Buy BAIC Motor

Deutsche Bank Markets Research

Rating Company Date 18 February 2016 Buy BAIC Motor Forecast Change Asia China Reuters Bloomberg Exchange Ticker Price at 18 Feb 2016 (HKD) 5.70 Automobiles & 1958.HK 1958 HK HSI 1958 Price target - 12mth (HKD) 7.40 Components 52-week range (HKD) 11.50 - 4.75

HANG SENG INDEX 18,925

Benz JV shines but local brand still in Vincent Ha, CFA Fei Sun, CFA reverse gear Research Analyst Research Analyst (+852 ) 2203 6247 (+852 ) 2203 6130 Benz JV success obscured by weakness at Hyundai JV and Beijing Motor [email protected] [email protected] BAIC's shares have underperformed even in a weak market, with a 27% decline YTD (vs. HSCEI's 15% drop), at a time when the Benz JV is seeing robust sales as expected. While we think the pressure on the Hyundai JV will Key changes be relieved by more new models, the Beijing Motor local brand operation still Price target 9.50 to 7.40 ↓ -22.1% struggles, even with better sales, and is the primary reason for our earnings Sales (FYE) 84,048 to 81,101 ↓ -3.5% cuts. We now forecast a ~RMB3bn annual loss for Beijing Motor and assign a Op prof 6.6 to 6.4 ↓ -3.8% negative value of HKD2.8/share to it. This implies a valuation of 9x for the margin (FYE) Benz/Hyundai JVs' FY16E earnings growth of 12%, still justifying a Buy rating. Net profit 4,709.2 to ↓ -19.3% (FYE) 3,798.9 Benz JV’s sales volume up 52% in January; strong growth to continue Source: Deutsche Bank Based on Daimler’s (DAIGn.DE, EUR64.86, Buy) FY15 annual report, Beijing Benz JV made a profit of EUR862m (+178%), ahead of our expectations, on a Price/price relative 66% YoY jump in revenue. In January, the JV recoded a strong 52% YoY jump in sales volume and we remain upbeat given the JV’s FY16 sales and profit 12 outlook on the ramp-up of new model sales (e.g. GLC Class SUV). 11 9 We foresee mild growth in Hyundai JV; Beijing Motor losses to continue 8 In January, Beijing Hyundai registered a 27% YoY sales volume decline. While 6 we expect sales to improve with the upcoming launch of the Elantra Lingdong 5 compact sedan, we prudently assume that margins will remain under pressure 12/14 6/15 12/15 due to competition from Japanese brands. Meanwhile, Beijing Motor local BAIC Motor brands had a good start to the year with a 34% January sales volume YoY HANG SENG INDEX (Rebased) increase on new SUV sales, but we factor in more cautious loss assumptions Performance (%) 1m 3m 12m given the intense competition for local brands, especially in the SUV segment. Absolute -3.1 -24.0 -32.3 Maintaining Buy but no longer a Chinese auto top pick HANG SENG INDEX -1.6 -14.7 -23.8 We cut our earnings forecasts on BAIC Motor mainly due to bigger loss Source: Deutsche Bank assumptions for the local brands. We use a sum-of-the-parts (SoTP) approach to value BAIC, based on DCF-derived valuations for Beijing Benz, Beijing Hyundai, and Beijing Motor (see the valuation section for details). We think that the implied target FY16E P/E of 10.1x is justified, considering a 25% FY15- 17E EPS CAGR. Major downside risks include weak new model sales and a failure to contain costs. Our top Buy is Dongfeng (0489.HK, HKD9.56).

Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 12,781.9 56,370.3 81,101.0 97,136.1 109,714.4 Reported NPAT (CNYm) 2,714.0 4,510.8 3,798.9 4,990.9 6,012.0 DB EPS FD (CNY) 0.48 0.70 0.50 0.66 0.79 OLD DB EPS FD (CNY) 0.48 0.70 0.62 0.81 0.98 % Change 0.0% 0.0% -19.3% -19.0% -19.0% DB EPS growth (%) -30.9 45.3 -28.4 30.6 20.5 PER (x) – 10.1 9.5 7.3 6.0 Yield (net) (%) – 4.3 4.7 6.2 7.5 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

18 February 2016

Automobiles & Components BAIC Motor

Model updated:18 February 2016 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.70 0.48 0.70 0.50 0.66 0.79 Reported EPS (CNY) 0.68 0.48 0.70 0.50 0.66 0.79 China DPS (CNY) 0.27 0.36 0.30 0.23 0.30 0.36 BVPS (CNY) 2.9 3.7 4.4 4.7 5.1 5.6 Automobiles & Components Weighted average shares (m) 5,001 5,612 6,419 7,552 7,595 7,595 BAIC Motor Average market cap (CNYm) na na 45,753 35,856 35,856 35,856 Enterprise value (CNYm) na na 48,291 43,987 42,446 39,796 Reuters: 1958.HK Bloomberg: 1958 HK Valuation Metrics P/E (DB) (x) na na 10.1 9.5 7.3 6.0 Buy P/E (Reported) (x) na na 10.1 9.5 7.3 6.0 Price (18 Feb 16) HKD 5.70 P/BV (x) 0.00 0.00 1.61 1.02 0.94 0.85

Target Price HKD 7.40 FCF Yield (%) na na nm nm 7.3 12.9 Dividend Yield (%) na na 4.3 4.7 6.2 7.5 52 Week range HKD 4.75 - 11.50 EV/Sales (x) nm nm 0.9 0.5 0.4 0.4 Market Cap (m) HKDm 42,796 EV/EBITDA (x) nm nm 12.7 4.7 3.5 2.9 EV/EBIT (x) nm nm 34.0 8.5 5.8 4.5 USDm 5,495 Income Statement (CNYm) Company Profile Sales revenue 3,520 12,782 56,370 81,101 97,136 109,714 BAIC Motor is the fifth largest manufacturer of passenger Gross profit -168 415 8,983 15,168 18,953 21,956 vehicles in China in terms of total sales volume. The EBITDA 357 -1,649 3,807 9,301 12,113 13,796 company's major businesses include production and sales Depreciation 125 572 1,856 3,422 4,036 4,080 of passenger vehicles, engines and auto parts. Major JV Amortisation 80 262 529 723 815 896 partners include Daimler and Hyundai. EBIT 151 -2,484 1,422 5,156 7,262 8,820 Net interest income(expense) -158 -474 -533 -847 -738 -563 Associates/affiliates 3,792 6,022 5,809 4,101 4,311 4,524 Exceptionals/extraordinaries -81 0 0 0 0 0 Other pre-tax income/(expense) 0 0 0 0 0 0 Profit before tax 3,785 3,065 6,698 8,410 10,835 12,781 Price Performance Income tax expense 226 114 857 1,742 2,352 2,728 Minorities 61 237 1,331 2,869 3,492 4,042 12 Other post-tax income/(expense) 0 0 0 0 0 0 11 Net profit 3,417 2,714 4,511 3,799 4,991 6,012

9 DB adjustments (including dilution) 81 0 0 0 0 0 8 DB Net profit 3,498 2,714 4,511 3,799 4,991 6,012 6 Cash Flow (CNYm) 5 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Cash flow from operations -624 -2,457 2,262 7,335 9,633 11,546 Net Capex -5,637 -7,194 -11,342 -12,260 -6,980 -6,880 BAIC Motor HANG SENG INDEX (Rebased) Free cash flow -6,261 -9,651 -9,080 -4,925 2,653 4,666 Equity raised/(bought back) 3,003 6,132 7,910 618 0 0 Margin Trends Dividends paid -1,541 -285 -2,793 -2,279 -1,710 -2,246 Net inc/(dec) in borrowings 5,998 7,194 7,396 -6,168 -2,645 -3,504 20 Other investing/financing cash flows -125 10,338 1,700 3,256 3,453 3,604 10 Net cash flow 1,074 13,727 5,133 -9,499 1,752 2,520 Change in working capital 237 -45 1,282 798 803 1,252 0 Balance Sheet (CNYm) -10 Cash and other liquid assets 2,891 16,790 21,923 12,424 14,177 16,697 -20 Tangible fixed assets 7,151 24,755 34,218 40,356 40,801 41,201 12 13 14 15E 16E 17E Goodwill/intangible assets 5,025 11,012 13,598 15,575 17,261 18,765 EBITDA Margin EBIT Margin Associates/investments 10,462 12,653 14,070 14,677 15,313 15,980

Other assets 6,253 20,186 26,048 30,195 37,361 40,571 Growth & Profitability Total assets 31,782 85,396 109,859 113,228 124,912 133,213 Interest bearing debt 11,696 22,956 29,918 23,750 21,105 17,601 400 30 Other liabilities 4,074 31,386 37,972 42,503 50,058 54,055 25 300 Total liabilities 15,770 54,342 67,890 66,252 71,163 71,656 20 Shareholders' equity 15,798 23,692 33,355 35,493 38,774 42,541 200 15 Minorities 215 7,362 8,614 11,483 14,975 19,017 10 100 Total shareholders' equity 16,012 31,053 41,969 46,976 53,749 61,557 5 Net debt 8,805 6,166 7,995 11,325 6,928 904 0 0 12 13 14 15E 16E 17E Key Company Metrics Sales growth (%) 83.7 263.2 341.0 43.9 19.8 12.9 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) 21.6 -30.9 45.3 -28.4 30.6 20.5 Solvency EBITDA Margin (%) 10.1 -12.9 6.8 11.5 12.5 12.6 EBIT Margin (%) 4.3 -19.4 2.5 6.4 7.5 8.0 60 20 Payout ratio (%) 40.2 73.7 43.2 44.7 45.0 45.0 50 ROE (%) 25.6 13.7 15.8 11.0 13.4 14.8 15 40 Capex/sales (%) 160.8 56.6 20.9 15.2 7.2 6.3 30 10 Capex/depreciation (x) 27.6 8.7 4.9 3.0 1.4 1.4 20 Net debt/equity (%) 55.0 19.9 19.0 24.1 12.9 1.5 5 10 Net interest cover (x) 1.0 nm 2.7 6.1 9.8 15.7

0 0 Source: Company data, Deutsche Bank estimates 12 13 14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

Vincent Ha, CFA +852 2203 6247 [email protected]

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Automobiles & Components BAIC Motor

Benz JV supports our Buy

Beijing Benz – GLA/GLC/E Class to drive growth

With the full-year sales contribution of the new generation C-Class (launched in August 2014) and the sales ramp-up of the all-new GLA Class (launched in April 2015), Beijing Benz’s FY15 sales volume jumped 72.0%. It significantly outperformed overall China passenger vehicle (PV) market growth of 7.3% YoY and its closest German premium brand JVs (i.e. FAW Audi and Brilliance BMW). Moreover, with improving economies of scale, in our view, the Benz JV’s auto net profit catapulted by 178% YoY to EUR862m, according to Daimler’s annual report.

Figure 1: Beijing Benz – monthly vehicle sales trend Figure 2: China – annual sales trend of locally produced German premium passenger vehicle brands (Units) (YoY) (units) 2011 2012 2013 2014 2015 35,000 250% 600,000 30,000 200% 25,000 150% 500,000 20,000 100% 400,000 15,000 50% 10,000 0% 300,000 5,000 -50% 200,000 0 -100%

100,000

10 16 09 11 12 13 14 15

13 09 10 11 12 14 15

------

Jul Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Jan Jan Beijing Benz Brilliance BMW FAW-VW Audi Source: Company data, China Association of Automobile Manufacturers (CAAM) Source: Company data, CAAM

Figure 3: Beijing Benz – FY15 results summary 2015 2014 YoY% Revenue (EURm) 9,575 5,767 66% Net profit (EURm) 862 310 178% Revenue (RMBm)* 66,819 47,229 41% Net profit (RMBm)* 6,015 2,539 137% Net profit margin 9.0% 5.4% * Based on average RMB/EUR exchange rate for the fiscal year Source: Daimler, Deutsche Bank

We expect Beijing Benz’s sales outperformance to continue in FY16, as evidenced by the robust 52.3% YoY growth in January. In our view, this will be driven by more new model contributions. To elaborate, there will be full-year sales recognition of the GLA Class SUV and the recently launched new GLC Class SUV (to replace the phased-out GLK Class). Furthermore, the launch of new generation E Class (around mid-2016E) is likely to boost demand for the model. Above all, with the product line-up still at a relatively young age (all less than two years old by mid-2016E), we expect a lower price discounting level for Beijing Benz vs. peers, implying support for the ASP on a same-model

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Automobiles & Components BAIC Motor

basis. Together with higher capacity utilization, we think that the JV will deliver a 19% two-year earnings CAGR in FY15-17E with ease.

Figure 4: Beijing Benz – summary of Deutsche Bank’s major assumptions 2012 2013 2014 2015E 2016E 2017E Volume (units) 103,445 116,006 145,468 250,188 303,648 346,149 YoY 10.8% 12.1% 25.4% 72.0% 21.4% 14.0% Revenue (RMBm) 29,673 33,220 43,937 64,904 76,238 86,618 YoY 3.4% 12.0% 32.3% 47.7% 17.5% 13.6% Net profit (RMBm) 1,911 1,507 2,470 5,855 7,127 8,249 YoY -45.1% -21.2% 63.9% 137.0% 21.7% 15.7% Net profit margin (%) 6.4% 4.5% 5.6% 9.0% 9.3% 9.5% Source: Company data, Deutsche Bank

Beijing Hyundai – we think the worst has passed

Beijing Hyundai suffered a weak FY15, with a 5.1% YoY decline in sales volume vs. China PV market growth of 7.3%. We think the weakness is attributable to 1) an aging product line-up, particularly in the SUV segment, and 2) high dealership inventory stock-up in 1H15, partially offset by new models (new generation Sonata mid-size sedan and Tucson SUV). In addition, we estimate that the JV recorded more than a 30% YoY earnings decline in FY15 due to extra costs on inventory de-stocking.

Figure 5: Beijing Hyundai – monthly vehicle sales trend

(Units) (YoY) 140,000 250% 120,000 200% 100,000 150% 80,000 100% 60,000 50% 40,000 20,000 0%

0 -50%

11 14 09 09 10 10 11 12 12 13 13 14 15 15 16

------

Jul Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Jan Jan

Source: Company data, CAAM

In FY16E, we prudently expect Beijing Hyundai to achieve about 7% YoY sales volume growth, marginally below our market growth expectations and ahead of the JV’s target (of selling 1.12m units of cars). Although the JV only started with 75,236 units of sales in January (down 27.2% YoY), we are still comfortable with our forecast considering the full-year contribution of the new generation Tucson and the upcoming new Elantra Lingdong compact sedan. While there is also market concern about falling utilization with the new capacity in Cangzhou and Chongqing, we do not envision significant margin erosion from the current 7-8% level, nor do we foresee a further earnings drop. To elaborate, the first phase of capacity addition should occur only in 4Q16E, with about 200,000 units of initial annualized capacity at Cangzhou (vs. a design capacity of 300k units), according to the company; hence, blended average FY16 capacity addition will be limited. That being said, we still

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prudently apply lower margin assumptions in FY16-17E vs. a low base in FY15E, considering the competitive pressure from the Japanese JV peers.

Figure 6: Beijing Hyundai – summary of Deutsche Bank’s major assumptions 2012 2013 2014 2015E 2016E 2017E Volume (units) 859,595 1,030,808 1,120,048 1,062,826 1,138,754 1,175,474 YoY 16.2% 19.9% 8.7% -5.1% 7.1% 3.2% Revenue (RMBm) 77,312 103,167 109,695 103,293 112,912 117,338 YoY 12.5% 33.4% 6.3% -5.8% 9.3% 3.9% Net profit (RMBm) 7,470 10,799 11,377 7,778 8,132 8,508 YoY 9.3% 44.6% 5.4% -31.6% 4.6% 4.6% Net profit margin (%) 9.7% 10.5% 10.4% 7.5% 7.2% 7.3% Source: Company data, Deutsche Bank

Beijing Motor – elevated losses likely to continue

Beijing Motor sold 337,102 units of PVs in FY15, up 8.9% YoY but underperforming the overall local PV brands’ growth of 15%. Among the different product types, sales of SUVs rose 380.0% YoY, driven by a low base, the launch of the Senova X65 and other new SUVs in 4Q15. In addition, Wevan M20 MPV sales rose 89.7% YoY. Despite the apparent product mix improvement, we now expect the local brands’ loss to widen in FY15E on higher new product costs coupled with disappointing sales of the new Senova X65 SUV amid fierce local brand SUV competition.

Figure 7: Beijing Motor – monthly vehicle sales trend Figure 8: Senova X65 SUV – monthly sales trend

(Units) (YoY) Sales volume (units, LHS) Market share (RHS) 70,000 600% 60,000 500% 4,000 0.8% 50,000 400% 3,500 0.7% 3,000 0.6% 40,000 300% 2,500 0.5% 30,000 200% 2,000 0.4% 20,000 100% 1,500 0.3% 10,000 0% 1,000 0.2%

0 -100% 500 0.1%

13 12 14 15

13 14 14 12 13 13 14 15 15 15

- - - -

------

- 0 0.0%

Jul Jul Jul Jul

15 15

15 15 15 15

15 15 15

Apr Apr Apr

Oct Oct Oct Oct

- -

- - - -

- -

Jan Jan Jan

- -

Jul

Jan

Apr

Jun

Oct

Feb

Sep

Mar

Dec Aug Nov May Remark: including sales of some models at parentco level Remark: Market share in the SUV segment Source: CAAM Source: CAAM

In FY16E, we think that Beijing Motor can return to 20% sales volume growth, with demand to be supported by the competitively priced Senova X25 (at RMB55,800-75,800) and X55 (at RMB76,800-119,800). Indeed, the local brands recorded 33.5% YoY sales volume growth in January to 40,608 units, with sales of X25 and X55 reaching 14,492 units. However, we now prudently assume that Beijing Motor will continue to lose more than RMB2.5bn a year in FY16-17E, considering the costs to promote the Senova brand and to develop more products for line-up enrichment, as well as the higher fixed costs due to capacity expansion.

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Automobiles & Components BAIC Motor

Figure 9: Beijing Motor – summary of Deutsche Bank’s major assumptions 2012 2013 2014 2015E 2016E 2017E Volume (units) 77,561 202,280 309,648 337,102 403,442 431,853 YoY 217.7% 160.8% 53.1% 8.9% 19.7% 7.0% Revenue (RMBm) 3,520 6,847 12,434 16,197 20,898 23,096 YoY 83.7% 94.5% 81.6% 30.3% 29.0% 10.5% Net loss (RMBm) (233) (3,256) (2,321) (3,288) (2,955) (2,719) YoY -67.7% 1295.4% -28.7% 41.7% -10.1% -8.0% Net profit margin (%) -6.6% -47.5% -18.7% -20.3% -14.1% -11.8% Source: Company data, Deutsche Bank

Earnings cut mainly on larger local brand loss

With the strong growth at Beijing Benz more than offset by lower ASP assumptions for the JV and a slower growth forecast for the local brands, we cut our FY15-17 revenue forecasts for BAIC Motor by 3.5-5.5%. With higher loss assumptions for Beijing Motor and lower earnings estimated for Beijing Hyundai on lower sales estimates, partly offset by a high Benz JV profit forecast, we trim our FY15-17 net profit estimates by 19.0-19.3%. To sum up, we are still optimistic that BAIC will achieve a 25% two-year EPS CAGR in FY15-17.

Figure 10: BAIC Motor – major assumptions underlying Deutsche Bank’s forecasts 2012 2013 2014 2015E 2016E 2017E Sales volume (units) Beijing Motor 77,561 202,280 309,648 337,102 403,442 431,853 YoY growth 217.7% 160.8% 53.1% 8.9% 19.7% 7.0% Beijing Benz 103,445 116,006 145,468 250,188 303,648 346,149 YoY growth 10.8% 12.1% 25.4% 72.0% 21.4% 14.0% Beijing Hyundai* 859,595 1,030,808 1,120,048 1,062,826 1,138,754 1,175,474 YoY growth 16.2% 19.9% 8.7% -5.1% 7.1% 3.2% Total 1,040,601 1,349,094 1,575,164 1,650,116 1,845,844 1,953,476 YoY growth 21.3% 29.6% 16.8% 4.8% 11.9% 0.0% Change from previous forecast 3.5% 1.3% 1.1%

Revenue (RMBm)** 3,520 12,782 56,370 81,101 97,136 109,714 YoY growth 83.7% 263.2% 341.0% 43.9% 19.8% 12.9% Change from previous forecast -3.5% -5.3% -5.5%

Gross profit (RMBm) -168 415 8,983 15,168 18,953 21,956 YoY growth n.a. n.a. n.m. 68.8% 25.0% 15.8%

Gross profit margin -4.8% 3.2% 15.9% 18.7% 19.5% 20.0%

Contribution by Beijing Hyundai JV (RMBm) 3,735 5,400 5,689 3,889 4,066 4,254 YoY growth 9.3% 44.6% 5.4% -31.6% 4.6% 4.6% Change from previous forecast 0.0% -3.8% -1.9%

Net profit (RMBm) 3,417 2,714 4,511 3,799 4,991 6,012 YoY growth 31.5% -20.6% 66.2% -15.8% 31.4% 20.5% Change from previous forecast -19.3% -19.0% -19.0% Note: *Beijing Hyundai’s operation is not consolidated into BAIC Motor’s financials. ** Beijing Benz's operation has been consolidated into BAIC Motor's financials since November 2013. Source: Company data, Deutsche Bank

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Automobiles & Components BAIC Motor

Valuation

We use DCF analysis to derive the valuations of Beijing Benz, Beijing Hyundai, and Beijing Motor separately. Our WACC is based on Deutsche Bank’s latest China risk-free rate of 3.9%, a risk premium of 5.6%, and a beta of 2.0 vs. a 20% ultimate debt-to-asset ratio (with 3.0% after-tax cost of debt for Beijing Benz/Beijing Hyundai and 5.0% for Beijing Motor). Our SoTP target price of HKD7.4/share (down from HKD9.5) for BAIC Motor comprises: 1) HKD6.3/share for Beijing Benz (with an implied FY16E P/E of 11.8x), 2) HKD3.9/share for Beijing Hyundai (with an implied target FY16E P/E of 6.5x), and 3) minus HKD2.8/share for the loss-making Beijing Motor. On a blended perspective, BAIC Motor’s implied FY16E target P/E of 10.1x should be well supported, in our view, by the 25% FY15-17E two-year EPS CAGR. We believe the company’s implied FY16E target P/BV of 1.3x is also justified, considering its 14-15% sustainable ROE.

BAIC Motor currently trades at HKD5.7/share; we think the current market valuation of the company reflects only the value of Beijing Benz, for which investors are receptive of the investment thesis, in our view. As we feel that the value of BAIC’s remaining businesses, predominantly Beijing Hyundai, is not fairly represented in the current share price; we maintain Buy on BAIC Motor. However, considering the continual losses at the local brand, we remove BAIC Motor from our top Chinese auto picks.

Figure 11: Beijing Benz – discounted cash flow analysis Figure 12: Beijing Hyundai – discounted cash flow analysis (RMB) 2017E (RMB) 2017E After-tax EBIT 8,288.7 After-tax EBIT 8,635.4 Plus depreciation & amortization 1,968.5 Plus depreciation & amortization 2,496.3 = After-tax EBITDA 10,257.2 = After-tax EBITDA 11,131.7 Minus capex (4,550.0) Minus capex (2,750.0) Minus change in working capital (154.3) Minus change in working capital 948.7 = Free cash flow 5,552.9 = Free cash flow 9,330.4 Net present value of free cash flow 75,874.8 Net present value of free cash flow 77,765.8 Plus FY16E net cash 8,500.0 Minus FY16E net debt (25,000.0) Equity valuation (RMBm) 84,374.8 Equity valuation (RMBm) 52,765.8 Beijing Benz's share of equity valuation (HKD/share) 6.3 Beijing Hyundai's share of equity valuation (HKD/share) 3.9

Source: Deutsche Bank Source: Deutsche Bank

Figure 13: Beijing Motor – discounted cash flow analysis Figure 14: BAIC Motor – SOTP valuation based on DCF (RMB) 2017E SoTP valuation (HKD/share) Implied FY16E P/E (x) After-tax EBIT (2,214.0) Beijing Motor (2.8) n.a. Plus depreciation & amortization 1,343.6 = After-tax EBITDA (870.4) Beijing Benz 6.3 11.8 Minus capex (3,050.0) Beijing Hyundai 3.9 6.5 Minus change in working capital (257.8) Total 7.4 10.1 = Free cash flow (4,178.2) Implied FY16E P/E (x) 10.1 Net present value of free cash flow (12,199.2) Minus FY16E net debt (6,928.4) Equity valuation (RMBm) (19,127.6) Beijing Motor's share of equity valuation (HKD/share) (2.8)

Source: Deutsche Bank Source: Deutsche Bank

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Automobiles & Components BAIC Motor

Figure 15: BAIC Motor – SOTP valuation trend for different entities

Beijing Benz Beijing Hyundai Benjing Motor Total (HKD/share) 16 14 12 10 8 6 4 2

15 15 15

15 15

-2 15

- - -

-4 Jul

Apr

Jan Jun -

Mar Feb

Aug Aug Nov

- -

- - -

25 02

23 18

11 26 27

Source: Deutsche Bank

Risks

Key downside risks to BAIC Motor include 1) weak reception of its new models, 2) pricing pressure amid intense industry competition, 3) failure to contain cost increases, and 4) an inability to achieve positive free cash flow and the subsequent funding pressure.

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure BAIC Motor 1958.HK 5.70 (HKD) 18 Feb 16 7 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=1958.HK

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vincent Ha

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Automobiles & Components BAIC Motor

Historical recommendations and target price: BAIC Motor (1958.HK) (as of 2/18/2016)

14.00 Previous Recommendations

Strong Buy 12.00 3 Buy 2 Market Perform Underperform 10.00 1 Not Rated 7 Suspended Rating 8.00 4 5 Current Recommendations Buy 6.00 6 Hold Security PriceSecurity Sell 4.00 Not Rated Suspended Rating

*New Recommendation Structure 2.00 as of September 9,2002

0.00 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Date

1. 25/01/2015: Upgrade to Buy, Target Price Change HKD11.30 5. 11/08/2015: Buy, Target Price Change HKD9.30 2. 21/04/2015: Buy, Target Price Change HKD12.30 6. 26/08/2015: Buy, Target Price Change HKD8.90 3. 02/06/2015: Buy, Target Price Change HKD13.40 7. 27/11/2015: Buy, Target Price Change HKD9.50 4. 31/07/2015: Buy, Target Price Change HKD10.10

Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 53 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 36 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 11 % Sell: Based on a current 12-month view of total share- 150 20 % 100 17 % 17 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research. Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

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David Folkerts-Landau Chief Economist and Global Head of Research

Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research

Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany

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