H * 2238 HK HKD 6.94 Hold 7.00 9.6 8.2 1.0 0.9 30.1 14.9 3.4 3.9 10.6 11.4

Dongfeng Motor Grp Co Ltd-H * 489 HK HKD 10.64 Outperform 12.20 6.4 5.8 0.9 0.8 7.0 5.8 2.3 2.6 15.2 14.7

Brilliance China Automotive * 1114 HK HKD 9.84 Underperform 8.90 12.4 10.7 2.1 1.8 n.a. n.a. 1.3 1.1 18.2 18.1

China A-share listed

BYD Co Ltd -A

002594 CH CNY 62.14 NR NA 67.1 54.7 5.3 4.7 18.5 15.4 0.0 0.1 8.9 8.8

Guangzhou Automobile Group-A

601238 CH CNY 22.57 NR NA 37.7 29.5 3.8 3.5 80.4 68.7 0.8 0.9 9.7 11.5

Great Wall Motor Co Ltd-A

601633 CH CNY 12.05 NR NA 11.9 10.0 2.7 2.2 7.8 6.5 2.3 2.7 24.4 23.5

Saic Motor Corp Ltd-A

600104 CH CNY 21.21 NR NA 8.2 7.4 1.4 1.2 10.6 9.1 6.2 6.8 17.6 17.4

Chongqing Changan Automobi-B

200625 CH HKD 16.95 NR NA 6.7 5.7 1.9 1.5 30.4 22.2 2.7 3.8 31.6 29.0

Faw Car Company Limited-A

000800 CH CNY 16.06 NR NA 48.7 55.4 2.8 2.7 17.7 15.1 0.1 0.1 7.3 5.7

Anhui Jianghuai Auto Co-A

600418 CH CNY 14.24 NR NA 17.8 12.1 2.4 2.0 11.4 8.4 1.8 2.6 13.7 17.4

Jiangsu Yueda Investment C-A

600805 CH CNY 12.61 NR NA 12.4 10.0 1.6 1.5 13.1 10.8 1.2 1.2 11.7 11.1

Tianjin Faw Xiali Automobi-A

000927 CH CNY 7.53 NR NA n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Lifan Industry Group Co Lt-A


Haima Automobile Group Co-A


Shenyang Jinbei Automotive-A


US

Ford Motor Co

F US USD 14.18 NR NA 8.7 7.4 1.9 1.6 4.2 3.5 4.0 4.3 27.9 25.1

General Motors Co

GM US USD 34.51 NR NA 7.2 6.5 1.6 1.3 2.8 2.6 4.0 4.4 21.0 21.8

Europe

Daimler Ag-Registered Shares

DAI GR EUR 77.56 NR NA 9.3 8.8 1.7 1.5 3.2 3.0 4.0 4.5 18.8 18.3

Bayerische Motoren Werke AG

BMW GR EUR 97.66 NR NA 10.4 10.1 1.6 1.4 7.6 7.4 3.5 3.5 16.8 15.3

Volkswagen AG

VoW GR EUR 143.79 NR NA 9.9 9.0 0.8 0.7 n.a. n.a. 2.0 2.9 8.5 8.8

Fiat Chrysler Automobiles NV

FCA IM EUR 13.00 NR NA 16.5 8.7 1.3 1.1 n.a. n.a. n.a. n.a. 5.6 13.0

Peugeot SA

UG FP EUR 16.07 NR NA 11.7 9.1 1.2 1.1 2.6 2.4 0.0 1.0 11.2 13.0

Renault SA

RNO FP EUR 93.40 NR NA 9.3 7.8 1.0 0.9 5.3 4.8 2.5 3.0 10.9 12.0

Japan

Honda Motor Co Ltd *, ** 7267 JP JPY 3875.00 Hold 4,000 12.4 11.9 1.1 1.0 9.3 8.1 2.3 2.4 8.9 8.1

Nissan Motor Co Ltd *, ** 7201 JP JPY 1268.50 Hold 1,300 11.8 9.4 1.1 1.0 4.2 3.4 2.6 3.3 9.8 11.3

Toyota Motor Corp *, ** 7203 JP JPY 7484.00 Outperform 8,800 10.8 9.6 1.4 1.3 10.8 9.9 2.7 3.1 14.2 13.9

Korea

Hyundai Motor Co * 005380 KS KRW 151,000 Buy 190,000 5.9 5.1 0.5 0.4 4.3 3.7 2.5 3.0 11.2 11.6

Kia Motors Corp * 000270 KS KRW 52,300 Buy 68,000 7.1 5.5 0.8 0.7 4.3 3.5 2.1 2.3 12.5 14.2

India

Tata Motors Ltd ** TTMT IN INR 394.00 NR NA 7.1 11.7 1.5 1.7 3.7 4.2 0.5 0.4 24.2 16.5

Mahindra & Mahindra Ltd ** MM IN INR 1249.40 NR NA 20.1 21.1 2.9 2.5 14.9 12.4 1.2 1.2 15.5 11.4

Total

Weighted average

12.9 11.0 1.5 1.4 8.5 7.3 2.7 3.1 14.8 14.6

High

67.8 55.4 5.3 4.7 80.4 68.7 6.2 6.8 31.6 29.0

Low

5.9 5.1 0.5 0.4 2.6 2.4 0.0 0.1 3.9 5.7

Median 10.6 9.1 1.6 1.4 7.6 6.5 2.3 2.8 13.9 14.1

Source: Bloomberg, *Daiwa forecasts Note: **Mar year-end

Pricing as at 28 December 2015



What's new: Geely remains our top pick in the China Autos sector due to

its strong product pipeline for 2016 and the successful upgrade of its brand

via solid sales of the B-segment sedan, the GC-9. We believe 2016 will be

another strong year, incorporating full-year sales of the new SUV NL-3 and

products from the CMA platform by the end of 2016 or early 2017, which

we think will further enhance its brand image and competitiveness in the

long run. We reiterate our view that Geely will see a long-term rerating in

the coming 3 years.

What's the impact: For 2016, we expect Geely to experience another

strong year, with a 20% YoY increase in new-car sales, to 600K units, due

to a ramp-up in sales of the GC-9, NL-3 and the new Emgrand EV. Also,

another SUV, NL-4, is slated for launch in mid-2016. Overall, we expect

16% of Geely’s sales to come from the SUV segment in 2016E.

Separately, Geely plans to launch its CMA platform sharing with Volvo by

end-2016, which we think will improve its brand acceptance and lower its

production costs and R&D expenses. Although we have reservations about

the attainability of Geely’s target of deriving 90% of its sales from EVs in

2020, we are confident it would become one of the leading NEV brands in

China, given its advanced technology vs. local peers as well as the

government’s support for local brands on NEV development. Finally, we

believe Geely will be better placed to deliver regular new-model launches

each year going forward.

What we recommend: We apply a target PER of 11x to Geely (on our

2016E EPS), a 20% premium to the stock’s past-3-year average PER of

9x. We believe this is justified as: 1) its past-3-year average was affected

by an abnormal valuation in 2014, when Geely’s operations were affected

by the restructuring of its sales network, and 2) it now has a more

sustainable growth model compared with previous years, in our view.

Therefore, we reiterate our Buy (1) rating with a 12-month TP of HKD4.90.

The key risk to our view: slower-than-expected improvements in its net

margin and sales-volume growth.

How we differ: Our 2016-17E EPS are 2-4% above the consensus forecasts, as we are more optimistic on its new-product launches. We expect Geely’s car models to see a robust sales performance. In addition, we think Geely’s improving brand image in China will support solid revenue growth over our forecast horizon.

4 January 2016

Geel y Automobil e

2016 likely to be another good year

We forecast a market-beating 20% YoY rise in 2016 sales volume

Strong 2016 pipeline should support consistent model launches

We forecast a flat gross margin YoY, better than peers; reiterate Buy (1)


Source: FactSet, Daiwa forecasts

Geely Automobile (175 HK)

Target price: HKD4.90 (from HKD4.90)

Share price (28 Dec): HKD4.23 | Up/downside: +15.8%

Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]

Forecast revisions (%)

Year to 31 Dec 15E 16E 17E

Revenue change - - -

Net profit change - - -

Core EPS (FD) change - - -

90

116

143

169

195

2.0

2.7

3.4

4.0

4.7

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Share price performance

Geely Auto (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.44-4.67

Market cap (USDbn) 4.80

3m avg daily turnover (USDm) 32.95

Shares outstanding (m) 8,801

Major shareholder LI Shu Fu (45.0%)

Financial summary (CNY)


Revenue (m) 28,350 36,757 42,242

Operating profit (m) 3,223 4,141 4,759

Net profit (m) 2,604 3,366 3,894

Core EPS (fully-diluted) 0.296 0.382 0.442

EPS change (%) 82.0 29.3 15.7

Daiwa vs Cons. EPS (%) 2.5 3.7 1.6

PER (x) 12.0 9.3 8.0

Dividend yield (%) 1.0 1.3 1.5

DPS 0.036 0.046 0.054

PBR (x) 1.6 1.4 1.2

EV/EBITDA (x) 6.1 4.6 3.7

ROE (%) 14.1 15.8 15.9

24

Geely Automobile (175 HK): 4 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Geely: net-profit forecasts

Following on from weak earnings in 2014 due to the

restructuring of its dealer network, Geely’s bottom line

looks set to get back on the right track, in our opinion.

Coupled with forecast margin enhancement, we project net

profit growth of 82% YoY for 2015. Bottom-line growth

should also be solid in 2016-17E, on our forecasts, as we

expect it to gain market share from its competitors, backed

by its product pipeline and the tax-cut stimulus. Our

forecast 2016-17E net-profit growth of 16-29% is likely to

outperform those of its peers.

Source: Company, Daiwa forecasts

Valuation Geely: 1-year-forward PER (x)

We apply a target PER of 11x to our 2016E EPS to value

Geely, marking a 20% premium to the stock’s past-3-year-

average PER of 9x, which we believe was distorted by the

stock’s abnormal valuation in 2014. We believe our target

PER is justified, as we consider Geely to have a more

sustainable growth model today. Therefore, we reiterate

our Buy (1) rating and 12-month target price of HKD4.90.


Earnings revisions Geely: Bloomberg consensus EPS forecast revisions

Our 2015-17E EPS are 2-4% above consensus, as we are

more optimistic on its new-product launches, on the back

of its R&D capability, represented by the success of the

GC9. In addition, deeper integration with Volvo also means

stronger technical support in the future.

Source: Bloomberg

(60%)

(40%)

(20%)

0%

20%

40%

60%

80%

100%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014 2015E 2016E 2017E

Net profit (LHS) YoY Growth (RHS)

(CNYm)

5

6

7

8

9

10

11

12

13

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

PER +1 SD Average PER -1 SD

(PER)

0.25

0.30

0.35

0.40

0.45

0.50

0.55

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

(CNY)

2015E 2016E

25


Financial summary

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales volume (unit) 416,000 422,000 483,000 549,000 418,000 500,000 600,000 645,000

Sales volume (YoY %) 27.3 1.4 14.7 13.6 (24.0) 19.6 20.0 7.4

ASP 48,334 49,726 50,939 52,246 52,024 56,706 61,243 65,530

ASP (YoY %) 12.2 2.9 2.4 2.6 (0.4) 9.0 8.0 7.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Domestic revenue 18,505 18,924 19,305 21,962 17,646 23,014 29,838 34,291

International revenue 1,594 2,041 5,323 6,745 4,092 5,336 6,919 7,951

Other Revenue 0 0 0 0 0 (0) (0) (0)

Total Revenue 20,099 20,965 24,628 28,708 21,738 28,350 36,757 42,242

Other income 765 991 1,046 976 1,016 1,247 1,617 1,859

COGS (16,379) (17,145) (20,069) (22,942) (17,776) (23,162) (30,067) (34,554)

SG&A (2,386) (2,459) (2,881) (3,474) (3,083) (3,213) (4,166) (4,787)

Other op.expenses 0 0 0 0 0 0 0 0

Operating profit 2,098 2,352 2,723 3,267 1,896 3,223 4,141 4,759

Net-interest inc./(exp.) (192) (167) (195) (40) (24) (47) (24) 14

Assoc/forex/extraord./others (5) (1) 0 77 71 60 64 64

Pre-tax profit 1,900 2,183 2,529 3,304 1,943 3,235 4,182 4,837

Tax (351) (467) (479) (624) (494) (599) (774) (895)

Min. int./pref. div./others (181) (172) (10) (17) (19) (32) (42) (48)

Net profit (reported) 1,368 1,543 2,040 2,663 1,431 2,604 3,366 3,894

Net profit (adjusted) 1,368 1,543 2,040 2,663 1,431 2,604 3,366 3,894

EPS (reported)(CNY) 0.186 0.207 0.271 0.317 0.163 0.296 0.382 0.442

EPS (adjusted)(CNY) 0.186 0.207 0.271 0.317 0.163 0.296 0.382 0.442

EPS (adjusted fully-diluted)(CNY) 0.161 0.181 0.252 0.303 0.163 0.296 0.382 0.442

DPS (CNY) 0.023 0.023 0.032 0.036 0.020 0.036 0.046 0.054

EBIT 2,098 2,352 2,723 3,267 1,896 3,223 4,141 4,759

EBITDA 2,603 2,993 3,583 4,345 2,770 4,168 5,239 6,012

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 1,900 2,183 2,529 3,304 1,943 3,235 4,182 4,837

Depreciation and amortisation 504 642 860 1,078 874 946 1,097 1,252

Tax paid (214) (281) (711) (610) (497) (599) (774) (895)

Change in working capital (701) (1,647) 1,503 (449) (960) (285) (314) (221)

Other operational CF items 492 310 256 238 673 53 28 (5)

Cash flow from operations 1,983 1,208 4,438 3,562 2,033 3,350 4,220 4,969

Capex (2,072) (2,197) (1,922) (2,022) (2,421) (2,561) (2,611) (2,663)

Net (acquisitions)/disposals 122 (788) (232) 313 429 0 0 0

Other investing CF items 604 32 83 844 524 0 0 0

Cash flow from investing (1,346) (2,953) (2,071) (865) (1,468) (2,561) (2,611) (2,663)

Change in debt (639) 716 (1,460) (930) (274) (200) (700) (700)

Net share issues/(repurchases) 106 14 618 11 0 0 0 0

Dividends paid (148) (170) (170) (264) (320) (174) (316) (409)

Other financing CF items (52) (166) (193) (183) 1,766 (113) (92) (59)

Cash flow from financing (732) 393 (1,206) (1,366) 1,172 (487) (1,108) (1,168)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash (95) (1,352) 1,160 1,330 1,737 302 501 1,138

Free cash flow (90) (989) 2,515 1,540 (388) 789 1,609 2,306

26


Financial summary continued …

Balance sheet (CNYm)

Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 4,393 3,030 4,189 5,478 7,203 7,505 8,006 9,144

Inventory 987 1,358 1,822 1,784 1,620 2,110 2,739 3,148

Accounts receivable 9,913 12,215 13,476 14,785 16,385 21,369 27,705 31,840

Other current assets 392 403 368 204 95 104 115 122

Total current assets 15,684 17,006 19,855 22,251 25,303 31,089 38,566 44,254

Fixed assets 5,467 6,796 7,008 6,209 5,861 6,285 6,693 7,084

Goodwill & intangibles 2,823 3,708 4,282 4,392 5,346 6,537 7,642 8,662

Other non-current assets 0 87 235 747 771 831 895 959

Total assets 23,974 27,597 31,380 33,599 37,280 44,741 53,796 60,959

Short-term debt 1,097 2,532 1,379 966 692 492 292 92

Accounts payable 10,508 12,114 15,183 16,075 17,017 22,173 28,783 33,078

Other current liabilities 174 339 131 197 137 178 231 266

Total current liabilities 11,778 14,985 16,693 17,237 17,845 22,843 29,306 33,436

Long-term debt 1,562 843 525 0 1,820 1,820 1,320 820

Other non-current liabilities 1,556 1,619 958 133 149 149 149 149

Total liabilities 14,897 17,447 18,176 17,370 19,814 24,812 30,775 34,404

Share capital 139 140 153 161 161 161 161 161

Reserves/R.E./others 7,883 9,443 12,734 15,907 17,127 19,557 22,607 26,092

Shareholders' equity 8,022 9,582 12,887 16,068 17,288 19,718 22,768 26,253

Minority interests 1,056 568 317 162 178 211 253 301

Total equity & liabilities 23,974 27,597 31,380 33,599 37,280 44,741 53,796 60,959

EV 30,485 31,992 29,001 26,140 25,960 25,430 24,207 22,354

Net debt/(cash) (1,734) 344 (2,285) (4,512) (4,691) (5,194) (6,394) (8,232)

BVPS (CNY) 1.078 1.285 1.560 1.826 1.964 2.240 2.587 2.983

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 42.9 4.3 17.5 16.6 (24.3) 30.4 29.7 14.9

EBITDA (YoY) 33.1 15.0 19.7 21.3 (36.3) 50.5 25.7 14.8

Operating profit (YoY) 31.9 12.1 15.8 20.0 (42.0) 70.0 28.5 14.9

Net profit (YoY) 15.7 12.8 32.2 30.5 (46.3) 82.0 29.3 15.7

Core EPS (fully-diluted) (YoY) (2.5) 12.6 39.2 20.1 (46.3) 82.0 29.3 15.7

Gross-profit margin 18.5 18.2 18.5 20.1 18.2 18.3 18.2 18.2

EBITDA margin 12.9 14.3 14.5 15.1 12.7 14.7 14.3 14.2

Operating-profit margin 10.4 11.2 11.1 11.4 8.7 11.4 11.3 11.3

Net profit margin 6.8 7.4 8.3 9.3 6.6 9.2 9.2 9.2

ROAE 19.0 17.5 18.2 18.4 8.6 14.1 15.8 15.9

ROAA 6.4 6.0 6.9 8.2 4.0 6.4 6.8 6.8

ROCE 19.4 18.6 19.0 20.2 10.2 15.3 17.7 18.3

ROIC 26.8 20.7 20.6 23.4 11.5 19.1 21.5 22.2

Net debt to equity net cash 3.6 net cash net cash net cash net cash net cash net cash

Effective tax rate 18.5 21.4 19.0 18.9 25.4 18.5 18.5 18.5

Accounts receivable (days) 145.8 192.6 190.4 179.7 261.7 243.0 243.7 257.3

Current ratio (x) 1.3 1.1 1.2 1.3 1.4 1.4 1.3 1.3

Net interest cover (x) 10.9 14.1 14.0 81.7 80.0 68.1 175.8 n.a.

Net dividend payout 12.3 11.0 11.7 11.5 12.2 12.2 12.2 12.2

Free cash flow yield n.a. n.a. 8.1 4.9 n.a. 2.5 5.2 7.4

Company profile

Listed on the Hong Kong Stock Exchange in 2003, Geely Automobile is engaged principally in the

manufacture and trading of automobiles, automobile parts and related automobile components.

Focused on the economy car segment, the company currently has 3 self-owned brands, Gleagle,

Emgrand and Englon, with an aggregated 2.1% market share in China’s passenger car market.

However, over the next 2 years, these 3 brands will gradually be consolidated into a single brand

under “Geely”.

27


Promising growth outlook

New-era growth strategy for Geely

New SUV and EV models the next earnings-growth drivers for 2016E

Geely’s preliminary sales-volume target for 2016 is 600k units, a rise of 20% YoY and in

line with our initial projection. In 2016, Geely plans to launch 4 new models, 2 of which are

the NL-3 and NL-4 (launch date to be announced in July/August 2016). Sales of Geely’s

SUVs should then reach close to 100k units for 2016E, or 16% of its target sales, up from

the current 12% for 2015. The other 2 new models are a new generation of the EC7 sedan,

and a cross-SUV. Moreover, the launch of the Emgrand EV at end-2015 could help Geely

establish a first-mover advantage in the NEV segment, in our view.

Geely: NL-3 SUV Geely: Emgrand EV

Source: Company Source: Company

Platform-sharing capability to result in more consistent launch schedule

From 2016, Geely plans to adopt a platform-sharing practice for its new models, which

means several auto models will share the same design blueprint for drivetrains, chassis,

axles and suspension systems. The goal is save development time and lower costs, due to

standardised designs and economies of scale. Geely aims to focus on 3 platforms for its

product line-up: the FE platform, KC platform, and CMA platform. Indeed, several of its

current models were developed under the FE platform or KC platform, eg, the Vision and

EC7 are under the FE platform, while the GC9 is under the KC platform. As a result, new

models should break even comfortably as existing models already cover the cost of the

plant operations for the platform. The CMA platform (based on which Volvo models are

built) is set to be unveiled in March/April 2016 and put into operation in 2017, according to

Geely’s management.

Additionally, Geely is developing 2 more brand new platforms: the PE platform for smaller-

size NEVs and the CV platform for commercial vehicles; it aims to launch the first models

using both platforms in 2017. As such, we expect Geely to have several model launches

each year going forward, as opposed to the more scattershot approach of previous years.

This implies to us greater earnings visibility in the coming years.

Geely: summary of future platforms

Platform name Positioning Current models Future pipeline

FE Volume market Vision, EC7 (Xindihao) EC7 (2016 ver.), NL-3, NL-4, a cross-SUV

KC Higher-end GC9 (Borui) no plan in 2016

CMA Premium/Luxury n.a. Start operation in 2017

PE Small size NEV n.a. First model in 2017 CV Commercial vehicle n.a. First model in 2017

Source: Company

With the launch of 4 new

models in the pipeline,

we forecast Geely to sell

600k units in 2016

Platform sharing could

help Geely launch new

models every year and

hence increase earnings

visibility

28


“Blue Geely Action Plan” a long-term positive NEV strategy

On 18 November 2015, Geely announced its long-term EV strategy: the “Blue Geely Action

Plan”. With this plan, it aims to derive 90% of total sales from the NEV segment in 2020,

65% of which should be from hybrids and 35% from pure EVs. Such a development would

allow Geely to achieve average fuel consumption of 5.0L/100km sooner than the China

Ministry of Industry and Information Technology requires it to. To reach this target, the

company aims to have NEV versions of all of its models. Although we have reservations

about Geely achieving its sales target for NEVs by 2020, we view this strategy to be

positive for Geely in the longer term, as it would help Geely to establish itself as one of the

first movers and market leaders for NEV among its customers. More details on the recent

EV launch and NEV strategy can be found in “Blue Geely Action Plan” and test drive of

Emgrand EV, 20 November 2015.

Improving R&D another long-term advantage

GC9 breakthrough suggests that Geely is at another level

Launched in April 2015, the GC9 is Geely’s first B-segment sedan model, with a length of

4956mm and price range of CNY130k-230k. In October 2015, just 6 months after its

launch, it accounted for more than 10% of Geely’s monthly sales volume, or 4,979 units.

Traditionally, the B-segment has been dominated by foreign JVs as cars in this segment

tend to carry higher prices compared with small cars and consumers generally favour

foreign JVs at such price points. Given the GC9’s unit-sales momentum, its market

acceptance is similar to that of cars produced by foreign JVs, and we note that similar

models offered by its domestic peers have recorded sales of a few hundred units or fewer.

These sales numbers suggest to us that Geely’s R&D is appreciably better than its peers,

which should be positive for Geely’s brand recognition.

Geely’s GC9 peer comparisons

Auto OEM Model Length

(mm) Price range


new options Avg. sales units per

month in 2015

Geely GC9 4956 115-230 Apr-2015 n.a. 3,090

SAIC Motor Roewe 950 4996 184-323 Mar-2012 Jul- 2015 (Facelift) 158

Lifan 820 4865 82-120 Mar-2015 n.a. 586

GAC Motor GA6 4850 117-197 Dec-2014 Mar-2015 (New options) 879

Beijing Hyundai Sonata-9 4855 175-250 Mar-2015 n.a. 6,540

GAC Honda Accord 4930 180-300 Sep-2013 Mar-2015 (Facelift) 8,756

GAC Toyota Camry 4850 185-330 Dec-2011 Mar-2015 (Facelift) 10,727

DF Nissan Teana 4892 178-300 Dec-2013 Apr-2014 (New options) 9,068

FAW Car Mazda Mazda 6 Atenza 4870 180-240 May-2014 Aug-2015 (New options) 3,360

SAIC VW Passat 4870 132-323 Sep-2011 Aug-2015 (New options) 17,349

SAIC GM Buick Regal 4843 179-280 Sep-2013 Mar-2015 (New options) 9,194

FAW VW Magotan 4865 200-300 Jul-2011 Apr-2015 (New options) 12,782

Dongfeng Honda Spirior 4840 180-268 Nov-2014 Oct-2015 (New options) 1,716


Increasing integration with Volvo means quality upgrade

Ever since Volvo Cars was bought by Geely’s parent holding company, Zhejiang Geely, in

2010, Geely’s R&D capability has been improving. The GC9 is one example of this trend.

On a 3- to 5-year view, by leveraging technology from Volvo Cars, we believe Geely will be

able to source components from quality international suppliers and ultimately deliver better

products than those of its peers. Currently, 60% of its suppliers are international (vs. 20%

10 years ago). In addition, management’s approach to pricing has helped Geely maintain

its net and gross margins. Since 2Q15, there have been multiple price cuts by the auto

OEMs, including domestic brands and foreign JVs. However, Geely did not participate in

these price wars, as management decided instead to protect its margins. In turn, we

project Geely’s net margin to come in at 9.2%, up by 2.6pp YoY, for 2015. For the years

thereafter, we expect Geely’s ASP to rise steadily, due to the more upmarket offerings in its

pipeline. However, the development of new platforms and models may require some

upfront costs. Therefore, we conservatively forecast that its net margin through 2017 will

hold at the 2015E level.

A bold move to establish

a market-leading

position in the NEV

segment

GC9 is the first among

China domestic brands

to see meaningful

traction in B-segment

sedans

2015E net margin to

improve by 2.6pp YoY to

9.2%, and to remain at

that level, at least, in

future years

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20151120cn_Geely_Automobile.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20151120cn_Geely_Automobile.pdf#page=1

29


Other long-term factors

Better positioned than its peers to benefit from the tax cut

On 30 September, China’s State Council announced plans to cut the purchase tax from

10% to 5% for cars with engine sizes smaller than or equal to 1.6L. The policy, which will

be effective from 1 October 2015 until 31 December 2016, should help boost Geely’s sales

volume, as 79% of its cars have engines in this category, compared with a market average

of 68%.

Demand from low-tier cities The auto penetration rate in China’s top-tier cities is already comparable to that in mature

market such as Japan, Korea and Taiwan. However, the overall auto penetration rate in

China is still lagging behind these markets. Hence, the growth mainly comes from low-tier

cities. As such, we believe there are ample growth opportunities in this market, and we

believe the domestic players are poised to capture most of the growth due to their

relatively low prices and more extensive sales networks. Therefore, well-known domestic

players, such as Geely, are likely to outperform the foreign JVs in general, in our view.

Geely has relatively high

exposure to small-

engine cars

Demand from low-tier

cities to benefit Geely

30


Valuation and recommendation

Our top pick in the sector

Our 2015-17E EPS are 2-4% above the consensus forecasts, as we are more optimistic on

its new-product launches on the back of its R&D capability. Based on our 2016 EPS

forecast and a PER multiple of 11x, we have a 12-month target price for Geely of

HKD4.90. The target multiple marks a 20% premium to the stock’s past-3-year average

PER of 9x. However, we note that its past-3-year average was brought down by an

abnormal valuation in 2014, when Geely’s operations were affected by the restructuring of

its sales network. In addition, we believe Geely now has a more sustainable growth outlook

compared with the past. Therefore, we believe our target PER is justified, and we reiterate

our Buy (1) rating with a 12-month TP of HKD4.90.

Geely: PER bands (x)


Risks

Weaker-than-expected sales of new models and declining exports

As mentioned, Geely has launched several new models recently (such as the GC-9, and

the new Emgrand EV), and soon plans to launch the NL-3 and NL-4. Therefore, the sales

performance of these new models could affect market sentiment on the stock. On the other

hand, after declining by 50% YoY in 2014, Geely’s exports were weak in 2015 YTD.

Its exports through November 2015 were down by 55% YoY, due to ongoing sanctions or

political instability in its major export markets (Iran, Egypt and Russia). Although exports

accounted for only 6% of its total sales through October 2015, if this sluggishness

continues it can be expected to weigh on Geely’s sales and profits to some extent.

Intensifying competition in the SUV segment

SUV unit-sales growth in China has been strong due to changing consumer preferences.

In a bid to increase market share, many domestic manufacturers (including Geely), as well

as foreign JVs, have launched new competitively-priced SUV models. Other strong

competitors include GS4 and Landwind, which have driven up the sales of Guangzhou

Automobile Motor (GAMC) and Jiangling Motor by 92% and 63% YoY, respectively. We

also expect to see additional SUV models coming to the market in 2016, such as the

Kadjar by Dongfeng Renault. However, we remain confident in Geely’s product quality and

believe its new SUV models can snatch market share from peers, similar to what the

company did with the GC9 in the sedan market in 2015.

5

6

7

8

9

10

11

12

13

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15


(PER)

Current valuation

attractive; we expect

PER to go up slightly

Risk of slower sales if

demand is weaker than

we expect

Risk of weak SUV sales

if competition intensifies

further

31


Geely NL-3/NL-4 possible competitors

Auto OEM Model Length (mm) Price range

(CNY k) Launch date Launch date of facelift

/ new options Avg. sales units per

month in 2015

Geely NL-3 not disclosed yet not disclosed yet Jan-2016

Geely NL-4 not disclosed yet not disclosed yet 2016

Dongfeng Renault Kadjar 4449 not disclosed yet Mar-2016

GAMC GS4 4510 80-147 Apr-2015 n.a. 13,930

Landwind X7 4420 130 -148 Aug-2015 n.a. 4,898

Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551

GWM H2 4335 99-129 Jul-2014 Sep-2015 (new options) 13,042

SAIC GM Wuling Baojun 560 4620 77-90 Jul-2015 n.a. 20,185

BAIC Hyundai Tucson 4475 122-196 Sep-2015 n.a. 10,054

Dongfeng Nissan Venucia T70 4542 80-128 Jan-2015 Sep-2015 (new options) 4,803




What's new: We see 2016 being a good year for BAIC, with the likelihood

of a continuing sales recovery for Beijing Hyundai and another strong year

for Beijing Benz. On the other hand, we expect losses at Beijing Brand, the

company’s self-owned brand, to diminish in 2016 with new SUV models.

BAIC remains our top pick among the foreign JV brands.

What's the impact: Beijing Hyundai’s strong sales recovery looks set

to continue in 2016. Beijing Hyundai’s sales volume turned around in

October, rising by 8% YoY compared to 16% YoY and 5% YoY declines for

August and September, respectively. The major driver was the launch of

the new Tucson SUV in September, as well as better sales of the Elantra

Langdong and Sonata due to higher discounts and new models. With a full-

year impact of the new Tucson and also a new Elantra Langdong launching

in 1Q16, the JV looks poised for a significant sales improvement in 2016,

especially given the relatively low base from which it is recovering.

Beijing Benz likely to maintain strong growth in 2016 with a strong

pipeline. Beijing Benz’s fast sales-volume growth in 2015 looks set to

continue in 2016 with 2 new models, namely the GLC SUV and new E-

class sedan, which combined should account for half of its sales volume for

the year. In addition, luxury brand sales are likely to outgrow that for the

broader China PV market due to the government’s purchase quota policy in

top-tier cities. Also, Beijing Benz is projected to see the strongest growth in

2016 among the luxury brands due to the favourable timing of its product

launches.

Losses at Beijing Brand poised to contract. With the launch of the

company’s new X25, X35 and X55 SUVs in 2016, versus only the X65

launch in 2015, we believe Beijing Brand stands a good chance of reducing

its losses, as the SUV is still the brand’s most profitable model despite its

declining gross margin. We forecast the JV’s losses to reduce to CNY2.3bn

in 2016E from CNY2.5bn in 2015E.

What we recommend: We reiterate our Buy (1) rating and 12-month TP of

HKD9.40, still based on a target PER of 9.5x, which is the industry’s past-3-

year average. The stock is trading currently at a 2016E PER of 7.7x, and

we expect it to be rerated back to close to peers’ average when we see

evidence of the sales recovery at Beijing Hyundai extending into 2016. The

key risk is weaker-than-expected new car sales.

How we differ: Our 2015-17E EPS are 7-12% higher than consensus, as

we are more confident of a sales recovery at Beijing Hyundai, as well as a

surge in sales for Beijing Benz.

4 January 2016

BAIC Motor

2016: a year of recovery

Beijing Benz to see strong sales growth in 2016E due to new models

Sales volume for Beijing Hyundai continues to recover from a trough

Beijing Brand’s losses should shrink in 2016; reiterate Buy (1) rating



BAIC Motor (1958 HK)



Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]






65

76

88

99

110

5

7

8

10

12

Dec-14 Mar-15 Jun-15 Sep-15


BAIC Motor (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder BAIC Group (45.0%)



Revenue (m) 89,490 115,563 132,324


Net profit (m) 5,057 6,324 7,221


EPS change (%) (4.2) 25.1 14.2

Daiwa vs Cons. EPS (%) 12.4 7.4 10.9

PER (x) 9.7 7.7 6.8


DPS 0.290 0.362 0.414

PBR (x) 1.4 1.2 1.1

EV/EBITDA (x) 6.6 5.1 4.4

ROE (%) 14.6 16.6 17.0

33

BAIC Motor (1958 HK): 4 January 2016



Growth outlook BAIC: net profit forecasts

We forecast BAIC to post sales growth of 29% YoY for

2016, after a 59% YoY rise for 2015. Firstly, we expect

Beijing Benz’s sales volume growth to continue, projected

to be 30% YoY, supported by new models. Secondly,

Beijing Hyundai has been on a recovery track after posting

rock-bottom sales growth in July 2015. In 2016, we

forecast a 10.6% YoY increase in sales volume, benefitting

from new product launches and better buying sentiment.

Thirdly, Beijing Brand looks likely to reduce its losses

incurred. Overall, we forecast BAIC’s net profit to increase

by 14-25% YoY 2016-17E.


Valuation BAIC: 1-year forward PER (x)

BAIC stock is trading currently at a 2016E PER of 7.7x,

which is well below the industry’s past-3-year average PER

of 9.5x, and also below the stock’s own average PER of 9x

since listing in January 2015. With a sales volume recovery

for Beijing Hyundai and strong growth for Beijing Benz, we

expect BAIC to be rerated back to the industry average

PER over the next 12 months.


Earnings revisions BAIC: Bloomberg-consensus EPS forecast revisions

Our 2015-17E EPS are 7-12% higher than consensus, as

we are more confident about a sales recovery for Beijing

Hyundai, as well as a surge in sales volume for Beijing

Benz. We expect the consensus to start revising up its

earnings for BAIC when it sees signs that the sales

recovery at Beijing Hyundai is sustainable, as well as

continuous strong sales-volume growth for Beijing Benz.

Source: Bloomberg

(40%)

(20%)

0%

20%

40%

60%

80%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014 2015E 2016E


(CNYm)

5

6

7

8

9

10

11

12

13

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15


(PER)

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

(CNY)

2015E 2016E

34


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Volume - Beijing Brand (unit) n.a. 24,000 78,000 202,000 309,000 314,000 420,000 480,000

Volume - Mercedes Benz (unit) n.a. 93,000 103,000 116,000 145,000 249,000 323,000 372,000

Volume - Hyundai (unit) n.a. 740,000 860,000 1,031,000 1,120,000 1,042,000 1,152,000 1,226,000

Volume growth - Beijing Brand (%) n.a. n.a. 225.0 159.0 53.0 1.6 33.8 14.3

Volume growth - Mercedes Benz (%) n.a. n.a. 10.8 12.6 25.0 71.7 29.7 15.2

Volume growth - Hyundai (%) n.a. n.a. 16.2 19.9 8.6 (7.0) 10.6 6.4

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Beijing Motor n.a. 1,916 3,520 6,847 12,434 11,340 13,967 15,488

Beijing Benz n.a. n.a. n.a. 5,934 43,937 78,151 101,596 116,835

Other Revenue n.a. n.a. n.a. 0 0 0 0 0

Total Revenue n.a. 1,916 3,520 12,782 56,370 89,490 115,563 132,324

Other income n.a. 99 732 496 1,418 1,769 969 1,213

COGS n.a. (1,888) (3,688) (12,367) (47,387) (73,915) (94,228) (107,633)

SG&A n.a. (753) (1,536) (3,520) (9,102) (11,110) (13,826) (15,832)

Other op.expenses n.a. 0 0 0 0 0 0 0

Operating profit n.a. (627) (972) (2,609) 1,299 6,234 8,478 10,072

Net-interest inc./(exp.) n.a. (82) (158) (474) (533) (635) (708) (660)

Assoc/forex/extraord./others n.a. 3,297 4,835 6,147 5,932 4,316 4,879 5,030

Pre-tax profit n.a. 2,588 3,704 3,065 6,698 9,915 12,648 14,442

Tax n.a. (21) (226) (114) (857) (1,983) (2,530) (2,888)

Min. int./pref. div./others n.a. 32 (61) (237) (1,331) (2,875) (3,794) (4,333)

Net profit (reported) n.a. 2,598 3,417 2,714 4,511 5,057 6,324 7,221

Net profit (adjusted) n.a. 2,598 3,417 2,714 4,511 5,057 6,324 7,221

EPS (reported)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962

EPS (adjusted)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962

EPS (adjusted fully-diluted)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962

DPS (CNY) n.a. 0.000 2.999 0.322 0.303 0.290 0.362 0.414

EBIT n.a. (627) (972) (2,609) 1,299 6,234 8,478 10,072

EBITDA n.a. (474) (779) (1,790) 3,663 9,306 12,362 14,812

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax n.a. 2,588 3,704 3,065 6,698 9,915 12,648 14,442

Depreciation and amortisation n.a. 153 193 818 2,364 3,072 3,885 4,740

Tax paid n.a. (10) (8) (258) (1,365) (1,983) (2,530) (2,888)

Change in working capital n.a. (250) 237 721 1,282 1,642 5,294 3,442

Other operational CF items n.a. (3,498) (4,750) (6,802) (6,717) (3,341) (3,841) (3,992)

Cash flow from operations n.a. (1,017) (624) (2,457) 2,262 9,305 15,457 15,743

Capex n.a. (4,258) (5,659) (7,236) (11,785) (13,102) (14,362) (14,501)

Net (acquisitions)/disposals n.a. (800) (328) 3,775 (2,691) 0 0 0

Other investing CF items n.a. 2,608 298 6,394 4,535 4,357 3,237 3,659

Cash flow from investing n.a. (2,449) (5,690) 2,933 (9,941) (8,745) (11,125) (10,841)

Change in debt n.a. 2,549 5,998 7,194 7,396 2,000 2,000 (2,000)

Net share issues/(repurchases) n.a. 1,500 3,003 6,132 7,910 0 0 0

Dividends paid n.a. 0 (1,500) (212) (2,273) (2,279) (2,174) (2,719)

Other financing CF items n.a. (2,001) (115) 141 (210) (975) (1,038) (1,038)

Cash flow from financing n.a. 2,048 7,386 13,254 12,822 (1,253) (1,212) (5,757)

Forex effect/others n.a. 0 0 0 0 0 0 0

Change in cash n.a. (1,419) 1,072 13,730 5,143 (693) 3,119 (855)

Free cash flow n.a. (5,275) (6,283) (9,692) (9,524) (3,797) 1,094 1,243

35




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment n.a. 1,818 2,891 16,790 21,923 21,230 24,349 23,494

Inventory n.a. 441 835 7,479 11,068 17,264 22,009 25,140

Accounts receivable n.a. 155 527 6,004 6,422 13,424 17,334 19,849

Other current assets n.a. 2,047 4,841 3,490 4,905 5,510 5,986 6,292

Total current assets n.a. 4,461 9,094 33,763 44,319 57,428 69,678 74,775

Fixed assets n.a. 2,899 7,151 24,755 34,218 44,251 54,759 64,577

Goodwill & intangibles n.a. 4,076 5,025 11,012 13,598 13,596 13,566 13,508

Other non-current assets n.a. 10,365 10,513 15,866 17,723 17,682 19,325 20,695

Total assets n.a. 21,801 31,782 85,396 109,859 132,957 157,327 173,555

Short-term debt n.a. 3,851 4,008 9,273 18,574 20,025 21,136 21,869

Accounts payable n.a. 472 1,493 11,112 14,978 21,435 27,326 31,214

Other current liabilities n.a. 3,354 1,787 16,535 17,948 25,484 32,909 37,682

Total current liabilities n.a. 7,677 7,288 36,920 51,500 66,945 81,371 90,764

Long-term debt n.a. 2,533 8,069 15,122 13,935 15,935 17,935 15,935

Other non-current liabilities n.a. 292 413 2,300 2,455 2,455 2,455 2,455

Total liabilities n.a. 10,501 15,770 54,342 67,890 85,335 101,761 109,155

Share capital n.a. 5,000 5,462 6,382 7,508 7,508 7,508 7,508

Reserves/R.E./others n.a. 5,859 10,336 17,310 25,847 28,625 32,775 37,276

Shareholders' equity n.a. 10,859 15,798 23,692 33,355 36,133 40,283 44,784

Minority interests n.a. 441 215 7,362 8,614 11,489 15,284 19,616

Total equity & liabilities n.a. 21,801 31,782 85,396 109,859 132,957 157,327 173,555

EV n.a. 44,101 47,775 51,150 53,965 61,026 63,170 65,720

Net debt/(cash) n.a. 4,566 9,185 7,606 10,586 14,730 14,722 14,310

BVPS (CNY) n.a. 2.234 3.159 4.221 4.443 4.813 5.365 5.965

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. n.a. 83.7 263.2 341.0 58.8 29.1 14.5

EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 154.0 32.8 19.8

Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. 379.8 36.0 18.8

Net profit (YoY) n.a. n.a. 31.5 (20.6) 66.2 12.1 25.1 14.2

Core EPS (fully-diluted) (YoY) n.a. n.a. 27.8 (29.2) 45.3 (4.2) 25.1 14.2

Gross-profit margin n.a. 1.4 n.a. 3.2 15.9 17.4 18.5 18.7

EBITDA margin n.a. n.a. n.a. n.a. 6.5 10.4 10.7 11.2

Operating-profit margin n.a. n.a. n.a. n.a. 2.3 7.0 7.3 7.6

Net profit margin n.a. 135.6 97.1 21.2 8.0 5.7 5.5 5.5

ROAE n.a. 47.9 25.6 13.7 15.8 14.6 16.6 17.0

ROAA n.a. 23.8 12.8 4.6 4.6 4.2 4.4 4.4

ROCE n.a. n.a. n.a. n.a. 2.0 7.9 9.5 10.2

ROIC n.a. (3.9) (4.4) (7.9) 2.5 8.7 10.2 10.8

Net debt to equity n.a. 42.0 58.1 32.1 31.7 40.8 36.5 32.0

Effective tax rate n.a. 0.8 6.1 3.7 12.8 20.0 20.0 20.0

Accounts receivable (days) n.a. 14.8 35.3 93.2 40.2 40.5 48.6 51.3

Current ratio (x) n.a. 0.6 1.2 0.9 0.9 0.9 0.9 0.8

Net interest cover (x) n.a. n.a. n.a. n.a. 2.4 9.8 12.0 15.3

Net dividend payout n.a. 0.0 438.9 66.6 50.5 43.0 43.0 43.0

Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 2.2 2.5

Company profile

BAIC Motor is the second-largest Hong Kong-listed passenger vehicle manufacturer by volume.

The company's manufacturing business operates under 3 brands: self-owned Beijing Motor, 51%-

owned Beijing Benz, and 50%-owned JV Beijing Hyundai. BAIC has a diverse product portfolio,

including economy and premium cars, small CUVs and sedans, and large SUVs and MPVs.

36


2016 unit sales growth poised to accelerate

Beijing Benz likely to continue to shine in 2016

Sales growth YTD in 2015 is unrivalled in the luxury segment

Year-to-date to November 2015, Beijing Benz’s sales had increased by 93% YoY, chiefly

because of new model launches last year, namely the C-class sedan and GLA SUV, both

of which were available for sale in August 2014. This is in contrast to other luxury brands,

such as BMW and Audi, which had relatively unattractive pipelines during the period.

Another reason was the increase in demand for luxury brands in China on the back of the

government’s purchase quota scheme, whereby buyers have to bid for the limited number

of licences available. In our view, those who could afford it would favour a luxury car

because they can only obtain a quota by bidding, and if they can buy only one car, they

would likely prefer a luxury car.

Luxury brands outgrowing overall market in China PV Beijing Benz: outperforming other luxury brands YTD 2015

Source: CAM Note: Luxury brands include Benz, BMW, VW Audi, Buick Cadillac, Volvo and Infiniti

Source: CAM

2016 new model launches to boost sales further Beijing Benz’s product offering remains strong for 2016. Two models, namely the GLC

SUV and E-class sedan, look likely to become the new sales drivers. The GLC was already

launched in late November 2015, and is expected to replace the current GLK SUV, which

was launched in 2012. Meanwhile, the E-class sedan is expected to be available in early

2016, and features a newer design to the existing E-class, which was launched in 2010

and facelifted in 2013. Moreover, domestic luxury brand peers Brilliance BMW and FAW

VW Audi are not planning to launch any new generation models of a similar type in 2016,

so Beijing Benz should enjoy another year of strong sales growth in 2016.

Beijing Benz GLC peer comparison – mid size luxury SUV

Auto OEM Model Length (mm) Price range (CNY ’000) Current/Past model launch date New model launch date

Beijing Benz GLC 4656 396-579 Oct-2012 (GLK) Nov-2015

BMW (Import) X3 4652 479-750 Mar-2011 (Launch); Jun-2014 (Facelift) 2016-17 (TBC)

FAW VW Audi Q5 4629 250-429 Apr-2010 (Launch); Apr-2013 (Facelift) N/A


Beijing Benz E-class peer comparison – full size luxury sedan

Auto OEM Model Length (mm) Price range (CNY ’000) Current/Past model launch date New model launch date

Beijing Benz E-class 5055 398-798 Jun-2010 (Launch); Aug-2013 (Facelift) Early-2016

Brilliance BMW 5-Series 5021 436-779 Aug-2010 (Launch); Sep-2013 (Facelift) 2017

FAW VW Audi A6 5015 383-743 Mar-2012 2016 (TBC, Facelift)


(20%)

0%

20%

40%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000(YoY %)(Sales Unit)

Luxury brands monthly sales (LHS) Luxury brands YoY (RHS)China overall PV YoY (RHS)

-30%

20%

70%

120%

170%

-30%

20%

70%

120%

170%

(YoY %)(YoY %)

Beijing Benz BMW Brilliance FAW VW Audi

Luxury brands are

outperforming the China

PV market, with Beijing

Benz enjoying the

fastest sales growth

among them

Beijing Benz should

maintain fast sales

growth in 2016 due to its

strong pipeline

37


Beijing Hyundai to recover in 2016

Coming back after the trough in 2015 Beijing Hyundai’s sales volumes have been the weakest in 2015 than they have been for 3

years. In the year to October, its sales volume had declined by 9% YoY, versus 9-20% YoY

growth over the past 3 years. In particular, July 2015 seems to mark the trough, when

Beijing Hyundai posted a 32% YoY decline in sales volumes. The main reason was the

overall sluggish sentiment in the market, coupled with the company’s lack of new models in

the mass market in 1H15. However, after July, its sales started to pick up again, driven by

its new generation Tucson SUV, more discounts being offered and a recovery in China’s

broad PV market.

Beijing Hyundai: sales volumes Beijing Hyundai: sales portfolio


Should outperform the market in 2016 Historically, Beijing Hyundai’s sales trend is closely correlated with China’s overall PV

market, mainly because Beijing Hyundai’s product offering has a similar composition to that

of the overall market. Examples include its SUV mix and small-engine car mix. With

China’s overall PV market set to recover in 2016 on the back of the purchase tax cut (see

the sector report for a detailed discussion) to 12% YoY according to our forecasts, we

expect better buying sentiment overall in the market which would benefit Beijing Hyundai.

Also, Beijing Hyundai’s new models, including the full-year impact of the Tucson SUV and

launch of the Elantra Langdong in 1Q16, which is the latest generation of the Elantra

sedan, would provide an incremental source of support for sales growth. Therefore, with

the low base in 2015, we forecast Beijing Hyundai’s sales growth to reach 10.6% YoY for

2016, higher than the market average of 12% YoY.

Beijing Hyundai: close resemblance to the China PV market Beijing Hyundai: new models

China PV market

Beijing Hyundai Honda Toyota

Volks-wagen

SUV mix 29.0% 26.4% 42.0% 20.7% 13.4%

Executive/Luxury model mix

5.8% 6.9% (Sonata)

1.4% (Crosstour)

2.4% (Crown and Land Cruiser)

14.8% (Audi)

Small-engine car mix 67.7% 66.5% 19.4% 57.9% 67.6%

Model Segment Launch date

Tucson SUV Sep-2015

Elantra Langdong Compact Sedan 2016 (Mar)

Equus Full size Sedan 2H15 (Dec)

Sonata PHEV ver. Plug-in Hybrid Sedan 2016

Source: CAM Note: as of YTD-2015

Source: Company, various media

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

20,000

40,000

60,000

80,000

100,000

120,000

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

(YoY %)(Sales Unit)

Beijing Hyundai sales (LHS) Beijing Hyundai YoY (RHS)

Overall China PV YoY (RHS)

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

(Sales mix %)

Verna Elantra Langdong Elantra - Old gens Sonata

Other Sedans Tucson Other SUVs

New model launch and

discounts helped Beijing

Hyundai’s sales volumes

to recover in 2H15

New model launches

should help Beijing

Hyundai’s sales bottom

out in 2H15

38


Beijing Brand should see losses recede in 2016

Sluggish sales in 2015

In 2015, despite Beijing Brand, the self-owned brand of BAIC, launching several new

models, sales have been relatively soft, with YTD-November growth of just 3.1% YoY. The

main reason was that the new models have been mostly sedans, namely the Senova CC

and Senova D80, which failed to provide growth momentum as the sedan segment itself is

weak. Thus, sales volume for Beijing Brand’s sedan segment has fallen by 23.2% YoY

YTD.

On the other hand, new models in the SUV segment, namely the Senova X65, have been

selling well, giving rise to a 265% increase in sales volume for Beijing Brand’s SUV

segment in the year to November 2015. In addition, the Wevan M20, which is priced as low

as CNY33-59,000, has also been a hit, posting YTD growth of 77% YoY.

However, according to BAIC’s management, Beijing Brand will still incur losses for the

company in 2015, with no reduction in the magnitude of losses, due to higher promotional

expenses and downward trending ASPs. As such, we forecast Beijing Brand to post a net

loss of CNY2.5bn for 2015.

Beijing Brand: sales volumes Beijing Brand: sales portfolio

Source: CAM Source: Company

SUV models to improve profitability in 2016E

However, in 2016, we believe Beijing Brand should return to better growth, with the help of

more new launches in the SUV segment including the X25, X35 and X65. This should

offset the weak profitability of its sedan models. Moreover, Beijing Brand’s NEV is also

projected to maintain high growth. However, the loss from Beijing Brand is likely to

continue, as the management revealed that the breakeven sales unit should be around

600k units annually. Given that we are now projecting a 33.9% YoY growth in 2016, or total

sales of 420k units, Beijing Brand is still far from breakeven. As such, we estimate a loss of

CNY2.3bn in 2016E.

Beijing Brand new models

Model Segment Launch date

Senova X65 Mid-size SUV (4654mm) Mar-2015

Senova X25 Small SUV (4110mm) Nov-2015

Senova X55 Compact SUV (4405mm) Dec-2015

Senova X35 Small SUV Mar-2016

BJ40 5-door ver. Compact/Mid SUV 2H-2016

BJ80 Mid-size SUV (4765mm) 2H-2016

Source: Company, various media

-60%

-20%

20%

60%

0

10,000

20,000

30,000

40,000

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

(YoY %)(Sales Unit)

Beijing Brand monthly sales (LHS) Beijing Brand YoY (RHS)


0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

(Sales mix %)(Sales mix %)

Sedan SUV MPV Crossover NEV

New sedan models have

been unable to help

Beijing Brand in 2015

We expect SUV models

to help Beijing Brand

reduce its losses in 2016

39



Valuation looks undemanding

We reiterate our Buy (1) rating on BAIC and 12-month TP of HKD9.40, based on a target

PER of 9.5x, which is the industry’s past-3-year average. The stock is trading currently at a

2016E PER of just 7.7x, which we consider to be undemanding given our expectation of a

sales recovery at Beijing Hyundai, continuous strong sales growth from Beijing Benz, and

a loss reduction at Beijing Brand. Our 2015-17E EPS are 7-12% higher than the

Bloomberg consensus, as we expect more upward earnings revisions in the next 6 months

to boost sentiment toward the stock. We believe BAIC should trade at least on a par with

the industry’s past 3-year average.

BAIC: PER bands


Risks

Stimulus policy not fully benefitting Beijing Benz

The tax reduction stimulus policy announced by the State Council in late-September is only

applicable to PVs with engine sizes smaller than or equal to 1.6L. However, only 19% of

Beijing Benz’s sales are derived from this sub-segment, versus the industry average of

67.7%. Therefore, the additional demand induced by this policy may not benefit Beijing

Benz as much as its peers, which could lead to downside risk to our forecasts if more-than-

expected buyers care about the 5% tax reduction and choose smaller-sized engine cars

than those Benz makes.

Beijing Benz: YTD 2015 sales by engine size

C-class engine size <=1.6L 27.8%

engine size >1.6L 72.2%

E-class engine size <=1.6L 0.0%


GLA engine size <=1.6L 63.9%


GLK engine size <=1.6L 0.0%


Beijing Benz total engine size <=1.6L 19.1%


Source: CAM Note: Only 2L and 3L engine size model available for E-class and GLK; same for the upcoming GLC

Loss reduction at Beijing Brand not certain

The losses incurred by Beijing Brand, the proprietary brand of BAIC, have dragged down

BAIC’s earnings in recent years. In 2014, this segment lost CNY2.4bn. For 2015,

management initially targeted the loss to narrow by CNY800m (to around CNY1.6bn).

However, the loss now is more likely to be in the region of CNY2.5bn, based on our

projections. For 2016, even though we project an increase in sales volume, which we

forecast will lead to a scaling up of production and therefore a lower loss of CNY2.3bn, we

still see a risk that margin erosion will impact its operation. Such erosion will come about

5

6

7

8

9

10

11

12

13

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15


(PER)

PER valuation should at

least catch up with

peers’ average, as we

project higher-than-peer

EPS growth

Less exposure to small

engine cars may limit the

growth of Beijing Benz

Loss reduction from

Beijing Brand remains a

question mark

40


because Beijing Brand plans to launch 3 new models in the SUV segment, where

competition is keen and many OEMs have been cutting prices to secure sales. If Beijing

Brand has to follow this trend to achieve sales growth, its margins would be hampered and

the much-needed reduction in losses may not materialise.


Hong Kong Consumer Discretionary

What's new: We believe the China Government will accelerate its

investment in charging facilities nationwide over the next 5 years from

2016, in order to increase the popularity of new energy vehicles (NEVs) in

China. However, in the long term, we see more local OEMs entering the

NEV market, which would intensify competition in this segment.

What's the impact: In our view, the policy guidelines announced by the

government on 17 November regarding the development of charging

facilities for NEVs in China from 2015 to 2020 set out a detailed target and

methodology to improve the current bottleneck of charging facilities in the

country. If implemented, the guidelines would be positive for BYD’s new-car

sales over the next 3 years.

However, at the same time, we expect more local OEMs to produce pure

electric vehicles (PEVs) in order to lower the blended fuel consumption for

their brands to meet government standards by 2020 requiring a 34%

improvement in fuel consumption as compared to 2015.

We are revising up our 2015-17E revenue after the acceleration in sales

volume growth we saw for BYD’s NEVs year-to-date to October. However,

we are cutting our 2015-17E EPS by 1-16% as a result of revising down

our EBIT margin forecasts for the automobile business from 5-7% to 5-6%,

and for the handset business from 6.5% to 5-6% due to increasing

competition from NEVs and weakening demand for handsets. As such, we

lower our SOTP-based 12-month target price to HKD47 from HKD56.

What we recommend: We reiterate our Outperform (2) rating on BYD as

we believe the company would benefit from increasing investment in

charging facilities. However, we see competition in the NEV segment

intensifying as more local OEMs start producing PEVs over the next 5

years. The key risks are weaker-than-expected sales due to more fierce

competition and slower-than-expected development of charging facilities.

How we differ: Our 2015E EPS is 37% lower than the Bloomberg-

consensus forecast as we exclude the one-off disposal gain. Our 2016E

EPS is 5% lower than consensus, while our 2017E EPS is 8% higher, as

we are more optimistic about BYD’s NEV sales in 2017 once the charging

infrastructure has been improved.

4 January 2016

BYD

Beneficiary of accelerating investment in NEVs

China likely to accelerate NEV investment in 13th FYP (2016-20)

BYD would be a beneficiary of policy support

But competition from other OEMs set to rise long term; Outperform (2)



BYD (1211 HK)



Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]



Revenue change 9.4 12.3 10.8

Net profit change (1.3) (15.8) (11.7)

Core EPS (FD) change (1.3) (15.8) (11.7)

80

104

128

151

175

25

34

43

51

60



BYD (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 25.15-59.30




Major shareholder Mr. Wang Chuan-fu (23.1%)



Revenue (m) 84,840 109,921 124,240


Net profit (m) 1,327 2,512 3,674


EPS change (%) n.a. 75.7 46.3

Daiwa vs Cons. EPS (%) (36.6) (4.7) 8.3

PER (x) 67.8 38.6 26.4


DPS 0.000 0.000 0.000

PBR (x) 2.3 2.1 2.0

EV/EBITDA (x) 13.3 11.2 9.1

ROE (%) 3.9 5.7 7.7

42

BYD (1211 HK): 4 January 2016



Growth outlook BYD: adj. net profit and growth (2010-17E)

We look for continued strong EPS growth of 46-76% YoY

in 2016-17, due to the favourable outlook for NEV

shipments and low base for BYD’s production. We

forecast the company’s NEV sales volume to rise by 80%

YoY in 2016, which is in line with our expectation for

market growth for the year. However, we only forecast a

21% YoY increase in BYD’s new NEV sales in 2017, lower

than market growth of 50% YoY, due to more model

launches by competitors.


Valuation BYD: SOTP valuation

We stick with our SOTP valuation methodology for BYD by

virtue of its diversified businesses. We apply a 2016E PBR

of 1.0x (unchanged) for its rechargeable batteries

business, and a new PER of 8.0x (previous 10.0x) for

mobile handsets, 6.0x (previous 8.0x) for conventional

autos, and 30.0x (unchanged) for its NEV business. We

lower the PER for the mobile handset and conventional

autos businesses to maintain a discount of 20% among

domestic peers due to its weaker brand.

(CNYm) Valuation Multiple (x) NAV 16E

Rechargeable batteries PBR 1.0x 11,967

Mobile handsets PER 8.0x 11,460

Autos – conventional PER 6.0x 4,556

Autos – NEVs PER 30.0x 91,579

Sub-total

119,562

- Net debt/cash

(6,813)

- Minority interest

(4,302)

Equity value (CNYm)

108,447

Exchange rate, 1HKD = x CNY

0.85

Equity value (HKDm)

127,585

Equity value/share (HKD)

47.00


Earnings revisions BYD: consensus 2015-16E EPS revisions

The Bloomberg-consensus 2015-16 forecasts remained

quite stable until late September 2015, when forecasts

started to be revised up due we believe to the purchasing

tax cut which benefits BYD’s conventional autos business.

With China’s government looking like it will speed up

construction of NEV infrastructure, we see further upside

to 2017 consensus forecasts.

Source: Bloomberg

(200%)

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Net Profit (LHS) Growth (YoY, RHS)

(CNYm)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

(CNY)

2015E 2016E

43


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

BYD NEV volume (units) n.a. n.a. 3,344 3,142 20,859 68,160 122,648 148,703

Volume growth - NEV (%) n.a. n.a. n.a. (6.0) 563.9 226.8 79.9 21.2

Battery shipment (%) n.a. 0.8 1.2 7.4 (0.8) 1.0 0.0 1.0

Handset shipment (%) n.a. (4.8) (12.3) 13.4 23.9 10.0 8.0 6.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Rechargeable Battery n.a. 4,620 4,675 5,018 4,980 5,030 5,030 5,080

Mobile handset n.a. 19,557 17,155 19,459 24,116 26,528 28,650 30,369

Other Revenue n.a. 22,136 22,551 25,291 26,270 53,282 76,241 88,790

Total Revenue n.a. 46,312 44,381 49,768 55,366 84,840 109,921 124,240

Other income n.a. 846 718 651 950 1,378 1,785 2,017

COGS n.a. (39,445) (39,255) (43,252) (47,743) (73,041) (94,751) (106,193)

SG&A n.a. (5,299) (4,717) (5,364) (6,694) (9,945) (12,886) (14,564)

Other op.expenses n.a. 0 0 0 0 0 0 0

Operating profit n.a. 2,414 1,127 1,803 1,879 3,231 4,069 5,500

Net-interest inc./(exp.) n.a. (687) (812) (947) (1,292) (1,192) (764) (789)

Assoc/forex/extraord./others n.a. 1 (25) (24) 287 1,650 0 0

Pre-tax profit n.a. 1,727 291 832 874 3,689 3,305 4,711

Tax n.a. (132) (78) (56) (134) (516) (463) (659)

Min. int./pref. div./others n.a. (210) (132) (223) (306) (443) (331) (377)

Net profit (reported) n.a. 1,385 81 553 434 2,730 2,512 3,674

Net profit (adjusted) n.a. 1,385 81 553 86 1,327 2,512 3,674

EPS (reported)(CNY) n.a. 0.598 0.035 0.235 0.179 1.074 0.918 1.342

EPS (adjusted)(CNY) n.a. 0.598 0.035 0.235 0.035 0.522 0.918 1.342

EPS (adjusted fully-diluted)(CNY) n.a. 0.598 0.035 0.235 0.035 0.522 0.918 1.342

DPS (CNY) n.a. 0.000 0.000 0.050 0.000 0.000 0.000 0.000

EBIT n.a. 2,414 1,127 1,803 1,879 3,231 4,069 5,500

EBITDA n.a. 5,091 4,383 5,336 6,092 8,049 9,554 11,639

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax n.a. 1,727 291 832 874 3,689 3,305 4,711

Depreciation and amortisation n.a. 2,678 3,256 3,533 4,212 4,817 5,485 6,139

Tax paid n.a. (344) (299) (246) (192) (516) (463) (659)

Change in working capital n.a. 1,179 1,132 (2,913) (6,106) 5,724 1,288 450

Other operational CF items n.a. 744 1,175 1,230 1,251 (360) 1,386 1,482

Cash flow from operations n.a. 5,985 5,555 2,436 38 13,354 11,002 12,121

Capex n.a. (8,942) (7,150) (5,764) (8,578) (8,767) (9,099) (9,449)

Net (acquisitions)/disposals n.a. (280) 2,573 80 480 575 0 0

Other investing CF items n.a. 299 (32) (168) 197 0 0 0

Cash flow from investing n.a. (8,923) (4,610) (5,851) (7,901) (8,192) (9,099) (9,449)

Change in debt n.a. 3,733 (3,085) 3,232 5,314 2,327 2,327 2,327

Net share issues/(repurchases) n.a. 1,368 0 0 3,342 15,000 0 0

Dividends paid n.a. 0 0 0 (124) 0 0 0

Other financing CF items n.a. (366) 1,868 1,276 (1,262) (1,290) (1,386) (1,482)

Cash flow from financing n.a. 4,736 (1,217) 4,508 7,271 16,037 941 845

Forex effect/others n.a. 0 0 0 0 0 0 0

Change in cash n.a. 1,798 (271) 1,093 (592) 21,199 2,843 3,518

Free cash flow n.a. (2,958) (1,595) (3,328) (8,540) 4,587 1,902 2,673

44




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment n.a. 3,737 3,487 4,511 3,950 25,149 27,993 31,511

Inventory n.a. 6,596 7,345 8,221 9,978 14,608 18,950 21,239

Accounts receivable n.a. 9,782 9,937 13,135 22,435 25,452 32,976 37,272

Other current assets n.a. 2,665 2,555 4,099 4,471 6,027 7,351 8,107

Total current assets n.a. 22,780 23,324 29,966 40,834 71,236 87,270 98,128

Fixed assets n.a. 30,723 33,659 34,147 36,379 39,935 42,217 44,331

Goodwill & intangibles n.a. 6,689 7,983 9,623 10,821 12,290 13,622 14,817

Other non-current assets n.a. 6,689 5,042 4,279 5,974 5,974 5,974 5,974

Total assets n.a. 66,881 70,008 78,015 94,009 129,436 149,083 163,251

Short-term debt n.a. 11,342 11,288 16,172 19,173 19,173 19,173 19,173

Accounts payable n.a. 17,236 19,933 22,293 25,851 36,521 47,376 53,097

Other current liabilities n.a. 6,050 6,008 4,879 7,998 12,256 15,880 17,948

Total current liabilities n.a. 34,628 37,228 43,344 53,022 67,950 82,428 90,218

Long-term debt n.a. 7,079 7,341 8,652 10,979 13,306 15,633 17,960

Other non-current liabilities n.a. 1,194 1,294 1,162 1,113 1,113 1,113 1,113

Total liabilities n.a. 42,901 45,863 53,158 65,114 82,369 99,174 109,291

Share capital n.a. 2,354 2,354 2,354 2,476 2,737 2,737 2,737

Reserves/R.E./others n.a. 18,770 18,843 19,356 22,890 40,358 42,870 46,544

Shareholders' equity n.a. 21,125 21,197 21,710 25,366 43,095 45,607 49,281

Minority interests n.a. 2,856 2,947 3,147 3,529 3,972 4,302 4,679

Total equity & liabilities n.a. 66,881 70,008 78,015 94,009 129,436 149,083 163,251

EV n.a. 113,946 114,119 119,355 125,295 106,866 106,680 105,866

Net debt/(cash) n.a. 14,684 15,143 20,313 26,202 7,329 6,813 5,622

BVPS (CNY) n.a. 9.127 9.004 9.222 10.245 15.744 16.661 18.003

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. n.a. (4.2) 12.1 11.2 53.2 29.6 13.0

EBITDA (YoY) n.a. n.a. (13.9) 21.7 14.2 32.1 18.7 21.8

Operating profit (YoY) n.a. n.a. (53.3) 60.0 4.2 71.9 25.9 35.2

Net profit (YoY) n.a. n.a. (94.1) 579.6 (84.5) 1,446.3 89.2 46.3

Core EPS (fully-diluted) (YoY) n.a. n.a. (94.2) 579.6 (84.9) 1,375.7 75.7 46.3

Gross-profit margin n.a. 14.8 11.6 13.1 13.8 13.9 13.8 14.5

EBITDA margin n.a. 11.0 9.9 10.7 11.0 9.5 8.7 9.4

Operating-profit margin n.a. 5.2 2.5 3.6 3.4 3.8 3.7 4.4

Net profit margin n.a. 3.0 0.2 1.1 0.2 1.6 2.3 3.0

ROAE n.a. 13.1 0.4 2.6 0.4 3.9 5.7 7.7

ROAA n.a. 4.1 0.1 0.7 0.1 1.2 1.8 2.4

ROCE n.a. 11.4 2.6 3.9 3.5 4.7 5.0 6.3

ROIC n.a. 5.8 2.1 4.0 3.2 5.1 6.3 8.1

Net debt to equity n.a. 69.5 71.4 93.6 103.3 17.0 14.9 11.4


Accounts receivable (days) n.a. 38.5 81.1 84.6 117.2 103.0 97.0 103.2

Current ratio (x) n.a. 0.7 0.6 0.7 0.8 1.0 1.1 1.1

Net interest cover (x) n.a. 3.5 1.4 1.9 1.5 2.7 5.3 7.0

Net dividend payout n.a. 0.0 0.0 21.3 0.0 0.0 0.0 0.0

Free cash flow yield n.a. n.a. n.a. n.a. n.a. 4.7 2.0 2.8

Company profile

Listed in Hong Kong in 2002, BYD is engaged in the R&D, manufacture and distribution of

automobiles, rechargeable batteries and mobile phone components. It owns 65% of BYD

Electronics (285 HK, Not rated). BYD focuses on autos (especially NEVs), rechargeable batteries

(lithium-ion and nickel batteries used in mobile phones and other portable electronic devices), as

well as mobile-phone components and its assembly mobile phones business (casings, keypads,

mobile-phone designs, etc.).

45


Benefits from accelerating investment in NEVs

More policy support

More charging facilities to be built

According to the NDRC, by the end of 2014, there were only 780 charging stations,

providing 31,000 charging poles, to serve more than 120,000 EVs owned in China. The

ratio of EVs to charging poles is far below the targeted 1:1 level. Therefore, the

government recently announced guidelines to develop charging facilities for NEVs in 2015-

20, targeting to build up to 4.8m charging poles and 120,000 charging stations to cater to

the expected 5m NEVs in China by 2020. Hence, we believe the problem of inadequate

charging poles, which is the biggest obstacle for potential EV buyers, would be mostly

solved by 2020. A more favourable operating environment for NEVs would benefit BYD,

which is the leading NEV player focusing on plug-in hybrid electric vehicles (PHEVs).

Apart from improving the charging facilities, other supportive measures such as lifting the

licence restriction on NEVs, and requiring property developers to reserve spaces to build

charging poles in the future, are also included in the document. Also, on 29 September, the

government announced a policy requiring that aged public transport vehicles that do not

meet emissions standards be replaced by NEVs by 2017. Such a policy should help boost

the sales volume of BYD’s PEV bus, the K9. As such, we look for the sales volume for K9

buses to increase by 30-50% YoY in 2016-17.

Chinese government’s latest supportive measures to promote NEVs

Policies Details

Licence & traffic restrictions Lift purchase restrictions and traffic controls for NEVs but retain curbs on conventional internal combustion engine (ICE) vehicles

Charging stations New residential complexes must be built with chargers or reserved spaces for future installations

At least 10% of public parking facilities should be built with chargers or spaces reserved for future installations

Every 2,000 EVs owned should be matched by 1 public charging station

In Beijing, 18% of parking space at all new residential complexes should be built for EVs

To build a nationwide charging network for up to 5m EVs by 2020

Source: CAAM

Auto stimulus policy details

Subject Policy details

Cars with engine sizes of <=1.6L Purchase tax reduced from 10% to 5%

New energy vehicles New car sales restriction removed in all cities

Old cars with excessive pollutant emissions To be replaced by NEVs by 2017, especially for public transport

Source: PRC State Council

Policy effect may bring sales forward to 2016

According to a notice issued by the Ministry of Industry and Information Technology (MIIT)

in April 2015 regarding subsidies on NEVs, the Chinese Government plans to gradually

reduce subsidies for buyers from 2017-20, except for those on fuel-cell vehicles (FCVs).

The government plans to cut subsidies for 2017-18 by 20% from the 2016 level, and by

40% for 2019-20 from the 2016 level, except for those on FCVs.

We believe the cuts in subsidies due to kick in by 2017 may urge more buyers to bring

forward their purchases to 2016, which would benefit BYD in the near term. Also, at the

moment, the purchase tax reduction is valid until the end of 2016, which could urge buyers

to purchase BYD’s conventional cars in 2016. In the year to November, about 60% of

BYD’s sales comprised models with an engine size of below 1.6L, which would benefit

from the purchase tax cut.

Government to speed up

NEV infrastructure

investment

Benefits from

replacement demand

from public transport

We believe lower

subsidies from 2017 and

a reduction in the

purchase tax at end-2016

will lead to buyers

bringing forward their

purchases to 2016

46


China: subsidies on NEPVs in 2016

Subsidies (CNY/vehicle)

Pure electric driving range, R

100 ≤ R < 150 150 ≤ R < 250 R ≥ 250 R ≥ 50

Pure EV 25,000 45,000 55,000 ／

Plug-in hybrid electric vehicle ／／／ 30,000

Source: NDRC

China: subsidies on FCVs in 2016

Vehicle types Subsidies (CNY/vehicle)

Fuel-cell PV 200,000

Fuel-cell light CV 300,000

Fuel-cell mid-large CV 500,000

Source: NDRC

BYD: YTD-November sales by engine size

Engine size %

<1.6L 61%

>1.6L 24%

EV 15%

Source: CAM, Daiwa forecasts

Strong product pipeline support for 2016

New products to contribute sales

Since May 2015, BYD has launched 4 new NEV models (including facelifts) in total. The

company currently owns a diversified NEV portfolio making up sedans, SUVs, MPVs and

even coaches with different powertrains, such as EVs and PHEVs. We believe such a

diversified product range proves the company’s technological know-how in NEV

manufacturing, and stands it in good stead to benefit from the growth of NEVs in different

segments.

BYD: comparison of select NEV models

Model Segment Powertrain Pure electric

range (km) Battery

(kWh) Fuel consumption

(L/ 100km) List price

('000 CNY) Launch date

F3DM Sedan PHEV 60 17 2.7 169.8 Dec-2008

K9 Coach EV ≥250 324 N.A. N.A. Sep-2010

Qin Sedan PHEV 50 10 - 11 2.0 209.8 - 219.8 Dec-2013

Denza Sedan EV 253 47.5 N.A. 369 Nov-2014

e6 (facelift) MPV EV 400 82 N.A. 309.8 - 369.8 May-2015

Tang SUV PHEV 60 13 2.4 251.3 - 279.8 Jun-2015

e5 (Surui EV) Sedan EV 256 43 N.A. N.A. Sep-2015

Song SUV PHEV 55 - 70 10 - 15 2.0 - 2.5 280 Aug-2015

Shang MPV PHEV 50-70 10 - 14 2.2 - 2.4 N.A. Nov-2015

Source: Company, MIIT, Baidu Note: list prices exclude subsidies from the government

For 2016, we expect BYD to launch 2 more NEV models, including the Qin EV and PHEV

SUV Yuan. The Yuan model is likely to be better received by customers as it belongs to the

popular SUV segment, and offers a new choice of mini SUV. As a reference, unit sales of

the newly launched Song SUV (August 2015) reached 2.3k in just 3 months after launch,

while sales of the Tang SUV remained at 3k for 2 consecutive months since its launch in

June. Hence, we assume monthly unit sales of the Yuan SUV will reach 2,000 in 2016, and

further ramp up to 2,800/month in 2017.

BYD: NEV product pipeline in 2016 or later

Model Segment Powertrain Pure electric

range (km) Battery

(kWh) Fuel consumption

(L/ 100km) Listed price

('000 CNY) Launch date

Yuan SUV PHEV 70 TBC TBC Est. <300k 1H2016

Qin EV Sedan EV 252-300 43 - 48 N.A. N.A. 2016

Source: company, MIIT, Baidu

Diversified product

portfolio should help

BYD see broad-based

growth

Well-positioned in the

SUV segment

47


BYD: Song SUV BYD: Yuan SUV

Source: company Source: PCAuto

BYD: Shang MPV BYD: Qin EV sedan

Source: PCAuto Source: AutoSohu

Non-PV segment to contribute in the long run

According the company’s “7+4” planning, BYD targets 7 markets including PVs, public

buses, inter-city transportation, taxis, sanitation vehicles, logistics trucks and construction

vehicles, and 4 markets for special-duty vehicles, including warehouses, airports, mines

and ports. Apart from PVs, the Chinese Government will likely continue to promote the

usage of EVs in different areas, especially electric buses, taxis, and sanitation and logistics

vehicles through supportive policies such as promoting bulk purchases by different

government offices. BYD has showcased several products in these segments at various

events (eg, several auto shows, Victory Day Parade); hence, we believe the company is

one of the major policy winners in this aspect.

BYD: T3 logistics electric vehicle BYD: T8 sanitation electric vehicle cleaning Tiananmen Square

before the 2015 China Victory Day Parade

Source: AutoSina Source: Company

Other vehicles to

support longer-term

sales-volume and

earnings growth

48


More challenges in the long run

Challenges from competitors

As the China Government plans to increase the fuel efficiency requirement for OEMs by

34% by 2020 as compared to 2015, many OEMs are likely to launch NEVs into the market

over the next 5 years. In the coming 5-year plan, NEVs are the major focus for many

OEMs. For example, Geely targets NEV sales to reach 90% of its total new-car sales with

more than 1m new-car sales by 2020. Even though BYD has a technology advantage over

other local OEMs, especially in terms of its capability to produce its own batteries, we

expect competition in the NEV segment to heat up over the next 5 years.

NEV strategic plans of some major China auto OEMs

Company Plans

Geely NEV sales targeted to reach 90% of total sales by 2020, 65% of which would be PHEVs and hybrid EVs while the remaining 35% would be pure EVs.

GWM According to market news, GMW's first EV sedan, C30EV, is targeted to be launched in 2016. The company also aims to launch its first hybrid SUV model in 2017.

GAC For the next 5 years, GAC will invest CNY2bn to develop NEVs and launch 5 new NEV models including sedans and SUVs..

Changan Changan has invested CNY1bn to develop NEVs since 2001 and currently plans to invest CNY18bn more in the next 10 years. The company aims to introduce 34 new NEV products to the market over the next decade and targets accumulated NEV sales to reach 100,000 units by 2020 and 2,000,000 units by 2025, and expects to see NEVs account for 10% of total sales.

SAIC The company will invest CNY20bn to develop EV products and aims to launch 30 NEV products consisting of 13 pure EV models and 17 hybrid EV models. It targets sales volume for NEVs to reach 600,000 units in 2020, of which 200,000 units would come from self-owned brands.

Source: cnstock.com

Summary of fuel-efficiency targets for major markets

km/l (mpg) US EU Japan China S. Korea

2005 12.4 (29.0) 15.8 (37.2) 16.7 (39.3) 11.0 (25.9) 12.3 (28.9)

2010 13.9 (33.0) 18.0 (42.3) 19.6 (46.1) 14.4 (33.9) 14.8 (34.8)

2015 15.4 (36.0) 19.7 (46.3) 21.0 (49.4) 15.7 (36.9) 16.7 (39.3)

2020 19.9 (47.0) 25.8 (60.7) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3)

2025 23.9 (56.0) 30.8 (72.4) ~ 35.0 (82.3) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3)

5-YoY (%) US EU Japan China S. Korea

2010 12.1% 13.9% 17.4% 30.9% 20.3%

2015 10.8% 9.4% 7.1% 9.0% 12.8%

2020 29.2% 31.0% 11.4% 35.7% 0.0%

2025 20.1% 19.4%~35.7% 0.0% 0.0% 0.0%

Improvement (%) US EU Japan China S. Korea

2010-25 71.9% 71.1%~94.4% 19.4% 47.9% 12.8%

2015-25 55.2% 56.3%~77.7% 11.4% 35.7% 0.0%

Source: ICCT Note: No official fuel efficiency guidance has been provided for Korea (from 2015), Japan (from 2020), or China (from 2020)

49


Mild growth from handset business

During its recent results briefing, BYD guided for only moderate sales-volume growth in its

handset business for 2015, which should not come as a surprise due to weakening

handset demand growth in China. However, management also highlighted that the

photovoltaic business seems to be improving in terms of profitability. We remain cautious

about this segment and assume a flat margin trend in 2015-17. We look for revenue

generated by the handset business to increase by 6-8% YoY in 2016-17.

BYD: mobile handset revenue and growth (2009-17E)


-20%

-10%

0%

10%

20%

30%

40%

50%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2009 2010 2011 2012 2013 2014 2015E 2016E 2017ERevenue (LHS) YoY Growth (RHS)

(CNY mn) (%)

No high hopes in the

handset segment

50


Valuation

We stick with our SOTP valuation methodology for BYD considering its diversified

businesses. We still apply a 2016E PBR of 1.0x to its battery business, but now assign a

lower PER of 8.0x (previous 10.0x) for its mobile handset business due to the weak

sentiment towards this business. For its conventional auto business, we now apply a

2016E PER of 6.0x (previous 8.0x) which remains at the low end of the 2016E PER of 7-

11x (excl. BYD) that we set for the auto OEMs under our coverage. We believe this

segment is benefitting from the purchase tax cut, as about 60% of BYD’s sales are for

engines of <1.6L, according to our estimates. However, we would also highlight that this

segment is characterised by fierce competition, which could put further pressure on BYD’s

profitability.

For its NEV business, we believe the segment will remain the most important earnings

driver for the company, and we assume BYD will remain one of the leading NEV OEMs in

China. We now forecast the company’s NEV unit sales to rise by 21-80% YoY in 2016-17.

Given such a high growth rate and lack of market comparables, we believe a valuation of a

30.0x PER is reasonable and appropriate for the segment.

However, we now expect more keen market competition in the NEV segment than we had

previously after reviewing several major OEMs’ NEV strategies, and believe this fierce

competition will put more pressure on the margins for BYD’s NEV business. Nevertheless,

we are revising up our 2015-17E revenue based on the company’s strong unit sales

growth recorded in the year to November 2015. However, we are cutting our 2015-17E

EPS by 1-16% after revising down our EBIT margin forecasts for the automobile business

over the same period from 5-7% to 5-6%, and the handset business from 6.5% to 5-6%

due to increasing competition in the NEV space and weakening demand for handsets. As

such, we are lowering our SOTP-based 12-month target price to HKD47 from HKD56. We

reiterate our Outperform (2) rating as we remain positive on the sector outlook over the

long term.

BYD: SOTP valuation

Valuation Multiple (x) NAV 16E

(CNY m)

Rechargeable Battery P/B 1.0x 11,967

Mobile handset P/E 8.0x 11,460

Auto - Conventional P/E 6.0x 4,556

Auto - NEV P/E 30.0x 91,579

Sub-total

119,562

- Net debt/cash

(6,813)

- Minority interest

(4,302)

Equity value (CNYm)

108,447

Exchange rate, 1HKD = x CNY

0.85

Equity value (HKDm)

127,585

Equity value/share (HKD)

47.00

Current price (HKD)

42.4

Potential share price upside/downside (%)

10.8%


We continue to apply an

SOTP valuation for BYD

but lower our multiples

for its handset and

conventional auto

businesses

Reiterate Outperform (2)

as we are still positive

on the overall outlook

for the company

51


Risks

Diminishing subsidies may be problematic

At current production and sales levels, and taking into account the subsidies on NEVs, the

margins on NEVs are comparable to those on conventional vehicles. We believe a ramp-

up in unit sales of NEVs would help BYD lower costs in the future. However, if the

government decides to cut the subsidies earlier than expected or impose stricter

standards, such as a higher electric drive range for NEVs, this would severely hurt BYD’s

profitability. But we see a low probability of this scenario playing out.

Delays in infrastructure completion

Even though we believe the government is determined to speed up the construction of EV-

related infrastructure, such as charging facilities, several factors could slow down the

process, including a lack of interest from private capital and difficulties in land acquisition

and conversion. We believe a delay in infrastructure construction would be one of the

major risks hindering NEV sales, despite the government potentially lengthening the NEV

subsidy scheme in response.

Keen competition within the industry

As we have pointed out, many major OEMs recently revealed long-term NEV strategies.

We believe some are very aggressive; for instance, Geely targets to increase the

proportion of sales from NEVs to 90% by 2020 (from <5% in 2015E). Therefore, due to this

intensifying market competition, the overall profitability in this segment is likely to be

adversely affected.

Drop in handset shipments may hinder performance

We assume a stable margin trend for BYD’s handset business. However, if global demand

for handsets is weaker than expected in 2015-17, this segment could drag down the

company’s overall P&L account.

Subsidies will be

important, at least for

the next few years

Delays on the

completion of

infrastructure would

greatly lower buyers’

willingness to purchase

Market competition may

lead to price cuts

Lower handsets margins

would be a drag on

overall earnings



Investment case: We think Dongfeng Motor’s (DFM) current valuation

looks attractive and believe the stock is a good proxy for the strong

turnaround in industry PV growth that we have seen during 4Q15. Among

DFM’s major brands, we expect Dongfeng Nissan and Dongfeng Honda to

show the strongest sales volume growth in 2016.

Catalysts: Dongfeng Nissan to be major sales driver in 2016. Apart

from a pick-up in sales volume for its SUV Murano, we expect the recent

launches of its other SUVs, such as the Qashqai (launched in October) and

T70X (September), and its sedan the Lannia (October), to be well received,

making a meaningful full-year unit sales impact in 2016. In 2016, we

forecast average monthly sales of 8,000 units for the Qashqai, 6,000 units

for the T70X, 4,500 units for the Murano and 8,000 for the Lannia, and we

look for Dongfeng Nissan to achieve an overall 17% YoY rise in new-car

sales, much higher than the 3% YoY increase in 2015.

Dongfeng Honda to record decent sales growth. We expect Dongfeng

Honda to record a 15% YoY rise in new-car sales in 2016, with SUVs (such

as the XR-V and CR-V) the major driver – we expect sales volume to rise

by 22% YoY for the XR-V and 8% YoY for the CR-V. Also, new sedans such

as the Greiz (launched in November) and the new Civic (launching in 2016)

should contribute to new-car sales for the year.

M&A would be a bonus share-price catalyst. We believe the PRC

Government might extend its ongoing sector-wide consolidation strategy to

the auto sector, especially to the big four auto makers (SAIC Motor,

Changan Motor, FAW Motor [all 3 not rated] and DFM), to support local

brand development. Similar to other recent SOE M&A activity, we see

limited synergies for DFM (if it were to merge with another automaker) but it

could provide an additional share-price catalyst.

Valuation: We initiate coverage of DFM with an Outperform (2) rating and

12-month TP of HKD12.20, based on a target 2016E PER of 7.0x, inline

with its past-3-year average. The stock is now trading at a 2016E PER of

5.8x, which is also lower than the average of the Hong Kong-listed China

auto OEMs at 6-11x. We think the current valuation has priced in DFM’s

discount for being an auto conglomerate. We expect improving investor

sentiment on the auto industry in 2016 to help DFM trade at par with its

past-3-year average valuation.

Risks: The key risk to our call would be weaker-than-expected new-car

sales, especially for Dongfeng Nissan and Dongfeng Honda.

4 January 2016

Dongfeng Motor Group

Initiation: attractive valuation and decent pipeline

Valuation looks attractive vs. peers

Rich pipeline from Dongfeng Nissan and Dongfeng Honda

Initiate coverage with Outperform (2) rating and TP of HKD12.20


Dongfeng Motor Group (489 HK)

Target price: HKD12.20


Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]

65

76

88

99

110

7

9

11

12

14



Dongfeng M (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Dongfeng Motor Corporation (66.9%)



Revenue (m) 124,293 115,645 109,312


Net profit (m) 12,021 13,201 13,591


EPS change (%) (6.4) 9.8 3.0

Daiwa vs Cons. EPS (%) (1.2) (0.4) (1.4)

PER (x) 6.4 5.8 5.6


DPS 0.209 0.230 0.237

PBR (x) 0.9 0.8 0.7

EV/EBITDA (x) 7.0 5.8 4.2

ROE (%) 15.2 14.7 13.4

53

Dongfeng Motor Group (489 HK): 4 January 2016



Growth outlook DFM: net profit and net profit growth

We expect DFM’s 2015 reported net profit to drop by 6%

YoY, mainly due to a CNY2.3bn before-tax valuation gain

from acquiring a 14.1% equity interest in PSA Peugeot

Citroën Group in 2014. In 2016, we forecast net profit to

rise by 10% YoY, due to rising unit sales for Dongfeng

Nissan on its strong SUV pipeline (including the Murano,

Qashqui and Venucia T70X), as well as for its new sedan

the Lannia. However, we forecast only a 3% YoY rise in net

profit in 2017, due mainly to the removal of the purchase-

tax cut, which we expect to end at the end of next year,

and a weaker pipeline.

Source: company, Daiwa forecasts

Valuation DFM: 12-month forward PER (x) (2012-YTD 2015)

The stock is now trading at 2016E PER of 5.8x, which is

below its past-3-year average of 7.0x. Although the stock

has long been trading at a discount to the other Hong

Kong-listed China auto OEMs due to DFM’s diversified

business, we still see the current valuation, which is at the

lower end of the stock’s past-3-year average, as attractive.

On improving investor sentiment for the sector after the

implementation of the purchase-tax cut, we believe our

target PER of 7.0x is reasonable and achievable.

Source: Bloomberg, Daiwa forecasts; note: YTD through 28 December 2015

Earnings revisions DFM: Bloomberg-consensus EPS forecast revisions

The Bloomberg consensus EPS forecasts for DFM began

to be revised up in late September 2015, which we believe

was mainly due to the implementation of the purchase-tax

cut. We estimate that the tax cut will boost the company’s

2016E PV sales volume by 8% YoY, but this is likely to

create a high base for 2017. Further, as we believe the

entry- and mid-level market is crowed with new models, we

expect the margins of DFM’s major JVs to suffer from

fierce market competition. Overall, our 2015-17E EPS are

in line with consensus.

Source: Bloomberg

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2013 2014 2015E 2016E 2017E

Net profit (LHS ) Growth YoY (RHS)

(CNYm) (YOY% )

3

4

5

6

7

8

9

10

11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15


(PER)

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

(CNY)

2015E 2016E

54


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

DF Nissan sales volume (units) n.a. 809,000 773,000 926,000 952,000 981,000 1,144,000 1,202,000

DF PSA sales volume (units) n.a. 404,000 440,000 550,000 704,000 699,000 713,000 691,000

DF Honda sales volume (units) n.a. 255,000 282,000 321,000 308,000 398,000 458,000 455,000

DF Nissan sales volume growth

(YoY %) n.a. n.a. (4.4) 19.8 2.8 3.0 16.6 5.1

DF PSA sales volume growth

(YoY %) n.a. n.a. 8.9 25.0 28.0 (0.7) 2.0 (3.1)

DF Honda sales volume growth

(YoY %) n.a. n.a. 10.6 13.8 (4.0) 29.2 15.1 (0.7)

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Commercial vehicles 33,418 35,473 2,784 24,527 42,627 36,030 32,427 30,806

Passenger vehicles 88,143 94,921 3,254 11,905 36,671 86,011 80,556 75,475

Other Revenue 834 1,047 52 831 1,656 2,252 2,662 3,031

Total Revenue 122,395 131,441 6,090 37,263 80,954 124,293 115,645 109,312

Other income (2,462) (3,425) (168) (1,448) (1,727) (2,113) (1,966) (1,858)

COGS (96,033) (105,051) (5,736) (32,582) (70,244) (109,378) (101,768) (96,194)

SG&A (9,997) (9,916) (1,518) (4,447) (7,415) (9,943) (8,905) (8,198)


Operating profit 13,903 13,049 (1,332) (1,214) 1,568 2,859 3,007 3,061

Net-interest inc./(exp.) 350 652 420 374 329 473 376 459

Assoc/forex/extraord./others 330 660 10,064 11,552 12,786 10,911 12,257 12,582

Pre-tax profit 14,583 14,361 9,152 10,712 14,683 14,242 15,640 16,102

Tax (3,006) (3,401) (45) (109) (1,365) (1,324) (1,454) (1,497)

Min. int./pref. div./others (596) (479) (15) (75) (473) (897) (985) (1,014)



EPS (reported)(CNY) 1.274 1.216 1.055 1.222 1.491 1.395 1.532 1.577

EPS (adjusted)(CNY) 1.274 1.216 1.055 1.222 1.491 1.395 1.532 1.577


DPS (CNY) 0.180 0.180 0.150 0.180 0.200 0.209 0.230 0.237

EBIT 13,903 13,049 (1,332) (1,214) 1,568 2,859 3,007 3,061

EBITDA 17,913 16,200 (1,120) (432) 3,078 4,693 5,285 5,854

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 4,010 3,151 212 782 1,510 1,834 2,278 2,793

Tax paid (2,379) (4,315) (52) (206) (1,144) (1,324) (1,454) (1,497)

Change in working capital 2,665 (2,505) (1,297) (8,825) (1,643) (3,684) (4,376) (4,508)

Other operational CF items (976) (1,476) (10,771) (12,157) (14,391) (10,586) (11,846) (12,231)

Cash flow from operations 17,903 9,216 (2,756) (9,694) (985) 482 242 659

Capex (5,054) (7,019) (555) (1,332) (3,501) (3,800) (4,000) (4,500)

Net (acquisitions)/disposals 92 (140) (310) 8,524 (10,183) 0 0 0

Other investing CF items (1,116) 6,624 5,634 10,790 12,988 8,067 8,642 8,703

Cash flow from investing (6,078) (535) 4,769 17,982 (696) 4,267 4,642 4,203

Change in debt (2,500) (701) (3,225) (145) 9,704 (3,000) (2,000) (2,000)


Dividends paid (776) (1,551) (1,551) (1,504) (1,551) (1,723) (1,803) (1,980)

Other financing CF items (29) (937) 0 (257) 70 (324) (411) (351)

Cash flow from financing (3,305) (3,189) (4,776) (1,906) 8,223 (5,047) (4,214) (4,331)


Change in cash 8,520 5,492 (2,763) 6,382 6,542 (298) 670 531

Free cash flow 12,849 2,197 (3,311) (11,026) (4,486) (3,318) (3,758) (3,841)

55




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 13,935 12,511 1,198 4,245 9,735 13,672 13,217 12,657


Other current assets 24,616 20,524 12,215 21,969 20,339 25,204 27,463 29,665


Fixed assets 18,551 21,578 2,430 9,418 11,285 13,276 15,035 16,791

Goodwill & intangibles 4,021 4,686 743 4,943 5,349 5,324 5,287 5,237

Other non-current assets 5,713 7,253 32,293 44,015 59,682 62,525 66,140 70,020

Total assets 110,622 117,533 62,366 115,998 145,473 160,316 171,541 178,162

Short-term debt 13,638 15,971 2,697 17,597 29,256 28,579 29,661 26,713


Other current liabilities 25,184 25,689 3,580 17,612 21,393 24,251 23,230 22,026


Long-term debt 6,289 2,820 0 0 350 350 350 350

Other non-current liabilities 341 414 122 3,275 2,988 2,988 2,988 2,988


Share capital 35,943 44,843 52,626 61,584 72,106 72,106 72,106 72,106



Minority interests 3,842 3,190 85 899 1,623 2,520 3,506 4,520


EV 73,470 65,812 37,113 42,661 35,340 33,015 30,797 24,453

Net debt/(cash) (5,962) (12,590) (7,591) 927 6,394 6,015 6,427 2,948

BVPS (CNY) 4.352 5.385 6.258 7.328 8.569 9.764 11.087 12.434

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 33.4 7.4 (95.4) 511.9 117.3 53.5 (7.0) (5.5)

EBITDA (YoY) 70.2 (9.6) n.a. n.a. n.a. 52.5 12.6 10.8

Operating profit (YoY) 77.9 (6.1) n.a. n.a. n.a. 82.3 5.2 1.8

Net profit (YoY) 75.7 (4.6) (13.3) 15.8 22.0 (6.4) 9.8 3.0

Core EPS (fully-diluted) (YoY) 75.7 (4.6) (13.3) 15.8 22.0 (6.4) 9.8 3.0


EBITDA margin 14.6 12.3 n.a. n.a. 3.8 3.8 4.6 5.4

Operating-profit margin 11.4 9.9 n.a. n.a. 1.9 2.3 2.6 2.8


ROAE 33.9 25.0 18.1 18.0 18.8 15.2 14.7 13.4

ROAA 11.2 9.2 10.1 11.8 9.8 7.9 8.0 7.8

ROCE 25.1 20.1 n.a. n.a. 1.7 2.6 2.5 2.3

ROIC 32.7 27.5 (3.2) (2.2) 1.9 3.0 2.8 2.5

Net debt to equity net cash net cash net cash 1.5 8.7 7.2 6.7 2.8



Current ratio (x) 1.3 1.3 3.3 1.2 1.0 1.1 1.2 1.4

Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 16.7 2.9 n.a. n.a. n.a. n.a. n.a. n.a.

Company profile

Dongfeng Motor Group (DFM) is engaged in the manufacture and sale of autos, engines and auto

parts, as well as offering other auto-related business, such as auto finance. Through its subsidiaries

and JVs with various foreign brands, DFM has a wide range of product lines, including 42 major

commercial vehicle models, 35 truck models and 7 for buses. It also had 51 passenger vehicles

models, consisting of 31 for sedans, 7 MPVs and 13 SUVs, as at the end-1H15. DFM also has a

leading position in China’s CV market, especially for medium- and heavy-duty trucks.

56


Attractive valuation and decent pipeline

Latest model launch means richer pipeline in 2016

Dongfeng Nissan should be the key revenue driver

Compared to the other OEMs in China, DFM had strong product launches in 2H15, which

should mean better sales volume growth in 2016 compared to its peers. Of all the brands

under DFM, we believe investors will focus the most on the success of the new car sales of

Dongfeng Nissan’s recently launched models, particularly the SUVs the Qashqai (launched

in October) and the Venucia T70X (launched in September). We expect Dongfeng Nissan

to account for about 50% of DFM’s net profit in 2015.

We expect sales volume for the Qashqai to reach 8,000 units/month in 2016, while for the

Venucia T70X, combined with the original T70, we expect sales to reach 6,000

units/month. Another recently launched SUV model, the Murano, which was launched in

August 2015, was selling at around 2,500 units/month in November YTD. We assume

average monthly sales of the Murano to increase to 4500 units/month in 2016.

In terms of DFM’s sedan models, we believe the new Lannia, which was launched in late

October 2015, will record 8,000 units/month in 2016, and that the Venucia R50X, which

was launched in early September, will see sales of around 2,000 units/month. We think the

most popular Nissan sedans will the Sylphy and Teana, for which we estimate average

monthly sales of around 27,500 units (flat YoY) and 9,350 units (up 2% YoY), respectively,

in 2016. Overall, we forecasts Dongfeng Nissan’s total PV sales to record 17% YoY

growth.

Dongfeng Nissan: Qashqai SUV Dongfeng Nissan: Venucia R50X Hatchback

Source: company

Source: company

Dongfeng Nissan: Venucia Lannia Sedan Dongfeng Nissan: Venucia T70X SUV

Source: company

Source: company

Focus will be on the

Qashqai, VenuicaT70X

and Murano when it

comes to 2016 sales

volume growth

Major sedan sales

should be driven by the

Sylphy, Teana and

Lannia in 2016

57


Dongfeng Honda should record stable growth

We expect Honda’s new sedan models such as the Greiz and the Civic to boost Dongfeng

Honda’s sales volume growth in 2016. Given the incremental sales volume pattern that we

have seen for the Honda New City (under GAC Honda), which was launched in August

2015, we expect the Greiz (launched on 7 November) to record around 3,000 units/month

next year.

We do not have high expectations, as both models (the GAC Honda City and the

Dongfeng Honda Greiz) target similar customers and were launched close together.

Besides, the new Civic is likely to help total Civic sales improve to 4,000 units/month in

2H16 (we expect it to be launched in mid-2016) from 2,600 units /month for 2015, on our

estimates. We believe the major sales volume drivers for Dongfeng Honda in 2016 will

remain its SUV models, such as the CR-V (especially after the April 2015 facelift) and the

XR-V (launched in December 2014). In 2016, we expect sales volume of 14,000

units/month for the CR-V and 12,000 units/month for the XR-V.

Dongfeng Honda: Greiz sedan Dongfeng Honda: existing Civic

Source: company Source: company

Comparison of Greiz, New City and New Civic

Manufacturer Price of top model

Launch date in China Average monthly sales in 2014

average monthly sales in 2Q15-3Q15

Length (mm) Width (mm) Height (mm) Wheelbase (mm)

Greiz Dongfeng Honda CNY106.8k 7 Nov 15 n.a. n.a. 4,495 1,705 1,477 2,600

City GAC Honda CNY109.8k 28 Aug 15 4k 3k 4,450 1,695 1,477 2,600

Civic Dongfeng Honda *CNY167.2k 2H16 4k* 3k 4,630 1,798 1,415 2,700

Rear view camera

Engine Front and Side airbags GPS navigation system Start-stop system VSA stability assist

Hill-start assist

Leather seating

Air-filtering system

Greiz Available Honda Earthdreams

1.5L

Available Available Not Available Available Available Available Not Available

City Available Only equipped with front airbags

Not Available Available Available Available Not Available Available

Source: companies Note 1: *: sales refer to sales of the current model Note 2: Detailed configuration of the New Civic has not been released yet

Performance of other brands should continue to vary

DPCA expected to record YoY decline in sales growth in 2016

We think that the only new models to make any meaningful contribution to Dongfeng

Peugeot Citroën Automobile’s (DCPA) sales volume in 2016 will be the recently launched

Citroën C5 facelift (launched in October 2015), and the Peugeot 3008 facelift in 1H16. We

expect sales of the C5 to reach 2,500 units/month and sales of the Peugeot 3008 to reach

6,100 units/month in 2016, compared to 2015 pre-facelift sales of around 2,000

units/month for the C5 and 5,500 units/month for the Peugeot 3008. However, we expect

overall sales volume to be flat YoY, due to a lack of new models.

Greiz to compete with

GAC Honda’s new City

model

Lack of new models for

DPCA

58


DPCA: recently launched Citroën C5

Source: company

Dongfeng Renault’s Kadjar could surprise on the upside

Renault’s Kadjar SUV seems to have been selling well since it was first launched in France

in April 2015. The sales volume for this model was close to that of Nissan’s Qashqai.

However, we believe Renault is likely to have a home base advantage when it comes to

sales and distribution in France, and we do not expect it to replicate this in China. We

currently assume sales volume of 5,000 units/month in China by the end of 2016,

assuming it will start to launch the Kadjar in the country in March 2016 (full-year 2016E

average of 3,500 units/month). We expect the Kadjar to be less popular than the Qashqai,

given that the Kadjar will be the first model to be launched by Dongfeng Renault (likely to

be in March 2016). We believe this will rise to 8,000 units/month by the end of 2017,

reaching average monthly sales of 6,500 units/month in 2017, as we are confident that the

Renault brand will sell well in China, even though it will take more time to get full brand

recognition among car buyers.

Renault: Kadjar SUV

Source: company

Dongfeng Renault’s

Kadjar could turn out to

be an attractive model in

China in the long run

59


Other share-price catalysts for DFM

Improving sales volume growth on tax cut

On 29 September 2015, the PRC Government announced several policies to support the

auto industry, including a cut in the purchase tax, from 10% to 5%, from 1 October 2015

until 31 December 2016 (applies to all cars with engines of 1.6L or less). Even though only

around half of DFM’s models fall into this category (less than 1.6L engines), we think the

tax cut boosted investor sentiment on the auto sector in October. We expect relatively

better YoY sales growth for the industry in 2016 as a result of the cut, and believe DFM’s

shares should also benefit from a rerating of the sector.

China and selected China OEM sales by engine size

YTD 2015 November:

China PV Small engines 68%

Large engines 32%

EV 1%

Geely Small engines 79%

Large engines 18%

EV 3%

BAIC Small engines 62%

Large engines 37%

EV 1%

Great Wall Small engines 94%

Large engines 6%

EV 0%

GAC Small engines 45%

Large engines 55%

EV 0%

Brilliance BMW Small engines 34%

Large engines 66%

EV 0%

Dongfeng Small engines 57%

Large engines 43%

EV 0%

Changan Small engines 75%

Large engines 25%

EV 0%

Source: cars with small engines of 1.6L or below

M&A would be another share-price catalyst

With ongoing SOE reforms in China, the PRC government is aiming to reduce the number

of SOEs in some industries to improve efficiency and reduce losses. The railway-

equipment players (CSR Corporation and CNR Corporation) have seen one merger so far

(finalised in June 2015), while the state-owned shipping groups, COSCO Group and China

Shipping Group and Sinotrans&CSC Group and China Merchants Group are also going

through a restructuring and merger. We believe the auto sector, especially the big four auto

makers (SAIC Motor, Changan Motor, FAW Motor and DFM), will be affected by

consolidation. We believe the focus of any restructuring would be on how to improve the

profitability of these companies’ self-owned auto brands. Similar to the other SOE mergers

that we have seen, even though we expect only limited synergies, we would consider it a

positive and thus a positive share-price catalyst, boosting investor sentiment on the stock.

Fraud investigation

On 2 November 2015, DFM announced that, according to the CPC Central Commission for

Discipline Inspection, its executive director and president Mr Zhu Fushou was being

investigated for serious disciplinary violations. With immediate effect, Mr Zhu was

suspended from his role at DFM, and there is no news yet as to whether he has been

charged. Even though this investigation may have raised concerns in the market about

DFM’s corporate governance, we are not concerned that it will have any material impact on

its business as it is an SOE, and we don't think the government will allow it to go bankrupt

or face large penalties. We think this investigation could continue for the next 3 years and

believe there could be news on the senior management of other SOEs being investigated

for similar reasons.

Better sector sentiment

should help DFM as well

Any news on M&A

activity could boost

investor sentiment

We believe the fraud

investigation will have a

limited impact on DFM’s

daily operation

60


Therefore, in terms of DFM, we expect the market to become less reactive to any future

news flow in the near term. We believe there could be a management reshuffle given Mr

Zhu’s suspension, but that this is unlikely to have any material change on DFM’s business

development and long-term strategy.

We expect little from commercial vehicle segment in 2016-17

We expect China’s trade data to remain weak in 2016. Daiwa’s Chief Economist Kevin Lai

expects China exports to decline by 3.4% YoY and imports to decline by 6.4% YoY in 2016.

As such, we believe the overall profitability of the logistics companies in China, especially

freight-forwarding and transportation companies, to remain weak next year. This in turn

leads us to believe that consumer confidence in the commercial vehicle (CV) segment will

remain weak during the same period.

Also, without new emissions standard being implemented in China in the near term and,

given that replacement orders were mostly made in 2014, we do not expect CV sales to

pick up in 2016. Overall, we expect a 10% YoY decline in China CV sales in 2016 and a

further 5% YoY decline in 2017. We expect DFM’s CV sales to record the same YoY

declines for 2016-17E.

Weak trade data leading

to lack of investor

confidence in CV

segment

61


Financial analysis

Strong balance sheet, indicated by stable low gearing ratio

DFMs’ net gearing ratio has been stable for the past few years, at lower than 10%. We

expect the ratio to be 7% in both 2015 and 2016 and 3% in 2017, mainly due to substantial

dividend from JV brands. However, we think this will be partly offset by DFM’s increasing

capex, as management guides for an increase in overall production capacity to 3.1m

vehicles by the end of 2016 (vs. guidance of 2.7m as at end-2015].

DFM: net debt-to-equity ratio


Although management has given no guidance on the company’s dividend policy for 2015

or beyond, its payout ratio in 2009-14 was 12-15%. We expect management to maintain

the payout ratio in this range and assume a 15% payout ratio in 2015-17, which would

translate into a 2015-16E yield of 2.3-2.6% at the current share price.

DFM: dividend per share and payout ratio


As DFM manufactures autos for several JV brands, including Japanese and European

brands, we believe the margins for these different brands will move in different directions

based on individual product pipelines and product mixes. For Dongfeng Limited (mainly in

terms of its work in the manufacture and sales of Dongfeng Nissan), we believe its net

margin peaked at 9.6% in 2014, and think its net margin will decline gradually to 8.3% in

2017, due mainly to significant market competition in the mid-level auto market.

We expect a similar scenario for Dongfeng Honda and DPCA. We look for net margins to

come down gradually to 8.8% in 2017 from 10.3% in 2014 for Dongfeng Honda and to

4.2% in 2017 from 5.1% in 2014 for DPCA. For DF Renault, we currently assume a net

margin of 2% in 2016 and 4% in 2017. We expect this relatively low margin mainly as the

Dongfeng Renault factory will still be in the early stages of production in its first 2 years of

operation.

6%

1%

9%

7%7%

3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Net cash Net cash Net cash

0.09

0.18 0.180.15

0.180.20 0.21

0.23 0.2412%

14%

15%

14%

15%

13%

15%15% 15%

10%

11%

12%

13%

14%

15%

16%

0.05

0.10

0.15

0.20

0.25

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

DPS (CNY , LHS) Payout ra tio (%, RHS)

(CNY)

We forecast DFM’s net

debt-to-equity ratio to

remain low in 2015-17

Payout ratio stable in

2009-14; we assume a

15% ratio in 2015-17

Mixed margin

performance likely in

2015-17 as DFM

manufactures different

brands, but overall net

margin should be stable

62


DFM: net profit margin for major JVs

Source: company, Daiwa forecasts Note: DFL = Dongfeng Limited which owns Dongfeng Nissan; DPCA = Dongfeng PSA; DHAC = Dongfeng Honda

3Q15 results on an upward trend

In 3Q15, DFM’s revenue increased by 95% YoY, mainly due to the 100% consolidation of

subsidiary DF PSA Sales Company. Investment income came in at CNY2,562m, up 3%

YoY. We believe the mild growth was due to a strong rebound in sales volume for

Dongfeng Honda (+106% YoY), but was partly offset by weak sales performance at DPCA

(-19% YoY). Overall, net profit increased by 22% YoY, which helped to narrow the net profit

decline in 9M15 to 11% YoY, from a YoY decline of 19% YoY in 1H15.

We expect net profit in 4Q15 to grow at a similar pace, due to the impact of the 5%

purchase-tax cut, as 57% of DFM’s sales volume is for cars with engines of 1.6L or less.

We believe the October and November 2015 sales figures support our view of the 4Q15

growth trajectory. Dongfeng Honda recorded strong sales volume growth of 52% YoY in

October and 99% YoY in November, while November sales for DPCA rose by 12% YoY

and those for Dongfeng Nissan rose by 23% YoY. Overall, DFM’s November sales growth

was 27% YoY, which was substantially higher than the company’s November YTD growth

of 5.9% YoY and the auto industry’s November YTD growth of 6.1% YoY.

DFM: income statement summary (CNYm)

PRC GAAP YoY %

(Equity method) 3Q14 3Q15 1H14 1H15 9M14 9M15 3Q15 1H15 9M15

Revenue 14,317 27,913 34,365 69,066 48,682 96,979 95% 101% 99%

Cost of sales (12,418) (23,833) (29,065) (59,445) (41,483) (83,277) 92% 105% 101%

Investment income 2,477 2,562 6,317 5,892 8,794 8,454 3% -7% -4%

Profit before tax 2,098 2,887 9,429 8,028 11,527 10,915 38% -15% -5%

Net profit 1,994 2,430 8,500 6,885 10,494 9,315 22% -19% -11%

EPS 0.23 0.28 0.99 0.80 1.22 1.08 20% -19% -11%

Source: company, Daiwa

0%

2%

4%

6%

8%

10%

12%

2013 2014 2015E 2016E 2017E

DFL DPCA DHAC DF Renault DFM Pro forma net margin

We expect earnings-

growth momentum to

continue in 4Q15

63



Still undemanding even after recent rally

Since late August 2015, DFM shares have rebounded by more than 50%, we believe due

partly to the implementation of the 5% purchase-tax cut. However, the stock is still trading

at only a 2016E PER of 5.8x. Although DFM has long traded at a discount to its Hong

Kong-listed China OEM peers due to the conglomerate nature of its business, the current

valuation of 5.8x is undemanding as it is close to the low end of the stock’s past-3-year

trading range of 4-9x.

Decent upside expected from current level

On the strong pipeline that we see for 2016, we believe DFM’s sales volume will

outperform the overall market, serving as a catalyst for a rerating of the stock. Hence, we

consider the current share price as a good entry point for investors.

We initiate coverage of DFM with an Outperform (2) rating. We set a 12-month target price

of HKD12.20 based on 7.0x our 2016E EPS, which is in line with its past-3-year average.

We believe our target PER of 7.0x is reasonable as DFM is now trading near the low end

of its past-3-year range, and because we see better-than-industry sales volume growth in

the coming year. Given the recovering market sentiment in the sector due to the purchase-

tax cut, we do not think it will be difficult for the valuation to bounce back to its past-3-year

average. Our target price implies upside of 15% to our target price from current share price

levels.

DFM: 12-month forward PER (x) (2012 – YTD 2015)


Risks

Currency risk

CNY depreciation a concern

We believe the recent CNY depreciation is likely to affect DFM’s profitability, as the

company imports certain auto parts and components from Japan and Europe given its JVs

with the various Japanese and European brands.

The company has highlighted that for every 5% weakening in the CNY against the EUR,

the company would record a CNY233m decrease in its after-tax profit. However, we

believe the company’s exposure to currency risks caused by fluctuations in the Yen is less

than it is for the Euro, as the localisation rate for its Japanese brand JVs is higher than for

its European peers.

3

4

5

6

7

8

9

10

11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15


(PER)

Trading near low end of

past-3-year PER range

Initiate with Outperform

(2) rating and target

price of HK12.20

Currency exposure to

EUR is a negative for the

company, in our view,

especially given the CNY

depreciation

64


Market risk

Severe market competition could drag down margins

We believe competition in the China auto market is intensifying at a faster pace than the

market has expected. Especially for the SUV segment, we believe the OEMs are keen on

fighting for market share, as indicated by their SUV pipelines and because they keep

introducing more SUV models into the market.

Therefore, we believe possible price cuts and the resulting margin erosion could hurt

DFM’s profitability. Furthermore, we think the fact that the luxury brands have started to

introduce more entry- and mid-level models into the market could put even more pressure

on DFM’s sales, given its high exposure to this segment.

Political risk

Sino-Japan tensions could crimp margins

We think DFM could be exposed to potential political risk due to ongoing tensions between

China and Japan, given the company’s exposure to Japanese brands. In 2012, when

China and Japan were in dispute over the Diaoyu Islands, the China OEMs with Japanese

JVs, such as GAC and DFM, saw their sales slow significantly. Therefore, we believe the

political climate between China and Japan could have an impact on the sales performance

of DFM’s Japanese brands while potentially benefiting their competitors.

Further, political instability in other countries could affect export demand for Chinese

domestic brands, especially as most of the local OEMs export to emerging countries,

which are politically less stable than developed countries.

Unexpected macro slowdown could result in further deterioration of CV segment profitability

CV segment may be a drag

CV sales are closely correlated with the macro environment, particularly trade flows. DFM’s

CV segment is likely to be adversely affected by the current China and global

macroeconomic slowdown. Hence, we conservatively assume modest profitability for the

segment. However, an unexpected “hard landing” for China’s economy would likely lead to

the CV segment being a further drag on the company’s overall performance.

DFM not immune to

intensifying market

competition

Escalation in Sino-Japan

tensions stands a risk

CV segment could weigh

on overall performance

65


Company background

Diversified product range, with both PVs and CVs

A leading manufacturer in the China PV market

Listed in Hong Kong in 2005, Dongfeng Motor is engaged in the manufacture and sales of

autos, engines and auto parts, and is involved in other auto-related businesses such as

auto finance. In 2014, DFM was one among the largest manufacturers in the China PV

market based on sales volume.

For its PV OEM business, DFM had 51 PV models, comprising 31 sedan models, 7 MPV

models and 13 SUV models, as at the end-1H15. Its major products for the China market

include well-recognised global brands such as Nissan, Infiniti, Honda, Peugeot, Citroen

and Renault. Similar to its peers, besides manufacturing foreign brands, DFM also invests

in and develops its own brand, namely Dongfeng Fengshen, which is run under the

Dongfeng Passenger Vehicle Company.

DFM has a leading position in China’s CV market, especially for medium- and heavy-duty

trucks. Through its subsidiaries and JVs with various foreign brands, DFM has a wide

range of product lines, including 42 major commercial vehicle models, comprising 35 truck

models and 7 bus models.

Major profit contributors

Big 3 account for largest share of JV profit

DFM’s own Dongfeng Fengshen is still loss-making. Its major profit contributors are its JVs

with several foreign brands. In 2014, DFL (mainly in terms of its work in the manufacture

and sales of Dongfeng Nissan), DPCA and DHAV accounted for 93% of the total share of

DFM’s profit from joint ventures, while its total profit from JVs accounted for 83% of its net

profit. We believe the distribution in 2015-17 will be similar.

DFM: profit share from JVs in 2014

Source: Company, Daiwa estimates Note: DFL = Dongfeng Limited which owns Dongfeng Nissan; DPCA = Dongfeng PSA; DHAC = Dongfeng Honda

58%

16%

20%

7%

DFL

DPCA

DHAC

Others

A leading China auto

OEM, with a broad

product range

66


DFM: management profile

Management Profile

Mr. Xu Ping Mr. Xu has been the chairman of the board of directors of the company since 2005. He is also the chairman of the board of directors of Dongfeng Peugeot Citroën, Dongfeng Honda and Dongfeng Renault.

Mr. Li Shaozhu Mr. Li is an executive director of the company. Mr. Li has more than 20 years’ business and management experience in the auto industry.

Mr. Zhu Yanfeng Mr Zhu is the chairman of the Board, and assumed the role and duty of the president of DFM with effect from 2 November 2015, prior to the election of a new president of the company.

Mr. Cai Wei Mr. Cai is the vice-president and the secretary of the board of directors of the company. He is a director of Dongfeng Peugeot Citroën, and the chairman of the board of directors of Dongfeng Honda Engine and Dongfeng Honda.

Source: company

DFM: development milestones

Year Event

2004 Dongfeng Motor Group Co., Ltd established.

2005 Dongfeng Motor Group Co., LTD listed on the Hong Kong Stock Exchange, with stock code 489.

2006 On 30 August 2006, Nissan Motor and DFM jointly signed an agreement in Wuhan to establish Dongfeng Nissan Auto Finance Co., Ltd, in 2007 in China.

2007 Dongfeng Motor Group Company Ltd awarded the title of “Most Influential Chinese Overseas Listed Company of 2006”.

2011 Acquired an equity interest in Dongfeng Yu'an to accelerate R&D for new EVs.

2013 DFM acquired the commercial vehicle and other businesses from Dongfeng Motor Corp and formed a new JV with Volvo to develop medium and heavy-duty commercial vehicles under the Dongfeng brand.

2013 DFM announced the restructuring plan for Sanjiang Renault, which was approved by the NDRC and a new JV, Dongfeng Renault, was formed by DFM and Renault S.A.

2014 DFM undertook to subscribe 69,866,666 PSA shares, representing around a 14% stake in PSA.

2014 DFM announced the establishment of Dongfeng Infiniti, a JV between DFM and Nissan Motor that is responsible for managing the sales operations of the Infiniti brand in China.

Source: Company

DFM: organisational chart

Source: Company

66.86%

100% 100%

25%

50% 50% 50% 50% 100% 55% 75% 44% 50% 25% 100%

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33.14%

Dongfeng Auto Group Co. (489.HK)

Dongfeng Motor Corporation Public shareholders

Dongfeng Yueda Kia

67


Dongfeng Nissan: Sunny Sedan Dongfeng Nissan: Sylphy Sedan


Dongfeng Nissan: Teana Sedan Dongfeng Nissan: Qashqai SUV


Dongfeng Nissan: X-Trail SUV Dongfeng Nissan: Murano SUV


68


Dongfeng Honda: Civic Sedan Dongfeng Honda: CR-V SUV


Dongfeng Honda: XR-V SUV Dongfeng Infiniti: Q50L Sedan


Dongfeng Infiniti: QX50 SUV Dongfeng PSA: Citroen C3-XR SUV


69


Dongfeng PSA: Citroen Elysee Sedan Dongfeng PSA: Citroen C4L Sedan


Dongfeng PSA: Peugeot 301 Sedan Dongfeng PSA: Peugeot 308 Sedan


Dongfeng PSA: Peugeot 408 Sedan Dongfeng PSA: Peugeot 3008 SUV


70


Dongfeng Passenger Vehicle: Fengshen AX7 SUV Dongfeng LiuZhou: Joyear SUV


Dongfeng LiuZhou: Future MPV

Source: Company

DFM: commercial vehicles

Source: Company



What's new: GAC’s share price is up more than 50% since the year’s

trough in September on improving sentiment on the China Autos Sector

after the government’s decision to cut the purchase tax on vehicles with

engines of 1.6L or smaller. While we believe the recent share-price rally

has factored in the positive impact of the supportive tax policy, GAC is likely

to face keen competition from the other OEMs in 2016.

What's the impact: We expect the Japan brands, which focus on mid-range

sedans and to which GAC has large exposure through its JVs with Toyota and

Honda, to lose market share to the luxury brands in the first-tier cities, and to

cheaper local brands in the lower-tier cities. As the licence plate restrictions are

due to be rolled out in more cities over the next few years, the earnings growth

potential of GAC’s Japanese JV brands could be further dampened.

In our view, SUVs are eating into the market share for sedans in China’s

PV market, yet GAC only has a limited range of SUVs. That said, sales of

GAC’s self-owned GS4, and that of GAC Toyota’s Highlander, were better

than expected in 2015, which should offset the losses for other sedan

models. GAC is scheduled to launch a few SUV models in 2016 (including

an SUV from Acura, which is a sub-brand of Honda, and the EV version of

the GS4), which should drive its earnings growth in 2016. Nevertheless, we

expect the margins and profitability on SUVs to deteriorate given the

intensifying competition, as more OEMs rush to launch new models.

We raise our 2015-17E revenues by 16-76% to factor in the potential

positive impact from the tax cut and the strong performance of the new

models launched to date. However, our upward revisions of 3-11% for

2015-17E EPS reflect a potential margin decline. We now forecast GAC’s

net profit to rise by 22% YoY to CNY3.9bn for 2015. For 2016-17, we look

for the net profit growth to slow to 17%/3% YoY, respectively.

What we recommend: We maintain our Hold (3) rating and raise our 12-

month target price to HKD7.0 (from HKD6.40), based on an unchanged

2016E PER of 8.5x, at the low end of the target PER range (7.0-11.0x) we

apply to the other auto OEMs we cover, due to our concerns about

Japanese cars losing market share to premium European brands under the

licence-plate restrictions, as well as the popularity of cheaper local brands

in lower-tier cities. The key upside and downside risks to our call: impact of

weaker/stronger-than-expected currency fluctuations.

How we differ: We are slightly more positive on GAC than the market for

2016, as some orders originally scheduled for 2017 have now been

brought forward to 2016 on the back of the positive impact of the tax cut.

4 January 2016

Guangzhou Automobile Group

Encountering strong headwinds

Japanese brands facing stiff competition from luxury/local brands

A latecomer to China’s SUV market boom in 2016E

Maintain Hold (3) with new TP of HKD7.0, based on 8.5x 2016E PER



Guangzhou Automobile Group (2238 HK)



Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]



Revenue change 16.5 66.4 75.8

Net profit change 4.2 10.8 2.7

Core EPS (FD) change 4.2 10.8 2.7

75

85

95

105

115

4.5

5.8

7.0

8.3

9.5



Gzhou Auto (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder GZ Auto Industry Grp (57.6%)



Revenue (m) 28,828 44,717 49,934

Operating profit (m) (691) (374) (251)

Net profit (m) 3,891 4,533 4,670


EPS change (%) 22.2 16.5 3.0

Daiwa vs Cons. EPS (%) 7.2 4.1 (5.9)

PER (x) 9.6 8.2 8.0


DPS 0.195 0.228 0.235

PBR (x) 1.0 0.9 0.8

EV/EBITDA (x) 30.1 14.9 10.5

ROE (%) 10.6 11.4 10.8

72

Guangzhou Automobile Group (2238 HK): 4 January 2016



Growth outlook GAC: net profit forecasts

We look for GAC’s net profit to rise by 22% YoY to

CNY3.9bn for 2015. Japanese JV brands have been

cutting prices during the course of 2015, and we expect

pricing pressure on mid-range JV brands, such as those

that GAC makes, to continue. For 2016-17, we forecast

net-profit growth of 17% YoY and 3% YoY, respectively,

partly helped by the company’s launch of some new SUV

models.


Valuation GAC: 1-year forward PER (x)

Our 12-month target price of HKD7.0 is based on an 8.5x

PER applied to our 2016E EPS forecast, which is at the

low end of the target PER range of 7.0-11.0x we apply to

the auto OEMs under our universe.

We see Japanese cars, to which GAC has large exposure,

losing market share to premium European brands under

stronger licensing restrictions, as well as the popularity of

cheaper local brands in lower-tier cities, and intensifying

competition in the sedan market.


Earnings revisions GAC: Bloomberg consensus EPS forecast revisions

We have seen continuous downward earnings revisions

from the street since June 2014. Our EPS forecasts for

2015-16E are now 4-7% above the consensus, as we

assume higher passenger vehicle (PV) sales-volume

growth from the forward shift demand as a result of

purchase tax cut, but 6% lower than consensus earnings

forecast for 2017E.

Source: Bloomberg

(80%)

(30%)

20%

70%

120%

170%

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014 2015E 2016E 2017E


(CNYm)

5

7

9

11

13

15

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15


(PER)

0.35

0.45

0.55

0.65

0.75

0.85

0.95

1.05

1.15

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

(CNY)

2015E 2016E

73


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Volume - GAC Honda (unit) 386,000 362,000 316,000 435,000 480,000 570,000 650,000 661,000

Volume - GAC Toyota (unit) 269,000 274,000 250,000 303,000 374,000 409,000 439,000 439,000

Volume - GAC Motor (unit) 39,000 31,000 59,000 109,000 135,000 197,000 308,000 343,000

Volume Growth - GAC Honda (%) n.a. (6.2) (12.7) 37.7 10.3 18.8 14.0 1.7

Volume Growth - GAC Toyota (%) n.a. 1.9 (8.8) 21.2 23.4 9.4 7.3 0.0

Volume Growth - GAC Motor (%) n.a. (20.5) 90.3 84.7 23.9 45.9 56.3 11.4

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Vehcicle-related operations 7,460 10,719 12,713 18,124 21,553 27,840 43,532 48,512

Other revenue 1,282 266 251 700 823 988 1,185 1,423

Other Revenue 0 0 0 0 0 0 0 0

Total Revenue 8,742 10,984 12,964 18,824 22,376 28,828 44,717 49,934

Other income (27) 836 8 117 340 438 679 759

COGS (7,999) (10,560) (12,274) (16,830) (19,829) (25,489) (39,510) (44,103)

SG&A (842) (1,806) (2,147) (2,784) (3,715) (4,468) (6,260) (6,841)


Operating profit (126) (545) (1,449) (672) (827) (691) (374) (251)

Net-interest inc./(exp.) (128) (41) (193) (169) (307) (458) (572) (633)

Assoc/forex/extraord./others 5,773 4,643 2,641 3,470 4,187 4,895 5,310 5,380

Pre-tax profit 5,520 4,057 1,000 2,629 3,053 3,746 4,364 4,496

Tax (2) 110 65 (101) (126) (155) (180) (186)

Min. int./pref. div./others (1,225) 105 69 124 259 300 349 360



EPS (reported)(CNY) 0.919 0.695 0.178 0.412 0.495 0.605 0.704 0.726

EPS (adjusted)(CNY) 0.919 0.695 0.178 0.412 0.495 0.605 0.704 0.726


DPS (CNY) 0.263 0.209 0.091 0.160 0.160 0.195 0.228 0.235

EBIT (127) (545) (1,449) (672) (827) (691) (374) (251)

EBITDA 72 (55) (781) 279 388 750 1,331 1,724

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 199 490 668 951 1,216 1,441 1,704 1,975

Tax paid (42) (81) (117) (172) (83) (155) (180) (186)

Change in working capital (825) (422) 1,555 566 612 349 1,562 509

Other operational CF items (5,859) (4,677) (2,621) (3,426) (4,450) (4,078) (4,322) (4,156)

Cash flow from operations (1,008) (633) 485 548 348 1,303 3,128 2,638

Capex (1,349) (2,244) (2,948) (1,904) (3,511) (3,696) (3,806) (3,922)

Net (acquisitions)/disposals (835) (1,079) (1,307) (1,077) (89) 0 0 0

Other investing CF items 4,143 3,056 6,585 3,689 348 3,345 3,916 4,248

Cash flow from investing 1,960 (267) 2,329 708 (3,252) (351) 110 326

Change in debt 461 429 38 4,041 28 2,500 4,000 5,000


Dividends paid (840) (686) (1,757) (538) (1,172) (1,030) (1,258) (1,465)

Other financing CF items (55) 56 (31) 9 235 (817) (988) (1,224)

Cash flow from financing (434) (201) (1,749) 3,512 (909) 654 1,755 2,311


Change in cash 518 (1,102) 1,065 4,767 (3,813) 1,605 4,993 5,275

Free cash flow (2,356) (2,877) (2,463) (1,356) (3,163) (2,393) (678) (1,284)

74




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 1,353 1,537 1,397 2,036 2,661 2,832 4,390 4,900




Fixed assets 3,028 4,309 5,927 7,366 8,536 9,916 11,250 12,535



Total assets 38,520 44,612 49,434 57,843 62,372 69,544 83,507 93,656

Short-term debt 1,053 2,100 2,515 9,397 9,541 10,041 11,041 12,041


Other current liabilities 33 37 139 25 37 47 73 82


Long-term debt 7,950 7,737 7,776 4,775 4,769 6,769 9,769 13,769

Other non-current liabilities 386 483 564 893 1,212 1,212 1,212 1,212


Share capital 6,148 6,148 6,435 6,435 6,435 6,435 6,435 6,435



Minority interests 233 976 922 805 796 496 147 (213)


EV 23,869 25,574 22,397 19,851 23,527 22,572 19,836 18,070

Net debt/(cash) (379) 1,598 975 89 4,042 4,936 3,943 3,669

BVPS (CNY) 5.481 4.751 4.894 5.177 5.497 5.942 6.451 6.949

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. 25.6 18.0 45.2 18.9 28.8 55.1 11.7

EBITDA (YoY) n.a. n.a. n.a. n.a. 39.2 93.1 77.5 29.6

Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Net profit (YoY) n.a. (0.5) (73.5) 133.9 20.1 22.2 16.5 3.0

Core EPS (fully-diluted) (YoY) n.a. (24.4) (74.4) 131.3 20.0 22.2 16.5 3.0


EBITDA margin 0.8 n.a. n.a. 1.5 1.7 2.6 3.0 3.5

Operating-profit margin n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


ROAE 33.5 15.6 3.8 8.2 9.3 10.6 11.4 10.8

ROAA 22.3 10.3 2.4 4.9 5.3 5.9 5.9 5.3

ROCE n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

ROIC (0.5) (1.9) (4.5) (1.9) (2.1) (1.6) (0.8) (0.5)

Net debt to equity net cash 5.5 3.1 0.3 11.4 12.9 9.5 8.2

Effective tax rate 0.0 n.a. n.a. 3.8 4.1 4.1 4.1 4.1


Current ratio (x) 4.6 3.5 2.2 1.5 1.3 1.3 1.3 1.4



Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Company profile

GAC is engaged in the manufacturing of vehicles and parts, as well as automobile finance and

insurance and related services. It sells passenger vehicles under the Trumpchi marque, passenger

and commercial vehicles under Gonow, SUVs under Changfeng Motor, and buses under GAC Bus.

GAC has also formed JVs with a number of foreign brands, including Honda, Toyota, Mitsubishi and

Fiat to sell passenger vehicles. It sells commercial vehicles through its GAC Bus and GAC Hino

businesses.

75


Tough times ahead in 2016

Losing market share to local and luxury brands Mid-range Japanese brands losing market share on licensing restrictions

In an effort to combat air pollution and traffic congestion, top-tier cities in China, like

Beijing, Shanghai, Guangzhou, Shenzhen and Tianjin, have introduced policies to restrict

new car registrations and curb the ownership of private cars in China. We believe more

cities will follow suit in 2016.

Japanese brands, such as Toyota and Honda, to which GAC has significant exposure via

its various JVs, and which focus on mid-range sedans, would be impacted the most over

the next few years, in our view. Under the licensing restrictions, we see Japanese brands

in first-tier cites losing market share to European luxury brands, and in lower-tier cities to

local Chinese brands. The reasons are as below:

1) In higher-tier cities where licence restrictions have been imposed, first-time car buyers,

due to their relative affluence, are likely to purchase luxury cars, while replacement car

buyers in these cities would seek to upgrade to premium European cars, given the

marginal extra cost required versus upgrading to a mid-range sedan.

2) In lower-tier cities where restrictions have not yet been imposed and where disposable

incomes are on the rise, first-time buyers would likely opt for entry-level local brand

cars for their value, not mid-level sedans.

GAC: market share since January 2015

Source: CAM

A latecomer to China’s SUV boom; profitability of new SUVs to deteriorate in 2016 on keen competition GAC’s model portfolio is skewed to the slowing sedan market in 2015 China’s SUV market posted robust sales-volume growth of 54% YoY for January to

November 2015, accounting for 29% of total PV sales. However, by our estimates, more

than 70% of the units GAC sold in 2015 comprised vehicles from the slowing sedan

segment, while SUVs and MPVs combined accounted for only 30% of its total sales

volume due to the company’s limited range of SUV models. GAC, as a result, failed to

catch China’s SUV boom and became trapped in the keenly contested sedan market in

2015.

Based on its product launch pipeline, the company seem to be making a concerted effort to

increase its SUV exposure, including launching a GAC-Mitsubishi Outlander-PHEV and

self-owned GS4-EV in 2016, after the launch of the Cherokee in 2H15. However, we

believe the profitability of its new SUV models in 2016 would not be as good as it was in

2015.

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3%

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5%

6%

7%

8%

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15

(YoY %)(Market share %)

GAC's Market Share in China PV market (LHS) Growth YoY (RHS)

We believe the Japanese

brands will likely lose

market share to both

Chinese and European

luxury brands as a result

of licensing restrictions

76


Despite our forecast for continuous strong SUV sales unit growth of 33% YoY for 2016E

(especially if we compare the 28% SUV penetration in China versus over 40% in the US),

margins on the SUV will likely see a deterioration over the next 2 years given the

intensifying competition in the segment as several other OEMs rushed into this lucrative

segment of the market. Given the current visibility, about one-third of the new models

launched during 2H15-1H16 will be SUVs, contributing around 35% of the total new model

auto sales volume for China during the period.

GAC: product mix GAC: product pipeline (2H15-2016)

GAC product pipeline 2H15-2016

Model Type Launch time

GAC Honda New City* Sedan 2H15

Crider (Facelift) Sedan 2H15 (Dec)

Crosstour (Facelift) Sedan 2H15 (Dec)

Acura SUV SUV 2016

GAC Toyota Levin HEV* Hybrid Sedan 2H15

Lingzhi EV EV Sedan 2016

GAC Fiat-Chrysler Cherokee SUV 2H15

GAC Mitsubishi Outlander PHEV PHEV SUV 2016

GAMC GS4 EV EV SUV 2016

GA3S PHEV PHEV Sedan 2016

Source: CAM

Source: Company, various media Note: *already launched

Financial forecasts We believe GAC Honda and GAC Toyota will continue to be the 2 key earnings

contributors for GAC. However, Japanese brands and slowing sales volume amid the high

operating leverage environment for the auto OEMs suggest that the net margin for the

Japanese JVs is likely to come under increasing pressure.

We are revising up our revenue forecasts for GAC by 17-76% for 2015-17E on a potential

forward shift in demand from China’s purchase tax cut, and the strong sales-volume

performance of the self-owned GS4. However, we are raising our earnings forecasts to a

lesser extent, 3-11%, for 2015-17E due to the potential for a margin decline. We now

forecast GAC’s net profit to rise by 22% YoY to CNY3.9bn for 2015. For 2016, we look for

GAC’s net profit to rise by 17% YoY for 2016, but slow to 3% YoY for 2017, due to the

aforementioned forward shift in demand to 2016 on the purchase tax cut.

We forecast GAC Honda to post sales volume growth of 14% YoY to 650k units in 2016,

slowing from 19% YoY growth for 2015. The Honda City should help offset part of the

volume slowdown in 2015, in our opinion. However, margins across the board could be

under pressure given GAC’s aggressive price discounting and its weaker-than-peer

product mix.

The Highlander SUV, contrary to its past strong sales performance, sold more than 9,000

units in October 2015, stronger than our previously forecast normalised sales-volume level

of 6,000-7,000 units per month for the rest of the year. Such a result could be due to pent-

up demand as car buyers have been waiting for the new-generation model which was

launched in April 2015. Having said that, we expect demand for high-end SUVs to continue

to be strong, with few competitors in China in this niche market.

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Sedan SUV MPV

We forecast the 2016E

and 2017E net profit to

rise by 17% and 3% YoY

respectively, impacted

by a decreasing margin

77



Maintain Hold (3) rating with new TP of HKD7.0 We maintain our Hold (3) rating on GAC and set a new 12-month target price of HKD7.0

(from HKD6.40 previously), based on an unchanged 8.5x PER on our 2016E EPS forecast

(from the 2015E-16E average previously), which is at the low end of the target PER range

of 7.0-11.0x that we apply to the auto OEMs under our coverage. Our target price implies

1% upside from current levels. We expect GAC to continue to register negative free cash

flow of CNY2-3bn per year over our forecast horizon on continual R&D and production

capacity expansion. Dividends received from its JVs are unlikely to see significant growth

on the sluggish performance of its Japanese brands.

We see the potential for Japanese cars, to which GAC has large exposure, losing market

share to premium European brands and other local brand rivals under strengthening

licensing restrictions and intensifying competition in the sedan market. As such, sales

momentum for GAC’s high-end models is likely to be weak, as first-time buyers in lower-

tier cities opt for low-end cars or local brands, and replacement car buyers in higher-tier

cities prefer luxury models and SUVs. However, the stock’s current valuation, trading at the

low end range of our coverage of China auto OEMs, looks well justified to us.

GAC: PER bands (x) GAC: PER based valuation

2016E EPS (CNY) 0.70

PER (x) 8.5x

Exchange rate, HKD1:CNY 0.85

Equity value/share (HKD/share) 7.00

Current price (HKD) 6.94

Potential share price upside/downside (%) 1%

Implied target 2017E PER 8.2x



Risks The main risk to our call on GAC is currency risk. The fluctuation of the Yen implies higher

or lower prices of imported components for GAC’s Japanese JVs. If the Yen depreciates/

appreciates against the CNY, this would imply upside/downside for the earnings of GAC

Honda and GAC Toyota, which are currently the main profit contributors to the company.

Other company-specific risks include better- or worse-than-expected sales volume from

newly launched SUV models, and narrowing losses for its self-owned brands benefiting

from the purchase tax cut, which would imply upside potential for our earnings forecasts.

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(PER)



Investment case: We initiate coverage of Brilliance China with an

Underperform (4) rating. On the one hand, the pipeline for 2016 looks

promising, with the launch of the 3-series facelift in September 2015 and

the coming 2-series sedan and X1 SUV in 2016 (we look for 2016-17 EPS

growth of 14-16% YoY, after declining by 38% YoY in 2015E). But on the

other hand, we believe Bloomberg-consensus expectations of an earnings

recovery in 2015-17 are too optimistic. Our 2015-17E EPS are 16-25%

lower than consensus, mainly as we are more cautious on the impact of the

purchase tax cut on the company’s bottom line. Despite this, we expect

BMW Brilliance to meet its 2015 sales volume target of 4% YoY.

Catalysts: While unit sales of the 3-series facelift may be a near-term

sales volume driver, sales of the X1 SUV are likely to continue to

deteriorate until the launch of the new version, which we assume will be

mid-2016. As such, we assume the new X1 SUV will boost overall X1

sales, resulting in 6% YoY growth in 2016, and 24% YoY in 2017. For the 2-

series model, we expect monthly sales of around 2,000-2,500 units in

2016-17. We do not expect the 2-series to be as much of an earnings

contributor over the next 2 years compared with the 3- and 5-series

models.

Separately, the purchase-tax cut should boost sentiment on the sector, but

this should be less relevant to BMW Brilliance’s financials as most of its

models/sales are not eligible for the tax cut (ie, engines are bigger than

1.6L). Thus, we think current consensus forecasts have factored in overly

optimistic expectations for earnings growth in 2015-17.

Valuation: The stock is trading currently at a 2016E PER of 11x, which is in

line with its past-3-year average. However, with Beijing Benz emerging as a

strong competitor and what we see as Brilliance’s less-attractive model

launches in 2016-17 (vs. Benz), we apply a 2016E PER of 10x (a 10%

discount to its past-3-year average, which we think is appropriate given the

circumstances), to derive our 12-month TP of HKD8.90. We initiate

coverage with an Underperform (4) rating and expect to see downward

2015-17 consensus forecast revisions, leading to negative stock sentiment.

Risks: The major risk to our call would be higher-than-expected new-car

sales for the company, especially sales of its new models such as the 2-

series sedan and new X1 SUV (scheduled to hit the market in 2016).

4 January 2016

Brilliance C hina Automoti ve

Initiation: improving pipeline but expectations too high

BMW Brilliance pipeline should do better in 2016

But market expectations look too high

Initiating with Underperform (4) rating and TP of HKD8.90


Brilliance China Automotive (1114 HK)

Target price: HKD8.90

Share price (28 Dec): HKD9.84 | Up/downside: -9.6%

Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]

70

85

100

115

130

8

10

13

15

17



Brilliance (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Huachen Automotive Group (42.5%)



Revenue (m) 5,085 5,543 5,503

Operating profit (m) (423) (395) (353)

Net profit (m) 3,340 3,873 4,405


EPS change (%) (38.2) 15.9 13.7

Daiwa vs Cons. EPS (%) (15.6) (21.5) (24.6)

PER (x) 12.4 10.7 9.4


DPS 0.110 0.092 0.105

PBR (x) 2.1 1.8 1.5

EV/EBITDA (x) n.a. n.a. n.a.

ROE (%) 18.2 18.1 17.6

79

Brilliance China Automotive (1114 HK): 4 January 2016



Growth outlook Brilliance: net profit and net profit growth

We forecast Brilliance’s net profit to decline by 38% YoY for

2015 as a result of its weak pipeline and new car sales in

China. However, with a better pipeline in late 2015 and

2016 (including the 3-series facelift, 2-series sedan and X1

SUV), we look for net profit to recover to 16% YoY growth

in 2016 and 14% YoY in 2017.


Valuation Brilliance: 12-month forward PER (x) (2012 – 2015)

The stock is trading currently at 2016E PER of 11x based

on our earnings forecasts, which is in line with the past-3-

year consensus average. We expect more downside to the

current valuation given that the competition from Beijing

Benz has ramped up in 2015 and also as we expect

downward earnings revisions to occur over the next 6

months after Brilliance announces its 2015 results. The

recent purchase tax reduction should boost sentiment

toward the stock slightly, but is unlikely to lead to a strong

rerating to a level well above its past-3-year average.


Earnings revisions Brilliance: Bloomberg consensus EPS forecast revisions

Our 2015-17E EPS are 16-25% lower than the Bloomberg-

consensus figures, as we expect BMW Brilliance to just

about meet its 2015 sales growth target of 4% YoY, and

also because we expect the impact of the purchase tax

reduction to be less significant for Brilliance. The fiercer

competition in the auto industry is also having an impact on

the bottom line.

Source: Bloomberg

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2011 2012 2013 2014 2015E 2016E 2017ENet profit (LHS) Growth YoY (RHS)

(CNYm) (YoY%)

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2015E 2016E

80


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

BMW Sales volume 70,000 108,000 161,000 207,000 279,000 290,000 332,000 370,000

BMW blended ASP 305,000 347,000 349,000 354,000 339,000 326,000 326,000 326,000

Local brands sales volume 95,000 82,000 83,000 84,000 78,000 64,000 59,000 57,000

Local brands blended ASP 94,000 78,000 72,000 73,000 71,000 70,000 69,000 68,000

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Domestic revenue n.a. 6,151 5,319 5,430 4,639 4,475 4,878 4,843

Overseas revenue n.a. 291 597 673 876 610 665 660

Other Revenue n.a. 0 0 0 0 0 (0) 0

Total Revenue 8,949 6,443 5,916 6,103 5,515 5,085 5,543 5,503

Other income 125 98 82 87 166 178 194 193

COGS (7,725) (5,587) (5,220) (5,417) (4,952) (4,729) (5,128) (5,063)

SG&A (825) (749) (878) (1,008) (987) (957) (1,004) (986)


Operating profit 523 205 (99) (234) (258) (423) (395) (353)

Net-interest inc./(exp.) (92) (117) (100) (92) (103) (102) (135) (125)

Assoc/forex/extraord./others 1,034 1,862 2,494 3,650 5,704 3,828 4,359 4,834

Pre-tax profit 1,465 1,949 2,295 3,325 5,343 3,303 3,829 4,356

Tax 54 (58) (58) (8) (43) (27) (31) (35)

Min. int./pref. div./others (248) (79) 64 58 103 64 74 84



EPS (reported)(CNY) 0.255 0.363 0.458 0.671 1.075 0.665 0.771 0.876

EPS (adjusted)(CNY) 0.255 0.363 0.458 0.671 1.075 0.665 0.771 0.876


DPS (CNY) 0.000 0.000 0.000 0.078 0.087 0.110 0.092 0.105

EBIT 523 205 (99) (234) (258) (423) (395) (353)

EBITDA 663 343 41 (95) (119) (265) (210) (143)

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 139 138 140 139 139 158 184 210

Tax paid (49) (12) (3) (9) (47) (27) (31) (35)

Change in working capital 531 (1,001) (108) (83) 1,100 (102) 239 (45)

Other operational CF items (907) (1,702) (2,325) (3,526) (5,766) (3,665) (4,196) (4,671)

Cash flow from operations 1,180 (628) (2) (154) 770 (333) 26 (186)

Capex (431) (306) (526) (616) (737) (958) (958) (958)

Net (acquisitions)/disposals 46 (301) 61 30 (435) 0 0 0

Other investing CF items (1,076) 671 828 1,057 1,387 1,360 1,754 2,177

Cash flow from investing (1,461) 64 363 470 214 401 796 1,219

Change in debt 309 688 27 151 (268) 0 0 0


Dividends paid 0 0 0 (394) (437) (553) (465) (529)

Other financing CF items (1,212) 25 (143) (7) (3) (163) (163) (163)

Cash flow from financing (900) 722 (110) (250) (709) (716) (627) (691)


Change in cash (1,181) 158 251 67 275 (647) 194 342

Free cash flow 749 (934) (528) (770) 32 (1,291) (932) (1,144)

81




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 428 586 837 903 1,179 532 726 1,068

Inventory 791 737 838 769 797 761 825 814




Fixed assets 1,585 1,670 1,745 1,686 1,960 2,440 2,904 3,350

Goodwill & intangibles 252 261 424 731 1,055 1,375 1,686 1,987


Total assets 13,220 12,811 16,058 18,990 23,207 25,639 29,440 33,161

Short-term debt 3,593 3,087 2,827 2,826 3,223 3,139 3,289 3,264


Other current liabilities 1,581 1,019 910 975 948 874 953 946


Long-term debt 0 0 0 0 0 0 0 0

Other non-current liabilities 2 2 2 56 119 119 119 119


Share capital 6,325 6,989 10,015 13,015 16,931 16,931 16,931 16,931

Reserves/R.E./others 0 0 0 0 0 2,787 6,195 10,072


Minority interests (1,069) (752) (816) (874) (977) (1,041) (1,116) (1,200)


EV 40,385 38,974 35,730 33,027 29,698 27,730 25,006 21,898

Net debt/(cash) 3,165 2,501 1,991 1,923 2,044 2,608 2,563 2,197

BVPS (CNY) 1.267 1.395 1.993 2.590 3.369 3.924 4.602 5.373

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 45.5 (28.0) (8.2) 3.2 (9.6) (7.8) 9.0 (0.7)

EBITDA (YoY) (15.8) (48.3) (88.1) n.a. n.a. n.a. n.a. n.a.

Operating profit (YoY) 60.3 (60.8) n.a. n.a. n.a. n.a. n.a. n.a.

Net profit (YoY) n.a. 42.6 27.0 46.6 60.1 (38.2) 15.9 13.7

Core EPS (fully-diluted) (YoY) n.a. 42.5 26.9 46.6 60.1 (38.2) 15.9 13.7


EBITDA margin 7.4 5.3 0.7 n.a. n.a. n.a. n.a. n.a.

Operating-profit margin 5.8 3.2 n.a. n.a. n.a. n.a. n.a. n.a.


ROAE 22.4 27.2 27.1 29.3 36.1 18.2 18.1 17.6

ROAA 10.3 13.9 15.9 19.3 25.6 13.7 14.1 14.1

ROCE 7.2 2.3 n.a. n.a. n.a. n.a. n.a. n.a.

ROIC 8.4 2.3 (1.0) (1.8) (1.6) (2.1) (1.7) (1.3)

Net debt to equity 50.0 35.8 19.9 14.8 12.1 13.2 11.1 8.1



Current ratio (x) 0.9 0.9 0.9 1.0 0.9 0.8 0.8 0.9

Net interest cover (x) 5.7 1.7 n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 1.8 n.a. n.a. n.a. 0.1 n.a. n.a. n.a.

Company profile

Brilliance China Automotive is an automotive manufacturer in China. Through BMW Brilliance

Automotive, a joint venture formed with BMW, the group produces the BMW 3-series sedan, 5-

series sedan and X1 SUV in China. Further, BMW Brilliance plans to introduce a BMW 2-series

sedan and X3 SUV in the near future to diversify its product range. The group also manufactures

and sells minibuses under its own brand, Jinbei, and in 2014 introduced a premier product line,

namely Huasong. In addition to auto manufacturing, Brilliance is also engaged in the manufacture

of automotive components as well as diesel engines and gasoline engines for use in minibuses,

sedans, SUVs and light duty trucks.

82


Fighting back

A better year in 2016

Behind target for 2015

BMW sales in China (represented by BMW Brilliance) have been disappointing this year,

with only a 2.6% increase in November 2015 YTD, and significantly lagging the sales of

Mercedes Benz (represented by Beijing Benz), which were up 93%YoY in November YTD.

We believe the disappointing BMW sales were a result of BMW Brilliance’s weak product

pipeline in 2H14, during which it only introduced a facelift for the X1 SUV, while Benz

launched its new C-class sedan and GLA SUV models. As a result, at the 1H15 results

briefing, Brilliance revised down its 2015 unit sales-growth target from 10% YoY set in early

2015 to 4% YoY.

We now expect BMW Brilliance to just about achieve its revised 2015 sales growth target,

mainly due to a pick-up in sales in November and December. That said, we believe the

market is being overly optimistic on the effects on BMW Brilliance of the recent purchase

tax cut, which was announced on 29 September 2015, as most of the models (around

97%) manufactured by BMW Brilliance have engines that are larger than 1.6L, which

means they are not eligible for the tax reduction.

With reference to its new car sales in October 2015, when the tax reduction was

implemented, BMW Brilliance recorded only a 3.5% YoY increase in sales, lagging behind

the market’s 13% YoY increase. However, unit sales in November increased substantially,

by 18% YoY, driven mainly by the 3-series and 5-series sedans, for which sales rose by

32% YoY and 20% YoY, respectively. Although we think BMW Brilliance is likely to achieve

its targeted 4% YoY sales volume in 2015, we expect the net profit margin in 2015 to

decline by 4.0pp YoY, due to a decline in ASPs as a result of fierce competition.

November 2015 YTD sales for BMW Brilliance and Beijing Benz

Source: CAM

Price trend of the middle configuration of BMW 3-Series (320Li) and 5-Series (525Li)

Source: CAM

250,000

300,000

350,000

400,000

450,000

250,000

300,000

350,000

400,000

450,000

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15

(Price, CNY)(Price, CNY)

Price of Mid config of BMW 320Li Price of Mid config of BMW 525Li

Price increase due tolaunch of 3-Series facelift

We forecast BMW

Brilliance’s new car

sales to rise by 4% YoY

in 2015

YTD Nov sales units YoY %

Brilliance BMW 262,600 2.6%

Beijing Benz 220,700 93.4%

83


BMW Brilliance: 3-series sedan (new facelift model)

Source: company

Improving product pipeline in 2016, but not enough

To reverse the weak growth trend for new-car sales, BMW Brilliance has planned a much

better pipeline in 2016. Apart from the launch of the facelift for its 3-series model in

September 2015, BMW Brilliance plans to launch a new 2-series sedan (first time in China)

and a new X1 SUV in 2016. The 2-series is a new size of compact sedan in China. While

we are not that positive on small sedans overall, if the pricing is not aggressive, such a

product could still be an incremental sales booster for BMW. On a global basis, the 2-

series sedan (which was launched in other countries in 2014) comprised around one-third

of the sales of the 3-series. We therefore assume the new sedan can achieve monthly

sales of only around 2,000-2,500 units in 2016, albeit still incrementally positive for BMW

Brilliance’s new-car sales.

BMW: retail sales volume by model

2009 2010 2011 2012 2013 2014 1H15

1-series 216,944 196,004 176,418 226,829 213,611 190,033 86,029

2-series - - - - - 41,038 64,285

3-series 397,103 399,009 384,464 406,752 500,332 480,214 219,369

4-series - - - - 14,763 119,580 79,351

5-series 175,983 238,454 332,501 359,016 366,992 373,053 174,228

6-series 8,648 5,848 9,396 23,193 27,687 23,988 11,393

7-series 52,680 65,814 68,774 59,184 56,001 48,519 19,324

X1 8,499 99,990 126,429 147,776 161,353 156,471 58,226

X3 55,634 46,004 117,944 149,853 157,303 150,915 66,444

X4 - - - - - 21,688 28,146

X5 88,851 102,178 104,827 108,544 107,231 147,381 85,983

X6 41,667 46,404 40,822 43,689 36,688 30,244 22,125

Z4 22,761 24,575 18,809 15,249 12,866 10,802 4,576

BMW i - - - - 311 17,793 12,562

Total 1,068,770 1,224,280 1,380,384 1,540,085 1,655,138 1,811,719 932,041

Source: company

With respect to the new X1 SUV, we believe it will help BMW Brilliance recapture market

share in the SUV market. The average X1 SUV has sold around 3,300 units/month as at

November 2015 YTD, and we see this trend continuing until the launch of the X1 SUV

facelift. Therefore, even though the new X1 SUV model may be able to achieve a higher

level of sales of 4,500 units/month by the end of 2016, the average monthly sales in 2016

would still be just 3,625 units/month, an increase of 6% YoY on our forecasts. However, we

see the X1 SUV’s unit sales rising in 2017 to post 24% YoY sales volume growth.

Overall, with the company’s low base in 2015, we see a good chance that BMW Brilliance’s

fortunes will turn around in 2016 and 2017, and that the company will achieve new car

sales growth of 15% YoY in 2016 and 11% YoY in 2017, on new model launches. Based on

2-series unlikely to

replace the position of

the 3- and 5-series

More significant

contribution from X1

SUV in 2017E

84


the YTD November sales number, BMW is still one of the leading luxury brands in China,

even though we expect Beijing Benz to match its sales closely in 2016.

Product pipeline of luxury cars Company Model Segment Launch date

Brilliance BMW

3-series (Facelift) Sedan Sep-2015

2-series Sedan 2016

X1 SUV 2016

FAW VW Audi Q7 SUV Dec-2015


Beijing Benz

C350eL Sedan (Hybrid EV) Nov-2015

GLC SUV 2016


Shanghai GM Cadillac ATS-L (Facelift) Sedan Oct-2015

CT6-40T Sedan end of 2015

Chery Jaguar Land Rover Discovery Sport SUV Nov-2015

Source: various media

BMW Brilliance: 2-series Active Tourer BMW Brilliance: X1 SUV (new model)

Source: company

Source: company

November 2015 YTD luxury brands sales in China

YTD Nov sales units YTD YoY %

FAW VW Audi 463,378 0.6%

Brilliance BMW 262,645 2.6%

Beijing Benz 220,700 93.4%

Volvo Car 58,956 354.7%

SAIC GM Cadillac 47,444 42.1%

Dongfeng Infiniti 22,603 2164.8%

Source: CAM

Brilliance: new vehicle sales forecasts

2015E 2016E 2017E

BMV JV sales volumes 290,000 332,000 370,000

3-series 98,000 105,000 108,000

5-series 151,000 156,000 160,000

X1 41,000 44,000 54,000

2-series - 29,000 30,000

1-series - - 18,000

Shenyang Automotive(Jinbei minibuses)sales volume 64,000 59,000 57,000

Haise minibuses 55,000 50,000 47,000

Granse minibuses 9,000 9,000 9,000

Huasong 7 MPV 3,000 6,000 7,000


85


Market share may flow to Benz

With many top-tier cities having imposed licence restrictions, we expect car buyers to

favour luxury brands (such as BMW, Benz and Audi) over mid-range brands (such as

Korean and Japanese brands) due to the expensive new car licence-plate fee and as the

number of new licences are limited. As a result of rising disposable incomes in China and

more luxury brands launching more affordable entry-level models, we believe mid-range

cars will be squeezed. Such a situation is evidenced by the consistently strong, mostly

double-digit, unit sales growth in the luxury segment in China (see the chart below). This

was true even amid the slowdown in overall new car sales growth in China in 2015, and

even when overall sales declined for some months.

Even though this is a positive factor for BMW Brilliance, the company is currently up

against strong competition from Beijing Benz. Compared to the start of 2014, when BMW

Brilliance’s monthly sales volume was double that of Beijing Benz, in November YTD 2015,

Beijing Benz sales volume was already 93% of BMW Brilliance’s, and we expect Beijing

Benz to overcome BMW Brilliance to become the second most popular luxury brand in

China (the No.1 is likely still FAW Audi).

China new car licence restrictions in different cities Luxury brand sales in China

Cities Plate issuance through Implementation date Quota (annual)

Shanghai Bidding 1994 132,000

Beijing Lottery 12/23/2010 150,000

Guiyang Lottery 7/11/2011 24,000

Guangzhou Bidding and lottery 6/30/2012 120,000

Tianjin Bidding and lottery 12/15/2013 100,000

Hangzhou Bidding and lottery 3/25/2014 80,000

Shenzhen Bidding and lottery 12/29/2014 100,000

Source: Local governments, various media reports

Source: CAM

Luxury brands: combined market share in 2015 Luxury brand breakdown

Source: CAM

Source: CAM

Positive sentiment from purchase tax reduction

On 29 September 2015, the China State Council announced a series of supportive policies

for the auto sector, including a purchase tax reduction from 10% to 5%. Such measures

should help boost overall new car sales in China, which we now forecast to increase by

12% YoY in 2016 (previously 4% YoY) from 7% YoY in 2015. However, Brilliance not likely

to see much of a benefit from the purchase tax reduction, as only a small proportion of its

car models have engine sizes smaller than 1.6L. Nevertheless, we expect the policy to

help partly boost sentiment for the overall China Auto Sector.

(20%)

0%

20%

40%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

(YoY %)(Sales unit)



0%

5%

10%

15%

20%

25%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

(Luxury brands)

Luxury brands' overall market share in China (LHS)

German brands' overall market share in China (RHS)

(German brands)

0%

20%

40%

60%

80%

100%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Beijing Benz Brilliance BMW FAW VW Audi

Dongfeng Infiniti SAIC GM Cadillac Volvo

(Breakdown of luxury brands, sales %)

Beijing Benz is catching

up fast

Brilliance should benefit

the least from the

purchase tax reduction

86


Brilliance BMW: YTD 2015 sales by engine size

3-series engine size <=1.6L 6.3%


5-series engine size <=1.6L 0.0%


X1 engine size <=1.6L 0.0%


Brilliance BMW total engine size <=1.6L 2.1%


Source: CAM Note: Only 2L and 3L engine size model available for 5-series and only 2L engine size model for X1

Lower YoY impact on increasing dealer margins

After experiencing weak auto demand in 2H14, which led to many dealers in China having

to sell at a loss to clear the previous high inventory, dealers in China joined forces to

bargain for better rebates and a more frequent review of sales targets and incentive

payments by OEMs to dealers. So far, the alliance has been successful in terms of

bargaining for better margins from OEMs, such as BMW, Jaguar Land Rover (JLR) and

Audi, and a more frequent review of sales targets on a quarterly basis (previously annual

basis).

In BMW’s case, it paid CNY5.1bn in cash rebates to dealers in 2014. However, we believe

such an impact will diminish in 2016, as BMW and the other OEMs are likely to revise

down their sales targets and control their production to better fit demand – which we

believe was the case in 2H15. We believe the OEMs are now more concerned about ASP

and margin erosion rather than chasing volume growth. Therefore, we think it unlikely that

BMW will offer additional rebates to dealers in 2016, as it did in 2015 and 2014.

Negotiations between BMW and its Chinese dealers

Date Events

2H14 China auto market deteriorated unexpectedly in 2H14 and BMW missed the chance to adjust its yearly sales targets which caused most of the BMW dealers to pile up around 2-3 months of inventory (usually should be around 1.5 months). In order to gain the rebates offered by BMW, dealers started to cut prices to meet what they saw as unachievable sales targets.

Late - Nov, 2014 Some BMW dealers started to take the lead and contacted other dealers, and eventually they formed an alliance.

Early - Dec, 2014 The dealer alliance had 2 meetings with BMW, during which both sides preliminarily agreed on a subsidy of less than CNY6bn.

Late - Dec, 2014 The two parties finalised a subsidy of CNY5.1bn.

17 April, 2015 BMW China and BMW Brilliance issued a circular to their dealers to reduce sales targets for 2Q15. Further, they announced that dealers achieving 85% of their sales targets would also be entitled to rebates, while those achieving equal to or more than 90% of their sales targets would get bonus rebates.

Early - July, 2015 BMW China released more details of the rebate policy for 1H15. For imported models, dealers that achieve 100% of their sales targets are granted CNY16,000/vehicle sold, while for localised models, dealers that achieve 100% of their sales targets are granted CNY18,000/vehicle sold. For dealers that do not achieve 100%, but were above 85% of their sales target, they still get a rebate but it is lower.

Source: Caxin, Sina

CNY depreciation only having a slight effect

According to management, the company has already hedged most of its currency

exposure and would not incur any forex gains or losses over the next 3 years. On the

income statement, it may record a lower contribution from BMW Brilliance as the cost of

BMW Brilliance would be recorded in Euros, while it receives revenue in CNY. Daiwa’s

chief economist, Kevin Lai expects the CNY to depreciate further by 4.8% against the Euro

by the end of 2016. However, due to hedging, we believe BMW Brilliance’s contribution

should not be affected significantly by such currency movements.

Financial analysis

Relatively strong financials, but net margin should fall in coming years

Between 2010 and 2014, Brilliance’s net gearing ratio declined gradually from 50% to 12%.

We believe one of the major reasons for this was that BMW Brilliance started to pay

dividends to Brilliance China in 2011: CNY200m in 2011, CNY500m in 2012, CNY1,000m

in 2013 and CNY1,250m in 2014. We expect this payout policy to continue, as BMW

Brilliance’s business is approaching maturity and it is capable of financing its own opex

We do not expect any

higher rebates given

current weak auto sales

Likely no near-term

impact on the bottom

line from CNY

depreciation

Low net gearing

compared with peers

indicates strong

financials

87


and capex. We consider Brilliance’s current overall financials as healthy, due to its lower-

than-average net gearing ratio compared with its China peers and overseas counterparts.

Brilliance: net gearing ratio

Source: company, Daiwa forecasts Note: net gearing ratio calculated as (net debt/equity)

Global major auto OEMS: net debt-to-equity ratio comparison (2010-14)

2010 2011 2012 2013 2014

China H-share listed 11 8 13 28 22

China A-share listed 3 3 15 27 21

US net cash net cash net cash net cash net cash

Europe net cash 25 26 119 55

Japan 81 64 63 66 62

Korea 59 47 32 21 23

Global 26 20 22 41 30

Source: Bloomberg

Since 2009, we have observed a general uptrend in Brilliance BMW’s net profit margin,

which reached an all-time high of 11.7% in 2014. However, we believe the 2015 net profit

margin is likely be adversely affected by the increase in rebates demanded by BMW

Brilliance’s dealers and general pressure on new-car sales in China. We expect this effect

to last until end-2017. We forecast Brilliance BMW’s net-profit margin to fall to 7.7% in

2015-17.

BMW Brilliance: net margin (2009-17E)


Brilliance started to pay a dividend in 2013, and its payout ratio was 12% in 2013 and 8%

in 2014. We believe a payout ratio ranging from 10-15% is a reasonable assumption, and

now assume payout ratios of 17% in 2015 and 12% in both 2016 and 2017.

6%

50%

36%

20%

15%12%12% 13%

11%8%

0%

10%

20%

30%

40%

50%

60%

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Net gearing Daiwa forecasts

4.8%

8.3%

9.2%

8.3%

9.4%

11.7%11.7%

7.7% 7.7% 7.7%

4%

6%

8%

10%

12%

14%

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Net margin Daiwa forecasts

But net profit margin

might have peaked in

2014

We expect payouts of

17% in 2015 and 12% in

2016-17

88



Downside expected

The stock is currently trading at 2016E PER of 11x based on our earnings forecasts, in line

with its past-3-year average. We see more downside from the current valuation as we

believe BMW Brilliance is currently facing much more competition from Beijing Benz than it

was before. Also, BMW Brilliance is less likely to benefit from the purchase-tax reduction,

and therefore investors are likely to focus more on local brands in 2016.

Our 2015-17E EPS are 16-25% lower than those of the Bloomberg consensus and,

therefore, we expect more downward revisions to earnings forecasts, which could create

negative sentiment on the stock. We believe the market is too optimistic about BMW

Brilliance’s planned new-model launches.

Looking for a better entry point

We initiate coverage of Brilliance with an Underperform (4) rating and 12-month target

price of HKD8.90, based on a target PER of 10x on our 2016E EPS, which represents a

10% discount to the stock’s past-3-year consensus average. We see such a valuation as

appropriate, given the competition from Beijing Benz and Brilliance’s relatively

unaggressive model launch plans for 2016.

Brilliance: 12-month-forward PER (2012–2015)


Risks to our call

Better-than-expected revenue from self-owned brands

Brilliance’s self-owned brands have been mostly engaged in the manufacture and sale of

minibuses, which have been loss-making for the past 3 years. As the data shows that the

cross-vehicle segment (sales volume) has also been shrinking over the same period, we

now forecast a mild loss for this segment in 2015-17. However, if there is strong demand

for the company’s minibuses and/or its MPV Huasong, this could lead to a reduction in the

net loss for Brilliance, and thus upside to our earnings forecasts.

Less competition within the sector

We believe BMW Brilliance’s major competitors, such as FAW Audi and Beijing Benz, may

now be more eager to penetrate the entry-level segments, which is evidenced by the

introduction of the 2-series by BMW Brilliance, the GLC by Beijing Benz, and the A3 facelift

and A4 by FAW Audi, etc. Given that a certain proportion of the entry-level segments

segment in China are already occupied by some of the domestic brands, the entry of these

foreign brands is likely to stir up a new round of competition, which may eventually lead to

price cuts and margin erosion for Brilliance. However, there is a chance that the launch of

new models by competitors could slow down due to concerns on demand for new cars in

China. This would help BMW Brilliance better uphold its gross margin, in our view.

6

8

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18

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-12

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2

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3

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-15


(PER)

Negatives from

competition and lack of

benefit from purchase

tax reduction don’t look

priced in

We initiate coverage with

an Underperform (4)

rating

89


Better-than-expected benefits from supportive policies

On 29 September, the State Council announced a series of supportive policies for the auto

sector, including the purchase-tax reduction from 10% to 5%. We expect this to only

slightly boost overall new car-sales in China. However, if the policy is more effective than

we expect, this could lead to upside risks to our forecasts, despite Brilliance BMW’s sales

being the least likely to benefit versus peers (in terms of sales volume and models), given

its limited exposure to models with engines of 1.6L or less.

Supportive policies may

pose upside risk

90


Company background

A leading luxury car OEM in China

Riding on BMW

Listed in Hong Kong in 1999, Brilliance is an automotive manufacturer in China. Through

its subsidiaries, associated companies and joint ventures in China, the group manufacture

and sell minibuses and automotive components.

In 2003, the group established a joint venture with BMW, BMW Brilliance Automotive Ltd.

(BMW Brilliance), to produce BMW 3-series and 5-series sedans in China. BMW Brilliance

commenced the production and sale of the BMW X1 SUV in early-2012. At the end of

2014, BMW Brilliance introduced the very first China-produced BMW new energy vehicle,

the 5-series long-wheelbase plug-in hybrid model, BMW 530Le, in China. Further, BMW

Brilliance plans to introduce BMW 2-series sedans and the X3 SUV in order to broaden its

product range in the near future.

Through its subsidiaries, Brilliance is engaged in the production and sale of minibuses in

China under the brand Jinbei, with 3 separate platforms (Haise, Grand Haise, and

Granse). A new premium MPV model was launched at the end of 2014 under a new brand,

Huasong.

In addition to auto manufacturing, Brilliance is engaged in the manufacture of diesel

engines and gasoline engines for use in minibuses, sedans, SUVs and light duty trucks

and automotive components, including window mouldings, strips, axles and stamped parts.

Brilliance: management profile

Management Profile

Mr Wu Xiao An Mr Wu has been the chairman of the board of directors of the company since 18 June 2002, and an executive director since 11 January 1994. Mr Wu has over 20 years of experience in the automotive industry and is primarily responsible for the overall strategic planning and business development of the group.

Mr Qi Yumin Mr Qi has been an executive director, the president and the chief executive officer of the company since 6 January 2006. From 1982 to 2004, Mr Qi held various positions in Dalian Heavy Industries Co., Ltd., including chairman and general manager. From October 2004 to December 2005, he was the vice mayor of Dalian municipal government. He was qualified as a senior engineer professor level) by the Personnel Department of Liaoning Province in December 1992.

Mr Wang Shiping Mr Wang has been an executive director of the company since 16 September 2005. Mr Wang was previously the deputy head engineer of Radiator Branch Company of China First Automobile Group Corporation, the general manager of FAW-ZEXEL Air-Condition Branch Company, the deputy general manager and director of Strategic Planning of Fawer Automobile Part Co., Ltd. Mr Wang is a senior engineer (researcher) in corporate management.

Mr Tan Chengxu Mr Tan has been an executive director of the company since 10 November 2010. Mr Tan has been appointed as a director and the vice president of Huachen since March 2010, and a director and the vice chairman of Shenyang Automotive since June 2011. Mr Tan is a senior engineer.

Mr Qian Zuming Mr Qian has been the chief financial officer of the company since 1st July, 2008. Mr Qian has been appointed as an assistant to the president of Huachen since December 2009 and a director of Shenyang Automotive since January 2010. Mr Qian is a fellow of the Institute of Financial Accountants of the United Kingdom.

Ms. Lisa Ng Ms Ng has been a senior vice president of the company since October 2006, with primary responsibilities in investor relations, capital market transactions, and financial reporting review. In addition, she is also the company secretary to the board of directors and audit and compliance committee of BMW Brilliance. Ms Ng is a qualified Chartered Accountant with the Canadian Institute of Chartered Accountants.

Ms Huang Yu Ms Yu is currently the vice president and chief accountant of the company. She is a certified public accountant of the PRC and also a member of the Association of Chartered Certified Accountants. Ms Huang is also qualified to be a lawyer in China.

Mr Wang Tao Mr Tao has served as general manager of Shenyang Automotive since February 2012.

Source: Company

A major player in China’s

luxury car segment that

is heavily reliant upon

BMW

91


Brilliance: development milestones

Source: Company

Brilliance: organisational chart

Source: Company

Year Event

1991 The company was initially established to hold a 51% interest in Shenyang Automotive, a Sino-foreign equity joint venture enterprise under the law of the PRC on 22 July 1991. Shenyang Automotive produced two principal types of minibuses under the JinBei brand, a version of Toyota's fourth generation 15-seat Hiace Minibus based on vehicle kits imported from Toyota, and a domestically designed 11-seat minibus based on domestic components.

1996 Formal launch of Shenyang Automotive's Mid-priced Minibus, which later became the flagship products of Shenyang Automotive.

1998 Established Xing Yuan Dong, a wholly owned subsidiary of the company, to centralise and consolidate the purchasing and sourcing of spare parts and automotive components for Shenyang Automotive so as to reduce production costs and optimise profits.

1999 Shares were listed on the Stock Exchange of Hong Kong Limited.

2000 The company acquired a 50% equity interest in Shenyang Xinguang, a manufacturer of gasoline engines for use in passenger vehicles.

2001 The company entered into a technical assistance agreement with BMW relating to technical support and training to be provided to Shenyang Automotive in connection with the commencement and production of the "Zhonghua" sedans.

2002 Huachen Automotive Group Holdings Company Limited became the substantial shareholder of the Company by acquiring a 39.45% interest in the company from the Chinese Financial Education Development Foundation.

2003 The company, through its indirectly owned subsidiary, entered into a joint venture contract with BMW to produce and sell BMW sedans in the PRC. The company's effective interest in the joint venture was approximately 40.5%.

2004 Commenced production of the BMW 3-series and 5-series sedans based on domestic and imported components.

2009 Completed disposal of Zhonghua sedan business by Shenyang Brilliance JinBei Automobile Co., Ltd. to Huachen Automotive Group Holdings Company Limited.

2010 The group entered into agreements for further acquisition of a 1% equity interest in each of Shenyang XinJinBei Investment and Development Co., Ltd. and Shenyang JinBei Automotive Industry Holdings Company Limited. With completion of the acquisition, the effective interest of the Company in BMW Brilliance increased to 50%.

2011 The group entered into an agreement for the acquisition of a 9.9% equity interest in Shenyang Brilliance JinBei Automobile Co., Ltd. Upon completion, Shenyang Automotive directly and indirectly owned 60.9% of the company.

2012 BMW Brilliance Automotive Ltd. commenced the production and sale of BMW SUVs in the PRC.

2013 Listing of and dealings in the shares of Xinchen China Power Holdings Limited on the Main Board of The Stock Exchange of Hong Kong. Following the listing of Power Xinchen, the indirect shareholding of the Company in Power Xinchen fell from 42.544% to 31.908%.

2014 The shareholders of BMW Brilliance Automotive Ltd. extended, four years before the expiry of the original agreement, the terms of the BMW Brilliance equity joint venture agreement by another ten years to 2028. BMW Brilliance introduced the very first China-produced BMW new energy vehicle, the 5-series long-wheelbase plug-in hybrid model.

2015 Brilliance-BEA Auto Finance Co., Ltd commenced business following approval by local regulators in the PRC in April 2015. This joint venture will offer a number of products and services, with an initial focus on financing dealers for the purchase of automobiles and providing car loans to individuals and companies.

Brilliance China Automotive (1114.HK)

Huachen Automotive Group

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92


BMW Brilliance: 5-series sedan BMW Brilliance: 530Le hybrid sedan

Source: Company

Source: Company

BMW Brilliance: X3 SUV

Source: Company



What's new: We still see a gloomy earnings-growth outlook for Great Wall

Motor (GWM) in 2016. Its market share of SUVs (accounting for more than

80% of its sales volume YTD in 2015) has declined since January 2015,

and we expect the decline to continue in 2016. We also think GWM will

face margin pressure going into next year, like its peers.

What's the impact: We attribute GWM’s declining share of the SUV

segment to its unsuccessful pricing strategy and the poorly received launch

of its H8 model, which was delayed by more than a year. As the foreign

brands have been offering price discounts as a result of weak car sales in

China since mid-2015, the difference in the price of the H8 and similar

SUVs (ie, the Dongfeng Honda CRV and FAW Mazda CX7) has narrowed

significantly, affecting GWM’s sales. And this situation looks likely to

continue in 2016.

With the unsuccessful upgrading of its brand in general, we have low

expectations for the launch of its H7 in 2016, for which we estimate

average monthly sales of 2,500 units. As a result, we expect GWM to have

to rely heavily on sales of its H6 and H2 models in 2016. We are also not

particularly inspired by GWM’s bid to differentiate itself via its Blue and Red

badge strategy for each model (ie, a sporty version and standard version

for each of its models). With more new SUV models coming onto the

market in 2016, and the little confidence we have in GWM’s badge strategy,

we believe 2016 will be a weak year for GWM.

What we recommend: We reiterate our Underperform (4) rating but lower

our 12-month TP to HKD8.40, from HKD8.90, after rolling forward our

valuation basis to a 2016E PER of 7.5x, set at a discount of about 15%

(previously 10%) applied to the stock’s past 3-year-average PER of 9x

(previously: 8.1x on our average 2015-16E EPS) to factor in our concerns

about a continuous decline in market share. We view our target PER as

reasonable, as we expect GWM shares to be derated in 2016.

How we differ: Our 2015-17E EPS are 7-15% lower than consensus, as

we think GWM’s product pipeline is relatively unexciting compared to its

peers. The downward margin trend is also likely to continue over our

forecast period.

4 January 2016

Great Wall Motor

Market share declining, margin erosion

Share of SUV market likely to decline in 2016 on thinner pipeline

GWM could suffer margin compression like SUV peers

Reiterate Underperform (4) rating; long-term derating expected



Great Wall Motor (2333 HK)


Share price (28 Dec): HKD9.14 | Up/downside: -8.0%

Kelvin Lau(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]






40

61

83

104

125

6

10

13

17

20



Great Wall (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Baoding Great Wall Asset (56.0%)



Revenue (m) 69,968 77,482 87,264


Net profit (m) 8,497 8,624 8,956


EPS change (%) 5.7 1.5 3.8

Daiwa vs Cons. EPS (%) (6.5) (15.0) (14.8)

PER (x) 8.2 8.1 7.8


DPS 0.282 0.286 0.297

PBR (x) 1.8 1.5 1.3

EV/EBITDA (x) 5.7 5.5 5.2

ROE (%) 23.3 20.3 18.4

94

Great Wall Motor (2333 HK): 4 January 2016



Growth outlook GWM: net profit

For 2015, we forecast only 6% YoY net profit growth for

GWM, as its net profit margin has continued to deteriorate

due to persistent price cuts. We forecast growth of only 1%

YoY in 2016 and 4% YoY in 2017, lower than the revenue

growth of 11-13%, as we think strong competition in the

China SUV market will lead to margin deterioration.


Valuation GWM: 1-year forward PER (x)

The stock is trading at a 2016E PER of 8.1x, lower than its

past-3-year average of 9x. However, we now see more

downside as we expect GWM to be derated on a lack of

new products in the pipeline, and given that the launch of

the H8 has not been well received. We believe GWM has

passed the sweet spot and therefore expect it to trade at a

discount to its past 3-year average. We lower our 12-month

TP to HKD8.40, from HKD8.90, after rolling forward our

valuation basis to a 2016E PER of 7.5x, set at a discount

of about 15% (from 10%) applied to the stock’s past-3-year

average of 9x (previously: 8.1x on our average 2015-16E

EPS) to factor in our concerns about a continuous decline

in market share. We view our target PER as reasonable,

as we expect GWM shares to be derated in 2016.


Earnings revisions GWM: Bloomberg consensus EPS forecast revisions

Our 2015-17 EPS forecasts are 7-15% lower than the

Bloomberg consensus, as we think GWM’s product

pipeline is relatively unexciting, while its competitors are

expected to aggressively launch new models in 2016.

Accordingly, we expect further downward consensus

revisions to GWM’s 2015-17E EPS in the near term.

Source: Bloomberg

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95


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales volume (unit) 363,000 463,000 621,000 771,000 733,000 803,000 855,000 945,000

Sales volume growth (%) 73.2 27.3 34.3 24.0 (4.9) 9.6 6.4 10.6

SUV (unit) 137,000 147,000 280,000 420,000 523,000 662,000 737,000 843,000

Sedan (unit) 123,000 188,000 199,000 205,000 87,000 46,000 37,000 30,000

Pick up truck (unit) 99,000 122,000 137,000 136,000 122,000 95,000 80,000 72,000

Others (unit) 5,000 6,000 6,000 9,000 1,000 0 0 0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Revenue - New car sales 21,725 28,178 40,728 53,796 59,346 68,952 76,285 86,047

Revenue - After-sales 761 1,212 1,974 2,674 3,034 3,443 3,908 4,299

Other Revenue (311) (353) (1,137) (1,743) (2,062) (2,427) (2,711) (3,081)

Total Revenue 22,175 29,037 41,565 54,727 60,317 69,968 77,482 87,264

Other income 35 47 74 233 352 408 452 509

COGS (17,298) (22,594) (31,562) (40,538) (45,252) (53,646) (60,326) (68,805)

SG&A (1,944) (2,477) (3,400) (4,643) (5,907) (6,870) (7,608) (8,569)


Operating profit 2,967 4,014 6,678 9,779 9,510 9,860 9,999 10,399

Net-interest inc./(exp.) 22 48 106 87 76 36 49 47

Assoc/forex/extraord./others 52 68 57 53 54 290 290 290

Pre-tax profit 3,041 4,131 6,841 9,920 9,640 10,186 10,338 10,736

Tax (214) (620) (1,119) (1,688) (1,599) (1,689) (1,715) (1,781)

Min. int./pref. div./others (126) (84) (30) (8) 0 0 0 0



EPS (reported)(CNY) 0.329 0.406 0.624 0.901 0.881 0.931 0.945 0.981

EPS (adjusted)(CNY) 0.329 0.406 0.624 0.901 0.881 0.931 0.945 0.981


DPS (CNY) 0.167 0.100 0.190 0.273 0.267 0.282 0.286 0.297

EBIT 2,967 4,014 6,678 9,779 9,510 9,860 9,999 10,399

EBITDA 3,516 4,713 7,622 10,935 11,183 11,921 12,496 13,341

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 549 700 944 1,155 1,672 2,061 2,496 2,942

Tax paid (917) (1,473) (2,602) (4,352) (4,999) (1,689) (1,715) (1,781)

Change in working capital (147) 303 (2,278) (288) (3,569) (1,340) (1,625) (2,523)

Other operational CF items (105) (94) 1,100 877 1,901 (70) (70) (70)

Cash flow from operations 2,421 3,567 4,005 7,313 4,644 9,148 9,425 9,304

Capex (2,602) (3,343) (4,370) (6,204) (6,636) (7,036) (7,366) (7,366)

Net (acquisitions)/disposals (262) (1,535) (177) (575) (632) 0 0 0

Other investing CF items 974 459 1,029 1,591 1,701 647 453 317

Cash flow from investing (1,890) (4,418) (3,518) (5,188) (5,567) (6,389) (6,913) (7,049)

Change in debt 0 5 1 182 (14) 0 0 0


Dividends paid (274) (552) (917) (1,729) (2,506) (2,434) (2,572) (2,610)

Other financing CF items (764) 4,217 264 (95) 299 0 0 0

Cash flow from financing (1,038) 3,670 (652) (1,641) (2,220) (2,434) (2,572) (2,610)


Change in cash (506) 2,819 (166) 484 (3,143) 325 (60) (355)

Free cash flow (181) 225 (365) 1,109 (1,992) 2,112 2,059 1,938

96




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 962 3,775 3,602 4,074 926 1,251 1,191 836

Inventory 2,104 2,777 2,695 2,764 3,470 3,832 4,309 4,915




Fixed assets 7,313 10,443 14,009 18,646 22,548 27,162 31,682 35,767


Other non-current assets 448 447 497 487 669 739 809 879

Total assets 23,698 33,135 42,569 52,605 61,345 69,652 77,877 88,374

Short-term debt 0 0 0 182 0 0 0 0


Other current liabilities 3,608 4,702 6,280 7,406 7,913 9,076 10,051 11,320


Long-term debt 0 0 0 0 0 0 0 0

Other non-current liabilities 1,410 1,400 1,607 1,757 1,682 1,682 1,682 1,682


Share capital 1,095 3,042 3,042 3,042 3,042 3,042 3,042 3,042



Minority interests 385 284 129 12 67 66 66 65


EV 69,107 66,269 66,316 65,904 68,905 68,510 68,499 68,784

Net debt/(cash) (962) (3,775) (3,602) (3,892) (926) (1,251) (1,191) (836)

BVPS (CNY) 3.048 1.834 2.357 3.067 3.665 4.329 4.992 5.688

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. 30.9 43.1 31.7 10.2 16.0 10.7 12.6

EBITDA (YoY) n.a. 34.0 61.7 43.5 2.3 6.6 4.8 6.8

Operating profit (YoY) n.a. 35.3 66.4 46.5 (2.8) 3.7 1.4 4.0

Net profit (YoY) n.a. 26.9 66.1 44.5 (2.2) 5.7 1.5 3.8

Core EPS (fully-diluted) (YoY) n.a. 23.4 53.7 44.5 (2.2) 5.7 1.5 3.8


EBITDA margin 15.9 16.2 18.3 20.0 18.5 17.0 16.1 15.3

Operating-profit margin 13.4 13.8 16.1 17.9 15.8 14.1 12.9 11.9


ROAE 53.9 25.6 29.8 33.2 26.2 23.3 20.3 18.4

ROAA 22.8 12.1 15.0 17.3 14.1 13.0 11.7 10.8

ROCE 57.1 29.3 34.5 39.2 30.8 27.0 23.5 21.3

ROIC 29.2 30.1 35.7 38.5 28.0 23.2 20.2 18.2

Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash



Current ratio (x) 1.2 1.4 1.3 1.4 1.4 1.4 1.4 1.4



Free cash flow yield n.a. 0.3 n.a. 1.6 n.a. 3.0 2.9 2.8

Company profile

Great Wall Motor is the largest manufacturer of SUVs and pickups in China. In 2014, the company

sold 733,000 vehicles (71% SUVs, 17% pickups, and 12% sedans), derived 95% of its revenue

from new car sales and 5% from after sales, and generated 5% of its revenue and 7% of its sales

volume from export sales.

97


Weak outlook for 2016

Weak product pipeline, margin erosion

Thin pipeline in 2016

In 2H15, both the domestic China manufacturers and foreign JVs have launched new SUV

models, with the most prominent being the Baojun 560 from SAIC GM Wuling and the

Tucson from Beijing Hyundai. GWM, in comparison, launched only different versions of its

H5 and H6 coupe SUVs. In addition, sales of the H8, which was launched in April 2015

(having been delayed by more than a year), have not ramped up well, with average

monthly sales of about 1,000 units/month YTD, lower than company’s initial target of 4,000

units/month.

GWM’s weak sales volume is likely to continue in 2016, as it plans to launch only 3 new

models – a facelift of the H8, a compact SUV that is smaller than its current H2, and

potentially the H7, which we may not be that popular as it is likely to be more expensive

than the H6. GWM is also launching a “Blue badge” version (sporty version) of the H2 and

a “Red badge” (standard version) of the H6 Coupe, which are only variants of their

respective current models.

GWM plans to launch a “Blue badge” and “Red badge” version of each of its models (we

refer to this as the “Blue/Red badge” strategy), where the Blue badge features a sportier

design and the Red badge is a standard version aimed at the mass market. The sales

network will be split between the Blue and Red badges. We don't see this strategy as

being incrementally positive for GWM, as we don't expect much difference between the

two badges. Therefore, we expect consumers to just go for the cheaper version, rendering

the strategy ineffective. Also, dividing the sales network could imply higher sales expenses.

GWM: product pipeline (2H15 - 2016)

Model Segment Launch

Facelift of C30-Classic* Sedan Nov-2015 Red badge version of Haval H1* SUV Dec-2015 Haval H7 SUV 2016 A new SUV smaller than H2 SUV 2016 Haval H2 Blue badge SUV 2016 Haval H6 Coupe Red badge SUV 2016 Facelift of H8 SUV 2016

Source: Company Note: *launched already

Losing share in the SUV market

In November 2015 YTD, SUV sales in China grew by 54% YoY, driven by strong consumer

demand and new model launches. However, GWM’s SUV sales for the same period rose

by only by 35% YoY, due to weak sales of new models, as mentioned previously. As such,

its share of the China SUV market has shrunk, from 14% in January 2015 to 10% in

November. Given GWM’s lack of exciting new models in its pipeline, we expect its SUV

sales in 2016 to rely on the H6 again (sales volume growth of only 16% YoY in January-

November 2015).

The H6 was launched in August 2011, more than 4 years ago, and although it has gone

through several facelifts since then, we expect sales growth for this model to slow in 2016.

As such, we expect 2016 sales volume for this model to grow by 10% YoY, and for GWM’s

total 2016 SUV sales volume to grow by 6% YoY. Both of these numbers are significantly

lower than our 2016 growth estimate of 33% YoY for the overall China SUV market.

Unexciting 2016 pipeline

We don't have

confidence in GWM’s

“Blue/Red badge”

differentiation strategy

GWM’s market share

expected to continue

decreasing in 2016

98


GWM: monthly SUV sales YoY underperforming market GWM: SUV market share declining since January 2015


GWM: H2 peer comparison


(mm) Price range


new options Avg sales units per

month in 2015

GWM H2 4335 99-129 Jul-2014 Sep-2015 (new options) 13,042

BAIC Hyundai ix25 4270 117-187 Oct-2014 n.a. 8,028

GAC Honda Vezel 4294 128-190 Oct-2014 n.a. 9,492

Dongfeng Honda XR-V 4270 128-163 Nov-2014 n.a. 9,753

SAIC GM Chevrolet Trax 4248 110-164 Apr-2014 Jul-2015 (new options) 3,845

Changan CS 35 4160 79-99 Jan-2014 Mar-2015 (Facelift) 14,241


GWM: H5/H6 peer comparison


(mm) Price range


new options Avg sales units per

month in 2015

GWM H6 4640 100-159 Oct-2012 May-2015 (Facelift) 29,037

GWM H5 4650 95-164 Nov-2014 n.a. 1,866

GAMC GS 5 4750 102-232 Jan-2013 n.a. 2,375 Dongfeng Honda CR-V 4585 180-250 Feb-2012 Apr-2015 (Facelift) 11,995 Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551

SAIC GM Wuling Baojun 560 4620 77-90 Jul-2015 n.a. 20,185


Margin erosion to continue

Since June 2015, the company has initiated several price cuts, from a CNY5,000 reduction

for the H2 to a CNY22,000 reduction for the H8. While the price cuts led to an early

recovery in sales volume, they also hurt the gross margin. In 3Q15 (based on PRC GAAP),

GWM’s gross margin declined by 3.1pp. This trend of lower prices is likely to continue for

the rest of 2015, as management has acknowledged that it would be difficult for customers

to respond positively to any price increases at this point.

The only way to alter this declining price trend would be to launch new variants or models

with higher prices. However, as the launches in 2016 have not been confirmed, we expect

the price cuts, and hence margin erosion, to continue to hurt GWM, resulting in a 1.2pp

drop in gross margin, to 22.1% in 2016E.

GWM: price cuts since 2H15

Model Type Price cut Price discount % in terms of MSRP Valid period

C30 Sedan CNY7,000 8.8-10.5% 27 June to 31 December 2015

C50 Sedan CNY7,000 7.5-8.8% 29 June to 31 December 2015

M4 SUV CNY7,000 9.0-10.8% 29 June to 31 December 2015

H1 SUV CNY5,000 6.0-7.3% 29 June to 31 December 2015



H8 SUV CNY22,000 10.9-8.6% 21 July 2015 to 31 March 2016

Source: Company

(20%)

0%

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80,000(YoY %)(Sales Unit)

GWM SUV monthly sales (LHS) GWM SUV sales YoY (RHS)China SUV sales YoY (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

GWM's Market share in China SUV

Price cuts and

increasing sales

expenses have led to

margin erosion, which

should continue

99


Tax-cut benefits may not stop derating

The State Council announced a tax cut for cars with engines smaller than 1.6L. The tax

rate was lowered from 10% to 5%, effective from October 2015 until the end of 2016. We

believe this is a tailwind for GWM’s sales volume, as it has higher exposure to PVs with

engine sizes smaller than 1.6L. For instance, from January until October 2015, 94% of

GWM’s unit sales came from smaller-engine cars, much higher than the market average of

68%. As such, we expect GWM to benefit more than peers from this tax-cut policy.

However, even though the share prices of most of the OEMs, including GWM, have risen,

partly on this positive catalyst, the October unit sales do not seem to show that GWM has

regained any market share.

October sales did not

show market-share

gains for GWM

100



Discount to past-3-year average reasonable

The stock is trading at a 8.1x 12-month forward rolling PER, lower than its past-3-year

average of 9x. We expect a derating and therefore apply a target PER of 7.5x set at a

discount of about 15% (from 10%) applied to the stock’s past-3-year average of 9x

(previously: 8.1x on our average 2015-16E EPS) to factor in our concerns about a

continuous decline in market share. As such, we now lower our 12-month TP to HKD8.40,

from HKD8.90. We reiterate our Underperform (4) rating on account of our 2015-17 EPS

forecasts being lower than the consensus by 7-15% due to what we see as a relatively

unexciting product pipeline.

In addition, we believe the proposed A-share placement is unlikely to go through, as

management seems unwilling to revise down the issue price from CNY14.39. Therefore,

we have excluded it from our modelling.

GWM: 1-year forward PER bands (x)


Risks

Better-than-expected sales of new models and ‘Blue/Red badge’ strategy

We have low expectations for GWM’s outlook in 2016, as we see the pipeline being

relatively thin and its new-model launches seem to have been unsuccessful so far. Also,

we have little confidence in its differentiation strategy for ‘Blue/Red badge’ models.

However, our forecasts could see upside if GWM’s sales performance were to beat our

expectations, which could be due to better-than-expected new-model sales, the ramp-up of

sales of existing models, or better-than-expected acceptance by customers of the

‘Blue/Red badge’ strategy.

Slower-than-expected margin decline

We forecast a 1.2pp YoY decline in the gross margin due to intense competition in the SUV

segment in 2016, and because of GWM’s continued loss of market share to foreign JVs.

However, there could be upside to our forecasts if the competition were milder than

expected or if the market’s perception of its models were better than expected, which could

lead to better unit sales and market-share gains.

4

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(PER)

Stock expected to derate

on weaker earnings-

growth outlook

We assume the A-share

placement won’t go

through

101


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Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,

Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

103


Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Ownership of Securities

For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationship

For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan

Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.

Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.

Investment Banking Relationship

Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa

Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures

Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK)

DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore

This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia

This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India

This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan

This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Phil ippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

https://daiwa3.bluematrix.com/sellside/Disclosures.action


http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf%20and%20http:/www.pse.com.ph/

104


Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany

This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States

This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa enti ty in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities

For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships

For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making

For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts

For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification

For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 63.9%

Hold** 21.3%

Sell*** 14.8%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law

(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory






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