Automobiles & components / Asia ex Japan 2 May 2012

China Auto Sector Six drivers beyond the inflection point

• NDRC, PBOC data, and our M2 growth forecast all suggest the sector is entering an upcycle • We see two short-term, two medium-term, and two long-term

growth drivers that could trigger earnings upgrades • Geely and Great Wall should benefit most from the six drivers How do we justify our view?

Dongfeng, Brilliance and Great Wall What we recommend benefiting the most from the drivers. Overall, we see Geely and Great Wall benefiting the most from the six Medium-term drivers (exports growth drivers, and believe their

and dealerships). Over the next medium-term earnings growth will Jeff Chung two years, we believe there will be be more sustainable than that for (852) 2773 8783 greater margin and earnings [email protected] the joint-venture names. Among the upgrades by the consensus for the joint venture brands, Brilliance quality domestic brands, such as remains in the fastest lane, with a Great Wall and Geely, than for the key catalyst being the launch of its What's new joint ventures, due to: 1) the quality In our view, China’s auto sales are new 3-series in 2H12. We are brands having more dealerships in downgrading our rating for approaching an inflection point and the fast-growing inland regions, 2) we expect a sector rerating in 2Q12. Dongfeng to Outperform (4) due to strong export sales, and 3) quality its sluggish CV sales and the risk of We see six driving forces that could domestic players, such as Geely and it launching cheaper models. lead to a rerating of stocks beyond Great Wall, being able to improve the sales inflection point, and their margins and brand image How we differ believe quality domestic brands will much faster, given that they are benefit most from an upcycle. coming from a low quality base. We believe quality domestic brands will stand out as a result of higher What's the impact Long-term drivers (diesel SUVs earnings growth due to the six Inflection point. We maintain our and self-owned technology). We drivers. 2012 forecast for 9.2% YoY passenger- believe diesel-powered SUVs will vehicle (PV) sales-volume growth, and grow in popularity in China due to Key stock calls expect an inflection point to be their fuel efficiency. Great Wall is New Prev. reached in 2Q12 on the back of: 1) among the few automakers offering Great Wall Motor (2333 HK) National Development Reform diesel PVs. For Geely, a possible Rating Buy Buy Target price HK$20.30 HK$15.60 Commission (NDRC) statistics technology transfer from Volvo Cars Up/downside S 21.1% showing that the decline in car prices (Not listed) and platform-sharing should narrow its drive-train Brilliance China Automotive (1114 HK) is easing, 2) a People’s Bank of China Rating Buy Buy (PBOC) survey suggesting pent-up technology gap with its global peers, Target price HK$11.40 HK$11.40 demand will emerge in 2Q12, and 3) which would improve both Up/downside S 35.4% better market liquidity, (earlier in the companies’ long-term competiveness Dongfeng Motor Group (489 HK) year we raised our M2 growth forecast, and earnings visibility. Rating Outperform Buy on the expectation that an upcycle was Target price HK$16.20 HK$16.90 China Auto Sector: six driving forces Up/downside S 5.9% on the way). GWM Geely Brilliance DFM GAC Geely Automobile (175 HK) Five-star safety model available Rating Outperform Outperform Short-term drivers (safety and Brand premium advantage Target price HK$3.30 HK$2.30 brands). We believe sector Exports >10% of total sales Up/downside S 14.2% consolidation will lead to high- Inland dealerships >49% of total Guangzhou Automobile Group (2238 HK) quality brands taking market share Diesel SUVs >20% total of Rating Underperform Underperform sales from low-quality brands, allowing Target price HK$7.60 HK$6.80 most joint ventures and a few Significant drive-train Up/downside T (11.7)% technology upgrades domestic brands to see higher-than- Total 5 4 2 2 2 Source: Daiwa forecasts average sector sales growth. We see Source: Daiwa Note: Please refer to page 3 for details.

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook PV sales and market-share forecasts We maintain our 9.2% YoY PV sales-volume forecast for Units 2011 2012E 2013E Domestic brands: sales volume 5,729,689 5,388,089 5,419,547 China for 2012, translating into 8%, 14% and 16% YoY JV brands: sales volume 8,768,358 10,453,842 13,095,774 growth for 2Q12, 3Q12 and 4Q12, respectively, or 2.7% China PV sales total 14,498,047 15,841,932 18,515,321 and 15.1% YoY growth for 1H12 and 2H12, respectively. YoY: China PV sales total 5.5% 9.3% 16.9%

We forecast the joint-venture brands’ sales volume to Great Wall: sales volume 462,679 547,809 650,773 rise by a CAGR of 20% for 2011-13, and that for Geely: sales volume 421,385 460,487 552,336 domestic brands decline at a compound annual rate of - Brilliance: sales volume 107,387 151,267 248,000 Dongfeng: sales volume 1,646,410 1,974,044 2,370,580 2.7%. Among the joint venture brands, Dongfeng and Guangzhou Auto: sales volume 722,005 869,233 1,080,000 Brilliance’s PV total sales volume will rise by 20% YoY Great Wall YoY growth (%) 27 18 19 and 41% YoY for 2012, while the growth for Great Wall Geely: YoY growth (%) 1 9 20 and Geely will be around 18% YoY and 9% YoY, Brilliance: YoY growth (%) 52 41 64 respectively, based on our forecasts. Dongfeng: YoY growth (%) 16 20 20 Guangzhou Auto: YoY growth (%) 0.3 20 24 Source: CAAM, Daiwa forecasts

Valuation Historical forward PERs vs. MSCI China Auto 10-year average

Historical forward PERs Brilliance and Geely are trading in similar PER ranges. Brilliance's bottom trading range has been hovering around the +1SD level, while Geely We prefer Brilliance due to its stronger short-term tends to be a highly volatile stock. 25 catalyst in the launch of its new 3-series BMW, which we expect to bring the PER back to the 20x range. For 20 the other three stocks, which are trading below the 15 +2SD = 15.0x MSCI China Auto past-10-year average, Great Wall +1SD = 12.8x 10 average = 10.5x offers the highest earnings visibility ahead of the sector -1SD = 8.2x 5 -2SD = 5.9x inflection point in 2Q12 from the six driving forces, and Great Wall's, Dongfeng's and Guangzhou Auto's PERs have been converging below the MSCI China Auto 10-year average. We believe Great Wall should benefit most from the six drivers when the sector enters an upcycle. we therefore apply a relatively high PER of 11x to the 0 stock. In our view, Geely’s valuation bottomed in 4Q11 3-Jul-11 3-Apr-12 3-Apr-11 3-Oct-11 3-Oct-10 3-Jun-11 3-Jan-12 3-Jan-11 3-Mar-12 3-Mar-11 3-Feb-12 3-Feb-11 3-Aug-11 3-Sep-11 3-Nov-11 3-Dec-11 3-Sep-10 3-Nov-10 3-Dec-10 and is now entering a rerating cycle due to solid organic 3-May-11 growth and a possible technology sharing from Volvo; 2238 HK 1114 HK 175 HK 489 HK 2333 HK we believe it deserves to trade at a PER of 11.3x, at a Source: Bloomberg, Daiwa forecasts premium to the sector average over the next 12 months.

Earnings revisions Consensus: 2012 EPS forecasts

Dongfeng’s and Guangzhou Auto’s Bloomberg- Rmb (EPS) consensus earnings forecasts have been consistently 1.5 trending down since 4Q11, while Great Wall and Geely 1.4 1.3 entered a positive rerating cycle in 1Q12. We are raising 1.2 our 2012 EPS forecasts for Geely and Brilliance by 4.5% 1.1 1.0 and 2.8%, respectively, and downgrading Dongfeng’s 0.9 and Guangzhou Auto’s by 5% and 1.9%, respectively. For 0.8 Great Wall, we are raising our 2012 revenue and EPS 0.7 0.6 forecasts by 2% and 0.5%, respectively. We have confidence in Great Wall’s strategy and believe it has a 1/1/2011 2/1/2011 3/1/2011 4/1/2011 5/1/2011 6/1/2011 7/1/2011 8/1/2011 9/1/2011 1/1/2012 2/1/2012 3/1/2012 4/1/2012 competitive edge in diesel SUVs. Our new forecast for 10/1/2011 11/1/2011 12/1/2011 GWM DFM Brilliance Geely GAC 2012E EPS is 9% higher than that of the Bloomberg consensus. Source: Bloomberg, Daiwa

- 2 - China Auto Sector 2 May 2012

Table of contents

Inflection point ahead ...... 4 Growth driver No.1 ...... 6 Growth driver No.2 ...... 8 Growth driver No.3 ...... 11 Growth driver No.4 ...... 14 Growth driver No.5 ...... 16 Growth driver No.6 ...... 19 Valuations ...... 21

Company Section Great Wall Motor ...... 25 Brilliance China Automotive ...... 30 Dongfeng Motor Group ...... 35 Geely Automobile ...... 39 Guangzhou Automobile Group ...... 45

Key stock calls

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Great Wall Motor 2333 HK 16.76 Buy Buy 20.30 15.60 30.1 1.504 1.496 0.5 1.819 1.731 5.1 Brilliance China Automotive 1114 HK 8.42 Buy Buy 11.40 11.40 0.0 0.477 0.464 2.8 0.691 0.677 2.1 Dongfeng Motor Group 489 HK 15.30 Outperform Buy 16.20 16.90 (4.1) 1.390 1.464 (5.1) 1.595 1.722 (7.4) Geely Automobile 175 HK 2.89 Outperform Outperform 3.30 2.30 43.5 0.258 0.247 4.5 0.325 0.309 5.2 Guangzhou Automobile Group 2238 HK 8.61 Underperform Underperform 7.60 6.80 11.8 0.722 0.736 (1.9) 0.852 0.927 (8.1) Source: Daiwa forecasts

- 3 - China Auto Sector 2 May 2012

Evidence 1: easing of the price decline suggests stronger demand in 2012 China’s PV sector average ASP has been declining over the past few years, and fell by 4.5% YoY in 1Q12. As a result, investors have been concerned about Inflection point ahead automakers’ margins being squeezed. However, National Development Reform Commission (NDRC) statistics show the rate of decline in PV prices has been Industry outlook consistently improving over the past 12 months. We believe the demand-supply mismatch improved in 1Q12 Shifting up to a faster gear and that the sector is returning to a balanced supply- demand situation. PV sales in China rebounded back to the 1.4m unit level for March 2012, the second-highest monthly PV sales Average PV ASP movements (YoY) ever recorded in China (the highest was in January 2011). We forecast 9.2% YoY China PV sales volume 0.00% growth for 2012, implying YoY growth of 9.6%, 14.1%, -0.50% -1.00% and 15.5% for each of the next three quarters, or 3.4% -1.50% and 14.9% YoY growth for 1H12 and 2H12, respectively. -2.00% For our fundamental assumptions, please refer to our -2.50% sector report (Safety matters, published on 2 -3.00% -3.50% November 2011). -4.00% -4.50% PV sales volume trend (2012 vs. 2009) Jul-11 Apr-11 Oct 11 Oct Jan 12 Jun-11 Jan-11 Feb 12 Feb Sep 11 Nov 11 Dec 11 Mar-12 Feb-11 Mar-11 Aug-11 Dec-10 PV sales (units) May-11 1,800,000 PV (domestically made) Daiwa forecast 1,600,000 Source: NDRC, Daiwa 1,400,000 1,200,000 1,000,000 Evidence 2: PBOC survey indicates long- 800,000 accumulated demand will surface in 2Q12 600,000 400,000 According to the PBOC’s March 2012 survey, 14.6% of 200,000 the people surveyed showed interest in buying a new 0 car in the next three months in China. This is higher Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec than the range of 12.9-13.9% over the past two years. 2009 2010 2011 2012 Given the front-loaded effect in 2011, as a result of the

Source: CAAM, Daiwa subsidy removal at the end of 2010, we expect the fall in PV sales growth in 2011 to be greater than this, but China PV monthly sales YoY volume growth (2008-2012E) accumulated demand is likely to surface again in 2Q12, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Full year which supports our double-digit PV sales volume 2008 20% 17% 24% 11% 16% 15% 7% -6% -1% 8% -10% -8% 7% growth forecast for June. 2009 -8% 24% 10% 37% 47% 48% 71% 90% 84% 76% 98% 89% 53% 2010 116% 55% 64% 34% 26% 19% 14% 19% 19% 27% 29% 19% 33% PBOC survey (% of people who plan to buy a car in the next 2011 16% 3% 7% 3% 0% 6% 7% 7% 9% 1% 0% 5% 5% three months) 2012E -24% 25% 4% 5% 7% 12% 11% 13% 17% 16% 16% 16% 9% Source: CEIC, figures in red are Daiwa forecasts Survey result: % planning to The following 3-month YoY buy a car in the nex t 3 months sales volume growth 15.0 100% Three pieces of evidence to support our 14.5 80% 14.0 view 60% 13.5 40% With the positive set of March PV sales, we believe the 13.0 sector is approaching an inflection point, implying 12.5 20% double-digit percentage monthly PV sales growth for 12.0 0% -11 r-11

June, according to our forecast. To follow, we g p A Apr-10 Oct-10 Oct-11 Jun-10 Jun-11 Feb-11 Feb-10 Feb-12 Aug-10 Dec-10 Au Dec-09 summarise some evidence that we believe supports our Dec-11 view. % of Planned to buy Car in the nex t 3 months Following 3-month YoY sales volume growth Source: PBOC, Daiwa

- 4 - China Auto Sector 2 May 2012

Evidence 3: correlation suggests faster M2 growth will benefit PV sales

China M2 and PV sales volume growth has recorded strong correlation in the past. Since 90% of PV purchases in China are still completed with cash, we believe PV sales growth has bottomed over the past 12 months and expect a mild recovery in M2 (Daiwa economists forecast 14.5% YoY growth for 2Q-3Q12).

Correlation between China M2 and PV sales YoY growth

LHS: M2 YoY growth (% ) RHS: PV sales volume YoY growth 35 We forecast China M2 growth to ex ceed 14.5% YoY between 2Q12 and 4Q12, 140% 30 which suggests PV sales growth has bottomed over the past 12 months, 120% according to the strong correlation below. 100% 25 80% 20 60% 15 40% 20% 10 0% 5 (20% ) 0 (40% )

7/2005 3/2006 7/2006 3/2007 7/2007 3/2008 7/2008 3/2009 7/2009 3/2010 7/2010 3/2011 7/2011 3/2012 7/2012 11/2005 11/2006 11/2007 11/2008 11/2009 11/2010 11/2011 LHS: M2 YoY growth (% ) RHS: PV sales volume YoY growth

Source: CEIC, Daiwa forecasts

Introduction of six driving forces beyond the inflection point Short-term growth drivers: We forecast quality joint venture and domestic brands to benefit from the first round of market consolidation, with their line-ups of high-quality safe vehicles and relatively stronger joint venture brand premium.

Medium-term growth drivers: Export sales growth and the next round of demand increases from inland provinces with relatively low car penetration should benefit quality domestic brands more due to their stronger dealership networks.

Long-term growth drivers: The rise in demand for diesel-powered SUVs will be higher in tier 2-4 cities and inland regions going forward, due to these vehicles’ better fuel efficiency and lower maintenance costs. As such, domestic brands that have strong PV diesel engine production capacity and which have also been upgrading drive- train components should achieve higher long-term growth and earnings visibility.

Six driving forces beyond the inflection point Guangzhou Great Wall Geely Brilliance Dongfeng Auto

1) Safety products line-up over 35% total sales

Short-term growth drivers 2a) Joint venture brand premium advantage

2b) Luxury brand premium advantage

3) Exports account for more than 10% total sales

Medium-term growth drivers 4) More than 50% of dealerships located in central and western parts of China

5) Diesel SUV availability Long-term growth drivers 6) Self-owned drive-train upgrades

Total points 5 4 3 2 2

Source: Daiwa

- 5 - China Auto Sector 2 May 2012

A car dealer in China selling five-star-rated cars

Growth driver No.1

Safety matters

We initiated coverage of the China Auto Sector in 4Q11 with a report entitled, Safety matters, on 2 November 2011. After several ground visits to China and the US since our report was published, we believe safety remains one of the key criteria in consumers’ purchases of new cars not only in China, but also in the US.

Source: Daiwa In 1Q12, sales of five-star safety models for Geely and Great Wall improved to contribute 44% and 46% of From New York to New Jersey (Short Hills): Toyota their YTD sales, respectively, up from 35% and 29% emphasises its five-star rated 2012 new Camry from the same period last year.

Geely domestic sales: five-star safety rating model sales 1Q11 1Q12 YoY growth (%) Five-star sales (units) 40,660 50120 23 Total sales units 116,826 114,822 (2) Five-star sales as % of total 35 44 Source: CAAM, Daiwa

Great Wall domestic sales: five-star safety rating model sales 1Q11 1Q12 YoY growth (%) Five-star sales (units) 31,400 58,342 85.8 Total sales (units) 107,000 126,606 18.3 Five-star sales as % of total 29 46 Source: CAAM, Daiwa

Safety standard bar will be raised in 2012, and the best will get better In order to meet international safety standards, under the China-New Car Assessment Program (C-NCAP), the safety benchmark will be lifted and frontal test speed increased from 56km/h to 64km/h in 2H12. Quality domestic brands and joint venture brands therefore will have first-mover advantage to maintain their ratings with their existing high portion of five-star models in their line-ups.

We forecast five-star safety models to account for 44% and 50% of Geely and Great Wall’s total 2012 sales volume, respectively, and as a result, partially contribute to 3.7% and 3.5% improvements in their blended ASPs for 2012. Source: Daiwa

- 6 - China Auto Sector 2 May 2012

Inside a dealership in China: Kia (K5) model with 5+ star rating Quality-model sales should lead to improved gross-profit margins

Gross-profit margin forecasts

GPM % (GWM & DFM) GPM % (Geely) 26.2 22

26.0 21 25.8 20 25.6 19 25.4 18 25.2 25.0 17 24.8 16 2011 2012E 2013E GWM Geely DFM

Source: Companies, Daiwa forecasts

The improvement in safety standards should benefit Geely and Great Wall the most within our coverage given that their brand premiums lead to better product positioning in terms of ASPs and margins. For Geely, we expect significant earnings upgrades by the consensus to occur in 2014, after the company receives the technology transfer from Volvo Cars.

Gross-profit margin forecasts (%) 2010 2011 2012E 2013E 2014E Great Wall 24.7 24.9 25.5 26.0 26.3 Geely 18.5 18.2 18.5 18.8 19.1 Dongfeng 21.5 20.1 20.8 21.2 21.4 *Guangzhou Auto 0.1 5.7 5.8 6.1 5.9 *Brilliance 6.0 5.0 4.9 4.9 5.0 Source: Daiwa Source: Companies, Daiwa forecasts *Adjusted EBITDA margin

- 7 - China Auto Sector 2 May 2012

Joint venture brands: 2M12 sales growth vs. market share (PV mkt share)

12.0%

10.0% SAIC Group

Growth driver No.2 Beijing Hyundai 8.0% FAW-VW DF-PSA DF-Nissan 6.0% GAC-Toyota A good brand matters FAW-Toyota 4.0% DF-Yueda GAC-Honda Brilliance-BMW In Safety matters, we put forward our view that the 2.0% DF-Honda joint venture brands would take 5-6pp in market share 0.0% away from the domestic brands in 2012. We estimate -100 -80 -60 -40 -20 0 20 40 the joint venture brands’ combined sales for January YTD YoY sales volume change (%) and February 2012 captured a total 65.5% share of the PV market, up from 60.5% last year, which is Source: CAAM, Daiwa consistent with our earlier forecast. Great Wall is the only domestic brand with PV market share (joint venture vs. domestic brands) high PV sales market (above 2.5%) and 70% 65.7% 60.4% positive growth 60% 50% Domestic brands: 2M12 sales growth vs. market share 39.5% 40% 34.0% (PV mkt share) Changan 30% Great Wall: sales rose by 4.5% 16% YoY for 2M12, with YTD 20% 4.0% market share expanding to 3.0% (from 2.5% for the same 10% YTD market Chery share is 9.7% , 3.5% period last year). 0% down from 12% 3.0% the y ear before BYD JV brands Local brands 2.5% Geely 2011 (Jan+Feb) PV market share 2012 (Jan+Feb) PV market share 2.0% Dongfeng (local brands)

Source: CAAM, Daiwa 1.5% YTD market 1.0% share is 7.5% , Joint venture brands are expanding their dow n from 0.5% 8.8% the y ear market share: top performers YTD are before 0.0% Brilliance and DF-Nissan -150 -100 -50 0 50 100 150 Among the joint venture names, we have seen strong YTD YoY sales v olume change (% ) improvements in sales volume for Brilliance-BMW and Source: CAAM, Daiwa DF-Nissan, with their YTD sales volume rising by 34%

YoY and 15% YoY, respectively. DF-Nissan’s YTD PV Due to the fast production ramp-up of its new models, market share in China expanded to 5.8% from 4.8% H6 and C50, Great Wall recorded 16% YoY sales- during the same period in 2011, while that for volume growth for the first two months of 2012, with Brilliance-BMW rose from 0.6% to 0.8%. its market share expanding to 2.96%, from 2.45% for the same period in 2011.

Among the domestic brands, the first two months of sales are equivalent to a combined PV market share of 34%, down from 39.5% during the same period in 2011, while that for joint venture brands expanded to 65.7% from 60.4%.

- 8 - China Auto Sector 2 May 2012

Domestic brands: YTD market share and sales volume growth Joint venture brands: YTD market share and sales volume Same period growth YTD 2012 YTD 2012 PV last year (PV Same period (sales YoY growth market share market YTD 2012 Same period YTD 2012 PV last year (PV volume) (%) (%) share) (%) (Sales in 2011 (Sales YoY growth market share market Dongfeng (domestic brand) 11,029 122 0.46 0.20 volume) volume) (%) (%) share) (%) Shaanxi auto 3,175 119 0.13 0.06 Brilliance-BMW 19,029 14,243 33.6 0.80 0.57 Youngman 6,219 96 0.26 0.13 DF-Nissan 136,662 119,023 14.82 5.76 4.79 Liuzhou Motor 22,201 49 0.94 0.60 ZZ-Nissan 8,332 7,291 14.28 0.35 0.29 Huatai 4,294 40 0.18 0.12 DF-Yueda 71,709 63,452 13.01 3.02 2.56 Yuantong Aeronautic 1,004 36 0.04 0.03 FAW-VW 158,471 143,306 10.58 6.68 5.77 Great Wall 70,263 16 2.96 2.45 SAIC-VW 213,210 193,015 10.46 8.98 7.78 Lifan 15,964 12 0.67 0.57 SAIC-GM 226,499 205,402 10.27 9.54 8.27 Beijing Auto 1,174 11 0.05 0.04 SAIC-GM-Wuling 232,740 216,140 7.68 9.80 8.71 JMC 4,469 8 0.19 0.17 Honda (China) 4,216 3,934 7.17 0.18 0.16 FAW 19,653 7 0.83 0.74 Guangzhou Auto - UFO 686 2 0.03 0.03 Toyota 40,712 39,693 2.57 1.72 1.60 Southeast motor 15,466 (8) 0.65 0.68 FAW-Toyota 81,289 79,604 2.12 3.42 3.21 BYD 71,160 (9) 3.00 3.17 DF-PSA 68,237 68,741 (0.73) 2.87 2.77 Haima 7,359 (10) 0.31 0.33 BJ-Hyundai 121,068 123,036 (1.6) 5.10 4.96 Jiangnan 17,825 (11) 0.75 0.81 DF-Honda 41,184 47,019 (12.41) 1.74 1.89 Geely 66,145 (12) 2.79 3.02 Changan-Suzuki 33,348 38,157 (12.6) 1.40 1.54 Changhea 26,529 (13) 1.12 1.23 Changan-Ford- Jinbei 28,796 (13) 1.21 1.34 Mazda 55,442 66,524 (16.66) 2.34 2.68 Sichuan industrial 1,336 (14) 0.06 0.06 Guangzhou Auto - Honda 41,482 60,009 (30.87) 1.75 2.42 Nanjing Changan 35,761 (14) 1.51 1.68 Fujing-Mercedes 333 783 (57.47) 0.01 0.03 Tianjing FAW 40,637 (21) 1.71 2.08 BJ-Mercedes 1,985 9,561 (79.24) 0.08 0.39 Shanghai auto 13,564 (22) 0.57 0.70 DF-Luxgen 4,159 0 0.18 0.00 Guangzhou Auto -Gonow 1,981 (23) 0.08 0.10 Total 1,560,107 1,498,933 0.0408117 65.72 60.38 FAW-Haima 18,037 (23) 0.76 0.95 Haima 1,220 (25) 0.05 0.07 Source: CAAM, Daiwa Guangzhou auto 1,838 (25) 0.08 0.10 Dong Feng Xiao Kang 40,902 (26) 1.72 2.23 Joint ventures: brand premium advantage Nanjing auto 10,041 (28) 0.42 0.56 persists, sales volume CAGR of 20% for FAW 28,075 (31) 1.18 1.64 Chery 82,095 (32) 3.46 4.87 2011-13E Changan 91,408 (34) 3.85 5.62 In the year-to-date, the domestic brands’ market share JAC 29,764 (35) 1.25 1.86 Qingling 180 (38) 0.01 0.01 has declined from 39.5% to 34.0%. In absolute terms, Huanghai 2,502 (38) 0.11 0.16 that’s a 13.9% YoY sales-volume reduction. If the same Foton 1,144 (42) 0.05 0.08 declining magnitude fully transferred into future Hafei 9,906 (46) 0.42 0.73 growth, we forecast joint-venture brands’ sales volume Guangzhou Chang Feng 2,914 (48) 0.12 0.23 ZX Auto 619 (73) 0.03 0.09 to rise at a CAGR of 20% for 2011-13, and that for Tianqi motor 2 (97) 0.00 0.00 domestic brands to decline at a compound annual Total 807,337 (17.7) 34.01 39.52 average rate of -2.7% for 2011-13. We believe most of Source: CAAM, Daiwa the joint venture brands, such as Brilliance, Dongfeng and Guangzhou Auto, would be in a better position as a result of the same declining magnitude fully transferred into their future growth.

Consolidation: joint venture and domestic brands sales forecasts 11-13 2011 2012E 2013E 2014E 2015E CAGR (%) Domestic brands: market share (%) 39.5 34.0 29.3 25.2 21.7 (13.9) JV brands: market share (%) 60.5 66.0 70.7 74.8 78.3 8.1

Domestic brands: sales volume 5,729,689 5,388,089 5,419,547 5,519,729 5,655,012 (2.7) JV brands: sales volume 8,768,358 10,453,842 13,095,774 16,392,215 20,430,034 22.2 YoY: China PV sales total (%) 5.5 9.3 16.9 18.3 19.0 Source: CAAM, Daiwa forecasts

- 9 - China Auto Sector 2 May 2012

PV sales volume forecast (joint venture vs. domestic brands) ... while low quality brands will have a hard (Units) time going forward 25,000,000

20,000,000 Our sensitivity analysis suggests that under our base case consolidation forecast, sales growth among the 15,000,000 domestic brands will be flat going forward.

10,000,000 Sensitivity test: sales volume growth 5,000,000 Base case - 5 ppt. Base case Base case + 5 ppt. YoY sales growth YoY sales growth YoY sales growth 0 11-13E CAGR (JV brands) 25.0% 22.2% 19.1% 2011 2012E 2013E 2014E 2015E 13-15E CAGR (JV brands) 25.6% 24.9% 23.5% Local brands: sales volume JV brands: sales volume 11-13E CAGR (Domestic Source: CAAM, Daiwa forecast brands) -8.4% -2.7% 2.9% 13-15E CAGR (Domestic PV market share forecasts (joint venture vs. domestic brands) brands) -3.8% 2.1% 8.1% Base case: Domestic brands' absolute market shares decline by 13.9% YoY 90% Source: CAAM, Daiwa forecasts 80% 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012E 2013E 2014E 2015E Local brands: mkt share JV brands: mkt share

Source: CAAM, Daiwa forecast

‘Quality’ domestic brands should be resilient from sector consolidation...

Due to the raising of the safety standards, we believe Geely and Great Wall will maintain double-digit percentage sales growth going forward, during the market consolidation period over the next few years.

PV sales growth forecasts (%) 2011 2012E 2013E 2014E Great Wall 27 18 19 20 Geely 1 9 20 25 Brilliance 52 41 64 33* Dongfeng 16 20 20 19 Guangzhou Auto 0 20 24 18 Sector average 5.5 9.3 16.9 18.3 Source: CAAM, Daiwa forecasts *have not factored in its new expansionary plan

- 10 - China Auto Sector 2 May 2012

Export sales growth (2011) 2011 export units % YoY change Chery 160,200 73 Great Wall 83,117 50 Jianghuai Auto 66,300 207 Geely 39,600 75 Source: CAAM, companies, Daiwa Growth driver No.3 Great Wall and Geely: monthly export volumes as a % of total sales

Growing exports matter 30%

25%

Why domestic brands are keen on exports 20% 15% • Domestic brands have an ASP advantage in the 10% overseas markets, where they are 20-30% cheaper 5%

than other brands. 0% -10 • Exports allow them to improve their profitability y Jul-10 Jul-11 Jan-11 Jan-10 Jan-12 Mar-11 Mar-10 Mar-12 Sep-10 Nov-10 Sep-11 Nov-11 May-11 as a result of better utilisation rates. Ma Geely Great Wall

• Diversification can provide a cushion against any Source: CAAM, companies, Daiwa domestic PV sales slowdown. • Overseas sales provide extra cash flow to help fund Geely: main export destinations (2011) additional R&D. Export (units) 9,000 • Exports provide better earnings visibility: China 8,000 PV exports are concentrated among four key auto- 7,000 makers. 6,000 5,000 4,000 China: % of PV export volume (2011) 3,000 2,000 40% 1,000 34% 35% 0 Ukraine Russia Saudi Iraq Chile Sri Lanka Turkey South 30% Arabia Africa 25% 20% 18% Source: Company, Daiwa 14% 15% 8% 10% Great Wall: export revenue as a % of total revenue (2011 vs. 2010) 5% 0% % to total revenue Chery Great Wall JAC Geely 6% 5.4%

% of 2011 China PV export 5% 4.7%

Source: CAAM, Daiwa 4% 2011 2010 Note: *JAC stands for Jianghuai Auto 3% 2.4% Main export beneficiaries: Geely and Great 2% 1.5% 1.4% Wall 0.9% 1% 0.3% In 2011, Geely’s and Great Wall’s export sales rose 0.1% 0.0% 0% by 75% YoY and 50% YoY, respectively, and Other Russia Australia South Chile Iraq Italy Ukraine Libya accounted for 9% and 16% of each of their total sales countries Africa volumes, respectively. Given the rapid improvement in Source: Company, Daiwa quality, attractive pricing strategies, and closer international relationships through bilateral trade, we forecast exports sales to account for 20% of Great Wall’s and 15% of Geely’s total sales for 2012.

- 11 - China Auto Sector 2 May 2012

Export growth may accelerate in 2014 How exports contribute domestic brands’ total sales growth 2012E 2013E 2014E 2015E China: PV export growth forecast (units) Domestic brands: domestic sales only (units) 5,388,089 5,419,547 5,519,729 5,655,012 + export (base case) 6,036,814 6,314,786 6,755,159 7,359,906 2,500,000 Bull case: 2011-15E ex port + export (bull case) 6,093,224 6,477,249 7,106,283 8,034,843 volume CAGR at 50% + export (bear case) 5,975,702 6,154,063 6,437,873 6,802,693 2,000,000 YoY: domestic brands: domestic sales only (units) (%) (6.0) 0.6 1.8 2.5 Base case: 38% 1,500,000 YoY: + export (base case) (%) (2.6) 4.6 7.0 9.0 CAGR YoY: + export (bull case) (%) (1.7) 6.3 9.7 13.1 1,000,000 YoY: + export (bear case) (%) (3.6) 3.0 4.6 5.7 2007-11 ex port volume Source: CAAM, Daiwa forecasts CAGR = 15.5% 500,000 Bear case: 25% CAGR Great Wall opens plant in Bulgaria 0 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Great Wall opened an assembly plant in Bulgaria in Ex port (base case) Ex port (bull case) Ex port (bear case) February this year after signing a joint-venture agreement with Litex Motors (Not listed). The Source: CAAM, Daiwa forecasts company will assemble semi knock down (SKD) vehicle models and later complete knock down (CKD) models. Our base-case scenario (derived from assuming export The first model to be built there will be Great Wall's sales volume relative to China’s domestic sales by 2015 Voleex compact sedan, followed by the Wingle pick-up reaches 6.4%) suggests that if China’s export volume and the Haval SUV. increased by a CAGR of 38% from 2011-15, the country would be able to export 1.7m PV units in 2015 (mainly The plant, which employs 120 people, initially will the four key brands: Chery, Great Wall, Jianghuai build as many as 50,000 vehicles a year. Those vehicles Auto, and Geely), an amount equal to 4x Geely group’s will be sold in Bulgaria and other east European total sales for 2011. We believe a rise in export volume countries. The Bulgaria plant will help Great Wall would help the four key brands’ sales expansion during expand its sales in Europe. The company has more the domestic market consolidation phase up to 2015, than 10 SKD and CKD plants in Southeast Asia, the and would open up new sources of cash flow that could Middle East, and Africa. ultimately support R&D expenses and long-term earnings visibility. Geely signs a assembly deal for North Africa

Our base-case forecast also shows exports help to Geely’s parent company, Zhejiang Geely Holding mitigate the decline in domestic brands’ 2012 sales Group (Not listed), has signed a deal for GB Auto (Not volume from a decline of 6% YoY to a fall of 2.6% YoY, listed) to assemble Geely cars in Egypt and distribute and enhance sales-volume growth from 2.5% YoY in them in North Africa. GB Auto, of Cairo, is the biggest 2012 to 9% YoY by 2015. independent car assembler in the Middle East. We believe the deal comes at a good time for the company, Export sales relative to domestic PV sales as it allows it to build CKD models in Egypt.

10% Bull case: 9% relative to domestic PV sales by 2015E Great Wall finished in the top-10 in the 8% Dakar race Base case: 6.4% 6% Great Wall’s H-series SUV beat entries from BMW and Mitsubishi in the 2012 edition of the Dakar race in 4% South America, finishing within the top-10 in the 2012 race, up from 22nd in 2011. A total of 171 competitors 2% Bear case: 4.3% took part in the race, with only 78 cars finishing. We believe this will make the company’s brand stand out 0% 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E from the other China automakers and boost its image internationally (more than 20% of its exports were sold Export (base case) Export (bull case) Export (bear case) in South America in 2011). Source: CAAM, Daiwa forecasts

- 12 - China Auto Sector 2 May 2012

ASEAN expansion plans Great Wall: expansion plans in ASEAN Thailand Great Wall set up a local production base in August 2010. Malaysia Oct 2011: the Haval H5 SUV and Wingle pick-up truck were launched, priced at RM120,000 and RM60,000-70,000, respectively. The company aims to account for 3-5% of the diesel SUV and pick-up truck segments in the future. The sales agent is Malaysia firm Green Oranges. After 2011: aims to begin assembly of SUVs or pick-up trucks at a plant in Gurun, Kedah, owned by Green Oranges. Looking to develop Malaysia as a production hub for ASEAN, with the aim of exporting to Cambodia and Indonesia. Philippines Since August 2010, Great Wall has apparently been considering setting up a local JV assembly base with Philippine National Motor. Cambodia Jan 2010: entered the market, selling the Peri, Florid, Deer, Hover, Wingle, and Cowry Source: Media reports, Daiwa

Geely: expansion plans in ASEAN Sales target for 2012 is 3,000 units. In 2012, the company plans to launch the EC7 (1.8L) mid-size sedan and GV5 (1.5L) MPV. By 2015, it plans to set up an assembly plant in Cikarang, West Java on a 15-25 hectare site with up to a Indonesia 30,000 unit annual capacity plant. Total investment of US$30-50m. In addition to the local market, aims to utilise the base for the export of right- hand-drive vehicles to ASEAN countries, Australia, New Zealand, and South Africa. Also aims to set up an adjoining 30,000-unit engine plant. Construction could begin in 2012 at the earliest. Malaysia Plans to launch five new models here by 2013. Philippines Apr 2011: the Panda and EC7t went on sale. Source: Media reports, Daiwa

Great Wall plans to undertake local vehicle assembly in Thailand, Malaysia, and the Philippines. We believe its key products (pick-up trucks and four-wheel-drive SUVs) are suitable for the landscapes of these countries. Overall, we forecast export sales for Great Wall to increase by 46% YoY for 2012 and 41% YoY for 2013, and account for 19% and 22% of its total sales volume for those respective years.

- 13 - China Auto Sector 2 May 2012

Car penetration vs. GDP per capita (provinces)

Car penetration: Measured by MV per 1000 person (2009 China) 100.0 90.0 80.0 70.0 This group 60.0 contains 45% Growth driver No.4 50.0 40.0 30.0 This group Inland China matters 20.0 contains 34% 10.0 0.0 China has more diversified income and car-penetration 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 levels than developed countries such as Korea or Japan. 2010 GDP per capita (US$) We estimate that the car-penetration rate for about the Note: *We have excluded Beijing and Shanghai for a better correlation plot half of the population on relatively low incomes is Source: CEIC, Daiwa below 4%. We believe demand from the central and western provinces has started to surface, and will Geely’s and Great Wall’s dealerships are generate an asymmetric second wave of high demand well prepared for the next wave growth growth that will offset the slowing sales growth in first- tier cities, resulting in overall PV sales growing Dealership location nationwide for the next five years. (%) Geely Great Wall BYD Chery East 38 41 47 45 Inland demand is picking up Northeast 9 9 7 8 Central 34 28 28 29 New PV registration (% of national total) West 20 22 19 19 15% 24% Source: Fourin, Daiwa 23% More than 50% of Geely’s and Great Wall’s dealerships 10% 22% are located in the country’s central and western areas. 21% We believe the quality domestic brands are well- 5% 20% positioned to meet the next wave of demand growth 19% from inland areas. 0% 18% Our forecasts for auto sales-growth and Jul-11 Apr-11 Oct-11 Jan-11 Jun-11 Jan-12 Mar-11 Feb-11 Feb-12 Aug-11 Sep-11 Nov-11 Dec-11 May-11 penetration rates LHS: Chongqing + Sichuan + Shaanxi LHS: Henan + Hubei + Hunan We believe penetration-rate growth will slow in the RHS: Total (Central and western provinces) first-tier cities over the next few years but that growth Source: CEIC, Daiwa in second- and third-tier cities will remain high. We forecast most of the regions to have a car-penetration Combined new PV registration in China’s central and rate above 10% by 2015 following our base assumptions western provinces for the first two months of 2012 which are set forth as below: accounted for 23% of the total nationally, compared with less than 21% during the same period in 2011. Our forecasts on penetration growth in first –to fourth-tier regions According to statistics for the first two months of 2012, Tier 1 regions: penetration growth rate (YoY) 2011-15 CAGR (%) 6.0 new PV registrations in the central and western regions Tier 2 regions: penetration growth rate (YoY) 2011-15 CAGR (%) 17.0 is increasing at a much stronger pace than elsewhere: Tier 3 regions: penetration growth rate (YoY) 2011-15 CAGR (%) 28.0 Tier 4 regions: penetration growth rate (YoY) 2011-15 CAGR (%) 29.0 rising 52% YoY compare with 36% YoY for provinces in Source: CEIC, Daiwa forecasts the rest of the country.

- 14 - China Auto Sector 2 May 2012

Car sales growth and penetration-rate forecasts

40%

35% 33.4% YoY growth (PV) 30% Penetration rate (PV) 25% 18.3% 19.0% 20% 15.8% 15% 9.2% 11.0% 10% 9.3% 6.6% 7.9% 5% 4.6% 5.0% 5.5% 0% 2010 2011 2012E 2013E 2014E 2015E

Source: CEIC, Daiwa forecasts

China: car-penetration rate forecasts (%) 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Beijing 242 257 272 289 306 324 344 364 386 409 434 Tianjin 112 119 126 133 141 150 159 168 178 189 200 Zhejiang 84 98 114 134 157 183 215 251 294 344 402

Shanghai 80 85 90 95 101 107 113 120 127 135 143 PV ownership Hebei 50 65 83 106 135 173 222 284 363 465 595 of more than 100 Shanxi 51 65 83 107 136 175 223 286 366 469 600 per 1,000 people Guangdong 66 78 91 106 124 146 170 199 233 273 319 (Penetration rate ≥ 10%) Jiangsu 59 69 81 95 111 129 151 177 207 243 284 Shandong 57 66 77 91 106 124 145 170 199 232 272 Liaoning 52 60 71 83 100 113 133 155 181 212 248 Inner Mongolia 54 63 74 87 101 119 139 162 190 222 260 Jilin 43 55 71 90 116 148 189 242 310 397 508 Yunnan 36 46 59 77 99 127 164 212 274 353 455

PV ownership Tibet 38 49 63 82 98 136 176 227 292 377 487 of 50-100 Fujian 41 52 67 85 109 139 179 229 292 374 479 per 1,000 people Shaanxi 37 47 60 77 99 127 162 208 266 340 436 Heilongjiang 38 49 62 80 102 131 168 215 275 352 450 Ningxia 39 50 64 83 106 135 173 222 284 363 465 Xinjiang 38 49 62 80 102 131 168 215 275 352 450 Qinghai 37 47 60 77 99 127 162 208 266 340 436 Hainan 33 43 54 70 89 114 146 187 239 306 392 Sichuan 33 43 54 70 89 114 146 187 239 306 392 Hunan 25 31 40 52 66 85 108 138 177 227 290 Henan 31 39 50 64 83 106 135 173 222 284 363

PV ownership Hubei 26 33 42 54 69 89 114 145 186 238 305 of less than 50 Chongqing 26 33 42 54 69 89 114 145 186 238 305 per 1,000 people Guangxi 22 28 36 46 59 76 97 125 160 204 261 Anhui 22 28 36 46 59 76 97 125 160 204 261 Gansu 21 27 35 45 58 75 96 124 160 207 267 Guizhou 21 27 35 45 58 75 96 124 160 207 267 Jiangxi 20 25 32 41 53 68 87 111 142 182 232

Source: CEIC, Daiwa forecasts

- 15 - China Auto Sector 2 May 2012

Why are diesel engines better than petrol ones? 1) Higher compression ratio: an engine running on diesel compresses the air inside the cylinder to high pressure and temperatures (compression Growth driver No.5 ratios from 14:1 to 18:1 are common in current diesel engines), which is higher than gasoline’s 10:1 ration Diesel-powered SUVs matter 2) Lower cost: diesel-powered cars generally have Why are SUVs selling well in China? better fuel economy than equivalent petrol- powered engines (20-40% better) and produce less SUV sales growth has been much higher in China than greenhouse-gas emissions. Their greater economy sedan sales in the past few years. We believe this is due is due to the high energy per-litre content of diesel to diverse road conditions as well as Chinese people’s fuel and the intrinsic efficiency of the diesel engine. preference for vehicles with large cabin areas and a Due to these advantage, about 35% of PVs in growing number of women wanting SUVs. Europe have diesel engines.

China: SUV sales growth 3) Better for the environment: diesel-powered 30% 25.0% vehicles emits 10-20% less greenhouse gas than 22.8% 25% petrol-powered vehicles. Europe has been a leader 20% in small diesel engine capability, and in Europe 15% 11.7% 6.6% more than 50% of new cars sold are now diesel 10% 5.4% 3.9% 5% 2.1% 0.4% Europe: diesel cars 0% (5%) -1.1% 40% (10%) 35% (15%) -9.4% Sedan MPV SUV Cross Total 30%

2011 Mar-12 25%

Source: CEIC, Daiwa 20%

15% China: road conditions 10% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Diesel cars in use % of total selected European Countries

Source: IEA, Daiwa

Why we believe demand for diesel SUVs will rise 1) We believe the hilly terrain in the central and western parts of China will drive up demand for the more powerful diesel-engine vehicles.

2) Diesel import volume has been increasing rapidly. Customs figures show that China imported about 1.44m tonnes of light diesel fuel for the first eight months of 2011, an increase of 44% YoY.

Source: Daiwa

- 16 - China Auto Sector 2 May 2012

China: the central and western parts of the country have hilly Great Wall: diesel engine vehicle sales as a % of total terrain 50% 45% 40% 38% 40% 35% 33% 30% 29% 30% Central and 23% western parts 20%

of China have 10% hilly terrain 0% 2009 2010 2011 1Q12 2012E 2013E 2014E 2015E

Diesel engine powered PV as % of total

Source: CAAM, Daiwa

Great Wall: forecasts of SUV engine types and gross-profit margins 2009 2010 2011 2012E 2013E 2014E Source: CAAM, Daiwa Diesel engines - SUV (%) 23.4 29.5 28.7 35.0 38.0 40.0 Petrol engines - SUV (%) 76.6 70.5 71.3 65.0 62.0 60.0 Diesel products as % of crude oil processed Gross-profit margin of gasoline SUVs 25.3 25.3 25.3 25.5 25.7 25.9 Gross-profit margin of diesel SUVs 27.8 27.8 27.8 28.0 28.2 28.4 42% Diesel product as % of crude Oil Processed Blended SUV gross-profit margin 25.9 26.0 26.0 26.4 26.7 26.9 Source: CAAM, Company, Daiwa forecasts 40% 38% Great Wall is one of the few automakers in 36% China with quality diesel-powered PV

34% production

32% Most of the diesel-engine makers in China make trucks

1/2001 8/2001 3/2002 5/2003 7/2004 2/2005 9/2005 4/2006 6/2007 1/2008 8/2008 3/2009 5/2010 7/2011 2/2012 and commercial vehicle, with the exception of Great 10/2002 12/2003 11/2006 10/2009 12/2010 Wall (see following table). RHS: Diesel product as % of crude Oil Processed

Source: CAAM, Daiwa Diesel engine production units (PVs and CVs) 2010-11 2011 2010 2011 mkt share (%) 2010 mkt share (%) Yuchai (CV) 722,542 749,601 19.3 18.8 Great Wall: blended gross-profit margin FAW (PV + CV) 456,983 534,721 12.2 13.4 should improve on higher diesel SUV sales Quanchai (CV) 377,398 446,392 10.1 11.2 Great Wall’s GW4D20 engine meets the Euro V Weichai (CV) 360,127 447,062 9.6 11.2 DFMC (CV) 225,326 229,272 6.0 5.7 emissions standards, and is more fuel efficient than Yunneidongli (CV) 228,417 247,664 6.1 6.2 petrol engines as it uses Bosch’s common rail system. JMC (CV) 195,296 187,604 5.2 4.7 Great Wall plans to expand its diesel-engine DCD (CV) 188,313 224,031 5.0 5.6 production capacity of 100,000 sets during 2012-13. Laidong (CV) 171,609 172,196 4.6 4.3 Foton (CV) 144,734 81,773 3.9 2.1 We forecast diesel-engine vehicle sales to account for Yangchai (CV) 141,639 118,422 3.8 3.0 35% of the company’s 2012 sales and 38% of those for Sinotruck (CV) 120,317 186,831 3.2 4.7 2013, helping to improve the blended SUV gross Great Wall (PV) 105,624 85,254 2.8 2.1 margin to 26.4% for 2012 from 26% last year due to a Qingling (CV 81,316 59,598 2.2 1.5 2pp difference in the grow-profit margins of diesel and JAC (PV + CV) 50,408 46,699 1.3 1.2 Nanjing Auto (PV + CV) 41,863 34,356 1.1 0.9 gasoline SUVs. DFM CV (CV) 37,418 32,868 1.0 0.8 SDEC (CV) 35,938 28,249 1.0 0.7 Shanghai Hino (CV) 21,587 22,305 0.6 0.6 GAC-Gonow (PV + CV) 4,153 13,842 0.1 0.3 FAW-VW (PV +CV) 130 11,407 0.0 0.3 Others 41,784 27,659 1.1 0.7 Total 3,752,922 3,987,806 100 100 Source: CAAM, Daiwa

- 17 - China Auto Sector 2 May 2012

The performance of Great Wall’s GW4D20 diesel engine is comparable to that of the major international players (see following table).

Engine comparison Great Wall VW 2.0 TDI Mercedes 200CDI Toyota D-4D Audi CAN (A6L) cc 1,996 1,968 2,143 1,998 2,698 kw/rpm 100/4,000 103/4200 105/3,200 93/3,600 140/3,500-4,400 Nm/rpm 310/1,800-2,800 320/1750 350/1,200-2,800 310/1,800-2,400 380/1,400-3,500 kw/L 55.1 52.3 49 46.5 51.9 Nm/L 155.3 162.6 163.3 155.2 140.8 Standard Euro 4/ Euro 5 Euro 5 Euro 5 Euro 4 Euro 4/ Euro 5 Source: Company, Daiwa

Diesel-engine auto-part makers are tapping into China: we believe this will lower future component costs Bosch (Not listed) plans to build its second diesel- injector plant in Qingdao in east China's Shandong Province in the next few years, manly to produce diesel fuel injectors for light- and heavy-duty trucks as well as PVs. It will be built in two phases with a total investment of Rmb1.6bn.

According to Bosch, a diesel car equipped with clean diesel technology from the company can reduce fuel consumption as much as 30% while generating 50% more torque than a petrol-powered car.

We believe that, higher diesel PV usage will be a potential trend in China going forward and global auto- parts makers are tapping into the market and will lower the auto-part cost in the long term.

- 18 - China Auto Sector 2 May 2012

automatic transmission, which is planned to be used in the company’s small vehicles in the future.

Geely: upgrades in technology Geely: key technology upgrades and achievements Date Event Growth driver No.6 Jun-09 Acquired Australian automatic transmission maker DSI for almost Rmb700m Plans to have an annual automatic transmission production capacity of 900,000 units Aug-11 DSI gearbox production has started the Xiangtan plant Drive-train technology matters News sources reported that Geely subsidiary, Volvo Cars, plans to invest Rmb3bn in Zhangjiakou to set up an engine base, apparently to manufacture 1.3T engines, with Jul-11 an annual capacity of 300,000 units Engine technology should define the long- At the Guangzhou Motor Show, the company launched the model Gleagle GC7 fitted Nov-11 with a 1.4DVVT and six-speed AT gearbox term winners Mainland news reports said a 7-speed DCT is to also go into regular production in Apart from the short- and medium-term consolidation 2013 and growth drivers, we believe, ultimately, that for the Source: Media reports, Daiwa domestic PV makers to survive over the long term, By acquiring DSI and achieving the four-star safety drive-train technology is key. This is because it rating in the Euro NCAP crash test, we believe Geely accounts for about 35% of the total cost of a car, and has been successful in improving its brand image. With plays a major role in defining the end product’s quality the likelihood of support from its parent and Volvo and reliability. According to industry experts we have Cars (Not listed), we forecast quality (five-star: C- spoken with, domestic auto-makers’ drive-train NCAP) models to account for 44% and 53% of Geely’s technology is 20 years behind that of their sales for 2012 and 2013, respectively, and the blended international peers. However, given the developments ASP to improve by 3% YoY and 4.5% YoY for the made in recent years, and their focus on quality respective years, with utilisation rates on five-star upgrades and overseas acquisitions, we expect Great models improving to 83% for 2012 and 91% for 2013. Wall and Geely to be the long-term winners among the Moreover, a redesigned version of the Gleagle was domestic brands. launched in June 2011, offering 1.0L continuous

variable valve timing and 1.5L variable valve timing. Great Wall: upgrades in technology Great Wall: key auto-parts suppliers Geely: what technologies might it gain Supplier Starting date Imported parts/ co-operation Ricardo Mar-11 Engines and transmissions from Volvo? Mahle Jun-11 Air management systems, engine pistons Engine: the four-cylinder VEA (Volvo environmental Brose Jul-11 Door-lock systems architecture) engine includes common rail diesel and Autoliv Jul-11 Safety components Valeo Jul-11 Power-train technology co-operation direct-injection petrol engines. It covers the range from Baosteel Group Jul-11 High-strength steel high-power and torque variants to fuel-efficient Coda Aug-11 Electric vehicles derivatives. TRW Automotive Sep-11 Safety systems Bosch Sep-11 Electromagnetic brake systems, brake systems Pioneering flywheel technology: the so-called Borg Warner Sep-11 Torque and transmissions Delphi Nov-11 Electronics, safety and power-train co-operation KERS (kinetic energy recovery system) captures TNO Nov-11 Safety and emissions braking energy in a flywheel that spins at up to 60,000 Source: Companies, Daiwa revolutions/minute. Once released, this stored energy can either accelerate the car or propel the vehicle once The PRC Government has been changing its policy it reaches cruising speed. The flywheel system offers from capital widening to deepening in the Auto Sector the driver an additional 80hp while reducing fuel recently. As a result, and with the market likely to consumption by up to 20%, according to the company. consolidate over the next five years, we believe the domestic automakers with better drive-train and safety Lightweight design: Volvo Cars has taken the lead in technologies will be able to survive without fully automotive lightweight design, with the upcoming SPA penetrating the low-end segment and seeing their models being 100-150kg lighter than its current models gross-profit margins squeezed. Great Wall signed 12 of the same size. New chassis technologies combined joint-venture and co-operation agreements with key with the lower weight and improved weight auto-parts suppliers in 2011. At the Guangzhou Motor distribution should also contribute to the lighter weight. Show in November last year, the company displayed a power-train comprised of a 1.0L turbo engine and an

- 19 - China Auto Sector 2 May 2012

More long-term synergies through platform integration and parts-sharing We believe Geely and Volvo are likely to pool the purchasing of parts and components and jointly develop small engines and technologies for electric vehicles. Geely will also develop a premium brand for the mass market in China using Volvo technology. Volvo aims to increase deliveries in China to 200,000 units a year by 2014, up from 47,000 last year according to media report.

- 20 - China Auto Sector 2 May 2012

Geely: PER bands Price (HK$) 7 21.22x Avg+2SD 6

5 16.12x Avg+1SD

4 Valuations 11.03x Avg 3

2 5.94x Avg-1SD Great Wall’s and Geely’s earnings 1 0.84x Avg-2SD visibility to be driven by six 0

factors Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Bloomberg, Daiwa forecasts Great Wall (raising target price by 30%) We are revising up our 2012 revenue and EPS forecasts Brilliance (Buy): new 3-series should be by 2% and 0.5%, respectively. Although we believe the the key share-price catalyst strong 1Q12 results have been factored into the share We reiterate our Buy (1) rating and six-month target price, we still expect plenty of catalysts to come in 2H12. price of HK$11.40, based on a 2012E PER of 19.4x – a We now apply a target 2012E PER of 11x, from 8.5x level reached twice following new model launches in previously (a 22% EPS CAGR for 2011-13E with a 0.49x the past two years – (38% 2011-13E EPS CAGR and PEG), and are raising our six-month target price to 0.51x PEG), which provides 35% upside potential. We HK$20.3 to capture the potential short-term rerating believe the launch of the new 3-series in 2H12 will have trend and improved long-term earnings visibility. a stronger impact than the launch of the 5-series last year, because it represents a generation change (5-6 Great Wall last traded at a forward PER of 11x in July years) rather than an upgrade (1-2 years) (the stock 2008 (export sales volume dropped by 38% YoY in was trading at a PEG of 0.51x at the time when the 2008). Our new target PER is now slightly above the company launched an upgraded model in 2011). Going MSCI China Auto’s past-10-year average PER of 10.4x. forward, we forecast an even stronger JV sales volume growth by 64% in 2013 from 41% in 2012. Great Wall: PER bands

Price (HK$) Brilliance: PER bands 35 17.47x Avg+2SD (HK$) 30 16 Falling ex ports: ex port sales volume 12.55x Avg+1SD 15 25x 25 dropped by 38% YoY in 2008 14 13 Our TP: 11x PER 12 20x 20 11 10 15 7.64x Avg 9 15x 8 10 7 6 10x 2.72x Avg -1SD 5 5 4 3 0 2 New upgraded version of 5-series 1 New 5-series launch launch Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0 Source: Bloomberg, Daiwa forecasts Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

Source: Bloomberg, Daiwa forecasts Geely (raising target price by 43%) We believe the worst is behind the company and see a Dongfeng Motor (downgrading to rerating point approaching. Outperform)

We believe it has entered an upcycle and deserves to We are cutting our 2012 EPS forecast for Dongfeng by 5% and our 2011-13 EPS CAGR forecast to 14% from trade at its past-six-year average PER of 11.3x (from 8.5x previously, the average PER of the MSCI China 16% due to the risks we see for the company. The stock has risen by 14% so far this year, underperforming the Auto benchmark). As such, we raise our six-month target price to HK$3.30, to reflect higher medium-long MSCI World Auto index by 6% but outperforming the MSCI China index by 2%. Even so, we believe Dongfeng term earnings visibility, with a 25% diluted EPS CAGR will benefit from industry consolidation due to its for 2011-13 and translating into 0.45x PEG.

- 21 - China Auto Sector 2 May 2012

strong market share, and so continue to apply a PER of Guangzhou Auto: PER bands 9.4x (the average of the past-10-year MSCI China Auto Price (HK$) Index and minus 1SD over the same period) and 14 15.3x Avg+2SD therefore lower our six-month target price to HK$16.2 13 12 13.13x Avg+1SD from HK$16.90. 11 10 10.95x Avg Dongfeng: PER bands 9 8 Price (HK$) 8.78x Avg-1SD 25 7 13.25x Avg+2SD 6 5 6.61x Avg-2SD 20 10.71x Avg+1SD 4 Jul-11 Apr-11 Apr-12 Oct-10 Oct-11 Jan-11 15 Jun-11 Jan-12 Mar-11 Mar-12 Feb-11 Feb-12 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 Dec-11 8.16x Avg May-11 Source: Bloomberg, Daiwa forecasts 5.62x Avg-1SD 10 3.07x Avg-2SD 5 Potential downside risks to our earnings forecasts 0 • Rising fuel prices. Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 • Increased competition and price wars in the Source: Bloomberg, Daiwa forecasts domestic market. Guangzhou Auto (Underperform) • Import restrictions in overseas markets. Based on its past 4-month highest/lowest PER trading • Global economic recession. range of between 10.61x and 7.34x, we take a slightly • Further liquidity tightening by the central lower-than-average PER of 8.5x (0.79x PEG) as our government. 2012E multiple to reflect the risks from Guangzhou • Failing to qualify for the C-NCAP crash test under Auto’s recent accounting method change (difficulty to the new standards in 2H12. do meaningful year-on-year comparisons, etc), and • The limited supply of quality diesel in China. further start-up losses from the setting up of the new joint ventures. We therefore maintain our • The recall of cars due to quality issues that affect the Underperform rating, with a new six-month target brand image. price of HK$7.60 (up from HK$6.80 previously) to reflect the recovery in the sector that we expect.

- 22 - China Auto Sector 2 May 2012

Absolute valuation comparison with the 10-year MSCI China Auto PER bands Historical forward PERs Brilliance's bottom trading range has been hovering around the +1SD level, while Geely tends to be a highly volatile stock. 25

20

15 +2SD = 15.0x +1SD = 12.8x 10 average = 10.5x -1SD = 8.2x 5 -2SD = 5.9x Great Wall's, Dongfeng's and Guangzhou Auto's PERs have been converging below the MSCI China Auto 10-year average. We believe Great Wall should benefit most from the six drivers when the sector enters an upcycle. 0 3-Jul-11 3-Apr-11 3-Apr-12 3-Oct-10 3-Oct-11 3-Jan-11 3-Jun-11 3-Jan-12 3-Mar-11 3-Mar-12 3-Feb-11 3-Feb-12 3-Sep-10 3-Nov-10 3-Dec-10 3-Aug-11 3-Sep-11 3-Nov-11 3-Dec-11 3-May-11

2238 HK 1114 HK 175 HK 489 HK 2333 HK

Source: Bloomberg, Daiwa forecasts

Valuation table Market cap Share price PER (x) PBR (x) Gross-profit margin (2012E) ROE (2012E) 11-13 EPS CAGR PEG (US$m) (local curr.) 2012E 2013E 2012E 2013E (%) (%) (%) 11-13 EPS CAGR China automobile companies 175 HK GEELY AUTOMOBILE 2,780 2.89 9.1 7.2 1.5 1.3 18.5 18.4 25.0 0.45 489 HK DONGFENG MOTOR-H 16,990 15.3 8.9 7.8 1.9 1.5 20.8 23.2 14.5 0.65 1114 HK BRILLIANCE CHINA 5,470 8.42 14.3 9.9 3.7 2.7 13.4 29.4 38.1 0.51 2333 HK GREAT WALL MOT-H 6,570 16.76 9.0 7.5 2.0 1.7 25.5 24.8 22.3 0.49 2238 HK GUANGZHOU AUTO-H 7,340 8.61 9.6 8.2 1.4 1.3 6.0 15.0 10.8 0.51 600104 CH SAIC MOTOR-A* 20,799 15.4 7.3 6.3 1.4 1.2 19.5 20.9 13.9 0.49 Average 9.7 7.8 2.0 1.6 17.3 21.9 20.8 0.53

Source: *Bloomberg, Daiwa forecasts. Share prices are as of 30 April 2012 Note: Geely’s valuation is based on diluted EPS

- 23 - China Auto Sector 2 May 2012

Absolute and relative returns Absolute return comparison 2004-12 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012 Great Wall (57.91) (29.79) 203.03 45.87 (74.77) 236.96 136.02 18.13 47.80 Geely (54.38) (10.96) 136.92 15.58 (30.34) 583.87 (21.70) (50.00) 70.00 Dongfeng 93.33 45.89 (54.55) 347.20 19.86 (0.60) 14.86 Brilliance (64.44) (24.34) 14.78 31.82 (76.72) 440.74 170.78 41.32 0.48 BYD 0.74 (41.88) 148.89 73.21 (6.48) 438.98 (40.32) (58.78) 21.44 GAC 10.72 (39.55) 32.87 Sector average (44.00) (26.74) 119.39 42.47 (48.57) 409.55 45.89 (14.91) 31.24 MSCI World Auto (absolute) 13.15 4.54 34.20 39.31 (48.27) 52.02 5.32 (21.74) 19.72 MSCI China (absolute) 3.27 15.42 78.77 61.49 (53.02) 60.61 4.56 (20.30) 13.68

Relative return comparison 2004-2012 % 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012 Great Wall (71.06) (34.33) 168.83 6.56 (26.50) 184.93 130.70 39.86 28.08 Geely (67.53) (15.50) 102.72 (23.72) 17.93 531.85 (27.02) (28.26) 50.28 Dongfeng 59.13 6.58 (6.28) 295.18 14.54 21.14 (4.85) Brilliance (77.60) (28.88) (19.42) (7.49) (28.45) 388.72 165.46 63.06 (19.24) BYD (12.41) (46.42) 114.69 33.91 41.79 386.95 (45.64) (37.04) 1.72 Guangzhou Auto 5.40 (17.81) 13.15 Sector average (relative to MSCI World Auto) (57.15) (31.28) 85.19 3.17 (0.30) 357.52 40.58 6.83 11.52

Great Wall (61.18) (45.20) 124.26 (15.63) (21.75) 176.35 131.46 38.43 34.12 Geely (57.64) (26.37) 58.16 (45.91) 22.69 523.26 (26.26) (29.70) 56.32 Dongfeng 14.57 (15.61) (1.52) 286.59 15.30 19.70 1.19 Brilliance (67.71) (39.76) (63.98) (29.68) (23.70) 380.13 166.22 61.62 (13.20) BYD (2.52) (57.30) 70.12 11.72 46.54 378.37 (44.88) (38.48) 7.76 Guangzhou Auto 6.16 (19.25) 19.19 Sector average (relative to MSCI China) (47.26) (42.16) 40.62 (19.02) 4.45 348.94 41.33 5.39 17.56

Source: Bloomberg, Daiwa Note: As of 30 April 2012

- 24 -

Automobiles & components / China 2 May 2012

Great Wall Motor Target price: HK$15.60 → HK$20.30 Up/downside: +21.1% 2333 HK Share price (30 Apr): HK$16.76

Diesel engines fuelling the fire

• We expect the next earnings-growth driver to be diesel-powered SUVs, a unique product from Great Wall • Blended 2012 ASP raised by 5.6% YoY, and gross-profit margin by 2.6pp, on a better product mix and strong export sales

• Next share-price rally likely to take place in June, when full ramp- up of production at the new factory has been completed

How do we justify our view?

margin to rise to 25.5% for 2012 (up Risks from 25.0% in 2011). We note that Earnings would be at risk in the Great Wall is one of only a few PV event of: 1) a slowdown in export producers in China that sales volume to single digit growth,

manufactures diesel PVs on a large or 2) an economic hard landing. Jeff Chung scale and believe investors have not (852) 2773 8783 factored this unique edge. Forecast revisions (%) [email protected] Year to 31 Dec 12E 13E 14E

Catalyst Revenue change 2.0 5.7 n.a. Net-profit change 0.5 5.1 n.a. A full ramp-up in June could Investment case EPS change 0.5 5.1 n.a. trigger a rerating. The utilisation We raise our target price by Source: Daiwa forecasts rate at the new factory in Tianjing 30% to HK$20.30 (highest in the Share price performance rose to 55% in March. We expect the market) as we expect Great Wall to full ramp-up to be completed by (HK$) (%) benefit from five of the six driving 19 150 June this year, and forecast this to forces we have identified in our 16 130 lead to an additional 37,000 sector report (Six drivers beyond 13 110 shipments in 2Q12, and 57% YoY 10 90 the inflection point). sale-volume growth for June 2012. 7 70

May-11 Aug-11 Oct-11 Jan-12 Apr-12 Diesel-powered SUVs the next Valuation Great Wall Motor (LHS) growth driver. We expect diesel- Relative to HSI (RHS) We are raising our 2012 revenue and powered engines to gain popularity EPS forecasts by 2% and 0.5%, 12-month range 8.43-16.76 in China due to their high fuel Market cap (US$bn) 6.57 respectively. We have confidence in efficiency and low engine Average daily turnover (US$m) 13.60 Great Wall’s strategy and believe it Shares outstanding (m) 3,042 maintenance cost, matching the next has a competitive edge in diesel SUVs. Major shareholder Baoding Innovation (38.1%) wave of fast-growing PV demand We now believe it deserves to trade from inland China with its hilly Financial summary (Rmb) above the MSCI China Auto’s past-10- landscape. Currently, around 30% of Year to 31 Dec 12E 13E 14E year average PER of 10.4x, as we see it Revenue (m) 37,614 47,721 60,582 Great Wall’s SUVs are equipped as the automaker that will benefit the Operating profit (m) 5,342 6,868 8,551 with diesel engines (whose gross- most from the driving forces we see. Net profit (m) 4,577 5,535 6,441 profit margin is 2.5pp higher than Core EPS 1.504 1.819 2.117 Although the strong 1Q12 results have that for gasoline SUVs). We forecast EPS change (%) 26.9 20.9 16.4 likely been factored into the share Daiwa vs Cons. EPS (%) 9.3 19.1 30.8 this ratio to increase to 50% by 2015, price, we believe there are plenty of PER (x) 9.0 7.5 6.4 and therefore are raising our potential catalysts to come in 2H12. Dividend yield (%) 2.7 3.3 3.8 blended ASP by 5.6% for 2012 and DPS 0.371 0.448 0.522 We now apply a target 2012E PER of forecast an SUV division gross-profit PBR (x) 2.0 1.7 1.4 11x, from 8.5x previously (a 22% EPS EV/EBITDA (x) 6.0 4.4 3.2 margin of 26.7% for 2012 from CAGR for 2011-13E with a 0.49x PEG), ROE (%) 24.8 24.9 24.0 26.0% in 2011. As a result, we now and raise our six-month target price to Source: Bloomberg, Daiwa forecasts forecast the blended gross-profit HK$20.30.

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Sales, product mix, ASP, gross margin and utilisation Overall, we forecast 18% YoY and 19% YoY increases in (% ) Gross margin (Gross margin) Great Wall’s total sales volume and 32% YoY and 44% 50% improvement 30% YoY export sales growth for 2012 and 2013, respectively. 40% 20% Following product-mix changes at the old factory, we Blended ASP forecast the overall utilisation rate to drop by 2pp to 30% improvement 10% 91% for 2012, but rebound back to 100% in 2013. The 20% 0% Significance of decline in the utilisation rate in 2012 will be offset by 10% (10% ) higher localisation of auto-parts and engine export sales volume 0% (20% ) components, as well as better PV margins from a rise in 2008 2009 2010 2011 2012E 2013E diesel-powered SUV sales. As such, we now forecast the Ex ports as % of total sales volume (LHS) 2012 blended gross margin to improve to 25.5% (up Blended GPM (RHS) from 25.0% in 2011) for 2012. Blended ASP YoY change (LHS) Source: Company, Daiwa forecasts

Valuation Great Wall: PER bands

We are revising up our 2012 revenue and EPS forecasts Price (HK$) by 2% and 0.5%, respectively. Although we believe the 35 17.47x Avg+2SD strong 1Q12 results have been factored into the share 30 price, we still expect plenty of catalysts to come in 2H12. Falling ex ports: ex port sales volume 12.55x Avg+1SD 25 We now apply a target 2012E PER of 11x, from 8.5x dropped by 38% YoY in 2008 Our TP: 11x PER previously (a 22% EPS CAGR for 2011-13E with a 0.49x 20 PEG), and are raising our six-month target price to 15 7.64x Avg HK$20.3 to capture the potential short-term rerating trend and improved long-term earnings visibility. 10 2.72x Avg -1SD 5 Great Wall last traded at a forward PER of 11x in July 0 2008 (export sales volume dropped by 38% YoY in Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 2008). Our new target PER is now slightly above the Source: Bloomberg, Daiwa forecasts MSCI China Auto’s past-10-year average PER of 10.4x.

Earnings revisions Great Wall: EPS forecasts (consensus) We believe the market has consistently underestimated Rmb (EPS) Great Wall’s earnings potential. During the new product Initial ramp up stage of H6 1.8 SUV and C50 sedan (H6 and C50) launch period in 4Q11, investors were 1.7 sceptical as to the company’s outlook, but Great Wall’s 1.6 strong sales in 4Q11 and 1Q12 disproved this. The 1.5 1.4 consensus has been revising up its 2013 EPS forecast for 1.3 the company since February 2012, when investors 1.2 started to distinguish Great Wall from other domestic 1.1 1.0 brands.

1-Jul-11 1-Apr-11 1-Apr-12 1-Oct-11 1-Jan-11 1-Jun-11 1-Jan-12 1-Mar-11 1-Mar-12 1-Feb-11 1-Feb-12 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-May-11

Historical Mean EPS 2012E Historical Mean EPS 2013E

Source: Bloomberg, Daiwa

- 26 - China Auto Sector 2 May 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales volume - PV 107,820 120,446 209,860 363,482 462,679 547,809 650,773 778,513 Export sales as % of total sales 43.4 15.5 13.8 17.1 19.0 23.0 22.1 volume Gross margins PV (%) 23.7 18.1 17.3 24.6 25.0 25.5 26.0 26.3 Gross margin (%) : Sedans 3.6 22.0 23.7 24.5 25.0 25.5 Gross margin (%) : SUVs 23.0 22.8 25.0 26.0 26.0 26.7 27.2 27.6 Gross margin (%) : Pick-up trucks 26.1 19.4 22.8 26.0 26.0 26.0 26.2 26.2 Blended ASP (Rmb/unit) 70,296.4 68,168.2 59,069.8 63,238.3 65,032.4 68,662.7 73,330.1 77,817.3

Profit and loss (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Pick -up trucks 2,905 3,447 4,114 5,377 6,880 8,872 11,662 15,328 SUVs 4,263 3,628 4,225 9,432 11,380 14,584 18,961 24,164 Others 728 1,349 4,475 8,178 11,829 14,158 17,098 21,090 Total revenue 7,897 8,425 12,815 22,986 30,089 37,614 47,721 60,582 Other income 9 (20) 4 27 33 105 102 (20) COGS (5,768) (6,684) (10,256) (17,298) (22,594) (28,014) (35,324) (44,620) SG&A (354) (462) (705) (1,070) (1,193) (1,505) (1,909) (2,484) Other op. expenses (755) (777) (1,053) (1,755) (2,336) (2,859) (3,722) (4,907) Operating profit 1,029 482 805 2,890 4,000 5,342 6,868 8,551 Net-interest inc./(exp.) 1 (49) (24) (8) (23) (25) (25) (25) Assoc/forex/extraord./others 24 103 108 152 131 145 181 202 Pre-tax profit 1,053 536 889 3,034 4,107 5,462 7,024 8,727 Tax (37) (33) 140 (214) (620) (819) (1,405) (2,182) Min. int./pref. div./others (70) (38) (49) (126) (84) (66) (84) (105) Net profit (reported) 946 465 980 2,693 3,403 4,577 5,535 6,441 Net profit (adjusted) 945 514 1,003 2,701 3,426 4,577 5,535 6,441 EPS (reported) (Rmb) 0.364 0.170 0.363 0.984 1.177 1.504 1.819 2.117 EPS (adjusted) (Rmb) 0.364 0.188 0.372 0.986 1.185 1.504 1.819 2.117 EPS (adjusted fully-diluted) (Rmb) 0.364 0.188 0.372 0.986 1.217 1.504 1.819 2.117 DPS (Rmb) 0.080 0.030 0.100 0.200 0.300 0.371 0.448 0.522 EBIT 1,029 482 805 2,890 4,000 5,342 6,868 8,551 EBITDA 1,197 713 1,184 3,415 4,674 6,266 8,042 9,975

Cash flow (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 1,053 536 889 3,034 4,107 5,462 7,024 8,727 Depreciation and amortisation 168 231 379 525 674 924 1,174 1,424 Tax paid (37) (33) 140 (214) (620) (819) (1,405) (2,182) Change in working capital 173 51 77 (143) 358 1,349 1,058 2,040 Other operational CF items 38 106 57 (39) (45) (50) (58) (60) Cash flow from operations 1,395 890 1,542 3,163 4,475 6,865 7,794 9,949 Capex (1,449) (1,106) (960) (3,218) (3,759) (4,200) (4,500) (4,500) Net (acquisitions)/disposals (301) (21) (96) 1,760 1,795 (3) (3) (3) Other investing CF items (15) (646) 308 0 0 0 0 0 Cash flow from investing (1,765) (1,773) (748) (1,458) (1,964) (4,203) (4,503) (4,503) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 1,542 0 0 0 3,894 0 0 0 Dividends paid (154) (219) (164) (287) (663) (1,128) (1,364) (1,587) Other financing CF items (4) (30) 8 (925) 5 (50) (50) (50) Cash flow from financing 1,384 (249) (156) (1,212) 3,236 (1,178) (1,414) (1,637) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,014 (1,132) 638 493 5,746 1,485 1,877 3,809 Free cash flow (54) (216) 582 (55) 716 2,665 3,294 5,449

Source: Company, Daiwa forecasts

- 27 - China Auto Sector 2 May 2012

Financial summary continued …

Balance sheet (Rmb m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 3,312 2,092 2,592 3,657 7,203 8,678 10,547 14,351 Inventory 958 876 1,590 2,104 2,777 3,916 4,968 5,809 Accounts receivable 810 1,210 3,386 8,053 9,382 10,778 12,708 14,621 Other current assets 506 689 460 1,011 1,461 1,461 1,461 1,461 Total current assets 5,586 4,868 8,027 14,825 20,823 24,833 29,684 36,243 Fixed assets 1,597 2,776 4,206 5,362 7,399 10,678 14,007 17,086 Goodwill & intangibles 212 218 247 4 22 22 22 22 Other non-current assets 2,690 2,954 2,584 3,507 4,891 4,891 4,891 4,891 Total assets 10,085 10,816 15,063 23,698 33,135 40,424 48,604 58,241 Short-term debt 985 938 2,192 3,429 4,418 4,418 4,418 4,418 Accounts payable 2,170 2,732 4,273 8,279 10,011 13,896 17,935 22,730 Other current liabilities 3 62 106 281 384 384 384 384 Total current liabilities 3,157 3,732 6,571 11,990 14,813 18,698 22,738 27,532 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 70 67 654 1,308 1,300 1,240 1,175 1,110 Total liabilities 3,227 3,799 7,225 13,298 16,113 19,938 23,913 28,642 Share capital 1,095 1,095 1,095 1,095 1,095 1,095 1,095 1,096 Reserves/R.E./others 5,347 5,639 6,497 8,920 15,642 19,091 23,262 28,114 Shareholders' equity 6,442 6,734 7,593 10,015 16,737 20,186 24,357 29,211 Minority interests 416 283 246 385 284 300 334 389 Total equity & liabilities 10,085 10,816 15,063 23,698 33,135 40,424 48,604 58,241 EV 33,097 34,137 36,989 37,301 34,643 37,308 35,473 31,724 Net debt/(cash) (2,327) (1,155) (400) (228) (2,785) (4,259) (6,129) (9,933) BVPS (Rmb) 2.496 2.609 2.773 3.658 6.112 6.635 8.006 9.602

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) n.a. 6.7 52.1 79.4 30.9 25.0 26.9 26.9 EBITDA (YoY) n.a. (40.4) 66.0 188.4 36.9 34.1 28.4 24.0 Operating profit (YoY) n.a. (53.1) 66.9 258.9 38.4 33.6 28.6 24.5 Net profit (YoY) n.a. (45.6) 95.2 169.2 26.8 33.6 20.9 16.4 EPS (YoY) n.a. (48.4) 97.9 165.2 20.2 26.9 20.9 16.4 Gross-profit margin 27.0 20.7 20.0 24.7 24.9 25.5 26.0 26.3 EBITDA margin 15.2 8.5 9.2 14.9 15.5 16.7 16.9 16.5 Operating-profit margin 13.0 5.7 6.3 12.6 13.3 14.2 14.4 14.1 ROAE 14.7 7.8 14.0 30.7 25.6 24.8 24.9 24.0 ROAA 9.4 4.9 7.8 13.9 12.1 12.4 12.4 12.1 ROCE 13.1 6.1 9.0 24.2 22.7 23.1 25.4 27.1 ROIC 21.9 8.7 12.1 30.5 27.8 29.8 31.6 33.6 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 3.5 6.2 n.a. 7.1 15.1 15.0 20.0 25.0 Accounts receivable (days) 37.4 43.8 65.4 90.8 105.8 97.8 89.8 82.3 Payables (days) 100.3 106.2 99.8 99.7 110.9 116.0 121.7 122.5 Net interest cover (x) n.a. 9.8 34.1 369.6 174.4 213.7 274.7 342.0 Net dividend payout 22.0 17.7 27.5 20.3 25.5 24.6 24.6 24.6 Source: Company, Daiwa forecasts

Company profile Great Wall Motor Company manufactures and sells pick-up trucks and SUVs in China under its Great Wall brand name. In 2010, the company accounted for a 2.1% share of China’s PV market. The three key product lines are: Hover SUV, Sedan VOLEEX, and Wingle Pickup.

- 28 - China Auto Sector 2 May 2012

Sales volume growth and valuation correlation

Units YoY change 60,000 80% 70% 50,000 60% 40,000 50% 40% 30,000 30% 20% 20,000 10% Key catalyst: ramp-up 10,000 0% (10%) of new factory by June 0 (20%) Jul-2011 Oct-2011 Apr-2011 Jan-2011 Jun-2011 Jan-2012 Feb-2011 Mar-2011 Feb-2012 Mar-2012 Aug-2011 Sep-2011 Nov-2011 Dec-2011 May-2011 Apr-2012E Jun-2012E May-2012E Another rally ahead in 2Q12 Monthly sales volume (LHS) YoY growth (RHS) PER (x) 9.5 Improved utilisation rate likely to lead to 9.0 strong monthly sales growth 8.5 8.0 Great Wall’s Tianjing factory is still in the ramp-up 7.5 7.0 stage, and we estimate it hit a utilisation rate of 55% for 6.5 March 2012, from around 35% in January 2012. As this 6.0 5.5 factory produces Great Wall’s ace products, H6 and 5.0 C50, we believe fast ramp-up to the 85% level by June

2012 is achievable, and will act as a key catalyst for the 1/5/2011 2/5/2011 3/5/2011 4/5/2011 5/5/2011 6/5/2011 7/5/2011 8/5/2011 9/5/2011 1/5/2012 2/5/2012 3/5/2012 company’s car sales volume YoY growth for 2012. 10/5/2011 11/5/2011 12/5/2011 Source: Company, Daiwa forecasts

Great Wall: Tianjing factory utilization rate New factory's utilization rate More diesel vehicle shipments 90% 85% 80% 75% means a better gross margin 70% 65% 60% 55% We expect diesel-powered engines to gain popularity in 49% 50% China, where Great Wall will enjoy first-mover advantage 36% 40% with its existing production capacity of diesel-powered 30% SUVs. As such, we forecast 35% of the company’s 20% shipments in 2012 to be installed with diesel-powered 10% engines, and therefore improve the SUV segment’s 0% blended ASP to 26.7% in 2012 from 26.0% in 2011. Jan-12 Feb-12 Mar-12 Apr-12E May-12E Jun-12E Diesel vehicle shipments as a % of total Source: Company, Daiwa forecasts 50% 45% 40% We assume the new factory’s utilisation rate will 38% 40% 35% improve to 65%, 75% and 85% between April-June 33% 30% 29% 2012, respectively, and deliver a total of 37,000 units of 30% shipments in 2Q12. This in turn will lead to the group 23% recording total sales volume growth of 42% YoY and 20% 57% YoY for May 2012 and June 2012, and, if the past share price/monthly sales volume growth correlation is 10% anything to go by, could trigger another rally. 0% 2009 2010 2011 1Q12 2012E 2013E 2014E 2015E Although we believe the strong 1Q12 results have been Diesel engine powered PV as % of total factored into the share price, we see plenty of catalysts Source: CAAM, Daiwa coming in 2H12, as a result of the six growth drivers which we expect to kick in beyond the sector’s sales Gross margin forecasts for SUVs inflection point in 2Q12. Diesel engine assumption 2009 2010 2011 2012E 2013E 2014E Diesel engines % 23.4 29.5 28.7 35.0 38.0 40.0 Gasoline engines % 76.6 70.5 71.3 65.0 62.0 60.0 GPM Gasoline % 25.3 25.3 25.3 25.8 26.2 26.6 GPM Diesel % 27.8 27.8 27.8 28.3 28.7 29.1 Blended SUV GPM % 25.9 26.0 26.0 26.7 27.2 27.6 Source: CAAM, Daiwa - 29 -

Automobiles & components / China 2 May 2012

Brilliance China Automotive Target price: HK$11.40 → HK$11.40 Up/downside: +35.4% 1114 HK | BCAUY US Share price (30 Apr): HK$8.42

New 3-series launch should be future earnings driver

• New 3-series should be the key catalyst for another rally in 3Q12 • We forecast a change in the product mix from making more 5- series to lift the 2012 blended ASP by 8% YoY • Localising BMW engines should trigger 2013-14 earning upgrades

How do we justify our view?

Catalysts Risks 1) 2H12 new 3-series launch. Key risks include: 1) hard landing for We believe the launch of the new 3- China’s economy, 2) significant price series will boost the share price in cuts due to increased competition,

3Q12 and provide improved and 3) slower-than-expected ramp- Jeff Chung earnings visibility comparable to the up in production at the new factory. (852) 2773 8783 [email protected] cycle in 3Q11 when the new 5-series was launched. 2) 2013 Forecast revisions (%) Year to 31 Dec 12E 13E 14E completion of new engine Revenue change (26.8) (31.8) n.a. Investment case workshop. The joint venture will Net-profit change 2.9 2.2 n.a. New product-mix boosts 2012E not only make BMW sedans in- EPS change 2.8 2.1 n.a. Source: Daiwa forecasts; note: change in revenue partly earnings. Our research in the house but also the engines, starting reflects change in accounting for value-added services market shows Brilliance-BMW with the four- and six- cylinder, Share price performance production is in a transition period, twin-power turbo-charged ones for with production of the old 3-series the new 3-series in 4Q12. Upon the (HK$) (%) completion of the engine factory by 11.5 170 ended and the focus currently on 9.9 150 manufacturing 5-series. We are 2013, we forecast the joint venture’s 8.3 130 therefore cutting our 2012 PV sales EBIT margin to improve to 9.4% for 6.7 110 forecast to 151,267 units (up 41% 2013 and 9.6% for 2014. 5.1 90 YoY) from 165,000, but now forecast May-11 Aug-11 Oct-11 Jan-12 Apr-12 Valuation Brilliance China Automotive (LHS) the blended ASP to rise by 8% YoY Relative to HSI (RHS) (2% previously). We forecast daily We reiterate our Buy (1) rating and production of 5-series to rise from six-month target price of HK$11.40, 12-month range 5.45-10.82 Market cap (US$bn) 5.47 306 units currently to 416 units in based on a 2012E PER of 19.4x – a Average daily turnover (US$m) 21.44 4Q12, and account for 69% of joint- level reached twice following new Shares outstanding (m) 5,044 model launches in the past two Major shareholder Huachen Auto GR (45.3%) venture sales volume, up from 60% last year, and so raise our 2012 EPS years – (38% 2011-13E EPS CAGR Financial summary (Rmb) forecast by 2.8%. and 0.51x PEG with joint-venture Year to 31 Dec 12E 13E 14E sales-volume growth of 64% YoY for Revenue (m) 6,215 6,550 7,207 2013 from 41% YoY in 2012). We Operating profit (m) 181 185 166 New factory ramp-up on track. Net profit (m) 2,406 3,486 4,500 We forecast daily production of the believe the launch of the new 3- Core EPS 0.477 0.691 0.892 X1 SUV to rise gradually to 120 series in 2H12 will make a stronger EPS change (%) 32.6 44.9 29.1 units/day in 4Q12 from 54 units/day impact than that of the 5-series in Daiwa vs Cons. EPS (%) 1.1 13.7 23.6 PER (x) 14.3 9.9 7.6 in March 2012, and account for 16% 2011 as it represents a generation Dividend yield (%) 0.0 0.0 0.0 of this year’s sales volume. We change rather than an upgrade. DPS 0.000 0.000 0.000 understand reservations with PBR (x) 3.7 2.7 2.0 EV/EBITDA (x) 10.3 6.9 5.3 dealers for the new 3-series will start ROE (%) 29.4 31.3 29.7 in the middle of June this year. Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Brilliance: product-mix forecast

We now forecast sales-volume growth for Brilliance’s (units) BMW models of 41% YoY for 2012 and 64% YoY for 140,000 64% growth 2013. With the focus of the company’s product mix 120,000 more on the 5-series this year, we forecast an 8% YoY 100,000 41% growth rise in 2012 blended ASP, which results in us raising our 2012 EPS forecast by 2.8%. Overall we forecast a stable 80,000 EBIT margin for the joint venture of 9.2% for 2012. 60,000 40,000 Meanwhile, we now forecast sales volume for mini-vans 20,000 to increase by 4.2% YoY for 2012 and 6.5% YoY for 2013 0 (down from previous increases of 10% and 15%, 2011 2012E 2013E 3 series 5 series 1 series (X1) New model respectively), with the blended ASP for the respective years dropping by 2% YoY and 1% YoY (vs a previous Source: Company, Daiwa drop of 1.4%, and flat, respectively). Note: 2013E new model = new MPV model

Valuation Brilliance: PER bands

We reiterate our Buy (1) rating and six-month target (HK$) price of HK$11.40, based on a 2012E PER of 19.4x – a 15 14 25x level reached twice following new model launches in the 13 12 past two years – (38% 2011-13E EPS CAGR and 0.51x 20x 11 PEG), which provides 35% upside potential. We believe 10 9 15x the launch of the new 3-series in 2H12 will have a 8 stronger impact than the launch of the 5-series last year, 7 6 10x because it represents a generation change (5-6 years) 5 rather than an upgrade (1-2 years) (the stock was 4 New upgraded version of 5-series launch 3 trading at a PEG of 0.51x at the time when the company 2 1 New genetration 5-series launch launched an upgraded model in 2011). Going forward, 0 we forecast an even stronger JV sales volume growth by Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 64% in 2013 from 41% in 2012. Source: Bloomberg, Daiwa forecasts

Earnings revisions Brilliance: consensus earnings forecasts

The Bloomberg-consensus 2012 and 2013 EPS forecasts Rmb (EPS) have been cut from Rmb0.48 and Rmb0.62, 0.70 respectively, in February this year to Rmb0.47 and 0.65 Rmb0.60, respectively, currently, due to the reduction 0.60 0.55 in the ASPs of imported premium-brand cars in the low 0.50 season in March. 0.45 0.40 0.35 0.30 1-Jul-11 1-Apr-12 1-Apr-11 1-Oct-11 1-Jun-11 1-Jan-12 1-Jan-11 1-Feb-12 1-Mar-12 1-Feb-11 1-Mar-11 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-May-11 Historical Mean EPS 2012 Historical Mean EPS 2013

Source: Bloomberg, Daiwa

- 31 - China Auto Sector 2 May 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales volume (3 series) 11,700 13,000 17,000 30,047 42,290 23,104 40,750 55,500 Sales volume (5 series) 22,000 20,000 27,000 40,441 65,097 104,122 122,250 166,500 Sales volume (X1 SUV) 0 0 0 0 0 24,041 80,000 100,000 Total sales volume (YoY change) 30.6 (2.1) 33.3 60.2 52.3 40.9 63.9 33.1 ASP-Rmb (3 series) 220,000 220,000 220,000 217,000 233,000 240,000 239,000 238,000 ASP-Rmb (5 series) 368,000 368,000 368,000 370,000 425,000 425,000 420,000 415,000 ASP-Rmb (X1 SUV) 0 0 0 0 0 295,000 295,000 295,000 ASP-Rmb (Blended) 316,617 309,697 310,818 304,781 349,389 376,083 347,416 345,959

Profit and loss (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Mini bus 5,394 5,473 6,149 8,949 6,443 6,215 6,550 7,207 Others 8,755 0 0 0 0 0 0 0 Others Total revenue 14,149 5,473 6,149 8,949 6,443 6,215 6,550 7,207 Other income 369 102 154 92 48 75 80 80 COGS (13,015) (4,786) (5,294) (7,725) (5,587) (5,382) (5,666) (6,234) SG&A (1,123) (462) (641) (793) (749) (727) (780) (886) Other op. expenses (181) (49) (43) 0 0 0 0 0 Operating profit 199 277 326 523 155 181 185 166 Net-interest inc./(exp.) 2 (62) (63) (92) (117) (153) (222) (265) Assoc/forex/extraord./others 11 524 (268) 1,034 1,912 2,667 4,089 5,510 Pre-tax profit 212 739 (5) 1,465 1,949 2,695 4,052 5,411 Tax (45) (55) (41) 54 (58) (189) (466) (812) Min. int./pref. div./others (69) 0 0 (248) (79) (100) (100) (100) Net profit (reported) 98 684 (46) 1,271 1,812 2,406 3,486 4,500 Net profit (adjusted) 98 684 (46) 1,271 1,812 2,406 3,486 4,500 EPS (reported) (Rmb) 0.027 0.186 (0.013) 0.255 0.360 0.477 0.691 0.892 EPS (adjusted) (Rmb) 0.027 0.186 (0.013) 0.255 0.360 0.477 0.691 0.892 EPS (adjusted fully-diluted) (Rmb) 0.027 0.186 (0.009) 0.252 0.360 0.477 0.691 0.892 DPS (Rmb) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 1,065 513 72 1,382 1,922 2,973 4,314 5,706 EBITDA 1,065 1,243 513 1,837 2,202 3,108 4,574 6,006

Cash flow (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 212 739 (5) 1,465 1,949 2,695 4,052 5,411 Depreciation and amortisation 733 445 461 280 138 260 300 330 Tax paid (65) (20) (29) (49) (12) (189) (466) (812) Change in working capital 1,105 (865) 1,661 2,045 (1,001) 612 490 486 Other operational CF items (177) (79) 1,620 (916) (1,702) (2,439) (3,794) (5,172) Cash flow from operations 1,809 219 3,708 2,825 (628) 939 582 243 Capex (685) (819) (963) (431) (306) (390) (380) (385) Net (acquisitions)/disposals (9) (28) (378) (103) (243) 0 0 0 Other investing CF items (257) (660) 35 (928) 915 400 400 400 Cash flow from investing (951) (1,507) (1,306) (1,461) 365 10 20 15 Change in debt (3,270) (811) 1,013 (1,267) (924) 0 0 0 Net share issues/(repurchases) 2 0 495 3 9 0 0 0 Dividends paid 0 0 0 0 0 0 0 0 Other financing CF items 2,295 2,967 (847) 364 1,636 672 575 502 Cash flow from financing (973) 2,157 661 (900) 722 672 575 502 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (115) 869 3,063 464 460 1,621 1,177 760 Free cash flow 1,124 (600) 2,745 2,394 (934) 549 202 (142)

Source: Company, Daiwa forecasts

- 32 - China Auto Sector 2 May 2012

Financial summary continued …

Balance sheet (Rmb m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 1,373 1,244 1,609 428 586 2,206 3,383 4,143 Inventory 2,469 1,869 1,350 791 737 681 718 790 Accounts receivable 1,713 1,844 1,438 1,564 994 939 1,012 1,255 Other current assets 2,907 3,550 1,530 2,486 1,933 1,533 1,133 733 Total current assets 8,463 8,507 5,927 5,269 4,251 5,360 6,247 6,921 Fixed assets 3,310 3,882 1,263 1,377 1,393 1,513 1,593 1,628 Goodwill & intangibles 1,350 1,371 164 185 198 208 208 228 Other non-current assets 3,748 3,555 4,111 6,389 6,969 9,636 13,725 19,235 Total assets 16,870 17,315 11,465 13,220 12,811 16,717 21,773 28,013 Short-term debt 370 500 723 165 1,297 2,197 3,067 3,907 Accounts payable 7,914 8,661 4,445 7,147 4,915 5,415 6,015 6,815 Other current liabilities 359 1,889 2,144 650 361 361 361 361 Total current liabilities 8,643 11,049 7,312 7,962 6,572 7,972 9,442 11,082 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 1,968 399 425 2 2 2 2 2 Total liabilities 10,611 11,448 7,736 7,964 6,573 7,973 9,443 11,083 Share capital 394 394 394 394 394 394 394 395 Reserves/R.E./others 5,656 5,660 4,628 5,931 6,595 9,001 12,488 16,986 Shareholders' equity 6,050 6,054 5,022 6,325 6,989 9,395 12,882 17,381 Minority interests 210 (186) (1,293) (1,069) (752) (652) (552) (452) Total equity & liabilities 16,870 17,315 11,465 13,220 12,811 16,717 21,773 28,013 EV 22,923 23,110 21,556 30,082 32,227 31,634 31,427 31,607 Net debt/(cash) (1,003) (744) (886) (263) 711 (10) (316) (237) BVPS (Rmb) 1.644 1.648 1.368 1.269 1.387 1.863 2.554 3.446

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) n.a. (61.3) 12.4 45.5 (28.0) (3.5) 5.4 10.0 EBITDA (YoY) n.a. 16.7 (58.7) 257.9 19.9 41.1 47.2 31.3 Operating profit (YoY) n.a. 39.2 17.7 60.5 (70.4) 16.6 2.3 (9.9) Net profit (YoY) n.a. 597.8 n.a. n.a. 42.6 32.8 44.9 29.1 EPS (YoY) n.a. 596.5 n.a. n.a. 41.1 32.6 44.9 29.1 Gross-profit margin 8.0 12.5 13.9 13.7 13.3 13.4 13.5 13.5 EBITDA margin 4.3 7.9 2.6 6.0 5.0 4.9 4.9 4.9 Operating-profit margin 1.4 5.1 5.3 5.8 2.4 2.9 2.8 2.3 ROAE 1.6 11.3 n.a. 22.4 27.2 29.4 31.3 29.7 ROAA 0.6 4.0 n.a. 10.3 13.9 16.3 18.1 18.1 ROCE 16.1 7.9 1.3 28.0 29.7 32.2 32.8 31.5 ROIC 3.0 4.9 8.2 13.4 2.5 2.1 1.6 1.0 Net debt to equity net cash net cash net cash net cash 10.2 net cash net cash net cash Effective tax rate 21.2 7.5 n.a. n.a. 3.0 7.0 11.5 15.0 Accounts receivable (days) 44.2 118.6 97.4 61.2 72.5 56.8 54.4 57.4 Payables (days) 204.2 552.7 389.0 236.4 341.6 303.3 318.4 324.9 Net interest cover (x) n.a. 8.2 1.1 15.0 16.4 19.4 19.4 21.5 Net dividend payout 0.0 0.0 n.a. 0.0 0.0 0.0 0.0 0.0 Source: Company, Daiwa forecasts

Company profile Brilliance China Automotive (Brilliance) produces minibuses in China. The company also has a joint venture with BMW to produce BMWs (3-series, 5 series and X1 SUVs) in China.

- 33 - China Auto Sector 2 May 2012

BMW 5-series: generation changes E12 First generation 1972-81 E28 Second generation 1982-88 E34 Third generation 1988-96 E39 Fourth generation 1995-2003 E60/E61 Fifth generation 2003-10 F10/F11 Sixth generation 2010-present New 3-series launch Source: Daiwa Note: shaded generations apply to Brilliance should be future Catalyst: launch of new 3-series earnings driver We expect the launch of the new-generation 3-series this year to have a significant impact on earnings and Car dealers have told us buyers should be trigger another rally in the share price. This is because the launch will not just be a model upgrade but a able to register for the new BMW 3-series generation change (which happens every 5-6 years), by the middle of June this year. and should provide greater earnings visibility over the next two years.

New model launches have a BMW 3-series history: generation changes E21 First generation 1975-83 significant share-price impact E30 Second generation 1982-94 E36 Third generation 1990-99 Brilliance’s new model launches in the past few years (5 E46 Fourth generation 1998-06 E90 Fifth generation 2005-11 August 2010 and 2 November 2011) have had a big F30 Sixth generation *Mainland China version to be launched this year impact on the company’s share price. When the new- Source: Company generation 5-series and upgraded versions of the 5- series were launched, the share price rose sharply. Brilliance-BMW sales forecasts Meanwhile, we believe Brilliance’s long-term growth Units 2008 2009 2010 2011 2012E 2013E 2014E fundamentals remain strong. The stock traded at a PEG 3 series 13,000 17,000 30,047 42,290 23,104 40,750 55,500 of 0.5x following the company’s new model launches 5 series 20,000 27,000 40,441 65,097 104,122 122,250 166,500 1 series (X1) 24,041 80,000 100,000 over the past two years. New model 5,000 8,000 Source: Company, Daiwa forecasts At the consolidated EBIT level, we forecast the 2012 contribution from the Brilliance-BMW joint venture Brilliance-BMW ASP forecasts and Brilliance’s mini-van business to account for 93% ASP (Rmb/unit) 2008 2009 2010 2011 2012E 2013E 2014E and 7%, respectively. 3 series 220,000 220,000 217,000 233,000 240,000 239,000 238,000 5 series 368,000 368,000 370,000 425,000 425,000 420,000 415,000 1 series (X1) 295,000 295,000 295,000 New model launches and share-price movements New model 295,000 295,000 (HK$) Source: Company, Daiwa forecasts 15 14 25x 13 Brilliance: mini-van forecasts 12 2011 2012E 2013E 2014E 20x 11 Revenue total (Rmb m) 6,443 6,215 6,550 7,207 10 Revenue (deduct ChenFa) 6,085 5,875 6,210 6,867 9 15x 8 Blended ASP (Rmb) 73,764 72,289 71,566 72,281 7 Total (units) 82,491 85,978 91,530 99,703 6 10x 5 mid-priced (units) 63,745 66,295 70,272 75,894 4 New upgraded version of 5-series launch Deluxe (units) 18,746 19,683 21,258 23,809 3 YoY change 2 1 New genetration 5-series launch Total (units) -13.3% 4.2% 6.5% 8.9% 0 mid-priced (units) -17.1% 4.0% 6.0% 8.0% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Deluxe (units) 2.4% 5.0% 8.0% 12.0% Source: Bloomberg, Daiwa Blended ASP (Rmb) -7.8% -2.0% -1.0% 1.0% Source: Company, Daiwa forecasts

- 34 -

Automobiles & components / China 2 May 2012

Dongfeng Motor Group Target price: HK$16.90 → HK$16.20 Up/downside: +5.9% 489 HK | DNFGY US Share price (30 Apr): HK$15.30

Focused on market share

• Dongfeng is the second-largest automaker in China, but the launch of new domestic models carries brand-dilution risks • Sluggish 1Q12 CV sales add pressure to 2H12 margin outlook • Looks the safest pick on the sector’s inflection point, but it has a

relatively weak 2011-13E EPS CAGR and a higher PEG

How do we justify our view?

EBIT margin of 5% for the model. price cuts due to increased Also, sales volume for its CV division competition, and 3) brand dilution fell by 13% YoY for 1Q12, and we from domestic brand launches. believe the risk of a drop in the CV

segment’s ASP is high in 2Q12. Forecast revisions (%) Jeff Chung Year to 31 Dec 12E 13E 14E (852) 2773 8783 Catalysts Revenue change (7.2) (10.5) n.a. [email protected] Net-profit change (5.0) (7.4) n.a. C-NCAP will tighten its crash-test EPS change (5.0) (7.4) n.a. safety standards in 2H12, which is Source: Daiwa forecasts Investment case likely to be negative for many low- Share price performance A safe pick. We remain positive on quality domestic brands. Dongfeng, the prospects for Dongfeng due to with a strong joint-venture brand (HK$) (%) 19 160 its strong product mix – we forecast premium and safe product line-up, should benefit from consolidation 16 140 DF-Nissan’s and DF-PSA’s 13 120 respective PV market shares to pressure in the industry. 10 100 expand to 5.8% and 2.9% for 2012, 7 80 from 4.8% and 2.8% for 2011. In Valuation Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 We cut 2012E EPS by 5% and the Dongfeng Motor Group (LHS) addition, the company’s strong Relative to HSI (RHS) exposure to SUV sales (35% of 2011 EPS CAGR for 2011-13E to 14% from PV sales volume) should keep it in 16% due to the risks we see. The 12-month range 8.98-15.98 the safe lane, with sector SUV sales stock has risen by 14% so far this Market cap (US$bn) 16.99 year, underperforming the MSCI Average daily turnover (US$m) 31.43 rising by 25% YoY for March 2012. Shares outstanding (m) 8,616 World Auto index by 6% but Major shareholder Dongfeng Motor Corp (66.9%) Change in assumptions. We cut outperforming the MSCI China our 2012 sales-volume forecast for index by 2%. Even so, Dongfeng Financial summary (Rmb) Dongfeng by 4% to 1.97m units, due should benefit from industry Year to 31 Dec 12E 13E 14E to slightly weaker 1Q12 DF-Honda consolidation due to its strong Revenue (m) 149,050 173,857 202,993 market share, and so we continue to Operating profit (m) 15,408 17,853 20,506 and DF-PSA sales growth, down 3% Net profit (m) 11,979 13,747 15,691 YoY and up 7% YoY, respectively. apply a PER of 9.4x to our 2012 EPS Core EPS 1.390 1.595 1.821 forecast. As a result, we are lowering EPS change (%) 14.3 14.8 14.1 Margin dilution likely. Dongfeng our six-month target price to Daiwa vs Cons. EPS (%) 3.0 6.0 8.7 HK$16.2 from HK$16.90. We also PER (x) 8.9 7.8 6.8 has an exclusive dealership strategy Dividend yield (%) 1.5 1.5 1.5 to sell the new domestic brand, the downgrade our rating to Outperform DPS 0.180 0.180 0.180 Venucia, and we are concerned that (2) from Buy (1). PBR (x) 1.9 1.5 1.3 this will eventually raise selling and EV/EBITDA (x) 3.3 2.7 2.1 Risks ROE (%) 23.2 21.8 20.6 administrative expenses and dilute Source: Bloomberg, Daiwa forecasts earnings given our forecast of a low The key risks are: 1) a hard landing for China’s economy, 2) significant

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Dongfeng: revenue and gross-profit margin forecasts We forecast 2012 sales-volume growth rates for DF- Rmb (m) GPM Nissan, DF-Honda, and DF PSA of 22% YoY, 18% YoY, 200,000 22% 21.5% and 16% YoY, respectively. We forecast group PV and 180,000 22% CV sales-volume growth of 20% YoY and 1% YoY, 160,000 140,000 21.2% 21% respectively, with the PV divison accounting for 83% of 120,000 the gross profit, up from 79% for 2011. This should see 100,000 20.8% 21% the PV division’s gross margin increase by 9pp YoY to 80,000 20.1% 20% 22.9% for 2012E and the group’s gross margin rise to 60,000 40,000 20% 20.8%. We are cutting our blended ASP forecast by 1.6% 20,000 YoY for 2012 to reflect the launch of ‘cheaper’ domestic 0 19% brands and possible gross-profit margin dilution. 2010 2011 2012E 2013E Revenue GP margin %

Source: Company, Daiwa forecasts

Valuation Dongfeng: PER bands

We are cutting our 2012 EPS forecast for Dongfeng by Price (HK$) 5% and our 2011-13 EPS CAGR forecast to 14% from 25 13.25x Avg+2SD 16% due to the risks we see for the company. The stock has risen by 14% so far this year, underperforming the 20 10.71x Avg+1SD MSCI World Auto index by 6% but outperforming the 15 MSCI China index by 2%. Even so, we believe Dongfeng will benefit from industry consolidation due to its strong 10 8.16x Avg market share, and so continue to apply a PER of 9.4x 5.62x Avg-1SD 5 (the average of the past-10-year MSCI China Auto Index 3.07x Avg-2SD and minus 1SD over the same period) and therefore 0 lower our six-month target price to HK$16.2 from Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 HK$16.90. Source: Bloomberg, Daiwa forecasts

Earnings revisions Dongfeng: consensus EPS forecasts

The 2012 Bloomberg-consensus EPS forecast has been Rmb (EPS) relatively stable since March 2011. 2.0 1.8 1.6 1.4 1.2 1.0 1-Jul-11 1-Apr-11 1-Apr-12 1-Oct-11 1-Jan-11 1-Jun-11 1-Jan-12 1-Mar-11 1-Mar-12 1-Feb-11 1-Feb-12 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-May-11 Historical Mean EPS 2012 Historical Mean EPS 2013

Source: Bloomberg

- 36 - China Auto Sector 2 May 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales volume - PV 726,520 1,058,811 1,418,091 1,646,410 1,974,044 2,370,580 2,821,376 Sales volume - CV 331,402 371,931 527,865 526,313 527,000 569,160 637,459 ASP PV (Rmb/unit) 66,977 65,039 62,156 57,653 56,716 56,430 56,100 ASP CV (Rmb/unit) 63,307 59,102 63,308 67,399 68,065 67,967 67,667 Gross margins PV (%) 21.0 20.6 24.4 22.0 22.9 23.2 23.3 Gross margins CV (%) 11.0 11.0 14.1 14.3 14.4 14.4 14.5

Profit and loss (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E PV 0 48,660 68,864 88,143 94,921 111,960 133,773 158,278 CV 0 20,980 21,982 33,418 35,473 35,870 38,684 43,135 Others 0 929 912 834 1,047 1,220 1,400 1,580 Total revenue 59,318 70,569 91,758 122,395 131,441 149,050 173,857 202,993 Other income 745 927 1,166 1,643 1,799 1,025 1,025 1,025 COGS (49,503) (58,688) (74,274) (96,033) (105,051) (118,048) (137,036) (159,559) SG&A (5,187) (6,034) (7,435) (9,997) (9,916) (10,806) (13,039) (15,631) Other op. expenses (1,432) (1,970) (3,110) (4,171) (4,943) (5,813) (6,954) (8,323) Operating profit 3,941 4,804 8,105 13,837 13,330 15,408 17,853 20,506 Net-interest inc./(exp.) (175) (92) 109 450 652 330 244 149 Assoc/forex/extraord./others 69 95 195 296 379 450 480 550 Pre-tax profit 3,835 4,807 8,409 14,583 14,361 16,187 18,576 21,205 Tax (202) (647) (1,671) (3,006) (3,401) (3,642) (4,180) (4,771) Min. int./pref. div./others (267) (205) (488) (596) (479) (567) (650) (742) Net profit (reported) 3,366 3,955 6,250 10,981 10,481 11,979 13,747 15,691 Net profit (adjusted) 3,366 3,955 6,250 10,981 10,481 11,979 13,747 15,691 EPS (reported) (Rmb) 0.438 0.459 0.725 1.274 1.216 1.390 1.595 1.821 EPS (adjusted) (Rmb) 0.438 0.459 0.725 1.274 1.216 1.390 1.595 1.821 EPS (adjusted fully-diluted) (Rmb) 0.438 0.459 0.725 1.274 1.216 1.390 1.595 1.821 DPS (Rmb) 0.050 0.050 0.090 0.180 0.180 0.180 0.180 0.180 EBIT 3,941 4,804 8,105 13,837 13,330 15,408 17,853 20,506 EBITDA 6,005 7,307 10,949 18,160 16,419 19,808 22,453 25,106

Cash flow (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 3,835 4,807 8,409 14,583 14,361 16,187 18,576 21,205 Depreciation and amortisation 2,026 2,277 2,689 3,985 3,089 4,400 4,600 4,600 Tax paid (326) (693) (1,373) (2,379) (3,401) (3,642) (4,180) (4,771) Change in working capital (48) 1,153 11,167 11,995 (1,447) 3,978 2,245 1,197 Other operational CF items (385) (274) (378) (951) (1,433) (1,100) (1,160) (1,250) Cash flow from operations 5,102 7,270 20,514 27,233 11,169 19,823 20,081 20,981 Capex (2,927) (4,681) (3,624) (4,732) (6,072) (12,500) (13,500) (13,500) Net (acquisitions)/disposals 55 (402) (764) 2,672 45 0 0 0 Other investing CF items (358) (2,970) (8,606) (1,006) 1,704 950 980 1,000 Cash flow from investing (3,230) (8,053) (12,994) (3,066) (4,323) (11,550) (12,520) (12,500) Change in debt 105 570 2,857 1,981 (580) 5,200 5,800 5,800 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (492) (485) (530) (898) (2,644) (1,551) (1,551) (1,551) Other financing CF items 9 804 229 94 35 25 25 25 Cash flow from financing (378) 889 2,556 1,177 (3,189) 3,674 4,274 4,274 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,494 106 10,076 25,344 3,657 11,947 11,835 12,755 Free cash flow 2,175 2,589 16,890 22,501 5,097 7,323 6,581 7,481

Source: Company, Daiwa forecasts

- 37 - China Auto Sector 2 May 2012

Financial summary continued …

Balance sheet (Rmb m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 9,542 12,431 29,379 41,404 42,899 54,847 66,682 79,437 Inventory 7,573 9,356 8,741 13,935 12,511 15,517 17,624 21,134 Accounts receivable 12,929 12,389 17,001 22,557 25,306 26,940 29,522 34,069 Other current assets 1,012 1,703 4,532 2,846 1,848 1,848 1,848 1,848 Total current assets 31,056 35,879 59,653 80,742 82,564 99,153 115,676 136,488 Fixed assets 16,438 18,390 18,703 18,551 21,578 29,578 38,378 47,178 Goodwill & intangibles 1,961 2,241 2,480 2,773 3,001 3,101 3,201 3,301 Other non-current assets 2,742 3,939 4,853 8,556 10,390 10,840 11,320 11,870 Total assets 52,197 60,449 85,689 110,622 117,533 142,672 168,575 198,837 Short-term debt 5,751 6,919 7,217 3,271 5,993 5,993 5,993 5,993 Accounts payable 22,381 25,645 41,869 56,667 55,755 64,374 71,307 80,561 Other current liabilities 868 893 1,350 2,718 2,967 2,992 3,017 3,042 Total current liabilities 29,000 33,457 50,436 62,656 64,715 73,359 80,317 89,596 Long-term debt 2,514 1,781 4,424 6,289 2,820 8,020 13,820 19,620 Other non-current liabilities 284 319 274 341 414 714 1,014 1,314 Total liabilities 31,798 35,557 55,134 69,286 67,949 82,093 95,151 110,530 Share capital 8,616 8,616 8,616 8,616 8,616 8,616 8,616 8,616 Reserves/R.E./others 9,097 13,439 18,668 28,878 37,778 48,206 60,401 74,542 Shareholders' equity 17,713 22,055 27,284 37,494 46,394 56,822 69,017 83,158 Minority interests 2,686 2,837 3,271 3,842 3,190 3,757 4,407 5,149 Total equity & liabilities 52,197 60,449 85,689 110,622 117,533 142,672 168,575 198,837 EV 107,138 104,593 90,741 75,950 72,821 66,190 60,325 53,562 Net debt/(cash) (1,277) (3,731) (17,738) (31,844) (34,086) (40,834) (46,869) (53,824) BVPS (Rmb) 2.056 2.560 3.167 4.352 5.385 6.595 8.010 9.652

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) n.a. n.a. 30.0 33.4 7.4 13.4 16.6 16.8 EBITDA (YoY) n.a. n.a. 49.8 65.9 (9.6) 20.6 13.4 11.8 Operating profit (YoY) n.a. n.a. 68.7 70.7 (3.7) 15.6 15.9 14.9 Net profit (YoY) n.a. n.a. 58.0 75.7 (4.6) 14.3 14.8 14.1 EPS (YoY) n.a. n.a. 58.0 75.7 (4.6) 14.3 14.8 14.1 Gross-profit margin 16.5 16.8 19.1 21.5 20.1 20.8 21.2 21.4 EBITDA margin 10.1 10.4 11.9 14.8 12.5 13.3 12.9 12.4 Operating-profit margin 6.6 6.8 8.8 11.3 10.1 10.3 10.3 10.1 ROAE n.a. n.a. 25.3 33.9 25.0 23.2 21.8 20.6 ROAA n.a. n.a. 8.6 11.2 9.2 9.2 8.8 8.5 ROCE n.a. n.a. 21.4 29.7 24.4 23.2 21.3 19.8 ROIC n.a. n.a. 38.2 98.5 81.4 67.8 59.8 52.1 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate n.a. 13.5 19.9 20.6 23.7 22.5 22.5 22.5 Accounts receivable (days) n.a. n.a. 58.5 59.0 66.5 64.0 59.3 57.2 Payables (days) n.a. n.a. 134.3 146.9 156.1 147.1 142.4 136.5 Net interest cover (x) 22.5 52.2 n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 11.4 10.9 12.4 14.1 14.8 12.9 11.3 9.9 Source: Company, Daiwa forecasts

Company profile Through joint ventures, Dongfeng Motor Group manufactures diesel engines, light trucks, automobiles, castings, and related spare parts. It has joint ventures with Nissan, Honda and Peugeot. The company is one of the top-three players and accounted for 10% of China’s PV market for 2010, after Shanghai Automotive Industry Corp and First Automobile Works.

- 38 -

Automobiles & components / China 2 May 2012

Geely Automobile Target price: HK$2.30 → HK$3.30 Up/downside: +14.2% 175 HK | GELYY US Share price (30 Apr): HK$2.89

Driving up the value chain

• We expect more five-star products and exports to drive earnings growth with 25% 11-13E diluted EPS CAGR, second highest in the sector • A likely technology transfer from Volvo Cars would narrow Geely’s

drive-train technology gap with its international peers • Potential platform-sharing with Volvo could boost 2014E EBIT by 9% How do we justify our view?

Catalysts and 2) an economic hard landing for We expect the joint venture between China. Geely’s parent and Volvo Cars to be finalised in 2Q12. Regardless of how Forecast revisions (%)

the joint venture is set up, we Year to 31 Dec 12E 13E 14E Jeff Chung believe the platform and further Revenue change (4.0) (3.8) n.a. (852) 2773 8783 Net-profit change 4.5 5.3 n.a. [email protected] envisioned technology-sharing with EPS change 4.5 5.4 n.a. Volvo will lay a solid foundation for Source: Daiwa forecasts Geely and increase the chances of it Investment case becoming mature in drive-train Share price performance We see better earnings ahead. technology. We estimate that if 20% (HK$) (%) We forecast Geely’s five-star safety of the joint venture were to be 4.0 140 3.3 120 products to account for 44% and injected into Geely, it could add Rmb386m to the latter’s 2014E 2.6 100 53% of its total sales volume for 1.9 80 2012 and 2013, respectively, with EBIT, before taking into account the 1.2 60 export sales volume rising by 65% acquisition cost. Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 YoY and 68% YoY for the same years, Geely Automobile (LHS) Valuation Relative to HSI (RHS) resulting in the blended ASP rising by 3.7% and 3.4% YoY, and the gross We believe a rerating is near, as: 1) a 12-month range 1.44-3.54 margin improving to 18.5% for 2012, recovery in the sector would lead to Market cap (US$bn) 2.78 up from 18.2% for 2011. We are higher earnings visibility, triggering Average daily turnover (US$m) 32.15 raising our 2012 diluted EPS earnings upgrades, 2) 54% of Geely’s Shares outstanding (m) 7,450 forecast by 4.5%, while cutting our dealerships are in inland areas, which Major shareholder Geely Holding (51.3%) sales-volume forecast by 9%. positions it well for the next wave of domestic PV sales growth, and 3) we Financial summary (Rmb) Benefitting from consolidation. forecast its utilisation rate to rise to Year to 31 Dec 12E 13E 14E Revenue (m) 24,669 30,605 39,530 With 1Q12 export sales volume 77% for 2012. We believe it has Operating profit (m) 2,799 3,462 4,404 rising by 258% YoY, we forecast the entered an upcycle and deserves to trade at its past-six-year average PER Net profit (m) 1,922 2,423 3,102 2012 ROE to improve to 18.4%. We Core EPS 0.258 0.325 0.416 expect FCF to remain above of 11.3x (from 8.5x previously, the average PER of the MSCI China Auto EPS change (%) 24.6 26.0 28.0 Rmb2bn for the next two years, Daiwa vs Cons. EPS (%) 3.2 9.3 17.1 providing resources for domestic or benchmark during the recovery PER (x) 9.1 7.2 5.6 overseas expansion and R&D, which stage). As such, we raise our six- Dividend yield (%) 1.4 1.6 1.8 should improve its competiveness month target price to HK$3.30. DPS 0.032 0.037 0.043 and market position during the PBR (x) 1.5 1.3 1.1 sector consolidation stage. Risks EV/EBITDA (x) 5.0 3.8 2.8 The key risks are: 1) the joint ROE (%) 18.4 19.6 20.8 venture with Volvo being delayed, Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Geely: Daiwa key forecasts

With the new company guidance, we are cutting our Sales volume (Units) YoY growth 2012E sales volume by 9% and our 2012E and 2013E 600,000 100% revenue by 4% each year, and revising up our diluted EPS forecasts by 4.5% and 5.4%, respectively, as we 400,000 50% expect Geely to sell more quality products under its new brand transformation strategy. We forecast its 5-star safety products to account for 44% and 53% of its total 200,000 0% sales for 2012 and 2013, with export sales rising by 65% YoY and 68% YoY during the same period, resulting in 0 (50%) the blended ASPs improving by 3.7% and 3.4% YoY 2010 2011 2012E 2013E 2014E during the same period, and the gross margin rising to Domestic sales volume (LHS) Export sales volume (LHS) Domestic sales YoY growth (RHS) Export sales YoY growth (RHS) 18.5% for 2012, up from 18.2% for 2011. Source: Company, Daiwa forecasts

Valuation Geely: PER bands

We believe the worst is behind the company and see a Price (HK$) 7 rerating point approaching. 21.22x Avg+2SD 6

We believe it has entered an upcycle and deserves to 5 16.12x Avg+1SD trade at its past-six-year average PER of 11.3x (from 4 8.5x previously, the average PER of the MSCI China 11.03x Avg Auto benchmark). As such, we raise our six-month 3 target price to HK$3.30, to reflect higher medium-long 2 5.94x Avg-1SD term earnings visibility, with a 25% diluted EPS CAGR 1 0.84x Avg-2SD for 2011-13 and translating into 0.45x PEG. 0

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Bloomberg, Daiwa forecast

Earnings revisions Consensus: EPS forecasts

The consensus EPS forecasts for 2012 and 2013 have Rmb (EPS) been trending up slightly since December 2011. We 0.32 believe the worst in terms of YoY declines in sales- 0.30 volume growth is behind Geely. 0.28 0.26 0.24 0.22 0.20 1-Jul-11 1-Apr-11 1-Apr-12 1-Oct-11 1-Jan-11 1-Jun-11 1-Jan-12 1-Feb-11 1-Mar-11 1-Feb-12 1-Mar-12 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-May-11

Historical Mean EPS 2012 Historical Mean EPS 2013

Source: Bloomberg, Daiwa

- 40 - China Auto Sector 2 May 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales volume - PV 181,517 204,205 325,413 415,286 421,385 460,487 552,336 691,135 ASP PV (Rmb/unit) 21,003 43,234 46,916 49,812 51,645 53,404 55,190 Gross margins PV (%) 11.5 15.2 18.1 18.5 18.2 18.5 18.8 19.1

Profit and loss (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Autos 131 4,289 14,069 20,099 20,965 24,669 30,605 39,530 Other 0 0 0 0 0 0 0 0 Others 0 0 0 0 0 0 0 0 Total revenue 131 4,289 14,069 20,099 20,965 24,669 30,605 39,530 Other income 8 308 358 766 997 995 1,093 1,114 COGS (116) (3,638) (11,528) (16,379) (17,145) (20,105) (24,852) (31,979) SG&A (48) (503) (1,289) (2,113) (2,322) (2,640) (3,275) (4,151) Other op. expenses 0 0 0 (273) (137) (120) (110) (110) Operating profit (25) 456 1,610 2,100 2,358 2,799 3,462 4,404 Net-interest inc./(exp.) (14) (11) (33) (192) (167) (200) (190) (230) Assoc/forex/extraord./others 346 473 (26) (7) (7) (7) (7) 0 Pre-tax profit 307 918 1,551 1,900 2,183 2,592 3,265 4,174 Tax 1 (52) (231) (351) (467) (648) (816) (1,043) Min. int./pref. div./others (3) 13 (136) (181) (172) (22) (26) (28) Net profit (reported) 305 879 1,184 1,368 1,543 1,922 2,423 3,102 Net profit (adjusted) 305 879 1,184 1,368 1,543 1,922 2,423 3,102 EPS (reported) (Rmb) 0.062 0.150 0.171 0.186 0.207 0.258 0.325 0.416 EPS (adjusted) (Rmb) 0.062 0.150 0.171 0.186 0.207 0.258 0.325 0.416 EPS (adjusted fully-diluted) (Rmb) 0.061 0.143 0.165 0.161 0.181 0.225 0.284 0.364 DPS (Rmb) 0.010 0.010 0.020 0.026 0.028 0.032 0.037 0.043 EBIT (25) 456 1,610 2,100 2,358 2,799 3,462 4,404 EBITDA (23) 597 1,975 2,604 3,000 3,499 4,222 5,239

Cash flow (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 307 918 1,551 1,900 2,183 2,592 3,265 4,174 Depreciation and amortisation 2 141 365 504 642 700 760 835 Tax paid (1) 10 (205) (214) (281) (648) (816) (1,043) Change in working capital 4 (59) (849) (701) (1,647) 512 108 (785) Other operational CF items (667) (686) 101 500 326 214 204 237 Cash flow from operations (355) 324 963 1,990 1,223 3,370 3,520 3,417 Capex (21) (460) (717) (1,529) (1,420) (800) (1,500) (1,600) Net (acquisitions)/disposals (18) 1,143 (240) 59 (290) 0 0 0 Other investing CF items 257 (1,008) (423) 15 (1,558) 0 0 0 Cash flow from investing 218 (325) (1,380) (1,455) (3,268) (800) (1,500) (1,600) Change in debt (9) (44) 1,653 (485) 716 460 470 470 Net share issues/(repurchases) 611 0 677 0 0 0 0 0 Dividends paid (55) (60) (91) (148) (170) (209) (240) (276) Other financing CF items 9 16 1,834 146 59 0 0 0 Cash flow from financing 556 (88) 4,073 (488) 604 251 230 194 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 419 (89) 3,656 47 (1,441) 2,821 2,251 2,011 Free cash flow (376) (136) 246 460 (197) 2,570 2,020 1,817

Source: Company, Daiwa forecasts

- 41 - China Auto Sector 2 May 2012

Financial summary continued …

Balance sheet (Rmb m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 762 1,743 5,392 4,636 3,384 5,998 8,051 9,833 Inventory 14 487 641 987 1,358 1,487 1,677 2,166 Accounts receivable 65 2,336 6,145 9,913 12,215 13,517 15,932 20,577 Other current assets 0 1,082 1,201 1,404 1,517 1,517 1,517 1,517 Total current assets 841 5,648 13,379 16,939 18,473 22,519 27,177 34,093 Fixed assets 31 3,946 5,398 6,916 9,021 9,121 9,861 10,626 Goodwill & intangibles 0 0 6 6 6 6 6 6 Other non-current assets 2,079 4,503 5,424 7,035 9,123 9,216 9,949 10,706 Total assets 2,920 10,151 18,802 23,974 27,597 31,735 37,127 44,799 Short-term debt 39 1,043 1,579 2,753 4,397 4,657 4,927 5,197 Accounts payable 37 4,161 7,329 10,508 12,114 14,058 16,770 21,119 Other current liabilities 0 69 0 0 0 0 0 0 Total current liabilities 76 5,273 8,908 13,261 16,512 18,715 21,697 26,316 Long-term debt 0 87 1,318 1,562 843 1,043 1,243 1,443 Other non-current liabilities 297 8 1,480 73 92 92 92 92 Total liabilities 373 5,368 11,706 14,897 17,447 19,850 23,032 27,851 Share capital 108 123 137 139 139 139 139 139 Reserves/R.E./others 2,236 4,075 6,239 7,883 9,443 11,156 13,339 16,165 Shareholders' equity 2,344 4,198 6,376 8,022 9,582 11,295 13,478 16,305 Minority interests 203 585 721 1,056 568 590 616 644 Total equity & liabilities 2,920 10,150 18,803 23,974 27,597 31,735 37,127 44,799 EV 8,969 13,098 15,319 18,040 19,797 17,643 16,092 14,817 Net debt/(cash) (723) (613) (2,495) (320) 1,856 (298) (1,881) (3,192) BVPS (Rmb) 0.475 0.718 0.872 1.078 1.284 1.516 1.809 2.188

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) 0.0 n.m. 228.0 42.9 4.3 17.7 24.1 29.2 EBITDA (YoY) 0.0 n.a. 230.7 31.9 15.2 16.7 20.7 24.1 Operating profit (YoY) 0.0 n.a. 252.9 30.4 12.3 18.7 23.7 27.2 Net profit (YoY) 0.0 188.2 34.7 15.6 12.8 24.5 26.0 28.0 EPS (YoY) 0.0 142.7 14.1 8.4 11.6 24.6 26.0 28.0 Gross-profit margin 11.5 15.2 18.1 18.5 18.2 18.5 18.8 19.1 EBITDA margin n.a. 13.9 14.0 13.0 14.3 14.2 13.8 13.3 Operating-profit margin n.a. 10.6 11.4 10.4 11.2 11.3 11.3 11.1 ROAE 13.0 26.9 22.4 19.0 17.5 18.4 19.6 20.8 ROAA 10.4 13.4 8.2 6.4 6.0 6.5 7.0 7.6 ROCE n.a. 10.7 20.2 18.0 16.4 17.0 18.3 20.1 ROIC n.a. 14.4 31.2 25.6 17.8 17.8 21.8 25.4 Net debt to equity net cash net cash net cash net cash 19.4 net cash net cash net cash Effective tax rate n.a. 5.7 14.9 18.5 21.4 25.0 25.0 25.0 Accounts receivable (days) 182.3 102.2 110.0 145.8 192.6 190.4 175.6 168.6 Payables (days) 103.1 178.6 149.0 162.0 196.9 193.6 183.8 174.9 Net interest cover (x) n.a. 40.5 48.6 10.9 14.1 14.0 18.2 19.1 Net dividend payout 16.2 6.7 11.7 14.0 13.5 12.5 11.4 10.2 Source: Company, Daiwa forecasts

Company profile Geely Automobile Holding Limited (Geely) manufactures and sells automobiles and related components. In 2010, the company had a 3% share of China's passenger-vehicle (PV) market. Geely's headquarters are in Hangzhou, the capital of Zhejiang Province, and it operates six car-assembly and power-train manufacturing plants in China.

- 42 - China Auto Sector 2 May 2012

ƒ Geely: 5-star models as % of total sales forecast 5-star models as % of total sales 70%

60%

50%

Dual growth drivers 40%

30%

Driving up the value chain 20%

10%

Recovering through organic 0% growth 2009 2010 2011 2012E 2013E 2014E Source: Company, Daiwa

Even without factoring in the potential contribution from Volvo Cars, we believe Geely would still be able to Potential technology-sharing with recover through a solid organic growth path for the following reasons. Volvo

1) we forecast its quality model sales (five-star safety We believe Geely’s long-term earnings visibility will be products) to account for 44% and 53% of its total sales greatly enhanced, regardless of how the joint venture is for 2012 and 2013, respectively, while structured. With its possible platform-sharing strategy with Volvo Cars, we believe Geely’s drive-train 2) its export sales rise by 65% and 68% YoY over the technology would also be greatly improved, allowing it same period. to stand out from other domestic brands going forward.

These dual growth drivers would improve the blended We estimate that if 20% of the joint venture were to be ASP by 3.7% and 3.4% YoY, respectively, on our injected into Geely, it could add Rmb386m, or 9%, to forecasts, with the gross margin rising to 18.5% for the latter’s 2014E EBIT (before taking into account the 2012, up from 18.2% for 2011, implying a 24% acquisition cost), assuming 70,000 PV units being improvement on 2012E diluted EPS and a higher ROE produced by the joint venture in 2014, with a blended of 18.4%. ASP of Rmb300,000 and a 9.2% EBIT margin. However, we have not factored this into our 2014 ƒ Geely: duel growth drivers (quality upgrades and exports) earnings forecasts. 50% We believe Geely’s long-term earnings visibility will be 40% enhanced with the possibility of it sharing the following Quality upgrade 30% core technologies with Volvo Cars.

20% Engine: four-cylinder Volvo Environmental Architecture (VEA) engine includes common rail 10% diesels and direct injected petrol engines. It covers the Export level 0% whole range from high power and torque variants to -09 -10 -11 -10 -11 y y y p p fuel-efficient derivatives. Jul-09 Jul-10 Jul-11 Jan-11 Jan-12 Jan-09 Jan-10 Mar-11 Mar-09 Mar-10 Nov-10 Nov-11 Nov-09 Sep-09 Se Se Ma Ma Ma Export % of total sales 5-star model % of total sales Pioneering flywheel technology: the so-called Source: Company, Daiwa Kinetic Energy Recovery System (KERS) captures braking energy in a flywheel that spins at up to 60,000 revs a minute. Once released, this stored energy can either accelerate the car or propel the vehicle once it reaches cruising speed. The flywheel system offers the driver an additional 80 horsepower, while reducing fuel consumption by up to 20%.

- 43 - China Auto Sector 2 May 2012

again, with better short-medium term earnings visibility, which should trigger another upgrading cycle. Lightweight design: Volvo Car has taken the lead in Moreover, we believe its co-operation with Volvo Cars automotive lightweight design with, upcoming scalable will enhance its long-term market position with platform architecture models being 100-150kg lighter possible technology transfers/upgrades. than current models of the same size. The new architecture enables electrification at all levels – and Key assumptions and forecasts new chassis technologies combined with the lower 2010 2011 2012E 2013E 2014E 5-stars model as % of total sales 27.4 35.7 44.0 53.0 62.0 weight and improved weight distribution will boost Domestic sales volume (units) 392,633 381,785 395,147 442,565 504,524 driving dynamics. Domestic sales YoY growth (%) 28.3 -2.8 4 12.0 14.0 Export sales volume (units) 22,653 39,600 65,340 109,771 186,611 Platform-sharing: We believe Geely and Volvo Cars Export sales YoY growth (%) 17.1 74.8 65.0 68 70 Total sales volume (Units) 415,286 421,385 460,487 552,336 691,135 are highly likely to pool the purchasing of parts and Total sales volume YoY growth (%) 27.6 1.5 9.3 19.9 25.1 components and jointly develop small engines and Export % of total sales volume (%) 5.5 9.4 14.2 19.9 27.0 technologies for electric vehicles. We believe Geely will Blended ASP (Rmb) 48,399 49,812 51,645 53,404 55,190 also develop a premium brand for the mass market in GPM (%) 18.4 18.2 18.5 18.8 19.1 China using Volvo’s technologies, but the new brand Domestic sales average ASP (Rmb) 48,500 50,000 52,000 54,000 56,000 Export sales average ASP (Rmb) 46,650 48,000 49,500 51,000 53,000 will later be put under Geely Automotive. Volvo aims to Source: Company, Daiwa forecasts increase Chinese deliveries to 200,000 units by 2014, from 47,000 last year, according to a media report.

Conclusion: According to the historical daily valuation versus sales volume correlation, we believe Geely’s sales volume growth has entered an upcycle

Geely daily valuation vs. monthly sales YoY growth Average monthly sales (units) Share price (HK$) Monthly sales YoY growth 160% 6 Share price 140% 5 120%

100% 4 80%

60% 3

40% 2 20%

0% 1 -20% forecast

-40% 0 1/2/2009 3/2/2009 5/2/2009 7/2/2009 9/2/2009 1/2/2010 3/2/2010 5/2/2010 7/2/2010 9/2/2010 1/2/2011 3/2/2011 5/2/2011 7/2/2011 9/2/2011 1/2/2012 3/2/2012 5/2/2012 7/2/2012 9/2/2012 11/2/2009 11/2/2010 11/2/2011 11/2/2012

Source: Company, CAAM, Daiwa forecasts

- 44 -

Automobiles & components / China 2 May 2012

Guangzhou Automobile Group Target price: HK$6.80 → HK$7.60 Up/downside: -11.7% 2238 HK Share price (30 Apr): HK$8.61

We remain cautious on the outlook

• 2Q12 YoY sales growth for the Camry and Accord should be significant due to the low base effect • However, we factor in a 50% cut in government subsidy with a 3.3% effective tax rate, implying 12% YoY EPS growth for 2012 • Initial joint venture start-up losses likely to trim the joint venture pre-tax profit margin by 4.5pp to 7.8% for 2012 How do we justify our view?

Guangdong Province, which is close Risks to Guangzhou Auto’s headquarters. The key upside risks are: 1) a strong Upon early completion in 4Q12, VW 3Q12 recovery from a low base effect, will be able to penetrate Guangdong or 2) the government encouraging

Province with its potential product consolidation with more subsidies. Jeff Chung mix of the Audi A4, Jetta, Golf, (852) 2773 8783 Forecast revisions (%) [email protected] Magotan and Sagitar. Year to 31 Dec 12E 13E 14E Revenue change (82.9) (82.8) n.a. Valuation Net-profit change (4.6) (10.6) n.a. Investment case As we believe the sector is EPS change (1.9) (8.1) n.a. We estimate Rmb350-400m in approaching an inflection point in Source: Daiwa forecasts start-up losses for the initial Fiat terms of sales volume, we are raising Share price performance and Mitsubishi joint ventures, which our target PER from 7.5x to 8.5x, (HK$) (%) would trim the overall joint venture and assume that the company’s pace 10.6 120 pre-tax profit margin by 4.5pp to of recovery is in line with that of the 9.4 110 7.8%. After factoring in a possible industry due to the low base effect in 8.2 100 50% cut in subsidies and a 3.3% 2Q11. Our new multiple is, however, 7.0 90 5.8 80 effect tax rate in 2012E, we forecast still lower than the sector average Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 EPS to rise by 12% YoY for 2012. In over the past 6 years, as we have Guangzhou Automobile Group (LHS) our view, Guangzhou Auto is a pick factored in the risks from Relative to HSI (RHS) for 2013, rather than for 2012, with Guangzhou Auto’s recent accounting 12-month range 6.24-9.99 our forecast calling for an EPS method change, the possibility of the Market cap (US$bn) 7.34 CAGR of 15% for 2011-13 and a 15% government subsidy being dropped Average daily turnover (US$m) 6.90 ROE for 2012, the lowest in the Shares outstanding (m) 6,618 in 2012, and further start-up losses Major shareholder GAIG (58.8%) sector. Although we expect the from the setting up of the new joint company’s 2Q12 sales growth to ventures. We retain our Financial summary (Rmb) improve due to the low base effect, Underperform rating, with a new Year to 31 Dec 12E 13E 14E the group’s 1Q12 Honda and Toyota six-month target price of HK$7.6 Revenue (m) 13,087 15,240 17,604 Operating profit (m) (735) (1,282) (1,826) divisional sales registered a 17% based on our new target 2012E PER Net profit (m) 4,648 5,485 6,031 decline and 2% YoY growth, of 8.5x. Although we believe the Core EPS 0.722 0.852 0.937 respectively, signalling a bumpy worst is behind the company, with it EPS change (%) 11.9 18.0 9.9 recovery path. trading currently at an attractive Daiwa vs Cons. EPS (%) (0.9) 7.9 19.9 2012E PBR of 1.4x, we believe the PER (x) 9.6 8.2 7.4 Dividend yield (%) 1.5 1.8 2.0 Catalysts stiff competition in the B-class DPS 0.105 0.124 0.137 VW poses a new threat: the joint segment and the company’s weak PBR (x) 1.4 1.3 1.1 venture First Auto Work- product line-up of SUVs will limit its EV/EBITDA (x) 8.3 7.4 7.3 VW (Not listed) is building an recovery. ROE (%) 15.0 15.8 15.4 assembly plant in Foshan, Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report. China Auto Sector 2 May 2012

How do we justify our view?

Growth outlook Valuation Earnings revisions

Guangzhou Auto: revenue, blended ASP and pre-tax margin Growth outlook forecast

We estimate Rmb350-400m in start-up losses for the JV revenue (Rmb m); JV blended ASP (Rmb) Pre-tax margin initial Fiat and Mitsubishi joint ventures, which would 120,000 8% trim the overall joint venture pre-tax profit margin by 8% 4.5pp to 7.8%. After factoring in a possible 50% cut in 100,000 8% subsidy and a 3.3% effect tax rate in 2012E, we forecast EPS to rise by 12% YoY for 2012. In our view, 80,000 8% 7% Guangzhou Auto is a pick for 2013, rather than for 2012, 60,000 with our forecast for EPS to rise at a CAGR of 15% for 7% 2011-13. Meanwhile, we believe the company’s 2Q12 40,000 7% sales growth will improve due to the low base effect. 2011 2012E 2013E 2014E Total JV sales revenue (Rmb m, LHS) JV blended ASP (Rmb, LHS) JV pre-tax margin (RHS)

Source: Company, Daiwa forecasts

Valuation Guangzhou Auto: PER bands

Based on its past 4-month highest/lowest PER trading Price (HK$) range of between 10.61x and 7.34x, we take a slightly 14 15.3x Avg+2SD lower-than-average PER of 8.5x (0.79x PEG) as our 13 2012E multiple to reflect the risks from Guangzhou 12 13.13x Avg+1SD 11 Auto’s recent accounting method change (difficulty to 10 10.95x Avg do meaningful year-on-year comparisons, etc), and 9 further start-up losses from the setting up of the new 8 joint ventures. We therefore maintain our 7 8.78x Avg-1SD 6 Underperform rating, with a new six-month target price 5 6.61x Avg-2SD of HK$7.60 (up from HK$6.80 previously) to reflect 4 the recovery in the sector that we expect. Jul-11 Apr-11 Apr-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Mar-11 Mar-12 Feb-11 Feb-12 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 Dec-11 May-11

Source: Bloomberg, Daiwa forecasts

Earnings revisions Consensus: EPS forecasts

The consensus has been consistently adjusting down its Rmb (EPS) 2012 and 2013 EPS earnings forecasts since June 2011 1.3 as a result of the Japan earthquake and intensifying 1.2 competition in the B-class sedan segment. 1.1 1.0 0.9 0.8 0.7 1-Jul-11 1-Apr-11 1-Apr-12 1-Oct-11 1-Jan-11 1-Jun-11 1-Jan-12 1-Feb-11 1-Mar-11 1-Feb-12 1-Mar-12 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-May-11 Historical Mean EPS 2012 Historical Mean EPS 2013

Source: Bloomberg

- 46 - China Auto Sector 2 May 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales volume - PV 473,621 486,266 583,246 719,639 722,005 869,233 1,080,000 1,273,200 Sales volume - CV 4,778 2,245 3,112 4,704 6,248 6,560 6,888 7,233 ASP PV (Rmb/unit) 91,082 91,524 87,366 78,602 82,135 85,420 88,410 89,294 Gross margins PV (%) 16.8 16.7 16.6 8.5 3.9 6.0 6.5 6.8

Profit and loss (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E PV 0 0 0 7,460 9,863 11,946 14,077 16,421 CV + others 0 0 0 1,282 1,122 1,141 1,163 1,183 Others Total revenue 42,407 43,770 50,254 8,742 10,984 13,087 15,240 17,604 Other income (29) (6) (429) 58 840 430 181 57 COGS (35,277) (36,446) (41,918) (7,999) (10,560) (12,302) (14,250) (16,407) SG&A (3,097) (4,414) (4,687) (842) (1,806) (1,950) (2,454) (3,081) Other op. expenses 0 0 0 58 0 0 0 0 Operating profit 4,004 2,904 3,220 (41) (541) (735) (1,282) (1,826) Net-interest inc./(exp.) 111 157 45 (128) (41) (100) (140) (190) Assoc/forex/extraord./others 838 515 716 5,690 4,639 5,664 7,406 8,739 Pre-tax profit 4,953 3,576 3,980 5,522 4,057 4,828 5,984 6,722 Tax (138) (602) (724) (2) 110 (160) (479) (672) Min. int./pref. div./others (1,378) (1,291) (1,224) (1,225) 105 (20) (20) (19) Net profit (reported) 3,437 1,683 2,032 4,295 4,272 4,648 5,485 6,031 Net profit (adjusted) 3,437 1,683 2,032 4,295 4,272 4,648 5,485 6,031 EPS (reported) (Rmb) 0.982 0.481 0.541 0.919 0.645 0.722 0.852 0.937 EPS (adjusted) (Rmb) 0.982 0.481 0.541 0.919 0.645 0.722 0.852 0.937 EPS (adjusted fully-diluted) (Rmb) 0.982 0.481 0.541 0.919 0.645 0.722 0.852 0.937 DPS (Rmb) 0.000 0.000 0.000 0.110 0.104 0.105 0.124 0.137 EBIT 4,004 2,904 3,220 (41) 4,098 4,928 6,124 6,912 EBITDA 4,709 3,625 4,189 90 4,348 5,178 6,374 7,162

Cash flow (Rmb m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 4,953 3,576 3,980 5,522 4,057 4,828 5,984 6,722 Depreciation and amortisation 705 721 969 130 250 250 250 250 Tax paid (411) (571) (568) (831) 110 (160) (479) (672) Change in working capital (203) (199) 4,218 (539) 467 (2) 25 (293) Other operational CF items (1,619) (894) (1,182) (11,212) (10,531) (11,227) (14,672) (17,287) Cash flow from operations 3,424 2,633 7,417 (6,930) (5,646) (6,311) (8,892) (11,280) Capex (1,164) (2,679) (3,206) (2,719) (1,000) (1,500) (2,000) (1,800) Net (acquisitions)/disposals (23) (40) (755) 65 (265) 0 0 0 Other investing CF items 1,865 (2,070) (4,048) 4,614 998 500 500 500 Cash flow from investing 678 (4,789) (8,009) 1,960 (267) (1,000) (1,500) (1,300) Change in debt 134 341 6,071 617 1,501 400 300 300 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (651) (737) (1,073) (676) (1,287) (1,200) (1,260) (1,323) Other financing CF items 221 701 1,347 33 (110) 160 479 672 Cash flow from financing (296) 305 6,345 (26) 104 (640) (481) (351) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 3,806 (1,850) 5,753 (4,995) (5,809) (7,951) (10,873) (12,931) Free cash flow 2,260 (46) 4,211 (9,648) (6,646) (7,811) (10,892) (13,080)

Source: Company, Daiwa forecasts Note: The accounting policy for interest in jointly-controlled entity has been changed to the equity method from FY10 onwards

- 47 - China Auto Sector 2 May 2012

Financial summary continued …

Balance sheet (Rmb m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 13,315 14,021 24,470 15,624 17,140 14,593 10,507 5,452 Inventory 1,294 1,658 2,242 1,353 1,537 1,793 2,004 2,508 Accounts receivable 2,297 2,220 1,666 2,845 2,980 3,406 3,841 4,727 Other current assets 0 0 0 0 0 0 0 0 Total current assets 16,906 17,899 28,378 19,822 21,656 19,792 16,353 12,687 Fixed assets 5,832 7,254 8,338 3,028 4,309 5,559 7,309 8,859 Goodwill & intangibles 582 1,318 1,943 2,112 3,257 3,257 3,257 3,257 Other non-current assets 3,430 3,601 4,969 13,558 15,390 21,054 28,460 37,198 Total assets 26,750 30,072 43,628 38,520 44,612 49,661 55,378 62,001 Short-term debt 1,325 1,292 7,649 7,950 7,737 8,137 8,437 8,737 Accounts payable 7,646 8,038 12,549 3,374 4,160 4,840 5,512 6,608 Other current liabilities 209 455 888 275 390 890 1,390 1,890 Total current liabilities 9,180 9,785 21,086 11,600 12,287 13,868 15,339 17,235 Long-term debt 967 1,454 1,070 1,053 2,100 2,100 2,100 2,100 Other non-current liabilities 1 1 10 23 39 39 39 39 Total liabilities 10,148 11,240 22,167 12,676 14,426 16,007 17,478 19,374 Share capital 3,935 3,935 3,935 6,148 6,149 6,150 6,151 6,152 Reserves/R.E./others 5,903 7,474 9,125 19,463 23,061 26,508 30,732 35,439 Shareholders' equity 9,838 11,409 13,060 25,612 29,210 32,658 36,883 41,591 Minority interests 6,765 7,421 8,402 233 976 996 1,016 1,035 Total equity & liabilities 26,751 30,070 43,628 38,520 44,612 49,661 55,378 62,001 EV 20,132 20,537 18,809 26,176 39,793 42,760 47,166 52,540 Net debt/(cash) (11,023) (11,275) (15,750) (6,621) (7,303) (4,356) 30 5,385 BVPS (Rmb) 2.811 3.260 3.479 5.481 4.414 4.935 5.573 6.284

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) n.a. 3.2 14.8 (82.6) 25.6 19.1 16.5 15.5 EBITDA (YoY) n.a. (23.0) 15.6 (97.9) n.m. 19.1 23.1 12.4 Operating profit (YoY) n.a. (27.5) 10.9 n.a. n.a. n.a. n.a. n.a. Net profit (YoY) n.a. (51.0) 20.7 111.4 (0.5) 8.8 18.0 9.9 EPS (YoY) n.a. (51.0) 12.6 69.8 (29.8) 11.9 18.0 9.9 Gross-profit margin 16.8 16.7 16.6 8.5 3.9 6.0 6.5 6.8 EBITDA margin 11.1 8.3 8.3 0.1 5.7 5.8 6.1 5.9 Operating-profit margin 9.4 6.6 6.4 n.a. n.a. n.a. n.a. n.a. ROAE 34.9 15.8 16.6 22.2 15.6 15.0 15.8 15.4 ROAA 12.8 5.9 5.5 10.5 10.3 9.9 10.4 10.3 ROCE 21.2 14.4 12.4 n.a. 10.9 11.7 13.3 13.6 ROIC 69.8 36.8 39.7 n.a. n.a. n.a. n.a. n.a. Net debt to equity net cash net cash net cash net cash net cash net cash 0.1 12.9 Effective tax rate 2.8 16.8 18.2 0.0 n.a. 3.3 8.0 10.0 Accounts receivable (days) 19.8 18.8 14.1 94.2 96.8 89.1 86.8 88.8 Payables (days) 65.8 65.4 74.8 332.4 125.2 125.5 124.0 125.6 Net interest cover (x) n.a. n.a. n.a. n.a. 100.8 49.3 43.7 36.4 Net dividend payout 0.0 0.0 0.0 12.0 16.1 14.6 14.6 14.6 Source: Company, Daiwa forecasts Note: The accounting policy for interest in jointly-controlled entity has been changed to the equity method from FY10 onwards

Company profile Guangzhou Automobile Group manufactures, sells, and services automobiles. The company also makes automobile parts and components, and is involved in auto financing and related services for both the overseas and domestic markets. In 2010, the company had a 5% share of China's PV market. It has already launched its own brand, the Trumpchi, in late 2010.

- 48 - China Auto Sector 2 May 2012

Daiwa’s Banner Products

Please also see:

China Auto Sector: China Auto Sector: Taxi tour (Day 1: BYD) Taxi tour (Day 2: Brilliance) 3 February 2012 20 February 2012 Jeff Chung (852) 2773 8783 ([email protected]) Jeff Chung (852) 2773 8783 ([email protected])

China Auto Sector: China Auto Sector: Taxi tour (Day 3: Abu Dhabi) Initiation: safety matters 9 March 2012 2 November 2011 Jeff Chung (852) 2773 8783 ([email protected]) Jeff Chung (852) 2773 8783 ([email protected])

.

- 49 -

Daiwa’s Asia Pacific Research Directory Hong Kong Regional Research Head Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Christopher LOBELLO (852) 2848 4916 [email protected] Head of Product Management John HETHERINGTON (852) 2773 8787 [email protected] Head of Thematic Research; Product Management Tathagata Guha ROY (852) 2773 8731 [email protected] Head of China Research; Chief Economist (Regional) Mingchun SUN (852) 2773 8751 [email protected] Deputy Head of Hong Kong and China Research; Regional Head of Clean Energy and Dave DAI (852) 2848 4068 [email protected] Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Macro Economics (Regional) Kevin LAI (852) 2848 4926 [email protected] Head of Hong Kong Research; Regional Property Coordinator; Jonas KAN (852) 2848 4439 [email protected] Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Automobiles and Components (China) Jeff CHUNG (852) 2773 8783 [email protected] Head of Greater China FIG; Banking (Hong Kong, China) Grace WU (852) 2532 4383 [email protected] Banking/Diversified Financials (Taiwan) Jerry YANG (852) 2773 8842 [email protected] Banking (Hong Kong, China) Queenie POON (852) 2532 4381 [email protected] Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 [email protected] Internet (Hong Kong, China) Alicia HU (852) 2532 4180 [email protected] Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 [email protected] Regional Head of Materials; Materials/Energy (Regional) Alexander LATZER (852) 2848 4463 [email protected] Materials (China) Felix LAM (852) 2532 4341 [email protected] Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Mark CHANG (852) 2773 8729 [email protected] Small/Medium Cap (Regional) John CHOI (852) 2773 8730 [email protected] Head of Solar Pranab Kumar SARMAH (852) 2848 4441 [email protected] Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 [email protected] Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 [email protected] Custom Products Group Philip LO (852) 2773 8714 [email protected] Custom Products Group Jibo MA (852) 2848 4489 [email protected]

South Korea Head of Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 [email protected] Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 [email protected] Banking/Finance Anderson CHA (82) 2 787 9185 [email protected] Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 [email protected] Materials (Chemicals); Oil and Gas Jihye CHOI (82) 2 787 9121 [email protected] Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 [email protected] Custom Products Group Shannen PARK (82) 2 787 9184 [email protected]

Taiwan Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8758 6247 [email protected] IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8758 6251 [email protected]

India Head of India Research; Pharmaceuticals and Healthcare Kartik A. MEHTA (91) 22 6622 1012 [email protected] Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Capital Goods/Utilities Saurabh MEHTA (91) 22 6622 1009 [email protected] FMCG; Consumer Percy PANTHAKI (91) 22 6622 1063 [email protected]

- 50 -

Singapore Head of Singapore Research Tony DARWELL (65) 6321 3050 [email protected] Quantitative Research Josh CHERIAN (65) 6499 6549 [email protected] Quantitative Research Suzanne HO (65) 6499 6545 [email protected] Banking (ASEAN) Srikanth VADLAMANI (65) 6499 6570 [email protected] Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH (65) 6499 6548 [email protected] Property and REITs David LUM (65) 6329 2102 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thematic Research Amy CHEW (65) 6321 3085 [email protected]

Philippines Head of the Philippines Research; Strategy; Capital Goods; Materials Rommel RODRIGO (63) 2 813 7344 ext 302 [email protected] Economy; Consumer; Power and Utilities; Transportation – Aviation Alvin AROGO (63) 2 813 7344 ext 301 [email protected] Property; Banking; Transportation – Port Danielo PICACHE (63) 2 813 7344 ext 293 [email protected]

- 51 -

Daiwa’s Office Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

DAIWA CAPITAL MARKETS LIMITED HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753 Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340 Federal Republic of Germany Daiwa Capital Markets Europe Limited, Paris Branch 127, Avenue des Champs-Elysées, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250 Daiwa Capital Markets Europe Limited, 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977 Moscow Representative Office Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Europe Limited, Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, (971) 47 090 401 (971) 43 230 332 Dubai, UAE. Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, 150-876, Korea Daiwa Securities Capital Markets Co Ltd, Room 3503/3504, SK Tower, (86) 10 6500 6688 (86) 10 6500 3594 Beijing Representative Office No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, (86) 21 3858 2000 (86) 21 3858 2111 Pudong, Shanghai 200120, People’s Republic of China Daiwa Securities Capital Markets Co. Ltd, Level 8 Zuellig House, 1 Sliom Road, (66) 2 231 8381 (66) 2 231 8121 Bangkok Representative Office Bangkok 10500, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Capital Markets Co. Ltd, Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hanoi Representative Office Hoan Kiem Dist. Hanoi, Vietnam

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

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

- 52 -

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 Capital Markets Co. Ltd., 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 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.

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: SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Ltd. (1165 HK); Rexlot Holdings Limited (555 HK); China Outfitters Holdings Limited (1146 HK); Beijing Jingneng Clean Energy Co. Limited (579 HK); Infraware Inc. (041020 KS) *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 • 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 (“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. 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. 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. DHK market making DHK may from time to time make a market in securities covered by this research.

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 Stockbroking 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. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

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 Philippines 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 Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

- 53 -

United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA 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.

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-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

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 entity 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 (telephone 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, 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 six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

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, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

- 54 -