Deutsche Bank Markets Research Industry Date 18 May 2016 China Autos Asia China Automobiles & Components Vincent Ha, CFA Fei Sun, CFA Research Analyst Research Analyst (+852 ) 2203 6247 (+852 ) 2203 6130 [email protected] [email protected] F.I.T.T. for investors What you should know about China's new energy vehicle (NEV) market Many players, but only a few are making meaningful earnings contributions One can question China’s target to put 5m New Energy Vehicles on the road by 2020, or its ambition to prove itself a technology leader in the field, but the surge in demand with 171k vehicles sold in 4Q15 cannot be denied. Policy imperatives and government support could ensure three-fold volume growth by 2020, which would make China half of this developing global market. New entrants are proliferating, with few clear winners as yet, but we conclude that Yutong and BYD have the scale of NEV sales today to support Buy ratings. ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Deutsche Bank Markets Research Asia Industry Date China 18 May 2016 Automobiles & China Autos Components FITT Research Vincent Ha, CFA Fei Sun, CFA Research Analyst Research Analyst What you should know about China's (+852 ) 2203 6247 (+852 ) 2203 6130 new energy vehicle (NEV) market [email protected] [email protected] Many players, but only a few are making meaningful earnings contributions Key Changes One can question China’s target to put 5m New Energy Vehicles on the road by Company Target Price Rating 2020, or its ambition to prove itself a technology leader in the field, but the 1211.HK 47.00 to Hold to Buy surge in demand with 171k vehicles sold in 4Q15 cannot be denied. Policy 50.80(HKD) imperatives and government support could ensure three-fold volume growth 600066.SS – to 25.90(CNY) NR to Buy by 2020, which would make China half of this developing global market. New 002594.SZ 39.50 to - entrants are proliferating, with few clear winners as yet, but we conclude that 42.60(CNY) Yutong and BYD have the scale of NEV sales today to support Buy ratings. Source: Deutsche Bank Clear intentions by the government and OEMs to drive up NEV ownership Top picks At a national level, by promoting the NEV industry, China can 1) reduce air Yutong Bus (600066.SS),CNY21.66 Buy pollution, 2) import less oil, and 3) compete globally for the latest auto Source: Deutsche Bank technologies. Long-term, China could go a long way to achieve self-sufficiency along the whole industry supply chain. For auto manufacturers, NEV adoption Companies Featured is also vital to achieve their mandated fuel economy targets by 2020. BYD (1211.HK),HKD42.15 Buy Most barriers are being tackled by monetary and regulatory initiatives 2015A 2016E 2017E A lack of infrastructure support and the price premium of NEVs are the most P/E (x) 28.7 25.4 18.4 obvious barriers to stimulating real demand – their current premium is as much EV/EBITDA (x) 12.1 9.7 8.0 as 90-175%. Government policy and existing subsidy support are critical to Price/book (x) 2.7 2.5 2.2 stimulate demand currently but falling battery costs will narrow the price gap in the medium to long run. DB estimates powertrain costs could be cut 33% by BAIC Motor (1958.HK),HKD5.40 Buy 2020 (from the 2014 level). Nonetheless, we have concerns over the financial 2015A 2016E 2017E burden that subsidies place on local governments, and we think that an emission P/E (x) 15.5 7.7 6.5 credit trading system could be a viable long-term solution beyond 2020. EV/EBITDA (x) 6.6 3.3 2.6 Price/book (x) 1.4 0.9 0.8 China requires a 33% NEV volume CAGR to reach 2020 ownership target Sales have surged, with a 4-year increase of 40x in 2011-15 and 4Q15 growth SAIC Motor (600104.SS),CNY19.81 Buy of 4.4x, before a slowdown recently as subsidy cuts took effect, and while a 2015A 2016E 2017E subsidy cheating investigation is taking place. We project a 5-year sales CAGR P/E (x) 8.6 6.7 6.1 of 33%, with China accounting for half of global EV/PHEV demand by 2020E. EV/EBITDA (x) 5.2 3.2 2.5 Price/book (x) 1.3 1.1 1.0 In our opinion, the constraints surrounding infrastructure (charging stations and poles) and production capacity can be resolved to enable this growth. Yutong Bus (600066.SS),CNY21.66 Buy 2015A 2016E 2017E An increasingly crowded sector with limited almost-pure plays P/E (x) 13.6 13.1 11.8 Among major auto manufacturers, BYD and Yutong have the largest NEV sales EV/EBITDA (x) 7.7 7.3 6.4 contributions in absolute and percentage terms vs. peers. The countless other Price/book (x) 3.9 3.6 3.0 traditional/non-traditional auto manufacturers/suppliers in the market are unlikely to record crucial NEV-related earnings contributions in the near future. BYD-A (002594.SZ),CNY58.56 Sell In the upstream segment, strong China NEV sales should stimulate demand for 2015A 2016E 2017E lithium, and our Metals & Mining team rates Ganfeng a Buy (70.46 CNY). P/E (x) 50.4 41.9 30.4 EV/EBITDA (x) 18.5 14.1 11.7 Yutong is our top pick for NEV bus leadership and low valuation as NEV play Price/book (x) 4.9 4.1 3.6 We initiate coverage on Yutong with a Buy rating, based on its leadership in Source: Deutsche Bank the bus segment (26% share of NEV sales) and an undemanding valuation of 12x. We upgrade BYD-H to Buy on its enhanced earnings outlook as the scale In this report we change ratings, of NEV sales begins to materially drive earnings. We also highlight SAIC Motor target prices and estimates for and BAIC Motor, which have been adding weight to their NEV business. We several companies under coverage. therefore envision higher sales with new products and favorable local Please refer to the company government policies for these two names. Key sector upside risks are incremental policy support and falling NEV costs. Key sector downside risks specific sections for further details. are lower subsidies, technology replacement, and over-competition. ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. 18 May 2016 Automobiles & Components China Autos Table Of Contents Executive summary ............................................................. 3 The big picture ..................................................................... 5 The challenges ................................................................... 12 The solution…? .................................................................. 19 The growth outlook ........................................................... 29 The supply chain ............................................................... 34 Stock implications ............................................................. 43 Sector risks ........................................................................ 48 Yutong Bus ........................................................................ 49 Investment thesis ............................................................................ 51 Valuation ......................................................................................... 52 Riding on the new energy drive ...................................................... 56 Financials ......................................................................................... 66 Risks ................................................................................................ 72 Company background ..................................................................... 73 Page 2 Deutsche Bank AG/Hong Kong 18 May 2016 Automobiles & Components China Autos Executive summary Stimulating NEV sales on all fronts in China Figure 1: China NEV sales volume (units) China NEV sales (units) YoY (RHS) (YoY) The development of China’s new energy vehicle (NEV) market has been in the 350,000 331,092 400% 300,000 2011-15 volume 350% limelight since the early part of this decade, with obvious government CAGR: 152% 250,000 300% initiatives to: 1) tighten emission standards to close the gap with developed 250% 200,000 200% regions; 2) contain overall fuel consumption to alleviate reliance on imported 150,000 150% 78,499 oils; and above all, 3) gain ownership of the latest vehicle drivetrain 100,000 100% technologies, in particular those for electric vehicles (EV) and plug-in electric 50,000 8,159 12,791 17,642 50% 0 0% vehicles (PHEV), so as to be competitive with global peers in the long run. 2011 2012 2013 2014 2015 Source: China Association of Automobile Manufacturers (CAAM), With battery costs still high, a significant price gap exists between China’s Deutsche Bank NEVs and its comparable internal combustion engine (ICE) vehicles. To address insufficient charging facilities, the central and local governments