MM September 8, 2019 09:00 PM GMT

China Autos & Shared Mobility Drive to Turnaround in 2020

2019 has seen the weakest sales for the Chinese auto market in decades. However, we expect a replacement cycle to kick in from 2020, for a turnaround which could benefit Japanese and luxury brands on upgrade demand. Trough valuations lead us to raise our Industry View to Attractive. We also upgrade SAIC to OW.

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MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ Jack Yeung Lillian Lou Frank Wan Equity Analyst Equity Analyst Research Associate +852 2239-7843 +852 2848-6502 +852 2239-1229 [email protected] [email protected] [email protected]

MORGAN STANLEY ASIA LIMITED+ MORGAN STANLEY ASIA LIMITED+ Tim Hsiao Shelley Wang, CFA Equity Analyst Equity Analyst +852 2848-1982 +852 3963-0047 [email protected] [email protected] MM China Autos & Shared Mobility Drive to Turnaround in 2020 2019 has seen the weakest sales for the Chinese auto market in decades. However, we expect a replacement cycle to kick in from 2020, for a turnaround which could benefit Japanese and luxury brands on upgrade demand. Trough valuations lead us to raise our Industry View to Attractive. We also upgrade SAIC to OW.

SAIC Motor Corp. Ltd. From To Possible auto stimulus: On August 27, 2019, China's State Council WHAT’S Rating Equal-weight Overweight CHANGED issued a policy package to promote consumption. For the auto sector, Dongfeng Motor Group Price Target HK$8.00 HK$10.00 it urged local governments to gradually loosen or cancel existing China Autos & Shared Mobility license plate restrictions, according to the local situation. It also Industry View In-Line Attractive urged local governments with sufficient resources to support the purchase of NEVs. We believe the local governments may implement these policies in 2020 which could support auto demand. Auto sales set to improve in 2020 after poor 2019: With lack- Outlook for 2H19 and 2020: While we now expect 7-8% industry luster macro indicators and worse-than-expected auto sales YTD, sales volume declines for 2019 and 1-2% sales volume growth for 2019 is set to be the weakest year for auto sales growth in China since 2020, for the six major H-share listed OEMs we cover we expect 0.3% 1990, and we lower our 2019 PV sales growth forecast from a 5% yoy sales volume declines for 2019 and 4.5% sales volume growth in decline to a 7-8% decline. However, we expect a replacement cycle to 2020, as we expect the major OEMs to take market share from kick in from 2020, and note this is ~5 years since the previous govern- smaller players. We expect an average of 14% yoy net profit decline ment stimulus policies were introduced in October 2015. We expect for the 6 OEMs for 2019E, but 8% net profit growth for 2020E, with the mid-to-high-end brands to benefit from this replacement cycle our updated assumptions for Dongfeng. driven by consumer upgrade demand. Among auto OEMs, our Risks to our ratings: If pressure on the macro economy lingers in favorite segment remains luxury and Japanese brands, where we 2020, we see downside risk to our forecasts. However, even if the expect to see continued market share gains. We adjust our 2020e PV downturn in the auto market continues, we still expect luxury and sales growth forecast from -3% to +1-2% in 2020e for China, which Japanese brands to be resilient, as was the case in 2018-19. is the highest growth among major global markets compared to -3% in Japan, -1% in Korea, -6% in US and -2% in Europe. Recommendations: We remain OW on Brilliance and BAIC given their luxury brand exposure, and on Dongfeng and GAC for their Market priced-in weak expectations: H-share listed OEMs have Japanese brand exposure. We also upgrade SAIC to OW from EW only seen ~10% share price returns YTD, after ~50% declines in 2018. with an unchanged PT, on valuation. We are bearish on domestic Since 2018, Chinese auto OEMs have underperformed the Hang Seng brands, which we expect to lose share from JV brands. We remain EW Index by 35% and also underperformed major US, European and on GWM and UW on Geely, as Geely trades at 14x 2019E P/E, much Japanese OEMs. Many of our OW-rated stocks are trading near his- higher than GWM's 10x. We raise our Industry View to Attractive torical trough valuations, and the industry average P/E is now at 1 from In-Line on an expected recovery from 2020 and attractive valu- standard deviation below its historical average. We believe the cur- ations. Five of the seven major OEMs we cover are rated OW. rent share prices are not taking into consideration the possibility of improved auto demand next year. MM Contents

5 Order of Preference 25 Risk-Reward: SAIC

6 Investment Summary 26 SAIC: Financial Summary

10 OEMs Trading Below Historical Valuation 27 Brilliance: 1H19 Results Recap

12 2019 Sales Plumb New Lows 28 Brilliance: Financial Summary

14 Replacement Cycle To Kick In From 2020 29 BAIC: 1H19 Results Recap

16 Consumer Product Examples: Premium Segment 30 BAIC: Financial Summary Outperforming 31 GAC: 1H19 Results Recap 17 Improvements in Industry Efficiency 32 GAC: Financial Summary 19 Where We Could Be Wrong 33 Great Wall: 1H19 Results Recap 20 Dongfeng: Raising PT to HK$10 34 GWM: Financial Summary 22 Risk-Reward: Dongfeng 35 Geely: 1H19 Results Recap 23 Dongfeng: Financial Summary 36 Geely: Financial Summary 24 SAIC: Upgrading to OW on Valuation

4 MM Order of Preference

Exhibit 1: Order of Preference

Brilliance Dongfeng SAIC GAC-H BAIC GMW-H GAC-A GWM-A Geely 1114.HK 0489.HK 600104.SS 2238.HK 1958.HK 2333.HK 601238.SS 601633.SS 0175.HK

Rating Overweight Overweight Overweight Overweight Overweight Equal-Weight Equal-Weight Underweight Underweight Trading Currency HKD HKD CNY HKD HKD HKD CNY CNY HKD Price Target 12.0 10.0 30.0 10.5 6.5 5.0 9.0 4.5 5.0 Current Price 8.4 7.1 25.3 7.5 4.5 5.1 11.5 8.1 12.6 Upside/(Downside) (%) 43% 41% 19% 40% 44% -2% -22% -44% -60%

Market Cap (in USD mm) 5,401.6 7,821.5 41,328.1 14,388.4 4,608.9 8,878.5 14,388.4 8,878.5 14,761.0 Avg Daily Traded Vol (in USD mm) 21.1 11.7 102.5 30.9 7.4 25.3 16.7 21.4 112.9

Street View: Ratings

Buy/Overweight ||||||||||||| 50% |||||||||||||| 54% |||||||||||||||||| 71% ||||||||||||||||||| 77% ||||| 21% |||| 15% ||||||||||| 42% |||||||||| 42% ||||||||||| 45% Hold/Equal-weight |||||||||| 40% |||||||||| 42% |||||| 23% || 10% |||||||||||||||| 63% ||||||||||||| 50% ||||||| 26% ||||| 21% ||||||||||| 42% Sell/Underweight ||| 10% | 4% || 6% ||| 13% |||| 17% ||||||||| 35% |||||||| 32% ||||||||| 38% ||| 12%

Bull Case Value 14.0 14.0 37.5 16.0 7.8 9.0 18.0 10.0 18.0 Upside (%) 67% 97% 48% 113% 73% 76% 57% 23% 43%

Bear Case Value 6.0 5.5 14.0 5.0 2.6 3.0 5.0 2.5 2.5 Downside (%) -29% -23% -45% -33% -42% -41% -57% -69% -80% Risk/Reward Skew 2.3 4.3 1.1 3.4 1.7 1.9 1.0 0.3 0.5

Morgan Stanley Estimates FY19e CNY CNY CNY CNY CNY CNY CNY CNY CNY Sales 3,673 97,503 915,038 66,929 168,721 93,455 66,929 93,455 83,173 EBITDA 6,616 19,645 32,701 4,777 29,633 8,342 4,777 8,342 11,688 EBIT 6,317 16,845 18,011 1,282 21,479 4,914 1,282 4,914 8,140 EPS 1.32 1.68 3.08 0.95 0.44 0.45 0.95 0.45 0.78

FY20e Sales 3,664 91,735 936,229 68,459 185,064 95,464 68,459 95,464 80,725 EBITDA 7,006 21,195 37,197 5,735 32,626 9,850 5,735 9,850 11,172 EBIT 6,679 18,070 19,992 2,053 23,101 5,912 2,053 5,912 7,500 EPS 1.39 1.77 3.22 1.07 0.51 0.54 1.07 0.54 0.72

FY19 MSe vs. Consensus Mean Sales -14.6% -1.3% 1.1% 3.9% 1.5% -6.0% -5.8% -10.5% -17.3% EPS -1.1% 8.2% 2.1% -3.7% -31.2% 0.6% -5.0% -9.9% -26.4%

FY20 MSe vs. Consensus Mean Sales -24.3% -6.5% -2.7% -2.3% 2.5% -10.1% -14.2% -15.0% -25.6% EPS -7.6% 10.8% -1.2% -1.2% -27.2% 7.7% -9.9% -5.6% -40.7%

Valuation Multiples at Last Close FY19e P/E 5.8x 3.9x 8.2x 7.2x 9.3x 10.3x 12.1x 18.1x 14.6x EV/EBIT 6.6x 2.8x 17.4x 60.5x 3.3x 14.1x 60.5x 14.1x 11.7x EV/EBITDA 6.3x 2.4x 9.6x 16.2x 2.4x 8.3x 16.2x 8.3x 8.2x EV/Sales 11.4x 0.5x 0.3x 1.2x 0.4x 0.7x 1.2x 0.7x 1.1x FCF Yield -0.1% 14.8% 0.1% -1.4% 7.4% -2.3% -1.4% -2.3% 0.4%

FY20e P/E 5.5x 3.7x 7.9x 6.4x 8.1x 8.6x 10.7x 15.1x 15.9x EV/EBIT 6.2x 1.9x 16.4x 33.9x 3.5x 11.5x 33.9x 11.5x 12.2x EV/EBITDA 5.9x 1.6x 8.8x 12.1x 2.5x 6.9x 12.1x 6.9x 8.2x EV/Sales 11.4x 0.4x 0.4x 1.0x 0.4x 0.7x 1.0x 0.7x 1.1x FCF Yield 0.6% 13.0% 1.2% 0.8% 28.9% 1.4% 0.8% 1.4% 4.6%

Implied Multiples on MS Price Target FY19e P/E 8.3x 5.4x 9.7x 10.1x 13.4x 10.1x 9.5x 10.0x 5.8x EV/EBIT 9.2x 4.2x 20.5x 3.5x 4.0x 4.1x 30.3x 6.7x 3.9x EV/EBITDA 8.8x 3.6x 11.3x 0.9x 2.9x 2.4x 8.1x 4.0x 2.7x EV/Sales 15.8x 0.7x 0.4x 0.1x 0.5x 0.2x 0.6x 0.4x 0.4x

FY20e P/E 7.9x 5.1x 9.3x 9.0x 11.7x 8.5x 8.4x 8.4x 6.3x EV/EBIT 9.0x 4.8x 19.6x 21.4x 2.3x 3.9x 38.2x 6.1x 7.6x EV/EBITDA 8.6x 4.1x 10.5x 7.7x 1.6x 2.3x 13.7x 3.7x 5.1x EV/Sales 16.5x 0.9x 0.4x 0.6x 0.3x 0.2x 1.1x 0.4x 0.7x

Stock Price Performance 1 Month 16.1% 12.3% 7.0% 1.6% 0.4% 3.3% 7.0% 2.4% 13.7% 3 Month 15.1% 12.3% 3.0% (2.1%) (5.1%) (12.9%) 8.2% (7.3%) 0.5% 1 Year (18.2%) (12.1%) (10.0%) (2.8%) (26.9%) 17.3% 12.6% 14.5% (18.8%) YTD 59.3% 0.3% (5.3%) (3.6%) 9.2% 13.1% 11.3% 45.4% (8.6%)

Source: Morgan Stanley Research, Thomson Reuters (consensus mean). e = Morgan Stanley Research estimates Note: Past performance is no guarantee of future results. Results shown do not include transaction costs. Priced as at September 5, 2019 close.

MORGAN STANLEY RESEARCH 5 MM Investment Summary

China auto market on track for another weak year: In the 7M19 Stocks pricing in bearish expectations: The six H-share listed OEMs China's PV sales declined 12.8% yoy, and it has now seen 13 consecu- we cover have posted an average of 11.6% YTD return in 2019, vs. the tive months of negative yoy growth. This is despite the introduction Hang Seng Index's 2.6%. However, considering they fell ~50% on of aggressive discounts to destock China V models in May-June ahead average in 2018 (vs. -14% for the HSI), we believe their current valua- of the China VI emission standards in many regions of the country. We tions are still pricing in a bearish outlook. We believe the market is also believe this is likely to have pulled forward some demand from expecting 1-2% yoy sales volume declines for 2020, while we expect later months, dampening hopes for a recovery in 2019. 1-2% positive growth. fr

Cutting China's 2019 PV sales forecast to 7-8% yoy decline, but Luxury brands - expect margins to improve in 2H19: In 1H19, 1-2% growth in 2020e: We do not expect a recovery in auto demand Brilliance BMW saw 26% yoy sales volume growth but the profit con- this year, as macro indicators remain weak, especially employment. tribution to its parent Brilliance declined 3% yoy. Similarly, Beijing As a result, we lower our forecast for China's 2019 PV sales to a 7-8% Benz had 12% yoy sales growth, but BAIC's profit contribution from decline, vs. a 5% decline previously. However, for 2020, we expect a the Benz JV declined 2% yoy. For Brilliance, the company guided this replacement cycle to kick in and raise our PV sales forecast to 1-2% was mainly due to the large rebates given to dealers to destock old 3 yoy growth for 2020, from a 3% decline previously. We note that this series models. For BAIC, it guided the margin decline for Mercedes is the most positive growth forecast for PV sales among major global was due to low localization rates for A-class models, which resulted markets when compared to Morgan Stanley's 2020 estimates for in low gross margin, and also the changed mix. For both companies, we -3% in Japan, -1% in Korea, -6% in US and -2% in Europe. expect some margin improvements in 2H19, and remain OW on both stocks given their luxury exposure. Local governments may loosen license plate restriction fol- lowing State Council's policy: On August 27, 2019, China's State Japanese brands - remain positive, should benefit from replace- Council issued a policy package to promote consumption. For the ment cycle: We remain positive on the Japanese JV brands, as they auto sector, it urged local governments to gradually loosen or cancel should benefit directly from the replacement cycle we expect in existing license plate restrictions, according to the local situation. If 2020. During the last round of stimulus, which started in 2015, the macro pressures linger in 2020, we believe local governments could government introduced an auto purchasing tax benefit for vehicles be more likely to implement stimulus policies, which would support with an engine size of 1.6L or lower. This supported low-end models' auto demand. market share, as illustrated in Exhibit 24 . We expect these cars are likely to be replaced in the next 1-2 years, and believe many of these Improved industry efficiency could improve profitability: Tough consumers could upgrade to JV brands. For mid-range products, as market conditions in 2018-19 have seen many OEMS reduce capacity Japanese brands have now launched cheaper models that are similarly and seen many small players lose share/exit the market. The fixed priced to domestic brands but offer better value for money, we asset investment growth for the auto manufacturing industry has believe the Japanese brands' strong momentum should continue. also fallen to historical lows. We believe these factors should lead to improved industry efficiency, which should help improve profit- What we are looking for next: While we now expect 7-8% industry ability once demand picks up. sales volume declines for 2019 and 1-2% sales volume growth for 2020, for the 6 major H-share listed OEMs we cover, we expect 0.3% Expect price recovery in 2H19 and 2020: Many auto dealers sales volume declines for 2019 and 4.5% sales volume growth in offered aggressive discounts for China V models in May-June, before 2020, as we expect the major OEMs to take market share as smaller the implementation of China VI emission standards on July 1, 2019 in players exit the market. many regions of China. These regions accounts for around 60% of China's total auto market. However, we have seen evidence of a Stock calls: We remain OW for Brilliance and BAIC given their expo- gradual recovery in pricing in the market. For example, SAIC guided sure to luxury brands, and also on Dongfeng and GAC given their expo- that pricing had recovered by Rmb6.6k per unit for SAIC Volkswagen sure to Japanese brands. Brilliance and Dongfeng are our top picks in since May-June. We expect this process to continue as the impact of the space, as Brilliance remains a pure play for BMW, while Dongfeng the previous aggressive discounts wears off. is trading at the cheapest valuation vs. peers. We also upgrade SAIC to OW from EW on valuation.

6 MM

Exhibit 2: Exhibit 3: Share price performance YTD for H-share listed OEMs Share price performance since 2018 for H-share listed OEMs Stock performance Stock performance 180 140 160 120 140 100 80 120 60 100 40 80 20 60 - Jan-19 Mar-19 May-19 Jul-19 Sep-19 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 BAIC Brilliance Dongfeng GAC BAIC Brilliance Dongfeng GAC Geely GWM HSI Geely GWM HSI Source: Thomson Reuters, Morgan Stanley Research. Priced at September 5, 2019 close. Source: Thomson Reuters, Morgan Stanley Research. Priced at September 5, 2019 close.

Exhibit 4: 2019 YTD Stock Performance Ticker Company 2019 YTD Performance 1114.HK Brilliance 59.3% 2333.HK GWM 13.1% 1958.HK BAIC 9.2% HSI 2.6% 0489.HK Dongfeng 0.3% 2238.HK GAC -3.6% 0175.HK Geely -8.6%

Source: Thomson Reuters, Morgan Stanley Research. Priced at September 5, 2019 close.

Exhibit 5: Stock performance from 2018 Ticker Company 2018 YTD Performance HSI -11.4% 0489.HK Dongfeng -24.7% 2238.HK GAC -43.1% 2333.HK GWM -43.2% 0175.HK Geely -53.4% 1114.HK Brilliance -55.6% 1958.HK BAIC -55.7%

Source: Thomson Reuters, Morgan Stanley Research. Priced at September 5, 2019 close.

Exhibit 6: What's Changed Rating PT EPS Chg Ticker Company New Old New Old 2019E 2020E 0489.HK Dongfeng Motor OW OW 10.0 8.0 12% 15% 600104.SS Shanghai Auto OW EW 30.0 30.0 0% 0%

Source: Morgan Stanley Research (E) estimates

MORGAN STANLEY RESEARCH 7 MM

Exhibit 7: What's Changed - Rationale

Company Reason

l Dongfeng reported 5% yoy net profit growth in 1H19 l The potential shutdown and sale of plants for Dongfeng PSA could improve the brand's profitability and result in narrowed Dongfeng Motor losses l We factor in higher profit contribution from Japanese JV brands as Dongfeng raised its sales volume guidance for Japanese JV brands

l Although the stock has traded off recently it is still near its historical average valuation of 8x P/E We think this was due to market concerns about the dividend payout SAIC l In contrast, we believe SAIC may raise its dividend payout from the current 40% to the previous level of around 60%, as it has reiterated its willingness to maintain a high dividend payout ratio in the long term

Source: Morgan Stanley Research (E) estimates

Exhibit 8: What's in the price

Company What’s in the price What’s the market missing?

l Declining profitability for BMW vehicles l Company will stop the rebates to dealers from 2H19 with new 3 l Market believes only part of cash to be received from series launched in late June, which would support dealers' profit- Brilliance BMW in 2022 to be paid out as special dividend l abilityBMW profitability could benefit from new import tariffs that makes luxury vehicles from the US more expensive l The majority of cash received from BMW could be paid out according to company guidance

l l Declining profitability for Beijing Benz vehicles Beijing Benz profitability could benefit from new import tariff that BAIC l Continued drag from BAIC's domestic brand makes luxury vehicles from the US more expensive

l l Stable market share and profitability for Japanese JV Japanese JV brands gain market share and improve profitability brands through operating leverage Dongfeng l l Continued losses from Dongfeng PSA The potential shutdown and sale of plants for Dongfeng PSA, as reported by Reuters, could improve future profitability

l Stable market share and profitability for Japanese JV l Japanese JV brands gain market share and improve profitability brands through operating leverage GAC l Wider losses from domestic brand l Losses from domestic brand stabilize or narrow with improved inven- tory

l SAIC's dividend payout to remain low in future l SAIC could raise its dividend payout back to previous high levels after SAIC the market improves, as the company has reiterated its willingness to keep a high dividend payout ratio in the long term

l l Geely to take market share with multiple new product Geely's new products do not see improved sales l launches Domestic brands keep losing market share due to continued upgrade Geely l Domestic brands, including Geely, see stable or demands and the vulnerability of low-end demand during an eco- improving market share after the recent downturn nomic downturn

Source: Morgan Stanley Research 8 MM

Exhibit 9: Morgan Stanley versus consensus Ticker Company 2019 EPS 2020 EPS MSe Cons % diff. MSe Cons % diff. 1114.HK Brilliance China 1.32 e 1.33 e -1% 1.39 e 1.50 e -8% 1958.HK BAIC Motor 0.44 e 0.64 e -31% 0.51 e 0.70 e -27% 0489.HK Dongfeng motor 1.68 e 1.55 e 8% 1.77 e 1.60 e 11% 2238.HK Guangzhou Auto 0.95 e 0.99 e -4% 1.07 e 1.08 e -1% 600104.SS SAIC Motor 3.08 e 3.02 e 2% 3.22 e 3.25 e -1% 2333.HK Great Wall Motor 0.45 e 0.45 e 1% 0.54 e 0.50 e 8% 0175.HK Geely Auto 0.78 e 1.07 e -26% 0.72 e 1.22 e -41%

Source: Morgan Stanley Research for MSe, Thomson Reuters for consensus.

MORGAN STANLEY RESEARCH 9 MM OEMs Trading Below Historical Valuation

Average H-share listed OEMs (ex. BYD) trading below historical ical trough valuations, after what has been the longest sales down- averages: Since 2010, the average H-share listed OEMs have traded turn in China's auto industry since 1990. We believe the current low at 10x 1-year forward P/E, with a standard deviation of 2x. Currently, valuation prices in the market's bearish expectations on the the auto market is trading at around 1 standard deviation below the industry's outlook, but in light of our anticipated turnaround, we historical average, at 8x. As we expect the auto market to start recov- think such valuations provide an attractive entry point for these four ering in 2020 as the replacement cycle kicks in, we see upside from stocks. On the other hand, Geely is trading at close to 1 standard devi- the current valuation levels. ation above its historical average, which we think looks demanding. Great Wall is trading around its historical average of 10x P/E, which OEMs trading at 34% discount to MSCI China: Currently, the we believe looks fair. For SAIC, while the stock is trading near its his- OEMs (ex BYD) are trading at a 35% discount compared to MSCI torical average valuation, we believe the recent pressure on stock China index, a relatively high level compared to history. With the price reflects market's concern on the dividend payout. We believe expected recovery in 2020, we expect this discount to narrow from the company may raise this from the current around 40% to previous here. high levels of around 60% in future, as it has reiterated its intention to maintain a high dividend payout ratio in the long term. In light of Many OW-rated OEMs trading near historical troughs: Currently, this, we raise our rating on SAIC to OW after the recent share price BAIC, Brilliance, Dongfeng and GAC are all trading near their histor- correction.

Exhibit 10: Exhibit 11: The average H-share listed OEMs (ex. BYD) are trading below historical OEMs' P/E vs MSCI Index average P/E ratio (P/E) 20 50% 16 18 40% 16 30% 14 14 20% 12 12 10% 10 10 0% 8 8 -10% 6 6 -20% 4 -30% 4 2 -40% 2 0 -50% - Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 MSCI OEMs Discount (RHS) Average P/E Historical Average +1 Stdev -1 Stdev Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research

Exhibit 12: Exhibit 13: BAIC: 1-yr forward P/E Brilliance: 1-yr forward P/E 25.0 20.0 18.0 Average +Stdv., 20.0 16.0 16.7x Average +Stdv., 12.8x 14.0 15.0 12.0 10.0 Average FY1 P/E, 12.5x 10.0 Average FY1 P/E, 9.7x 8.0 Average -Stdv., 6.0 Average -Stdv., 5.0 6.6x 4.0 8.4x 2.0 0.0 0.0 Jul-13 Jul-14 Jul-15 Jul-18 Jul-19 Jul-16 Jul-17 Jul-16 Jul-17 Jul-18 Jul-19 Jul-15 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-17 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Oct-16 Oct-17 Oct-18 Oct-15 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv. Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv.

Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research 10 MM

Exhibit 14: Exhibit 15: Dongfeng: 1-yr forward P/E GAC: 1-yr forward P/E 9.0 20.0 Average +Stdv., 8.0 18.0 6.8x 7.0 Average +Stdv., 16.0 11.6x Average FY1 P/E, 5.6x 6.0 14.0 12.0 5.0 Average FY1 P/E, 8.8x 10.0 Average -Stdv., 4.0 8.0 4.4x 3.0 6.0 2.0 Average -Stdv., 4.0 1.0 6.0x 2.0 0.0 0.0 Jul-13 Jul-14 Jul-15 Jul-18 Jul-19 Jul-16 Jul-17 Jul-13 Jul-14 Jul-15 Jul-18 Jul-19 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-17

Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv. Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv.

Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research

Exhibit 16: Exhibit 17: Geely: 1-yr forward P/E GWM: 1-yr forward P/E 25.0 18.0 Average +Stdv., 16.0 Average +Stdv., 20.0 13.5x 14.0 15.4x 12.0 15.0 10.0 Average FY1 P/E, 10.7x Average FY1 P/E, 8.0 11.2x 10.0 Average -Stdv., 6.0 Average -Stdv., 5.0 7.8x 4.0 7.0x 2.0 0.0 0.0 Jul-13 Jul-14 Jul-15 Jul-18 Jul-19 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-16 Jul-17 Jul-18 Jul-19 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-17 Jan-19

Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv. Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv.

Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research

Exhibit 18: SAIC: 1-yr forward P/E 14.0 Average +Stdv., 12.0 9.7x 10.0 8.0 Average FY1 P/E, 7.9x 6.0 Average -Stdv., 4.0 6.2x 2.0 0.0 Jul-13 Jul-14 Jul-15 Jul-18 Jul-19 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-17

Forward P/E (x) Average FY1 P/E Average +1 Stdv. Average -1 Stdv.

Source: Thomson Reuters, Morgan Stanley Research

MORGAN STANLEY RESEARCH 11 MM 2019 Sales Plumb New Lows

Worse-than-expected PV sales YTD demand was pulled forward by destocking in May-June, the combined June-July YoY IP growth (5.6% vs. 6.0% in Jan-May) and retail sales ex-auto (8.8% YoY vs. 9.4% in Jan-May) still points to generally 13 consecutive months of negative growth: Up until July this year, weaker growth momentum for the remainder of the year amid China's passenger vehicle sales reported 13 consecutive months of domestic and external headwinds. negative yoy sales growth since July 2018. This is despite market expectations that PV sales would turn positive mid-year. However, Employment data remains weak: In our previous industry down- even with the massive discounts offered by the industry to destock grade note China Autos & Shared Mobility: The Fall of Domestic China V models, wholesale sales remained negative in June/July. Brands (1 May 2019), we noted that a high unemployment rate of above 5% would hinder auto demand in the near term. In the past few May-June destocking likely pulled forward demand: That being months, the unemployment rate has remained above 5%, and the said, as many regions in China moved to implement China VI emission 5.3% unemployment rate in July was near the government's red line standards from July 1, in May/June dealers in these regions (which of 5.5%, as noted by our China economics team. accounted for around 60% of national auto sales) offered aggressive discounts on China V models, and this resulted in 4.9% positive retail State Council stimulus package: The State Council announced a sales growth in June, per CPCA. We believe this likely pulled forward stimulus package to promote consumption on August 27, which some demand from July-August. included a move to urge local governments with license plate restric- tions to consider loosening or cancelling them. We believe some Near-Term Macro Environment Remains local governments may implement this by allowing more quotas for license plates. As it will take time for local governments to enact Unfavorable these changes, we don't expect any significant benefits until 2020.

Disappointing macro indicators in July: China's July industrial pro- No recovery expected in 2019: In view of the lingering uncertainty duction figure was 4.8% YoY, vs. consensus and MSe of 6.0%. Fixed as a result of China-US trade tensions, weak economic data and a high asset investment was 5.7% YTD, vs. consensus and MSe of 5.8%. unemployment rate, we do not expect a fundamental improvement Retail sales was 7.6%, vs. consensus of 8.4% and MSe of 8.6%. As our in China's auto demand in 2019. However, we believe the potential China economics team pointed out (see China Economics: loosening of license plate restrictions may also boost demand in Broad-based Growth Slowdown Boosts Case for Further Easing (14 2020. Aug 2019), even if the July data was affected by weak auto sales as

Exhibit 19: Exhibit 20: China's PV wholesale sales have seen 13 consecutive months of nega- China Job Market Remained Sluggish tive yoy growth (k units) 2,800 20% 2,100 15% 1,400 10% 700 5% - 0% -700 -5% -1,400 -10% -2,100 -15% -2,800 -20% Source: CEIC, NBS, Morgan Stanley Research Jul-18 Jul-19 Oct-18 Apr-19 Apr-18 Jan-19 Jan-18

PV sales yoy

Source: CAAM, Morgan Stanley Research

12 MM Expect 7-8% PV sales decline in 2019, but Exhibit 21: We now expect 7-8% declines for 2019 but 1-2% growth in 2020 for 1-2% growth in 2020 China's PV sales China PV sales growth yoy

2019 likely a bottom for China's PV market growth: With lower- 60% than-expected wholesale sales YTD and a turnaround to positive yoy 50% sales growth unclear, we cut our 2019 PV sales growth forecast from 40% 30% a 5% decline to a 7-8% decline, implying -2% to 1% yoy growth for 20% Aug-Dec 2019. This would indicate another year for low PV sales 10% 1~2% growth. 0% -5% -10% -3% -7~-8% -20% Turning positive on 2020: While we are bearish on 2019, we believe

2020 could see positive growth as replacement demand kicks in. At 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E the same time, we expect better profitability for major OEMs in Old Forecast New Forecast Source: CAAM, Morgan Stanley Research (E) estimates. 2020, as the industry's efficiency has improved, and smaller players have lost market share or exited the market.

MORGAN STANLEY RESEARCH 13 MM Replacement Cycle To Kick In From 2020

4-5 year replacement cycle: We believe the replacement cycle in 2020, we believe it is more likely that local governments will do so, China's auto market is around 4-5 years based on our analysis of which in turn could support the auto demand in 2020. second hand vehicle data and historical record. According to the China Passenger Car Association (CPCA), 67% of second hand cars Mid-to-high-end brands should benefit most: As is shown in transacted in China in 2018 were 6 years old or below, with 43% 3-6 Exhibit 24 , the market share of low-end models (below Rmb100k) years old. This is consistent with our estimate of a 4-5 year replace- has been declining since 2005, except for two stimulus periods when ment cycle. taxes on vehicles with engines of 1.6L or below were cut. We believe these tax policies temporarily halted the upgrading trend for China's Peak auto sales growth after 2009-10 stimulus was 4-5 years auto market. As the next replacement cycle kicks in, we believe the later: China had the highest PV sales growth in history in 2009, up general trend to upgrade will resume, and customers that purchased 53% yoy from 2008, helped by the government's stimulus in the low-end models during the stimulus will likely upgrade to a mid-to- form of an auto purchasing tax cut. Sales growth dropped to 5% in high-end brand. As a result, we expect these brands to benefit and 2011 and 7% in 2012, and we believe the replacement cycle started in continue to take market share. Additionally, if local governments do 2013-14, which saw 16% and 10% of yoy sales growth, 4-5 years after loosen license plate restrictions, we believe the additional demand the 2009-10 stimulus. will flow to luxury and mid-to-high end brands, as these cities tend to be tier 1-2 cities. This replacement cycle likely postponed to 2020 due to unfavor- able macro conditions: Since the last round of stimulus started in Continue to be bullish on Japanese JV brands: Japanese brands Oct 2015, a 4-5 year replacement cycle implies it should start in have been taking market share since 2018, and have continued to out- October 2019. However, in light of unfavorable macro conditions, we perform the market in recent months. If the replacement cycle comes do not expect a car sales recovery this year. Instead, we believe the in 2020, we believe Japanese brands will be a key beneficiary, as they replacement cycle will begin in 2020. have launched relatively lower-end models with fewer features but offer better value for money compared to local brands, which we New models to also trigger a replacement cycle: During the down- think makes them an ideal choice for upgrading consumers. turn in 2019, brands have delayed or cancelled the launch of new models. However, assuming the market starts to recover from early Exhibit 22: 2020 (potentially due to organic replacement or low base in 2019), Age distribution for second hand cars in China in 2018 we believe OEMs will start to launch new models to gain market share. In turn, more options for customers could trigger a wave of replacement.

Potential loosening of license plate restrictions could support auto market in 2020: On August 27, the State Council announced a stimulus policy package, including measures for multiple sectors related to consumption. For the autos sector, it urged local govern- ments with existing license plate restrictions to consider loosening or cancelling them. If the macro environment remains unfavorable in

Source: CPCA, Morgan Stanley Research

14 MM

Exhibit 23: Exhibit 24: We expect replacement cycle from the last round of stimulus to start Mid-to-high end brands starting to take market share from low-end to kick in from 2020 brands again in 2019 yoy change (market share in LTM sales) 50% 70.0% 40% 60.0% 30% 4-5 yrs 50.0% 20% 40.0% 10% 4-5 yrs 0% 30.0% -10% 20.0% Low end -20% Mid-High end 10.0% Luxury 0.0% 5% tax cut* Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 2.5% tax cut**

5% tax cut* Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 LTM PV sales yoy 2.5% tax cut** Source: CPCA, Ministry of Finance, Morgan Stanley Research.

Source: CAAM, Ministry of Finance, Morgan Stanley Research. *Auto purchasing tax cut from 10% to 5% for vehicles with engine size of 1.6L or below *Auto purchasing tax cut from 10% to 5% for vehicles with engine size of 1.6L or below **Auto purchasing tax cut from 10% to 7.5% for vehicles with engine size of 1.6L or below **Auto purchasing tax cut from 10% to 7.5% for vehicles with engine size of 1.6L or below

Exhibit 25: Exhibit 26: China PV sales market share by brand origin Japanese brands have been taking market share from domestic Market Share brands since 2018 100% Market Share yoy change (ppts) 90% 80% Others 6 70% French 4 60% Korean 2 50% American 40% Japanese 0 30% German (2) 20% Domestic (4) 10% 0% (6) 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 7/2016 1/2017 7/2017 1/2018 7/2018 1/2019 7/2019 1/2018 2/2018 3/2018 4/2018 5/2018 6/2018 7/2018 8/2018 9/2018 1/2019 2/2019 3/2019 4/2019 5/2019 6/2019 7/2019

Source: CAAM, Morgan Stanley Research 10/2018 11/2018 12/2018 Domestic Japanese

Source: CAAM, Morgan Stanley Research

MORGAN STANLEY RESEARCH 15 MM Consumer Product Examples: Premium Segment Outperforming

Consumption upgrades in the consumer sector: According to our Exhibit 28: China consumer team, the upgrade trend is also being seen in the cos- High-end liquor gaining market share in China metics and liquor segments. For cosmetics, premium products have China Liquor Market YoY Growth 100% 30% been gaining market share since 2011, and has expanded from 24.4% 0.9% 0.9% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 25% in 2011 to 32.4% in 2018. The same is true for liquor where high-end 95% 27% products' market share has expanded from 0.9% in 2013 to 1.6% in 20% 21% 90% 19% 2018. 15% 14% 85% 7% 12% 12% 10% Expect similar trends in auto: Although the macro economy has 5% 80% 2% 4% been under some pressure, it has not appeared to affect the 3% 0% 75% -1% 0% 0% 0% 0% upgrading trend for different categories of consumer goods and -5% autos. During the downturn in 2018-19 for auto markets, the luxury -6% 70% -10% brands continued to gain market share. We believe one of the reasons 2013 2014 2015 2016 2017 2018 2019e 2020e for the outperformance of luxury auto sales during this downturn High-end by volume (LHS) Mid-to-low-end by volume (LHS) High-end mkt size yoy Mid-to-low-end mkt size yoy was that customers were less vulnerable to the economic cycle. As Source: Company Data, Morgan Stanley Research (E) estimates. a result, we expect the luxury segment to remain strong, even if eco- nomic pressures linger. Exhibit 29: Exhibit 27: Luxury retail sales growth outperformed the overall market during the Premium products gaining market share in China's beauty market 2018-19 downturn China Beauty Market Premium Beauty Products Sales (LHS) Mass Beauty Products Sales (LHS) Premium Beauty Products YoY Growth (RHS) Mass Beauty Products YoY Growth (RHS) 28.9% Total Beauty Products YoY Growth (RHS) 25.8% 30% 25% 18.4% 14.2% 20% 14.1% 14.9% 12.0% 11.4% 11.2% 9.8% 10.7% 15% 10.2% 8.7% 7.6% 8.4% 12.3% 7.2% 10% 12.8% 10.0% 6.4% 8.6% 9.2% 5% 9.8% 9.6% 7.2% 6.4% 8.6% 7.1% 7.6% 5.6% 4.8% 4.1% 50,000 5.2% 0% 40,000 35.7% 37.1% 32.4% 34.2% 30,000 28.9% 25.0% 25.8% 24.9% 24.9% 20,000 24.4% 24.6% (USD (USD mn) 65.8% 64.3% 62.9% 75.0% 74.2% 71.1% 67.6% 10,000 75.6% 75.4% 75.1% 75.1% 0 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e 2021e

Source: Euromonitor, Morgan Stanley Research. e=Euromonitor estimates. Source: CPCA, Morgan Stanley Research

16 MM Improvements in Industry Efficiency

OEMs have improved efficiency: The continued sales decline for July 2019, SAIC Volkswagen suspended production at its Anting the auto industry has reduced the overall utilization rate from a plants for longer than usual, and this could affect production for recent peak of 83.6% in 4Q17 to 76.2% in 2Q19. Echoing this, Fixed around 15k units of vehicles, according to Sina. Asset Investment in the auto manufacturing industry dropped to only 1.8% yoy growth in 7M19, from over 30% in 2012. We expect the Increased industry concentration: Smaller brands have suffered slower capacity additions in 2017-18 to result in a higher utilization more in the tough market conditions. In 1H19, the top 20 brands' rate in future, assuming demand recovers from 2020. market share increased to 85.5%, from 78.6% in 2017. We expect it to be difficult for the small brands to take back market share, even if the Multiple cases of capacity reduction: In August 2019, Reuters industry recovers, so the total market share and overall profitability reported Dongfeng PSA planned to close one of its four plants, sell for mainstream brands should improve when the market recovers. another and halve its workforce to 4,000, to improve performance. In response to the news, the company guided during its 1H19 briefing Expect utilization rate expansion for Japanese and luxury that there were no concrete plans to be disclosed, but its first plant brands: While the utilization rate for the overall industry has been was built 27 years ago and it was now surrounded by business and falling, we expect that for Japanese and luxury brands to rise driven commercial centers. The company suggested that the local govern- by strong demand. The Chinese government has set out strict rules ment may also have different plans for the plot. As a result, we on any ICE capacity expansion, and the major OEMs have guided that believe it is possible that the plants could be closed in the longer there won't be any additional major ICE capacity expansion. We term. In June 2019, Dongfeng Yueda Kia announced it was closing one expect the overall capacity for major OEMs to be stable in the near of its three plants in China in Yancheng, Jiangsu and would utilize the future. As a result, we believe the utilization rate for Japanese and capacity to produce for an NEV startup in China, Human Horizons. In luxury brands should increase as a result of our forecast growing sales. Exhibit 30: Capacity reduction details

Company Plant Note Source Reportedly plans to close the plant and Dongfeng PSA Wuhan #1 Reuters redevelop Dongfeng PSA Wuhan #2 Reportedly plans to sell Reuters Transfer to production for Human Dongfeng Yueda Kia Yancheng #1 Horizons Autohome (NEV startup) SAIC Volkswagen Anting #1-3 Production suspension longer than usual Sina

Source: Reuters, Autohome, Sohu, Morgan Stanley Research.

MORGAN STANLEY RESEARCH 17 MM

Exhibit 31: Exhibit 32: Utilization rate in auto manufacturing industry Fixed Asset Investment (FAI) yoy growth in China's auto manufacturing 86.0% industry 84.0% (yoy) 82.0% 83.6% 35% 32.8% 82.0% 82.0% 82.1% 81.4% 80.0% 81.0% 80.7% 30% 78.0% 79.6% 25% 77.9% 78.3% 76.0% 20% 76.2% 15.0% 14.2% 74.0% 15% 10.2% 10% 8.3% 72.0% 4.5% 3.5% 5% 1.8%

4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 0% Utilization Rate 2012 2013 2014 2015 2016 2017 2018 7M19 Source: National Bureau of Statistics, Wind, Morgan Stanley Research Auto Industry FAI yoy growth

Source: National Bureau of Statistics, Wind, Morgan Stanley Research

Exhibit 33: Top 20 brands' market share increased in 2018 and 2019 Top 20 brands' share 86.0% 85.5%

84.0% 82.3% 82.0% 80.9% 80.0% 78.6% 78.0%

76.0%

74.0% 2017 2018 1H18 1H19 Source: CPCA, Morgan Stanley Research

18 MM Where We Could Be Wrong

Continued downcycle in macro economy: If the weakness in macro strong upgrade demand. As a result, even if macro economic pres- conditions is prolonged into 2020, we believe there could be down- sures might impact the auto market, we still expect Japanese and side risk to our 2020 PV sales forecast of 1-2% yoy growth. luxury brands to be resilient as they take market share from domestic brands. We don't expect the upgrade trend to reverse, as the demand However, we expect Japanese brands and luxury brands to be most vulnerable to the economic cycle is low-end demand, not resilient: Even as the auto market went through a downcycle in 2H18 upgrade demand. and 1H19, luxury and Japanese brands remained resilient driven by

MORGAN STANLEY RESEARCH 19 MM Dongfeng: Raising PT to HK$10

1H19 net profit up 5%: Dongfeng was the only major OEM reporting 1H19 results briefing, Dongfeng's management guided that there is positive growth in 1H19 net profit, thanks to the strong sales perfor- no concrete plan on the Wuhan plants for Dongfeng PSA to be dis- mance of Japanese JV brands, while Dongfeng PSA recorded further closed. However, management said that the Wuhan #1 factory was losses. In the 1H19 results, Dongfeng raised guidance for Japanese JV built 27 years ago and was now surrounded by business and commer- brands, but cut that for Dongfeng PSA. cial centers, and that the local government may have other plans for the plot. We believe it is possible that the Wuhan plants #1 and/or #2 Expect strong Japanese JVs and limited loss from PSA in 2H19: We could be closed in the longer term, which if it did happen could result continue to be bullish on the Japanese JV brands, and raise our fore- in narrowed losses and a potential one-off gain for Dongfeng PSA. cast for their full-year sales in light of raised guidance. For PSA, while guidance was lowered from 235k to 161k unit sales for 2019, this still Remain OW and raise PT to HK$10: We cut Dongfeng's revenue by implies 98k unit sales for 2H19, which is up 2% from a low base in 6-7% for 2019E-21E due to the reduced guidance for Dongfeng PSA, 1H18, which was down 58% yoy. As a result, we believe the losses as its revenue is consolidated in Dongfeng's financials. However, we from PSA in 1H19 will not significantly widen yoy. raise the profit from its JV and associates by ~8% for 2019E-21E to reflect the increased sales guidance for Japanese JV brands. Our net Potential sales of Dongfeng PSA plants could further narrow profit assumptions for 2019-21E are raised by 12-17%, which in turn losses and see one-off gains: In August 2019, Reuters reported supports our price target increase. The magnitude of our PT increase Dongfeng PSA planned to close one of its four plants, sell another in larger than that of our earnings forecast because our FCF assump- and halve its workforce to 4,000, to improve performance. At the tions for future years are larger.

Exhibit 34: Changes in assumptions Before change After change Change (%) (Rmb Mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenue 104,045 98,455 94,227 97,503 91,735 87,457 -6% -7% -7% Gross profit 11,630 10,751 10,008 10,995 10,287 9,736 -5% -4% -3% Operating profit (236) (204) (304) 307 815 1,160 NM NM NM Net profit 12,952 13,312 13,668 14,491 15,285 16,033 12% 15% 17% EPS 1.50 1.55 1.59 1.68 1.77 1.86 12% 15% 17% Change (ppt) Gross margin 11.2% 10.9% 10.6% 11.3% 11.2% 11.1% 0.1 0.3 0.5 Operating margin -0.2% -0.2% -0.3% 0.3% 0.9% 1.3% 0.5 1.1 1.6 Net margin 12.4% 13.5% 14.5% 14.9% 16.7% 18.3% 2.4 3.1 3.8

Source: Company Data, Morgan Stanley Research

Exhibit 35: FCF assumption changes in future years

(Rmb m) 2022E 2023E 2024E Old FCF 9,274 8,944 8,558 New FCF 11,222 11,046 10,824 % Change 21.0% 23.5% 26.5%

Source: Morgan Stanley Research (E) estimates.

20 MM We continue to use a discounted cash flow model to value Dongfeng We raise our bull case PT by 27% to HK$14, and raise our bear case Motor. We maintain our 10.5% WACC, derived from a risk-free rate of PT by 22% to HK$5.5. The magnitude of our bull- and bear-case PT is 3.3%, a beta of 1.5, an HK equity risk premium of 4.5%, and a China risk similar to that of our base case PT. premium of 2%. We maintain our terminal growth assumption at 2%, similar to what we use for its peers.

Exhibit 36: DCF assumption Rmb mn 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Turnover 125,016 104,543 97,503 91,735 87,457 91,830 96,422 101,243 106,305 111,620 113,852 YoY% 2% -16% -7% -6% -5% 5% 5% 5% 5% 5% 2% Pre-tax profit (EBIT) 16,367 15,510 16,845 18,070 19,339 17,448 17,356 17,211 15,946 14,511 8,539 EBIT margin 13% 15% 17% 20% 22% 19% 18% 17% 15% 13% 8% YoY% 1% -5% 9% 7% 7% -10% -1% -1% -7% -9% -41%

+Amortization & Depreciation 2,142 2,229 2,322 2,418 2,520 2,627 2,739 2,856 2,980 3,110 3,164 EBITDA 18,509 17,739 19,167 20,488 21,860 20,074 20,095 20,068 18,926 17,620 11,703 -Less Adjusted taxes (4,188) (3,974) (4,308) (4,614) (4,931) (4,458) (4,435) (4,399) (4,083) (3,724) (2,231) - Capital expenditure (3,511) (3,687) (3,871) (4,065) (4,268) (4,481) (4,705) (4,941) (5,188) (5,447) (5,556) +/- Changes in working capital 52 (409) (141) (115) (86) 87 92 96 101 106 45 Free cash flow 10,861 9,669 10,847 11,694 12,575 11,222 11,046 10,824 9,756 8,555 3,960

Discount factor 1.00 1.00 1.10 1.22 1.35 1.49 1.65 1.82 2.01 2.22 PV 9,669 10,847 10,585 10,301 8,321 7,413 6,575 5,364 4,257 1,783 Terminal Value - - - 21,440

Corporate NPV 86,886 Cost of equity (%) Cost of debt (%) Minorities (6,569) Risk free rate (%) 3.3 Average spread over risk-free rate (%) 2.7 Net (debt)/cash 1,098 Beta 1.5 Pre-tax cost of debt (%) 6.0 Equity NPV 81,415 HK Equity risk premium (%) 4.5 Avg. corporate tax rate for company (%) 25.0 NOSH 8,616 China Equity risk premium (%) 2.0 Post-tax cost of debt (%) 4.5 NPV Per share 9.45 CAPM unleveraged discount rate 13.1 Estimated target gearing (net debt/EV) (%) 10.5 Exchange rate 1.11 WACC (%) 10.5 PT (HK$) 10

Source: Company Data, Morgan Stanley Research (E) estimates.

MORGAN STANLEY RESEARCH 21 MM Risk-Reward: Dongfeng (0489.HK, HK$7.12, OW, PT HK$10)

Investment Thesis Strong Japanese JV brands n We continue to expect strong performance HK$ 16 from Dongfeng's Japanese JVs. n Dongfeng's P/E is around trough levels since 14 HK$14.00 (+97%) 2013, which we think looks attractive. n 12 Our PT of HK$10 implies 40% upside, so we remain OW. 10 HK$10.00 (+40%) Key Value Drivers n 8 HK$7.12 Japanese JVs. n Sales and profitability of Dongfeng PSA 6 HK$5.50 (-23%) brands. n 4 Sales of Fengshen brand, especially its SUV models. 2 Potential Catalysts

0 n Possible sale of PSA's Wuhan plants Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 n Continued strong sales growth for Price Target (Sep-20) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~0489.HK~ Dongfeng's Japanese brands Source: Thomson Reuters, Morgan Stanley Research n Turnaround of PSA and domestic brands Price Target HK$10 Risks to Achieving Price Target n Base case, DCF Downside: n Tougher-than-expected competition leads to deterioration of Dongfeng's Japanese brands' Bull HK$14 sales. 7.5x 2019E EPS n Slower-than-expected sales of DF PSA and Stronger-than-expected sales of Japanese JV brands and domestic brands: Stronger- domestic brand. n than-expected sales from Honda and Nissan JV brands, along with narrowed losses from Worsening demand in China's auto industry. the PSA brand.

Base HK$10 5.4x 2019E EPS Continued strong performance from Japanese brands: Sales of DF Honda and DF Nissan remain resilient in 2019-20e, driven by new model launches amid a recovery in the sedan segment. Incremental improvement in PSA and domestic brands.

Bear HK$5.5 2.9x 2019E EPS Tougher competition drags down sales and profitability of DF's JV brands: Sales of Japanese brands slow amid fierce competition, with widened losses from Dongfeng PSA.

22 MM Dongfeng: Financial Summary

Exhibit 37: Dongfeng: Financial Summary Income Statement Ratio Analysis (Rmb Mn) 2018A 2019E 2020E 2021E 2018A 2019E 2020E 2021E Revenue 104,543 97,503 91,735 87,457 Growth (%) Cost of sales (91,128) (86,507) (81,448) (77,721) Turnover -16.4% -6.7% -5.9% -4.7% Gross profit 13,415 10,995 10,287 9,736 Operating Profit -91.8% 539.6% 165.6% 42.2% Other income 3,164 2,848 2,848 2,848 Net Profit -7.7% 11.7% 5.5% 4.9% Distribution costs (6,342) (5,363) (5,229) (5,160) Administrative expenses (4,506) (3,627) (3,225) (2,979) Margins (%) Other operating expenses (5,683) (4,546) (3,864) (3,285) Gross Margin 12.8% 11.3% 11.2% 11.1% Operating profit 48 307 815 1,160 Operating Margin 0.0% 0.3% 0.9% 1.3% Finance costs (265) (358) (414) (433) Net Margin 12.4% 14.9% 16.7% 18.3% Income from associates 15,462 16,538 17,254 18,180 Profit before tax and MI 14,239 16,487 17,656 18,907 Efficiency Income tax expense, net (1,661) (1,923) (2,060) (2,206) Asset Turnover (X) 0.46 0.40 0.35 0.31 Minority interests 401 (73) (312) (668) Inventory Days 43 43 43 43 Net profit 12,979 14,491 15,285 16,033 Receivables Days 79 79 79 79 EPS (Rmb) 1.51 1.68 1.77 1.86 Payable Days 149 149 149 149 Recurring Net Profit 13,985 14,491 15,285 16,033 # Recurring EPS (Rmb) 1.62 1.68 1.77 1.86 Return (%) MW EPS (Rmb) 1.51 1.68 1.77 1.86 ROA 5.7% 5.9% 5.8% 5.7% ROE 11.0% 11.1% 10.6% 10.2% Balance Sheet (Rmb Mn) 2018A 2019E 2020E 2021E Gearing (X) Non-current assets 111,294 112,224 113,058 113,566 Asset/Equity 1.9 1.9 1.8 1.8 PPE 15,835 16,756 17,279 17,555 Total Liabilities/Equity 0.9 0.8 0.8 0.8 Lease prepayments 1,476 1,029 940 851 Total IB Debt/Equity 0.2 0.3 0.3 0.3 Intangible assets 6,625 7,081 7,481 7,802 Net Interest Coverage (4.0) (7.5) (3.9) (2.9) Investments in associates 17,682 17,682 17,682 17,682 Available-for-sale financial 0 0 0 0 assets Other long-term assets 25,029 25,029 25,029 25,029 Current assets 115,223 132,571 150,372 170,123 Cash Flow Statement Inventories 10,710 10,167 9,572 9,134 (Rmb Mn) 2018A 2019E 2020E 2021E Trade and bills receivables 22,522 21,005 19,763 18,841 Cash fr oper. activi (22,249) 2,017 872 531 Prepay, deposits and 39,602 36,935 34,750 33,130 Cash fr inv. activi 12,680 13,578 14,707 16,283 others Due from jointly-controlled 9,586 8,940 8,412 8,019 Cash fr fin. activities 2,903 7,125 6,773 6,311 entities Other financial assets 1,899 1,899 1,899 1,899 Inc in cash & bank equival (6,666) 22,720 22,352 23,124 Cash and cash equivalents 30,904 53,624 75,976 99,100 Cash & bank equival b/f 33,350 27,251 49,971 72,323 Other current assets 0 0 0 0 Cash & bank equival c/f 27,251 49,971 72,323 95,447 Current liabilities 84,457 86,505 88,230 90,937 Trade payables 37,140 35,257 33,195 31,676 E = Morgan Stanley Research estimates Other payables 32,222 30,694 29,021 27,788 Source: Company data, Morgan Stanley Research Provisions 1,127 1,127 1,127 1,127 Current portion of 15,424 20,883 26,343 31,802 borrowings Other current liabilities (1,456) (1,456) (1,456) (1,456) Non-current liabilities 17,135 20,933 24,730 28,528 Interest-bearing borrowings 10,729 14,527 18,324 22,122 Deferred income tax 2,086 2,086 2,086 2,086 liabilities Other long-term liabilities 4,320 4,320 4,320 4,320 Minority interests 6,569 6,569 6,569 6,569 Shareholders' equity 118,356 130,788 143,901 157,656 Registered capital 8,616 8,616 8,616 8,616 Reserves 16,412 16,412 16,412 16,412 Retained profits 93,328 105,760 118,873 132,628

Source: Company Data, Morgan Stanley Research (E) estimates.

MORGAN STANLEY RESEARCH 23 MM SAIC: Upgrading to OW on Valuation

Recent stock underperformance: SAIC's share price has declined Market concern on margins looks overdone: We believe the 19% since the high on April 17, underperforming the Shanghai recent share price correction also partly reflected the market's Composite Index which is down 10%. YTD, SAIC's share price has bearish outlook on SAIC's margins. As guided, the company offered fallen 8%, vs. +18% for the Shanghai Composite. aggressive discounts for its products in the May-June destocking, which was the primary reason for the losses at its domestic brands. Market is bearish on the outlook for dividends: We believe the As of end August, SAIC has narrowed the discounts by Rmb6.6k per recent correction in SAIC's stock price partly reflected the market's vehicle for SAIC Volkswagen, and Rmb2k for Skoda. We believe mar- concern on its dividend cut for F2018. While the company made no gins will continue to recover in 2H19. promise to raise the dividend payout in the near term, it did reiterate its willingness to raise the dividend back to a high level of around Move to OW: We continue to see solid fundamentals for SAIC, and 60% in the long term. keep our PT and estimates on SAIC unchanged. We move to OW as our PT of Rmb30 implies 22% upside.

24 MM Risk-Reward: SAIC (600104.SS, Rmb25.55, OW, PT Rmb30)

Market concerns on margins look overdone Investment Thesis n SAIC has the largest PV JVs in China: SH VW, Rmb 40 SH GM, and SH GM Wuling. Rmb37.50 (+47%) n We expect margin recovery for SAIC and the 35 JV brands to benefit from the replacement cycle from 2020. 30 Rmb30.00 (+17%) n Rmb25.55 We keep our PT of Rmb30 and upgrade to 25 OW as it now implies 17% upside.

20 Key Value Drivers n Sales growth of PVs, especially sedans under 15 Rmb14.00 (-45%) its major JVs. n Sales growth of SAIC's own brand 10 n NEV sales. 5 n CV sales growth.

0 Risks to Achieving Price Target May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 n Price Target (May-20) Historical Stock Performance Current Stock Price Downside: Negative sentiment towards US WARNINGDONOTEDIT_RRS4RL~600104.SS~ resulting in pressure for SAIC-GM; Greater- Source: Morgan Stanley Research, Thomson Reuters than-expected losses from its self-owned brands; fiercer-than-expected competition in Price Target Rmb30 the sedan segment, which could drag down market prices and the average margins of OEMs Base case, DCF.

Bull Rmb37.5 12.2x 2019E P/E Stronger-than-expected PV demand: SAIC’s sales continue to outperform the PV industry. ASP grows amid inflation, and gross margin increases with an improving product mix.

Base Rmb30 9.9x 2019E P/E Margin recovery in the near term: SAIC's margin to recover in 2H19 remains stable in 2020/21. SAIC VW and SAIC GM to benefit from replacement demand from 2020.

Bear Rmb14 4.6x 2019E P/E Weaker-than-expected PV demand: SAIC’s sales decline along with the whole industry. ASP cut due to fierce competition leads to overall gross margin erosion.

MORGAN STANLEY RESEARCH 25 MM SAIC: Financial Summary

Exhibit 38: SAIC: Financial Summary Income Statement Balance Sheet Rmb Mn 2018A 2019E 2020E 2021E Rmb Mn 2018A 2019E 2020E 2021E Revenue 902,194 915,038 936,229 961,237 Balance Sheet COGS (773,878) (793,577) (812,344) (834,591) Fixed Assets 90,037 97,952 103,522 106,661 Business taxes and surcharges (7,463) (7,570) (7,745) (7,952) Intangible assets/prepayments 140,497 142,884 145,100 147,159 Gross Profit 120,852 113,892 116,140 118,695 LT investment 70,930 103,507 136,278 169,286 Net- other revenue 29 29 29 29 Deferred taxes 27,930 27,930 27,930 27,930 Selling expense (63,423) (59,477) (59,919) (60,558) Non-current assets Subtotal 329,394 372,273 412,830 451,036 G&A expense (36,721) (32,941) (32,768) (32,682) Finance expense (195) (311) (516) (523) Accounts receivable 40,130 40,701 41,644 42,756 Asset impairment (3,490) (3,490) (3,490) (3,490) Inventory 58,943 60,443 61,872 63,567 Operating profit 17,051 17,700 19,476 21,470 Note receivable 20,960 21,259 21,751 22,332 Investment income 33,126 32,577 32,771 33,008 Bank balances and cash 87,449 70,585 62,952 59,488 Fair value gain (113) (113) (113) (113) Other Current assets 245,894 246,527 247,316 248,248 Non-operating income 4,735 4,735 4,735 4,735 Current assets Subtotal 453,376 439,514 435,535 436,391 Non-operating expense (455) (455) (455) (455) Profit before income tax 54,344 54,444 56,414 58,645 Short term loan 16,726 16,926 17,126 17,326 Income tax expense (5,939) (5,950) (6,165) (6,409) Notes payable 29,561 30,314 31,031 31,880 Profit after tax 48,405 48,494 50,249 52,236 Accounts payable 125,265 128,454 131,492 135,093 Minority Interest (12,395) (12,518) (12,683) (12,873) LT debt with one year 14,614 8,674 8,674 8,674 Net Profit 36,009 35,976 37,566 39,362 Other Current liabilities 228,156 230,562 233,007 235,903 EPS 3.08 3.08 3.22 3.37 Current liabilities Subtotal 414,323 414,930 421,329 428,876

2018A 2019E 2020E 2021E LT Loan 19,158 13,795 8,433 3,070 Bond payable 13,375 13,375 13,375 13,375 Growth (%) Other LT liabilities 48,927 48,927 48,927 48,927 Revenue 3.6% 1.4% 2.3% 2.7% Deferred Taxes 2,267 2,267 2,267 2,267 Operating Profit -19.8% 3.8% 10.0% 10.2% Non-Current liabilities Subtotal 83,726 78,364 73,002 67,639 Net Profit 4.6% -0.1% 4.4% 4.8% Minority interests 50,352 62,870 75,552 88,426 Margins (%) Share Capital 11,683 11,683 11,683 11,683 GP Margin 13.4% 12.4% 12.4% 12.3% Reserves 222,685 243,940 266,798 290,803 OP Margin 1.9% 1.9% 2.1% 2.2% Shareholders’ Equity 234,369 255,623 278,482 302,486 Net Margin 4.0% 3.9% 4.0% 4.1% Total Liability & Equity 782,770 811,787 848,365 887,427 EBITDA Margin 5.9% 6.2% 6.6% 6.9% - (0) (0) (0)

Return (%) Cash Flow Statement ROA 4.8% 4.5% 4.5% 4.5% Rmb Mn 2018A 2019E 2020E 2021E ROE 15.7% 14.7% 14.1% 13.6% Profit after tax 36,009 35,976 37,566 39,362 Gearing (%) Depreciation of PPE 10,908 14,690 17,206 19,793 Total Liabilities/Assets 63.6% 60.8% 58.3% 55.9% Changes in working capital 25,392 3,344 2,546 3,026 Total debt/Equity 27.3% 20.6% 17.1% 14.0% Others (63,334) (16,258) (16,082) (16,121) Net debt/Equity -15.8% -12.2% -10.3% -10.1% Net cash flow from operating activities 8,976 37,752 41,236 46,061 Purchases of PPE (31,975) (25,000) (25,000) (25,000) Efficiency Others 41,820 (3,482) (3,482) (3,482) Asset Turnover (x) 1.2 1.1 1.1 1.1 Net cash flows from investing activities 9,845 (28,482) (28,482) (28,482) Inventory Days 25.7 27.5 27.5 27.4 Receivables Days 15.1 16.1 16.1 16.0 Proceeds/ (repayments) of bank loans 22,497 (11,103) (5,162) (5,162) Payable Days 58.1 58.3 58.4 58.3 Others (41,611) (15,032) (15,224) (15,881) Cash Days (17.3) (14.8) (14.9) (14.8) Net cash flow from financing activities (19,114) (26,135) (20,386) (21,043) Other Ratio Exchange difference on cash and cash equivalents (434) 0 0 0 Total debt / EBITDA 0.2 0.2 0.1 0.1 Net change in cash (727) (16,865) (7,632) (3,464) EBITDA / Financial Cost 29.2 29.5 30.2 35.1 Cash at beginning of the year 88,176 87,449 70,585 62,952 Current Ratio 1.1 1.1 1.0 1.0 Cash & cash equiv. at EOP 87,449 70,585 62,952 59,488 Quick Ratio 0.3 0.3 0.2 0.2

Source: Company Data, Morgan Stanley Research

26 MM Brilliance: 1H19 Results Recap

1H19 net profit down 9% yoy: Brilliance's net profit was Rmb3.2bn, for the dividend from the onshore JV to Brilliance. While the standard down 9% yoy. The share of profit from its BMW JV was down 3% yoy tax rate for withholding tax is 10%, Brilliance negotiated with the gov- to Rmb3.6bn, while the revenue for Brilliance BMW rose 25.6% yoy ernment and reduced the tax rate to 5%. We believe this may indicate to Rmb79.3bn. that the 5% withholding tax rate may be applicable to any future spe- cial dividends. Recurring net profit from BMW JV better than expected: The rev- enue for Brilliance BMW rose 25.6% yoy to Rmb79.3bn, implying flat Brilliance expects HoH improvement in cost of retail for BMW JV: ASP yoy, as the increase in mix of X3 was offset by the pressure Per management, part of the reason for the reduced profitability of pricing from destocking of the old 3 series model. The company the BMW JV in 1H19 was the higher cost of retail given the tough guided for some FX hedging losses as well as the increase in rebates market. In the second half, management expects a healthier condi- to dealers in a tough market contributed to the 3.4% yoy net profit tion for its dealers with new 3 series, X2, facelift of the 1 series, and decline to Rmb7.1bn for the JV. This indicates the recurring net profit the imported new 7 series. from the JV was better than a 3.4% yoy decline, and also better than our previous estimate from BMW's reported results. Brilliance also Contribution from BMW Auto Finance increased 14%: The guided for 15% yoy growth for its 2019 sales volume target for Brilliance BMW JV holds 42% of BMW Auto Finance company, which Brilliance BMW, and 10% yoy decline for the minibus. contributed Rmb510m profit for the JV in 1H19, up 14%. The FX hedging loss in 1H19 for BMW Brilliance JV was not disclosed. Management reiterated its willingness to pay out special divi- dends: In late July, Brilliance announced a special dividend of Additional information on financials: Brilliance commented that HK$0.74 per share, which was paid out to shareholders on August 8. the yoy rise in other income in 1H19 was due to increase in govern- During the 1H19 results briefing, management noted that it is willing ment subsidy. The decrease in finance costs was due to the reduced to pay out more in special dividends in the future, although the final bank borrowing as well as lower borrowing rate. The increase in decision will depend on the mutual agreement by Brilliance and other current assets reflected the dividends receivable at end 1H19, BMW, and the cash position of the company. For the cash to be which has been paid out. received in 2022, management maintained guidance that it would pay the cash out as special dividend unless it sees other attractive Remain OW with PT of HK$12: We remain OW on Brilliance as we investment opportunities or needs from other businesses. continue to be bullish on the outlook for luxury brands. The reported 1H19 results imply better-than-expected recurring profitability for Benefit in withholding tax rate: Management noted the increase in BMW JV, and we believe management's reiteration on the willingness tax expense in 1H19 for Brilliance was due to the withholding tax paid to pay out special dividends could sustain investors' confidence.

MORGAN STANLEY RESEARCH 27 MM Brilliance: Financial Summary

Exhibit 39: Brilliance: Financial Summary Income statement Balance Sheet Rmb Mn 2018A 2019E 2020E 2021E Rmb Mn 2018A 2019E 2020E 2021E Turnover 4,377 3,673 3,664 3,698 Non-current assets 32,818 39,357 46,362 53,842 Cost of sales (4,091) (3,414) (3,394) (3,419) Fixed asset, net 2,330 2,332 2,410 2,561 Gross profit 287 259 269 279 Land lease prepayments 84 82 80 78 Other revenues 141 119 118 119 Intangible asset 612 855 1,149 1,506 SG&A (1,294) (1,232) (1,229) (1,241) Construction in progress 219 342 455 572 Profit from operations (866) (855) (842) (842) Investments in JCEs 24,074 30,213 36,701 43,525 Interest income 61 68 70 79 Investments in associates 1,673 1,706 1,740 1,773 Interest expense (114) (128) (145) (165) Deposits for an investment - - - - Profit from Asso Co & JCEs 33 33 33 33 Other long term assets 3,814 3,814 3,814 3,814 Profit from BMW JV 6,245 7,139 7,488 7,824 LT advances to an affilicated Co. 12 12 12 12 Profit before tax 5,359 6,258 6,605 6,929 Taxation (65) (75) (80) (83) Current Assets 9,282 9,081 9,572 10,144 Minority interests 526 448 449 455 Cash and Equivalents 2,310 2,411 2,917 3,445 Net profit 5,821 6,631 6,974 7,301 ST bank deposits 609 609 609 609 Basic EPS (RMB) 1.16 1.32 1.39 1.45 Pledged bank deposits 1,076 1,076 1,076 1,076 Financial Analysis Notes receivable fr affiliated Co. 148 129 129 130 2018A 2019E 2020E 2021E accounts receivable net 349 367 366 370 Profitability due from affiliated companies 676 712 710 717 Net Margin 133.0% 180.5% 190.4% 197.4% Other receivables 1,917 1,915 1,910 1,928 Gross Margin 6.5% 7.1% 7.4% 7.6% Inventories 1,012 853 849 855 EBITDA Margin 130.0% 180.1% 191.2% 199.5% Advances to affiliated Co. 952 799 797 804

Returns Current Liabilities 10,132 10,288 11,258 12,465 ROE 18.7% 17.6% 15.6% 14.0% short term bank loans 4,624 5,229 5,956 6,828 ROIC 18.9% 17.7% 15.8% 14.2% notes payable 1,631 1,844 2,101 2,408 ROA 13.8% 13.7% 12.5% 11.4% accounts payable 1,860 1,536 1,527 1,539 due to affiliated companies - - - - Efficiency customer advances - - - - Asset turnover 0.10 0.08 0.07 0.06 other payables 1,984 1,665 1,661 1,676 Inventory Days 90 91 91 91 accrued expenses and other current liabilities - - - - Receivable Days 215 254 254 254 taxes payable 14 14 14 14 Payable Days 145 197 226 257 advances from affiliated companies - - - -

Cash flow statement Lt Liabilities 143 143 143 143 Rmb Mn 2018A 2019E 2020E 2021E Convertible bonds due 2011 - - - - Cash inflow fr. oper. activities (3,192) (898) (513) (497) Net Current Assets (850) (1,207) (1,686) (2,320) Cash used fr. investing activities 3,123 335 189 14 Total Assets 42,100 48,438 55,934 63,986 Cash (outflow)/inflow fr. fin. activities 285 799 983 1,180 Net Assets 31,825 38,007 44,532 51,378 Inc/(dec) in cash & cash equiv. 578 101 505 528 Cash & cash equiv. at beginning of the Ye 1,732 2,310 2,411 2,917 MINORITIES 745 297 (152) (607) Cash & cash equiv. at end of theYear 2,310 2,411 2,917 3,445 Represented By: Share capital 397 397 397 397 Share premium 2,473 2,473 2,473 2,473 Reserves 28,209 34,840 41,814 49,114 Shareholders' equity 31,080 37,710 44,684 51,985

Source: Company Data, Morgan Stanley Research (E) estimates.

28 MM BAIC: 1H19 Results Recap

1H19 results in line: BAIC reported 1H19 net profit of Rmb2.1bn, to be to non-individual customers, i.e. taxi companies, ride hailing down 26% yoy, in line with our estimate of Rmb2.0bn. Net profit from companies or the government. BAIC mentioned the mix for non-indi- Beijing Benz was down 2% yoy to Rmb5.1bn. The net loss from Beijing vidual customers for the industry has increased from 18% in 2018 to Hyundai and other JVs/associates was Rmb0.4bn vs. net profit of around 25% now. Rmb0.6bn in 1H18. Net loss from other businesses including the domestic brand narrowed 10% to Rmb2.7bn. Interpretation on State Council policy to promote consumption: BAIC believes the policy from State Council echoes the previous 2H19 guidance: BAIC's target for full-year 2019 on sales volume is policy from NDRC and shows the central government's intention to small positive growth yoy, outperforming the auto market. It also support economic growth with consumption. BAIC expects some aims for positive EPS growth for 2019. For domestic brands, the sales local governments may follow with specific policies after accessing target is 200k units, and the company targets a narrowed loss in the local economic development. 2019. The mix from NEV for domestic brand is expected to rise. For Beijing Benz, the company expects double-digit sales volume growth, Profitability of Beijing Benz: BAIC guided the decline in Beijing and the target for net profit contribution is flat or slight decrease yoy. Benz's margins as the natural result of increased sales volume, with For Beijing Hyundai, although a sales decline is expected, the com- relatively lower mix from high-end models. It expects profit margins pany targets to achieve positive profit contribution in 2H19, which to go back to a reasonable level in the future. The current gross would more than offset the net loss contribution in 1H19. margin for Beijing Benz is still close to 30%. BAIC will also try to sup- port the margin by introducing new products. Plan for domestic brand NEVs: BAIC expects around Rmb10k fur- ther cut in NEV subsidy from the transition period to 2H19, and Remain OW: We expect luxury brands to continue to take market expects the impact could be offset by the reduction in cost as well as share with strong upgrade demand. The recently launched new GLC the increase in price for newly launched products in 2H19, although L could boost profitability for Beijing Benz, while the loss from a price hike for existing products looks difficult. The EU7 will be domestic brand should be contained after the suspension of Wevan launched in September 2019. BAIC expects 50-60% of its NEV sales brand and the sales of plant to Beijing Benz.

MORGAN STANLEY RESEARCH 29 MM BAIC: Financial Summary

Exhibit 40: BAIC: Financial Summary Income statement Balance Sheet Rmb Mn 2018A 2019E 2020E 2021E Rmb Mn 2018A 2019E 2020E 2021E Turnover 151,920 168,721 185,064 197,798 Non-current assets 90,275 115,135 126,356 138,374 Cost of sales (114,914) (126,043) (138,935) (148,719) Fixed asset, net 43,218 55,695 64,510 74,685 Gross profit 37,007 42,678 46,129 49,079 Land lease prepayments 7,378 7,352 7,337 7,335 SG&A (17,002) (21,259) (23,086) (24,519) Intangible asset 13,123 13,938 14,619 15,153 Profit from operations 20,628 21,479 23,101 24,618 Construction in progress - 11,680 13,629 15,262 Interest income 761 799 937 1,022 Investments in JCEs 12,995 12,909 12,701 12,379 Interest expense (1,118) (1,041) (1,084) (1,128) Investments in associates 3,191 3,191 3,191 3,191 Profit from Asso Companies - - - - Deferred tax assets 7,926 7,926 7,926 7,926 Profit from Joint Ventures 904 (86) (208) (321) Other long term assets 701 701 701 701 Profit before tax 21,175 21,152 22,745 24,190 LT advances to an affilicated Co. 1,743 1,743 1,743 1,743 Taxation (6,904) (6,896) (7,416) (7,886) Minority interests (9,842) (10,728) (11,265) (11,774) Current Assets 81,759 69,601 79,667 88,049 Net profit 4,429 3,527 4,065 4,529 Cash and Equivalents 35,390 20,347 25,619 30,306 Basic EPS (RMB) 0.55 0.44 0.51 0.57 ST bank deposits - - - - Pledged bank deposits 820 820 820 820 Financial Analysis accounts receivable net 21,988 24,420 26,785 28,628 2018A 2019E 2020E 2021E Other receivables 4,133 4,590 5,034 5,381 Profitability Inventories 18,963 18,906 20,840 22,308 Net Margin 2.9% 2.1% 2.2% 2.3% Advances to affiliated Co. 466 518 568 607 Gross Margin 24.4% 25.3% 24.9% 24.8% EBITDA Margin 18.7% 17.5% 17.5% 17.9% Total Assets 172,034 184,736 206,023 226,424

Returns Current Liabilities 80,426 78,668 84,690 89,084 ROE 9.1% 7.0% 7.8% 8.3% short term bank loans 8,956 10,138 11,320 12,503 ROIC 9.4% 7.1% 7.7% 8.1% notes payable 1,822 1,822 1,822 1,822 ROA 2.6% 1.9% 2.0% 2.0% accounts payable 38,633 34,032 37,512 40,154 due to affiliated companies 1,992 1,992 1,992 1,992 Efficiency other payables 28,789 30,450 31,809 32,379 Asset turnover 0.88 0.91 0.90 0.87 advances from affiliated companies 234 234 234 234 Inventory Days 60 55 55 55 Receivable Days 63 63 63 63 Lt Liabilities 22,370 24,338 26,306 28,274 Payable Days 6 5 5 4 Net Current Assets 1,333 (9,068) (5,024) (1,035) Total Assets 172,034 184,736 206,023 226,424 Cash flow statement Net Assets 69,238 81,730 95,027 109,066 Rmb Mn 2018A 2019E 2020E 2021E Cash inflow fr. oper. activities 31,729 23,809 32,672 35,265 MINORITIES 20,822 31,551 42,815 54,590 Cash used fr. investing activities (9,532) (33,100) (20,954) (23,472) Cash (outflow)/inflow fr. fin. activities (13,700) 1,386 1,117 886 Represented By: Inc/(dec) in cash & cash equiv. (1,499) (15,043) 5,272 4,686 Share capital 8,015 8,015 8,015 8,015 Cash & cash equiv. at beginning of the 36,825 35,390 20,347 25,619 Share premium 23,040 23,040 23,040 23,040 Cash & cash equiv. at end of theYear 35,390 20,347 25,619 30,306 Reserves 17,360 19,124 21,157 23,421 Shareholders' equity 48,415 50,179 52,212 54,476

Total Liabilities and Equity 172,034 184,736 206,023 226,424

Source: Company Data, Morgan Stanley Research (E) estimates.

30 MM GAC: 1H19 Results Recap

1H19 results in line: GAC reported 1H19 net profit of Rmb4,919m, only put into production after the utilization for the first plant down 29% yoy and roughly in line with our expectation of reaches 85%. Rmb5.0-5.3b. Excluding one-off items, mainly government grants, recurring net profit for 1H19 was Rmb3,267m, down 50.8% yoy. 2Q19 Japanese JV brands: GAC Toyota had over 30% yoy growth in profit net profit fell 29.4% yoy and 22.9% qoq to Rmb2,141m. Recurring net contribution, while GAC Honda only had a slight growth. profit for 2Q19 was Rmb1,057m, down 62.7% yoy and 52.2% qoq. Management guided this was due to GAC Honda's effort to de-stock cheaper models like Fit and Crider. In 2H19, GAC expects a higher Keeping annual sales target unchanged: GAC's sales for 1H19 were profit growth for GAC Honda as the mix of products will improve. down 1.7% yoy, outperforming China's auto industry by 10ppts. GAC Currently, GAC Toyota only has around 500k annual capacity, which believes if the auto market is down 5% yoy for full year 2019, as would increase to 600k at end 2019 with phase II of its third produc- CAAM currently predicts, then it should be able to achieve its original tion line. It would expand 2 more production lines according to target of 2,225k units, up 3.6% yoy. However, the company expects demand and targets for 1 million units annual capacity in the future. some downside risk to CAAM's 5% decline forecast, and expects 5-10% yoy decline for the industry. If the industry declines by 10% in Quantifying the impact from additional license plates in 2019, GAC still believes it is possible to target 3.6% growth, although Shenzhen and Guangzhou: GAC guided its market share in it would be challenging. Hence, GAC is keeping the 3.6% growth Shenzhen was 11% and 23% in Guangzhou. For Guangzhou's 50k addi- target unchanged. tional license plates for energy saving vehicles, GAC believes it could take 75%, and for the city's other 50k license plates, GAC expects it Trumpchi: GAC guided that the Trumpchi ICE business achieved pos- would take around 23%. itive profit in 1H19, thanks to the government grants. The dealers' inventory for Trumpchi declined by 40k units YTD and is currently 1.5 Expects stable or improving pricing in September and October: months. GAC expects sequential improvement in 2H19, but the GAC expects pricing levels will not be further lowered in the this market will still be quite tough. The company will prioritize sales September and October, which is the traditional high season. GAC volume, while still taking profitability into consideration. sees these two months as a good opportunity to secure better sales.

NEV business: GAC had been cautious on NEV but in 2019 the NEV Remain OW: We remain OW on GAC-H given our bullish expectation business ramped up rapidly. Management expects more meaningful on its Japanese JV brands. We expect GAC Toyota and GAC Honda to volume contribution in 2H19 with Aion S launched in April and Aion continue to take market share from domestic brands, especially with LX to start delivery only in October. The annual planned capacity for the new SUV products to be launched. We expect sequential the new NEV industrial park is 400k units, but the construction of the improvement for GAC Trumpchi as inventory is now at a healthy plants would depend on the market condition, with the second plant level.

MORGAN STANLEY RESEARCH 31 MM GAC: Financial Summary

Exhibit 41: GAC: Financial Summary Income Statement Financial Analysis (Rmb Mn) 2018A 2019E 2020E 2021E 2018A 2019E 2020E 2021E Revenue 72,380 66,929 68,459 70,137 Growth (%) Cost of sales (60,836) (56,643) (57,469) (58,342) Turnover 1.1% -7.5% 2.3% 2.5% Gross profit 11,544 10,285 10,989 11,795 Operating Profit -45.6% -34.3% 60.2% 38.8% Distribution costs (5,073) (4,758) (4,730) (4,776) Net Profit -1.0% -11.1% 12.3% 14.0% Administrative expenses (4,519) (4,246) (4,206) (4,169) Operating profit 1,952 1,282 2,053 2,850 Margins (%) Finance costs, net 98 (352) (671) (694) Gross Margin 15.9% 15.4% 16.1% 16.8% Other gains 1,061 669 685 701 Operating Margin 2.7% 1.9% 3.0% 4.1% Share of profit of jointly-controlled entities 7,226 7,712 8,605 9,469 Net Margin 15.1% 14.5% 15.9% 17.7% Income from associates 1,527 1,503 1,475 1,516 Profit before tax and MI 11,863 10,813 12,148 13,843 Efficiency Income tax expense, net (921) (1,081) (1,215) (1,384) Asset Turnover (X) 54.8% 52.4% 50.1% 47.7% Minority interests (43) (38) (43) (49) Inventory Days 40 30 30 30 Net profit 10,900 9,694 10,890 12,410 Receivables Days 84 50 50 50 EPS (Rmb) 1.07 0.95 1.07 1.21 Payable Days 223 130 130 130 MW EPS (Rmb) 1.07 0.95 1.07 1.21 Return (%) Balance Sheet ROA 8.2% 7.6% 8.0% 8.4% (Rmb Mn) 2018A 2019E 2020E 2021E ROE 15.7% 12.7% 13.2% 13.7% Non-current assets 65,963 66,177 66,196 66,047 PPE 16,318 16,599 16,749 16,792 Gearing (X) Investments in associates 6,882 7,290 7,698 8,105 Asset/Equity 172.5% 163.4% 153.0% 149.4% Other current assets 42,763 42,287 41,750 41,149 Total Liabilities/Equity 70.8% 53.2% 49.7% 46.2% Current assets 66,211 61,439 70,539 80,990 Total IB Debt/Equity 16.2% 23.1% 21.9% 20.7% Inventories 6,730 4,656 4,724 4,795 Net Interest Coverage 0.0% 0.0% 0.0% 0.0% Trade and other receivables 16,605 9,168 9,378 9,608 Financial assets at fair value through profit or lo 968 968 968 968 Time deposits 10,337 10,337 10,337 10,337 Restricted cash 3,842 3,842 3,842 3,842 Cashflow Statement Cash and cash equivalents 27,730 32,469 41,291 51,441 (Rmb Mn) 2018A 2019E 2020E 2021E Current liabilities 40,291 33,113 33,938 34,779 Cash fr operating activities (2,338) (3,424) 4,551 5,336 Trade and other payables 37,122 20,174 20,469 20,779 Cash used in investing activities (5,148) 5,506 6,379 7,281 Current income tax liabilities 340 340 340 340 Cash fr/(used in) financing activities (2,012) 2,658 (2,108) (2,467) Current interest-bearing borrowings 2,829 12,598 13,129 13,659 Increasein cash and equivalents (9,498) 4,739 8,822 10,150 Provisions 0 0 0 0 Cash and cash equivalents at BOP 37,199 27,730 32,469 41,291 Non-current liabilities 13,908 10,698 10,968 11,237 Cash and cash equivalents at EOP 27,730 32,469 41,291 51,441 Trade and other payables 198 198 198 198 Borrowings 9,611 6,402 6,672 6,941 E = Morgan Stanley Research estimates Others 4,098 4,098 4,098 4,098 Source: Company data, Morgan Stanley Research Minority interests 1,371 1,409 1,452 1,501 Shareholders' equity 76,604 82,395 90,378 99,521 Share capital 10,232 10,217 10,217 10,217 Other Reserves 26,881 26,881 26,881 26,881 Retained earnings 39,491 45,298 53,280 62,423

Source: Company Data, Morgan Stanley Research (E) estimates.

32 MM Great Wall: 1H19 Results Recap

1H19 results in line: Great Wall reported 1H19 net profit of 2Q19 should actually be around 18% instead of the reported 15%, and Rmb1,517m, down 59% YoY and in line with its preliminary results actually improved 3ppts qoq, in line with the qoq improvement in announced on July 21. The results imply some qoq recovery on net ASP and net profit per vehicle. However, the 18% actual gross margin profit per vehicle, albeit still down meaningfully yoy. is still around 2ppts lower than 2Q18's 20%.

Incremental improvement in profitability per vehicle: The results Investors' concern on capacity expansion: Two questions during imply 2Q19 net profit of Rmb744m, down 54% yoy and down 4% qoq. the results briefing was on GWM's plan to expand capacity in mul- Recurring net profit for 1H19 was Rmb1,241m, down 65% yoy. tiple locations during an industry downturn. The company guided Recurring net profit for 2Q19 was Rmb598m, down 59% yoy and that each of the locations made business sense, for example, the down 7% qoq. However, based on the company's reported monthly Chongqing plant which would produce pickups would be closer to its sales volume, recurring net profit per vehicle was around Rmb2.9k in market in Northwestern China, and the Rizhao plant which would 2Q19, down 58% yoy but up 26% qoq. produce WEY would become an individual R&D center, and the loca- tion was convenient for seaborne transportation. The new plants Reported monthly volume vs. volume in financial statement: In might be smaller in terms of total capacity compared to existing ones, 1H19, the company reported 493,538 units of total sales in the and they might gradually replace the old plants which would get monthly sales report, while in the 1H19 financial report total sales obsolete, improving the efficiency. came to 460,269 units, 7% lower. The discrepancy was due to the different scope of the sales company and the finance department. Increase in advertising expenses due to more targeted mar- Such discrepancy was very small for 1H18. This will result in the actual keting: Advertising expenses for 1H19 increased by 38% yoy to yoy decline in per vehicle net profit to be smaller than calculated Rmb835m, despite the decline in sales. The company attributed this above, but we do not know the impact to the qoq improvement as the to the more targeted strategy, which meant multiple channels for quarterly volume was not disclosed in the financial reports. marketing for the different brands. The company expects the effort to bear fruit from 2H19. Incremental improvement in ASP: Due to the discrepancy in reported sales volume, we cannot accurately calculate the change in Future product lineup: GWM will launch WEY VV7 GT along with ASP either. We estimate that ASP for 2Q19 for GWM was around the PHEV version in September, as well as the high end pickup Pao. Rmb84k, down 13% yoy from 2Q18's Rmb95k but up 12% from 1Q19's It will also launch Ora R2 in 4Q19. For 2020, the company guided for Rmb75k. This is in line with company guidance that ASP for 1H19 4 brand new products, including 2 SUVs, 1 pickup and 1 NEV. overall was close to Rmb80k. We believe the yoy ASP decline was due to a lower mix in WEY, a higher mix in Ora and larger discounts. Product strategy: GWM guided it would keep its strategy focus on For the qoq ASP improvement, we believe it may imply a narrowing SUVs, while the mix of SUVs might fall in the future because of in discounts, as the sales mix was relatively stable qoq. increasing mix of NEVs (Ora). It guided compact SUVs like H6 and F7 would continue to be the largest focus of its sales, as this level is the Change in accounting rules impacted gross margin: According to mainstream, even in the global market. Great Wall, the new accounting policy applicable from April 2019 resulted in part of selling expenses being recognized as COGS now, Remain EW: We remain EW on GWM H-share as we expect con- leading to a 3ppts change in gross margin. Therefore, gross margin for tinued pressure from competition from Japanese brands.

MORGAN STANLEY RESEARCH 33 MM GWM: Financial Summary

Exhibit 42: GWM: Financial Summary Income Statement Financial Analysis (Rmb Mn) 2018A 2019E 2020E 2021E 2018A 2019E 2020E 2021E Revenue 99,230 93,455 95,464 97,639 Growth (%) Cost of sales (81,481) (78,023) (79,094) (80,265) Turnover -1.9% -5.8% 2.1% 2.3% Gross profit 17,749 15,432 16,370 17,374 Operating Profit 3.4% -19.8% 20.3% 17.9% Business tax and surcharges (3,627) (3,416) (3,394) (3,374) Net Profit 3.6% -21.4% 19.8% 17.5% Selling expenses (4,575) (4,112) (4,105) (4,101) Administrative expenses (3,420) (2,991) (2,959) (2,929) Margins (%) Other operating expenses - - - - Gross Margin 17.9% 16.5% 17.1% 17.8% Operating profit 6,127 4,914 5,912 6,970 Operating Margin 6.2% 5.3% 6.2% 7.1% Finance costs 111 (489) (489) (489) Net Margin 5.2% 4.4% 5.1% 5.9% Impairment loss on assets (318) - - - Gain / loss from changes in fair value (140) - - - Efficiency Investment income 219 219 219 219 Asset Turnover (X) 0.89 0.81 0.80 0.79 Non-operating income 487 458 468 479 Inventory Days 20 25 25 26 Non-operating expenses (8) (7) (8) (8) Receivables Days 12 12 12 12 Income tax expenses (1,229) (968) (1,159) (1,363) Payable Days 15 15 15 15 Minority interests (40) (32) (38) (45) Net profit 5,207 4,095 4,905 5,764 Return (%) EPS (Rmb) 0.57 0.45 0.54 0.63 ROA 4.7% 3.6% 4.2% 4.7% MW EPS (Rmb) 0.60 0.45 0.54 0.63 ROE 10.2% 7.5% 8.4% 9.2% Check - - - - Balance Sheet Gearing (X) (Rmb Mn) 2018A 2019E 2020E 2021E Asset/Equity 2.1 2.0 2.0 1.9 Non-current assets 45,674 50,299 52,853 54,953 Total Liabilities/Equity 1.1 1.0 1.0 0.9 PPE 28,994 33,619 36,173 38,272 Total IB Debt/Equity 0.3 0.3 0.2 0.2 Prepaid land premium (Long term prepa 1,979 1,979 1,979 1,979 Net Interest Coverage 198 267 760 761 Construction in progress 4,406 4,406 4,406 4,406 Intangible assets 3,391 3,391 3,391 3,391 Investments in associates 0 0 0 0 Financial Analysis Long term investments 78 78 78 78 (Rmb Mn) 2018A 2019E 2020E 2021E Other long-term assets 6,827 6,827 6,827 6,827 Cash fr oper. activi 19,698 6,386 8,953 10,031 Current assets 66,126 65,108 66,444 68,872 Cash fr inv. activi (10,040) (6,509) (6,543) (6,519) Inventories 4,445 5,344 5,417 5,717 Cash fr fin. activities (6,501) (1,562) (1,228) (1,471) Trade and bills receivables 3,343 3,149 3,216 3,290 Inc in cash & bank equival 3,157 (1,685) 1,182 2,041 Other receivables 652 614 627 641 Cash & bank equival b/f 3,844 6,615 4,930 6,111 Prepayments 441 441 441 441 Cash & bank equival c/f 6,615 4,930 6,111 8,152 Pledged bank deposits 1,067 1,067 1,067 1,067 Cash and cash equivalents 6,615 4,930 6,111 8,152 Other current assets 49,563 49,563 49,563 49,563 Current liabilities 54,618 54,098 54,274 54,464 Trade payables 3,434 3,288 3,333 3,383 Bills payables 29,402 29,402 29,402 29,402 Other payables, advance from customers 6,431 6,057 6,187 6,328 Short term bank loans 12,800 12,800 12,800 12,800 Other current liabilities 2,551 2,551 2,551 2,551 Non-current liabilities 4,493 4,493 4,493 4,493 Long term bank loan 2,158 2,158 2,158 2,158 Deferred income tax liabilities 2,083 2,083 2,083 2,083 Deferred tax liabilities 253 253 253 253 Minority interests 164 195 233 278 Shareholders' equity 52,525 56,620 60,296 64,589 Issued capital 9,127 9,127 9,127 9,127 Share premium 1,411 1,411 1,411 1,411 Retained earnings 36,620 40,715 44,391 48,684 AOCI 5,367 5,367 5,367 5,367

Source: Company Data, Morgan Stanley Research (E) estimates.

34 MM Geely: 1H19 Results Recap

1H19 results: Geely reported 1H19 net profit of Rmb4,009m, down dealers from offering discounts, and likely resulted in the poor sales 40% YoY and down 32% HoH, in line with its previous profit warning. volume. The company expects much better gross margin for the PHEV version of Lynk 01. Geely guided to improved profitability: Geely attributed its 3% yoy increase in ASP in 1H19 to the greater mix of higher-priced Geely's strategy for BEV and PMA platform: Geely announced models, which was partly offset by the discounts offered during the 9,000 domestic orders and 18,000 orders for its Geometry A model China V models destocking in May-June. Geely believed its current when it was launched, but sales have stayed below 2,000 units per profitability is at a low level in its history because the economies of month. Geely attributed this to the approval process to gain access scale for its multiple platforms have not ramped up. Also, the high to certain overseas markets. The Geometry brand is targeted to indi- marketing expense was due to the launch for multiple new models vidual customers, and not a single Geometry A was sold to taxi com- during 1H19 despite the tough market. panies or ride-hailing businesses. Instead, Emgrand NEV was targeted at such business customers. Geely guided the PMA platform would Low inventory at end of June: Geely guided it had only 6,000 units have multiple partners, including Smart. of inventory at the OEM level at end-June vs. over 20,000 units at the same time last year. Geely guided that its retail sales were up 5% yoy Overseas markets: Geely's decision to keep the production of Lynk in 1H19, which was better than both its wholesale sales and its pro- models inside China is beneficial to the margin for Lynk. For Proton, duction volume. However, we note the low inventory at the end of the first model introduced from Geely, the Boyue model, became the June might be just the results of destocking of China V models. top-selling model in the market once it entered the market as Proton X70. Geely expects rapid growth in Russia and Belarus market, and Limited capex and R&D investment from now on: Geely noted the is also preparing ready for the European market. large scale of capacity expansion has come to an end. In the future, it may suspend the production of old plants if the new plants ramp High gross margin in the auto parts business: Geely's revenue up. On R&D expenses, the company guided it would stay at around from auto parts business rose 139% yoy to Rmb2.2b in 1H19. The com- 5-6% of revenue in the future. The depreciation for fixed assets and pany guided there are two segments in this business – parts sold to amortization of R&D investment increased Rmb800m in 1H19 and customers for repairing and replacement and the parts sold to Lynk. Geely expects around Rmb1bn increase for the full year. The company guided the gross margin for parts sold to customers are higher than 39%, while the gross margin for parts sold to Lynk is min- Geely expects better profitability for Lynk: The revenue for Lynk imal. only rose 3% yoy in 1H19, while the sales volume was up over 20%, which the company attributed to the lower mix of the Lynk 01 model, Remain UW: We remain bearish on Geely as we expect strong com- which had the highest ASP. Still, we believe the 22% profit decline petition from JV brands, and underperformance in terms of monthly implied poor profitability for Lynk in 1H19. The company noted that sales growth yoy compared to its peers due to the high base in 2018 Lynk had the smallest price change during the market downturn, except for December. which we believe could be related to the company's policy banning

MORGAN STANLEY RESEARCH 35 MM Geely: Financial Summary

Exhibit 43: Geely: Financial Summary Income Statement Financial Analysis (Rmb m) 2018A 2019E 2020E 2021E 2018A 2019E 2020E 2021E Sales 106,595 83,173 80,725 77,520 Growth (%) Cost of sales (85,082) (68,834) (66,966) (64,567) Turnover 14.9% -22.0% -2.9% -4.0% Gross profit 21,513 14,339 13,759 12,953 Operating Profit 18.3% -43.6% -7.9% -8.5% Other Income 1,237 965 937 900 Net Profit 18.1% -43.9% -7.7% -8.3% Selling & Distribution expenses (4,523) (3,909) (3,875) (3,798) Adminstrative and general expenses (3,777) (3,244) (3,310) (3,178) Margins (%) Share-based payments (15) (11) (11) (11) Gross Margin 20.2% 17.2% 17.0% 16.7% Operating Profit (EBIT) 14,435 8,140 7,500 6,865 Operating Margin 13.5% 9.8% 9.3% 8.9% Finance costs 79 (38) (39) (41) Net Margin 11.8% 8.5% 8.1% 7.7% Share of results of associates 445 315 306 297 Profit before tax 14,959 8,418 7,767 7,121 Efficiency Income tax expense (2,285) (1,305) (1,204) (1,104) Asset Turnover (X) 1.17 0.88 0.82 0.76 Profit for the year from discontinued operations - - - - Inventory Days 18 15 15 15 Profit for the year 12,674 7,113 6,563 6,017 Receivables Days 78 120 120 120 Minority interest (121) (68) (63) (58) Payable Days 178 210 210 210 Net profit 12,553 7,045 6,500 5,960 EPS - diluted (Rmb) 1.37 0.78 0.72 0.66 Return (%) MW EPS (Rmb) 1.37 0.78 0.72 0.66 ROA 13.7% 7.5% 6.6% 5.9% ROE 27.9% 14.3% 11.9% 10.1% Balance Sheet (Rmb Mn) 2018E 2019E 2020E 2021E Gearing (X) Property, plant and equipment 23,423 24,143 24,813 25,437 Asset/Equity 2.0 1.9 1.8 1.7 Interest in associates 6,322 6,322 6,322 6,322 Total Liabilities/Equity 1.0 0.9 0.8 0.7 Intangible assets 15,020 15,602 16,111 16,554 Total IB Debt/Equity 0.1 0.1 0.1 0.1 Available-for-sale financial assets - - - - Net Interest Coverage (54.9) (47.5) (50.1) (38.5) Prepaid land lease payments 3,268 3,268 3,268 3,268 Deferred tax assets 643 643 643 643 Financial Analysis Non-current assets 48,676 49,979 51,157 52,224 (Rmb Mn) 2018A 2019E 2020E 2021E Prepaid land lease payments 67 67 67 67 Cash fr oper. activi 13,925 5,444 9,897 9,378 Inventories 4,097 2,829 2,752 2,653 Cash fr inv. activi (11,319) (4,643) (4,667) (4,615) Trade and other receivables 22,865 27,345 26,540 25,486 Cash fr fin. activities (306) (2,655) (1,298) (1,191) Financial assets at fair value through profit or loss - - - - Inc in cash & bank equival 2,300 (1,853) 3,932 3,572 Tax recoverable - - - - Cash & bank equival b/f 13,415 15,737 13,884 17,816 Pledged bank deposits 19 19 19 19 Cash & bank equival c/f 15,737 13,884 17,816 21,388 Bank balances and cash 15,737 13,884 17,816 21,388 Current assets 42,785 44,143 47,194 49,614 E = Morgan Stanley Research estimates Total Assets 91,461 94,122 98,351 101,838 Source: Company data, Morgan Stanley Research Convertible bonds 2,048 2,048 2,048 2,048 Long-term bank borrowings, secured - 94 189 283 Deferred taxation 278 278 278 278 Non-current liabilities 2,326 2,420 2,514 2,609 Trade and other payables 41,438 39,603 38,528 37,148 Taxation 947 947 947 947 Short-term bank borrowings (secured) 1,375 1,431 1,487 1,542 Current liabilities 43,760 41,981 40,962 39,638 Total liabilities 46,086 44,401 43,477 42,247 Minority interests 431 431 431 431 Share capital 164 164 164 164 Reserves 44,780 49,125 54,279 58,996 Total Equity 45,375 49,720 54,874 59,591 Total Liabilities and Equity 91,461 94,122 98,351 101,838

Source: Company Data, Morgan Stanley Research

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As of August 30, 2019, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Dongfeng Motor Group, Great Wall Motor Company Limited, Minth Group Limited, Nio Inc..

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40 MM INDUSTRY COVERAGE: China Autos & Shared Mobility

COMPANY (TICKER) RATING (AS OF) PRICE* (09/06/2019)

Eddy Wang, CFA

Cango Inc. (CANG.N) O (08/20/2018) US$5.13 CAR Inc (0699.HK) E (03/29/2018) HK$5.77 Uxin Limited (UXIN.O) O (07/23/2018) US$2.85 Zhengzhou Yutong Bus Co (600066.SS) E (10/30/2018) Rmb15.64

Jack Yeung

Anhui Jianghuai Automobile (600418.SS) U (10/28/2015) Rmb5.19 BAIC Motor (1958.HK) O (01/08/2018) HK$4.63 Brilliance China Automotive (1114.HK) O (10/22/2013) HK$8.54 Chongqing Changan Automobile (000625.SZ) E (12/01/2016) Rmb8.80 Chongqing Changan Automobile (200625.SZ) O (11/28/2013) HK$3.67 Dongfeng Motor Group (0489.HK) O (07/02/2019) HK$7.25 FAW Car Company Limited (000800.SZ) U (07/11/2015) Rmb8.93 Geely Automobile Holdings (0175.HK) U (01/03/2019) HK$12.76 Great Wall Motor Company Limited (601633.SS) U (10/29/2018) Rmb8.39 Great Wall Motor Company Limited (2333.HK) E (10/29/2018) HK$5.31 Guangzhou Automobile Group (601238.SS) E (07/02/2019) Rmb11.90 Guangzhou Automobile Group (2238.HK) O (07/02/2019) HK$7.83 Jiangling Motors Company (000550.SZ) U (12/01/2016) Rmb16.53 Jiangling Motors Company (200550.SZ) U (12/01/2016) HK$6.93 Nio Inc. (NIO.N) O (10/08/2018) US$2.95 SAIC Motor Corp. Ltd. (600104.SS) O (09/08/2019) Rmb25.94

Shelley Wang, CFA

Baoxin Auto Group (1293.HK) U (07/25/2019) HK$1.54 China Yongda Automobiles Services (3669.HK) O (07/25/2019) HK$6.99 China Zhengtong Auto Services (1728.HK) O (07/25/2019) HK$2.48 Zhongsheng Group Holdings (0881.HK) O (07/25/2019) HK$24.80

Tim Hsiao

BAIC BluePark New Energy (600733.SS) O (08/28/2019) Rmb7.19 BYD Company Limited (002594.SZ) U (08/23/2019) Rmb50.49 BYD Company Limited (1211.HK) U (08/23/2019) HK$41.30 Changzhou Xingyu Automotive Lighting Sys (601799.SS) O (09/13/2018) Rmb72.01 Fuyao Glass Industry Group (600660.SS) E (12/01/2016) Rmb22.97 Fuyao Glass Industry Group (3606.HK) E (12/01/2016) HK$23.05 Huayu Automotive (600741.SS) O (07/11/2015) Rmb25.85 Minth Group Limited (0425.HK) O (08/24/2015) HK$25.50 NavInfo Co Ltd (002405.SZ) E (09/13/2018) Rmb17.10 Nexteer Automotive Group (1316.HK) E (01/15/2018) HK$6.82 Zhejiang Sanhua Intelligent Controls (002050.SZ) E (09/13/2018) Rmb12.31 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

MORGAN STANLEY RESEARCH 41 © Morgan Stanley 2019

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