Bet on Past Winners 11 February 2015 the 2014 Auto Market Slowed but Strong Brands and Segments Such As

Sector Research

Auto Hong Kong / Auto Bet on past winners 11 February 2015 The 2014 auto market slowed but strong brands and segments such as

German brands and SUV products continued to outperform. The 2015 PV market is challenging given a slowing macro economy, conservative sales targets of large OEMs and increasing capacity. Highlights will still be in the SUV and luxury segment. We like DFG/GWM for their SUV exposures, also Brilliance China/Baoxin/ZTA for high exposure in luxury brands, while cautious on Japanese and domestic brand focused companies such as GAC/DCH/GEELY. Sector Performance

HK$ Strong “Matthew effect” in 2014 6.50 105% Among the slowing auto market in 2014, the strong segments and brands 6.00 100% continued to get stronger. SUV and MPV sales again beat the market with 36.4% 5.50 95% and 46.7%YoY growth, respectively, while sedan sales lagged with 3% YoY growth. 5.00 90% German brands extended their leading position with high ASP and sales volume 4.50 85% per models, squeezing market share from other brands. On the other hand, the 4.00 80% combined market shares of domestic and Japanese brands further shrank by 3.50 75% 3.00 70% 2.4ppts. Top 10 OEMs group raised their share in the auto market by 1.5ppts to Jan-13 Apr-13 89.7%, and the largest 7 auto OEM groups all recorded net adds in sales volume. Price(LHS) Rel. to HSI(RHS) Harsher situation expected in 2015 Source: Bloomberg With relatively more modest stimulus policies, slower M2 growth in 2015 points to lower growth rate in auto sales. We estimate auto sales to grow by only 6.1% in 2015, and PV sales up only by 6.7%. The largest six OEMs have set a more conservative sales target in 2015 compared to the growth in 2014. However, we estimate that the total PV capacity will increase by 13% to 26.5m units, which translated into a lower utilization of 79.4%. With lower sales growth and increased capacity, operating profit growth of OEMs is expected to slow down.

Past winners higher chance to success We believe there will still be three highlights in 2015: 1) SUV, especially A0 class SUV market will continue to boom, 2) Luxury brands will still lead the market, strong German brands will extend their competitive edge, 3) Luxury dealers are expected to see stabilizing margins thanks to improved OEM-dealer relationship.

Stock picks We initiate coverage of GAC (2238.HK) and Geely Auto (0175.HK) with Neutral rating, due to their high exposure in Japanese brands and domestic A0/A class John Luo sedans, and rate DFG (0489.HK) with BUY due to its diversified brand portfolio and SFC CE No.: AVT518 +852 2899 8300 strong SUV cycle in 2015. We maintain our BUY rating for GWM (2333.HK) for [email protected] dominant SUV position, BUY for Brilliance China (1114.HK), Baoxin Auto (1293.HK) and ZTA (1728.HK) thanks to high exposure in German and luxury brands. We kept our Neutral rating for DCH (1828.HK) for high exposure in Japanese brands.

Figure 1: Sector Valuation Summary Target Price(9 Feb 15) FYE1 FYE2 FYE1 FYE2 Price Stock BBG HK$ PE(x) PE(x) Yield(%) Yield(%) HK$ Upside(%) Rating Baoxin Auto 1293 HK 4.7 9.7 8.1 3.1 3.7 6.0 27.0 Buy Brilliance China Auto 1114 HK 13.5 10.8 8.9 1.4 1.7 18.0 33.3 Buy Dongfeng Motor 489 HK 11.3 6.2 6.1 2.4 2.5 15.0 32.3 Buy Geely Automobile 175 HK 3.3 16.7 10.3 0.7 1.1 3.2 (1.5) Neutral Great Wall Motor 2333 HK 46.1 13.5 10.4 2.1 2.9 55.0 19.4 Buy Guangzhou Auto 2238 HK 7.0 11.6 9.9 2.2 2.5 7.1 1.6 Neutral Zhengtong Auto 1728 HK 3.9 7.5 6.5 2.7 3.1 5.4 38.8 Buy DCH 1828 HK 4.7 8.9 8.0 4.5 5.0 4.7 0.4 Neutral

Source: Guosen Securities (HK)

See the last page of this report for important disclosures 1

行业报告

汽车香港 / 汽车

押注旧赢家 2015 年 2 月 11 日虽然 2014 年中国汽车市场增速有所放缓，但是强势品牌以及强势

的细分市场依然跑赢大市，最好的例子是德系品牌以及 SUV 市场。在宏观经济放缓、大型整车集团下调增长目标以及产能继续扩张的背景下，2015 年的乘用车市场是充满挑战的。我们认为市场的热点依然是 SUV 以及豪华车市场。我们喜欢东风集团股份以及长城汽车，因为他们的 SUV 产品较多，喜欢华晨中国/宝信汽车/正通汽车，因为他们与豪华品牌相关，而对日系以及自主品牌较为集中的广汽

集团/大昌行/吉利汽车保持谨慎。股价表现

HK$ 6.50 105% 2014 年车市：马太效应明显 6.00 100% 在 2014 年增速逐渐放缓的汽车市场中，强势的品牌和细分领域继续保持强劲 5.50 95% 增长。SUV 和 MPV 销量再次分别以 36.4%和 46.7%的增速领跑市场，而轿车市 5.00 90% 场增速仅有 3%，落后大市。德系品牌巩固了他们的领先优势，不断从其他品 4.50 85% 牌手中攫取份额。另一方面，自主品牌和日系品牌的合计市场占有率萎缩了 4.00 80% 2.4 个百分点。前十大汽车集团的市场份额提升了 1.5 个百分点至 89.7%，而 3.50 75% 最大的 7 家集团都录得了销量增长。 3.00 70% Jan-13 Apr-13 2015 年市场环境趋于严峻 Price(LHS) Rel. to HSI(RHS) 在缺乏刺激政策的背景下，更慢的 M2 增长预示着 2015 年汽车销量增速将会放缓。我们预计 2015 年汽车销量仅增长 6.1%，其中乘用车增长 6.7%。我们资料来源：国信证券(香港) 发现最大的六个汽车集团设立的 2015 年增长目标都较 2014 年的实际增长更保守。在此背景下，2015 年的乘用车产能预计却会增长 13%至 2,650 万辆，产能利用率可能会低至 79.4%。在销量放缓和产能增加的背景下，整车厂的经营利润增速将会进一步减慢。

旧赢家更有可能成功我们认为 2015 年的市场依然有三个亮点：1）SUV，尤其是 A0 级 SUV 市场会持续火爆；2）豪华品牌将继续引领市场，德系品牌将进一步加强领先优势； 3）豪华车经销商将得益于更和谐的整车厂-经销商关系而录得平稳的利润率。

选股逻辑. 罗文安我们对广汽集团（2238.HK）以及吉利汽车（0175.HK）的首次评级为中性，证监会中央编号:AVT518 因为他们在日系品牌以及自主 A0/A 级轿车中有较高的风险暴露，对东风集团 +852 2899 8300 股份（0489.HK）首次评级为买入，因为公司具有分散的产品线以及 2015 年 [email protected] 迎来强劲的 SUV 产品周期。我们维持对于长城汽车（2333.HK）的买入评级，因为公司在 SUV 市场有领先优势；维持华晨中国（1114.HK）、宝信汽车（1293.HK）、正通汽车（1728.HK）的买入评级，因为他们将得益于德系以及豪华品牌的发展。我们对日系品牌风险暴露较高的大昌行（1828.HK）保持中性评级。

行业概览股价(9 Feb 15) FYE1 FYE2 FYE1 FYE2 目标价市盈率市盈率股票代码 (港元) 股息率(%) 股息率(%) (港元) 上升空间(%) 评级 (x) (x) 宝信汽车集团 1293 HK 4.7 9.7 8.1 3.1 3.7 6.0 27.0 买入华晨中国汽车 1114 HK 13.5 10.8 8.9 1.4 1.7 18.0 33.3 买入东风集团股份 489 HK 11.3 6.2 6.1 2.4 2.5 15.0 32.3 买入吉利汽车 175 HK 3.3 16.7 10.3 0.7 1.1 3.2 (1.5) 中性长城汽车 2333 HK 46.1 13.5 10.4 2.1 2.9 55.0 19.4 买入广汽集团 2238 HK 7.0 11.6 9.9 2.2 2.5 7.1 1.6 中性正通汽车 1728 HK 3.9 7.5 6.5 2.7 3.1 5.4 38.8 买入大昌行 1828 HK 4.7 8.9 8.0 4.5 5.0 4.7 0.4 中性

资料来源：国信证券 (香港)

2 研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 2

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

TABLE OF CONTENTS

Strong “Matthew Effect” in 2014 ...... 4 Auto sales growth slowed in 2H14 4 SUV and MPV maintained strong growth 5 German brands continue to dominate the PV market 5 Strong brands continue to take market share from weak brands 6 Large OEMs extending their leads 7

Harsher situation in 2015 ...... 8 Slower M2 growth + no stimulus policy will like result in slower growth 8 Large OEM groups have turned more conservative 9 Further capacity expansion will put pressures on utilization rate 9 Operating profit of OEMs will decelerate further on slower auto sales growth 11

Navigating a slowing market ...... 11 SUV still booming, A0 class SUVs should be even better 11 Luxury brands will still lead the growth 13 Recovery year for dealers? 14

Stock-picking criteria: ...... 15 Methodology 15 Criterion 1: companies with strong SUV product lines 17 Criterion 2: high exposure to luxury/German brands 18 Criterion 3: Cautious on Japanese and domestic brands 19 Stock picking and ratings 20

Peers comparison ...... 21

Risk factors: ...... 22 Slower auto sales growth will hurt the margins of OEMs 22 Overcapacity and price war 22 More cities putting restrictions on car license 22

Appendix: ...... 23 Representativeness of Guosen Securities (HK) auto database 23 Product lines of major auto OEM groups (2014) 24 Product lines of major Hong Kong listed OEMs 25

Company Section ...... 26 Dongfeng Motor (489 HK/BUY): 2015 the year of SUVs 27 Guangzhou Auto (2238 HK/NEUTRAL): Compacting for more shares 51 Geely Automobile (175 HK/NEUTRAL): Swimming in the red ocean 67 Great Wall Motor (2333 HK/BUY): Dancing SUV giant 87 Brilliance China Auto (1114 HK/BUY): Eyes on a growing pie 92 Baoxin Auto (1293 HK/BUY): Largest BMW dealer pending rerate 97 Zhengtong Auto (1728 HK/BUY): Steadier growth 102 DCH (1828 HK/BUY): Shifting away from auto dealer business 107

Guosen Securities (HK) 3

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Strong “Matthew Effect” in 2014

Auto sales growth slowed in 2H14 In 2014, auto sales grew by 6.9% YoY, down from 13.9% YoY in 2013. On a monthly basis, auto sales growth was lower in 2H14. Auto sales growth slowed to 6.9% YoY in 2014 Figure 2 Year-to-date auto sales growth (2011-2014) （%） 20

0 1 2 3 4 5 6 7 8 9 10 11 12 (5)

(10)

(15)

(20) 2011 2012 2013 2014

Source: CAAM, Guosen Securities(HK) Research

In Nov. 2014, sedan sales volume was down by 4.7% YoY. However, due to strong December sales, whole-year sedan sales volume was up by 3.1%. We noticed a jump in auto sales in Dec. 2014, which we believe is abnormal. Without significant Abnormal jump in Dec. 2014 sales volume improvement in the macro economy, the Dec. sales volume might be overstated because OEMs pushing more inventories into dealers to achieve their 2014 sales targets. Excluding the bounce in Dec., both PV and sedan sales growth were slowing in 2H14.

Figure 3 Monthly auto sales volume – abnormal jump in Dec. 2014 Figure 4 YoY growth of PV/Sedan

'000 Units (%)

3,000 Abnormal jump 60 千 50 2,500 40 2,000 30

1,500 20

1,000 10 0 500 2011-01 2012-01 2013-01 2014-01 (10) 0 (20) 1 2 3 4 5 6 7 8 9 10 11 12 (30) 2011 2012 2013 2014 PV(LHS) Sedan(LHS)

Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research

Guosen Securities (HK) 4

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

In 2014, the “Matthew Effect” was even stronger in the China auto market – the strong brands and segments became stronger, while the weak ones became weaker. SUV and MPV maintained strong growth

SUV and MPV still gaining MPV and SUV were still the highlights in the auto market in 2014, when sales volume of the two shares grew by 46.7% and 36.4% YoY, respectively. Total sales volume of SUV and MPV reached 4.1m and 1.9m units. As of 2014, SUV and MPV accounted for 20.7% and 9.7% in PV sales, respectively, increasing their combined shares by 6.5 ppts.

Figure 5 YoY growth of PV segments Figure 6 Breakdown of PV sales in 2014 Cross PV 100 350 7%

300 80 SUV 250 20% 60 200

40 150

100 20 50 MPV Sedan 0 0 63% 2011-01 2012-01 2013-01 2014-01 10% (20) (50) PV(LHS) Sedan(LHS) SUV(LHS) MPV(RHS)

Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research German brands continue to dominate the PV market In 2014, German brands continued to dominate China’s PV market. German models have the highest sales volume per model in almost every price segment from RMB 80,000 to RMB 450,000 (see the models within the “A” parallel line zone in the figure below), meaning their models are most competitive among all brands. Japanese brands were also strong in terms of number of models and in the B class segment (priced RMB 180,000 – RMB 230,000). Japanese brands used to lead the B-class segment in both SUV and German brands dominated sedan in China. However, their dominant position was challenged by German brands. Starting from the PV market 2012, sales volume of German models have surpassed Japanese models in the B-class segment and more importantly, their ASPs were even higher compared to Japanese models. On the other hand, Japanese brands have a weak position in the A class market, which will uproot their position in the B class sedan market if this trend continues. U.S. brands have secured a strong position in the A class segment, and they are extending their competitive edge in the B class segment. French brands are catching up in the China market, and their products have ranged from A-class sedans to B-class SUVs. Domestic brands are in the weakest position in China’s PV market. Although they have the most number of models (45% of all the models in our database), but most models tend to have low ASP and low sales volume.

Guosen Securities (HK) 5

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 7 China auto market at a glance

ASP (RMB '000) 450 A: German brand models has the highest sales volume in most price segments B: Japanese brands are strong in the B class segment 400 C: U.S. brands has strong position in the A class segment D: Domestic brands are weak in terms of both ASP and sales volume per model 350

300 A

250 B 200

150

100

50 C

Sales vol.(2014) 0 D - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Japanese S. Korean German U.S. Domestic French

Note: ASP based on the best-seller option of a particular model Note: Based on Guosen Securities (HK) auto database Source: AutoHome, CAAM, Guosen Securities(HK) Research Strong brands continue to take market share from weak brands German, U.S, and French brands were strong in the past 4 years. Since 2012, when the German brands surpassed Japanese brands for the first time, their leading position was further strengthened thereafter. In 2014, German brands took up 20% of China’s PV market and 27% of the sedan market. German brands continued to take market share from domestic and Japanese brands.

Guosen Securities (HK) 6

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 8 Monthly PV market share Figure 9 Market share of brands (2014)

45% 50% 38.3% 40% 45% 40% 35% 35% 30% 27.0% 22.4% 30% 25% 20.0% 25% 20% 15.8%17.5% 16.5% 12.8% 20% 15% 11.0% 15% 9.0% 10% 4.9% 10% 3.7% 5% 5% 0% 0% Domestic Japanese German U.S. S. Korean French 2011-01 2012-01 2013-01 2014-01 Domestic Japanese German PV Sedan U.S. S. Korean Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research In 2014, the market share of Japanese and domestic brands shrank by 0.3 and 2.1ppts, respectively while that for German, U.S., South Korean and French expanded by 1.2, 0.2, 0.1, 0.6 ppts, respectively. Japanese and domestic brands were market share Figure 10 Market share of different brands in the PV market losers PV market share Year Domestic Japanese German U.S. S. Korean French 2011 42.1% 19.4% 16.4% 10.8% 8.4% 2.8% 2012 41.8% 16.1% 18.4% 12.0% 8.8% 2.8% 2013 40.4% 16.1% 18.8% 12.6% 8.9% 3.1% 2014 38.3% 15.8% 20.0% 12.8% 9.0% 3.7% Change in PV market share Year Domestic Japanese German U.S. S. Korean French 2011 2012 -0.3% -3.2% 2.0% 1.1% 0.4% 0.1% 2013 -1.3% 0.0% 0.4% 0.7% 0.1% 0.2% 2014 -2.1% -0.3% 1.2% 0.2% 0.1% 0.6% Source: CAAM, Guosen Securities(HK) Research Large OEMs extending their leads Large OEMs were extending their leads in 2014. The N10 concentration rate (market share of the top 10 players) in the auto sector increased from 88.4% in 2013 to 89.7% in 2014, and N10 concentration rate in the PV market was up from 59.4% in 2013 to 61.0% in 2014. Furthermore, the largest 7 auto OEM groups all recorded improvement in their sales volume in Top 10 OEM groups gaining shares 2014, while smaller OEMs such as GWM, JAC, BYD and Geely saw their sales decreased in the same year.

Guosen Securities (HK) 7

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 11 Sales volume of major auto OEMs

SAIC DFG FAW CHANG'AN BAIC 2014 sales volume GAC increased BRILLIANCE GWM CHERY 2014 sales volume JAC decreased BYD GEELY

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2014 2013

Source: CAAM, Guosen Securities(HK) Research Harsher situation in 2015

Slower M2 growth + no stimulus policy will like result in slower growth

Slower M2 growth will hurt China’s auto sales growth used to be highly correlated with M2 growth. auto sales growth Starting from 2006, there is a strong liner relationship between M2 growth and PV sales growth. Our estimate shows that for every percentage point increase in M2 growth, the growth rate of PV sales will increase by 4.25 ppts. The R squared was as high as 0.61.

Figure 12 M2 growth VS PV sales vol. growth Figure 13 M2 growth VS PV sales vol. growth

140 35 140 120 120 30 100 100 25 80 80 y = 4.2537x - 52.012 60 20 60 R² = 0.6059

40 15 40 20 20 10 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 5 0 5 10 15 20 25 30 35 -20 -20 -40 PV sales vol. growth(%, LHS) 0 -40 M2 growth (%,RHS)

Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research In 2015, according to our macro team, M2 growth will go down from 12.2% to 12.0%, which suggest a weaker macro driver for auto sales growth. While the PBOC recently lowered the RRR to stimulate the economy but our macro team expects the central bank will not lower interest rates in the short term, we conservatively expect auto sales growth to further drop from 6.9% in 2014 to 6.1% in 2015, mainly due to slower growth in PV sales. Expect auto sales to grow Our forecast was more bearish compared to the numbers of China Association of Automobile by 6.1% in 2015 Manufacturers (“CAAM”), mainly due to lower sedan sales estimates. We expect that in 2015, sedan sales will drop by 1%, as compared with 3.1% growth in 2014. We also expect higher growth in the SUV segment due to more new models and strong replacement demand.

Guosen Securities (HK) 8

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 14 2015 auto sales forecast 2014 Actual 2015 forecast by Guosen HK 2015 forecast by CAAM sales vol. Net add. sales vol. Net add. sales vol. Net add. YoY YoY YoY ('000 units) ('000 units) ('000 units) ('000 units) ('000 units) ('000 units) Total 6.9% 23,492 1,508 6.1% 24,932 1,440 7.0% 25,130 1,638 PV 9.9% 19,701 1,772 6.7% 21,027 1,326 7.9% 21,250 1,549 Sedan 3.1% 12,377 367 -1.0% 12,253 -124 1.0% 12,510 133 MPV 46.7% 1,914 609 30.0% 2,489 574 35.0% 2,580 666 SUV 36.4% 4,078 1,089 28.0% 5,220 1,142 25.0% 5,100 1,022 Cross PV -18.1% 1,332 -294 -20.0% 1,065 -266 -20.0% 1,060 -272 CV -6.5% 3,791 -264 3.0% 3,905 114 2.40% 3,880 89 Bus -8.9% 610 60 5.0% 641 31 6.50% 650 40 Truck 8.4% 3,181 -246 2.0% 3,245 64 1.30% 3,230 49 Source: CAAM, Wind, Guosen Securities(HK) Research Large OEM groups have turned more conservative

The sales growth targets for 2015 of major OEMs are lower than the actual growth of 2014. The 2015 growth targets of the five largest OEMs, SAIC-GM-Wuling, FAW-VW, SAIC-VW, SAIC-GM, and Beijing-Hyundai are all lower than the actual growth in 2014. More conservative tunes from large OEM groups Dongfeng-Nissan also lowered its 2015 sales target from 1.1m units to 1.0m, representing 5% growth. The other two Japanese auto OEMs, Toyota and Honda, still keep their targets of over 1.0m units, even though both of them missed the 2014 target. The tune-down of sales growth target shows a more conservative attitude of OEMs on the 2015 market.

Figure 15 Key new/ sub-new models of OEMs in 2015 OEM 2014 sales 2015 sales target 2014 sales growth 2015 growth target SAIC-GM-Wuling 1,806 1,900 13% 5% FAW-Volkswagen 1,781 1,850 18% 4% SAIC-Volkswagen 1,725 1,900 13% 10% SAIC-GM 1,724 1,900 12% 10% Beijing-Hyundai 1,120 1,160 9% 4% Dongfeng-Nissan 952 1,000 3% 5% Changan-Ford 806 1,000 18% 24% GWM 730 850 -3% 16% Dongfeng-Peugeot-Citroen 704 800 28% 14% Dongfeng-Yueda-Kia 646 750 18% 16% FAW-Toyota 582 650 5% 12% GAC-Honda 480 600 10% 25% Geely Auto 426 450 -23% 6% GAC-Toyota 374 450 23% 20% Dongfeng-Honda 308 400 -4% 30% Changan-Suzuki 165 200 12% 21% GAC Motors 117 160 36% 37% Changan-Mazda 102 150 52% 47% Note: 1. Honda's (DF-Honda +GAC Honda) target for 2015 was 1.0m units, we split the target into the two JVs 2. Toyota's (FAW-Toyota + GAC-Toyota) target for 2015 was 1.1m units, we split the target into the two JVs 3. Green/Red mean the growth rate was high (green) or low (red) in 2014/2015 Source: News, company data, Guosen Securities(HK) Research Further capacity expansion will put pressures on utilization rate According to our data on major auto OEMs, the total PV capacity of main auto OEMs has reached 23.4m units in 2014, of which 14.3m units are from JVs and the rest 9.1m units from domestic brands. PV capacity will still increase by 13% Compared with the sales volume of 19.7m in 2014, we estimate that the utilization rate in 2014 was 84.2%, as compared with 90.5% in 2013.

Guosen Securities (HK) 9

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 16 PV capacity of major auto OEMs in China OEM Auto Group 2012 2013 2014 2015 2016 Beijing-Benz BAIC 100 120 130 250 300 Beijing-Hyundai BAIC 800 900 1,000 1,000 1,600 BAW BAIC 100 350 450 600 800 BYD BYD 900 900 900 900 900 Dongfeng-Honda DFG 340 360 360 480 480 DFG DFG 100 220 360 520 520 Dongfeng-Nissan DFG 1,120 1,150 1,260 1,350 1,380 Dongfeng-Infinity DFG - - - 200 400 Dongfeng-Peugeot-Citroen DFG 450 600 700 750 840 Dongfeng-Renault DFG - - - - 150 Dongfeng-Yueda-Kia DFG 450 450 650 700 800 GAC-Honda GAC 380 380 480 600 650 GAC Motors GAC 80 100 200 200 200 GAC-Fiat GAC 100 140 210 210 370 GAC-Toyota GAC 390 480 480 480 480 GAC-Mitsubishi GAC 40 50 130 130 130 Brilliance BMW Brilliance 160 300 400 500 600 Brilliance Auto Brilliance 440 440 540 540 740 Geely Auto Geely 625 670 670 670 670 JAC JAC 300 700 700 700 700 JMC JMC 250 250 450 450 450 Lifan Auto Lifan 150 250 250 250 250 Youngman Auto Youngman 800 800 800 800 800 Chery Auto Chery 850 900 1,050 1,100 1,200 Chery-JLR Chery - - - 130 130 SAIC-Volkswagen SAIC 1,100 1,350 1,600 1,700 1,900 SAIC-GM SAIC 1,000 1,400 1,500 1,800 1,800 SAIC-GM-Wuling SAIC 1,500 1,700 1,700 2,000 2,000 FAW-Volkswagen FAW 1,150 1,160 1,650 1,930 1,950 FAW-Toyota FAW 560 650 650 850 850 FAW FAW 350 350 430 430 430 FAW-Mazda FAW 200 200 270 270 270 Changan-Ford Chang'an 420 520 550 900 1,200 Changan-Suzuki Chang'an 200 250 350 350 500 Changan-Mazda Chang'an - - 220 220 400 Changan Auto Chang'an 800 920 1,245 1,245 1,400 GWM GWM 600 800 1,065 1,265 1,315 Total 16,805 19,810 23,400 26,470 29,555 Total JV 10,460 12,160 14,290 16,800 19,180 net add 1,700 2,130 2,510 2,380 Total Domestic 6,345 7,650 9,110 9,670 10,375 net add 1,305 1,460 560 705 *Note: some CV capacity might be included in DFG/Chang’an Source: News, Company data, Guosen Securities(HK) Research

In 2015, JV companies are still adding capacity. We estimate that the total net add capacity in 2015 from JVs will be 2.5m units, the fastest since 2012. And the total PV capacity is expected to grow by 13% to 26.5m units. However, due to slower growth in demand, we estimate that utilization rate will drop to 79.4% by end-2015. Due to high operating leverage, lower utilization rate will likely hurt Utilization rate will go down margins of OEMs. below 80% Figure 17 Estimated PV capacity and utilization rate of major auto OEMs

30,000 95.0%

25,000 90.0% 20,000 85.0% 15,000 80.0% 10,000

5,000 75.0%

- 70.0% 2012 2013 2014 2015

Total PV sales (LHS) Total PV capacity(LHS) Utilization rate(RHS)

Source: CAAM, Wind, Guosen Securities(HK) Research

Guosen Securities (HK) 10

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Operating profit of OEMs will decelerate further on slower auto sales growth Historically, the correlation of auto sales growth and the operating profit growth of OEMs has been significant (R-square = 0.508), due to high level of operating leverage. A regression from 2003 to 2014 shows that every percentage point increase in auto sales growth will bring almost two times Operating profit growth of (1.93x) the increase in OEMs’ operating profit growth. OEMs will be hurt In 2015, due to slower forecast in autos sales volume growth, we expect that, overall speaking, the operating profit growth of OEMs is set to slow down.

Figure 18 Auto sales growth VS OEM operating profit growth Figure 19 Auto sales growth VS OEM operating profit growth OEM OP growth(%) y = 1.9323x - 8.7681 50 100 100 R² = 0.508 45 80 80 40 60 35 60 30 40 25 20 40 20 0 20 15 -20 10 0 0 5 10 15 20 25 30 35 40 45 50 5 -40 -20 0 -60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -40 Auto sales growth(%, LHS) Operatin profit growth of OEMs(%,RHS) -60 Auto sales growth(%) Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research

Navigating a slowing market

SUV still booming, A0 class SUVs should be even better The SUV market in China has been outperforming the PV market for quite some years. From 2011 to 2014, SUV has been growing at a CAGR of 36% in China, as compared with 11% for sedan and 7% for the entire PV market. The penetration rate of SUVs in the PV market increased from 10% in Jan. 2011 to 24% in Dec. 2014. In 2015, we expect that the SUV market will maintain high growth due to strong replacement demand and Chinese customers’ need for larger space.

Figure 20 Market share of SUVs in PV Figure 21 A0 class SUV was the star in 2014 auto market Sales growth 30% 80% SUV:A0 25% 60% 20% 40% 15% SUV:A 20% SUV:B 10% Sedan:C Sedan:B Sedan:A 0% Sedan:A0 5% - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 -20% Sales volume('000 units) 0% 2011-01 2012-01 2013-01 2014-01 -40% Sedan:A00

Month Year-to-date -60%

Source: CAAM, Wind, Guosen Securities(HK) Research Source: CAAM, Wind, Guosen Securities(HK) Research Furthermore, we are more optimistic on entry-level SUV market, the A0 class SUV market. In 2014, sales volume of this segment increased by more than 73% compared to 2013, based on Guosen Securities (HK) Auto Database. We are more optimistic on the A0 class SUV market based on:

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Hong Kong / Auto John Luo +852 2899 8300 [email protected]

1) Low penetration rate, huge potential market size. The target customers of the A0 class SUV Still prefer SUVs, especially products overlapped that of A-class sedans, which we estimate to be the largest segment in A0 class SUVs China’s auto market. In 2014, the total estimated sales volume of A class sedan was over 7m units, while that of A0-SUV was merely 0.66m units. 2) Shifting consumer preference. Chinese auto customers like SUVs. In previous years, SUVs were considered the “upgraded need” or the second vehicle of a family, due to their higher price and larger engine size. However, some customers now prefer to buy SUVs as their first car because the price of SUVs has dropped and OEMs are introducing more entry-level models. 3) Adoption of turbo-charged engines. SUVs used to have larger engines compared with sedans, because SUVs tend to be larger in size and heavier than sedans in the same class. However, the prevalence of turbo-charged engines has enabled the use of smaller engines in SUVs. For example, many A class or even A0 class SUVs are now equipped with 1.5L turbo-charged engines, which is rare in past SUV models. 4) More new models to come. Competition in the A0 class SUV market was less fierce thanks to smaller number of models. In 2013, there were only 2 JV models in this segment, the Buick Encore and Ford Ecosport. However, the list of similar products will expand dramatically in 2015, as more OEMs will launch their A0 class SUV models, such as 2008 by Dongfeng-Peugeot, Vezel by GAC-Honda, X-RV by Dongfeng-Honda, C3-XR by Dongfeng-Citroen, ix25 by BAIC- Hyundai, CX-3 by Chang’an-Mazda etc. Many domestic brands also planned to launch small SUV models in 2015. The introduction of more new models will stimulate customer awareness and demand in this segment.

Figure 22 Key new/ sub-new models of OEMs in 2015 - A0 class SUVs are highlights (red color) OEM Auto Group SUV Sedan MPV Beijing-Benz BAIC GLA/ new GLK New C series Beijing-Hyundai BAIC ix25 Sonata 9 BAW BAIC Shenbao X65/ X55 Shenbao D80/ D60/ D20/ C33/ CC Huansu H2 BYD BYD Tang/S3 Denza Shang Dongfeng-Honda DFG XR-V Spirior DFG DFG Jingyi X3 Jingyi S50/ Venucia T70 Fengxing CM7/Fengguang 360 Dongfeng-Nissan DFG Murano/new Qashqai March/ Spirior Dongfeng-Infinity DFG QX50 Q50L Dongfeng-Peugeot-Citroen DFG C3-XR / 2008 308S/ new 508 Dongfeng-Yueda-Kia DFG KX3 new compact sedan GAC-Honda GAC Vezel New City Odyssey GAC Motors GAC GS4 / GS5 Super GA6 GAC-Fiat GAC GAC-Toyota GAC Leven/ A-class hybrid sedan GAC-Mitsubishi GAC Brilliance BMW Brilliance BMW 2 series Brilliance Auto Brilliance Small SUV Huasong 7 Geely Auto Geely Small SuV GC9 JAC JAC Refine S3/ Refine S2 JMC JMC Everest/new small SUV new Transit Lifan Auto Lifan Youngman Auto Youngman Chery Auto Chery Arrizo 5/ Arrizo 7 Fulwin 8 SAIC-Volkswagen SAIC Lamando / new Passat SAIC-GM SAIC Envision ATS-L SAIC-GM-Wuling SAIC Baojun SUV FAW-Volkswagen FAW FAW-Toyota FAW A-class hybrid sedan FAW FAW Beturn B60 FAW-Mazda FAW Changan-Ford Chang'an Edge Escort/ Taurus Changan-Suzuki Chang'an Olivio Changan-Mazda Chang'an CX-3 New Mazda 2 Changan Auto Chang'an CS15 New B-class sedan GWM GWM H9/H8/H7/H2/H1 * Dongfeng-Yueda-Kia was not included in DFG(0489.HK) * Red color: small SUV models Source: News, Guosen Securities(HK) Research

Guosen Securities (HK) 12

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Luxury brands will still lead the growth Although PV sales growth slowed to 9.9% in 2014, sales volume of major luxury brands remains robust. Audi and BMW kept around 17% growth while sales of Mercedes-Benz shot up by 31%.

Figure 23 Most luxury brands still recorded higher growth than PV sales

700,000 35% 578,932 600,000 30%

500,000 455,979 25%

400,000 20% 287,460 300,000 15% PV sales growth (9.9%) 200,000 122,010 10% 81,219 100,000 5%

- 0% Audi BMW Benz JLR Volvo

Sales volume(LHS) Sales volume growth(RHS)

Source: CAAM, Wind, Guosen Securities(HK) Research

Luxury brands will benefit Thanks to higher localization rate, sales volume growth of localized luxury brands was even higher. from higher localization rate For example, sales volume growth of FAW-Audi and Brilliance BMW in 2014 were 24.8% and 34.6%, respectively, both higher than the 17% growth of their respective brands.

Figure 24 Sales volume growth of Brilliance BMW still stood at 34% in 2014

30,000 120

25,000 100

20,000 80

15,000 60

10,000 40

5,000 20

0 0 2012-01 2013-01 2014-01

Sales volume (LHS) Growth (%, RHS)

Source: Company, Guosen Securities(HK) Research

We are optimistic about the luxury brand market due to: 1. Rising disposable income. Increasing disposable income in China is the source of increasing demand for luxury vehicles. 2. Higher localization rate coupled with capacity expansion of luxury brands. In 2014, we estimate that the localization of Audi/BMW/Benz has increased to 89%/61%/52%, respectively, and the localization rate has been increasing in the past few years to cope with fiercer competition in the market. Moreover, the capacity of Brilliance BMW is expected to increase by 50% from 400,000 units in 2014 to 600,000 units in 2016, and that of Beijing-Benz is expected to increase from 250,000 units by 68% in 2014 to 420,000 units in 2015. The production facilities of Chery-JLR and Dongfeng-Infinity were launched by the end of 2014. With higher localization rate, the prices of luxury cars will drop, boosting demand in the market.

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Hong Kong / Auto John Luo +852 2899 8300 [email protected]

3. More localized models to come. In the coming three years, BMW is going to bring in three new models into the China market (current models: 3), and Mercedes-Benz will launch the new GLA and GLK model in China in early 2015. Q50L and QX50 of Dongfeng Infinity, localized Chery-JLR- Evoque will soon enter the market. We believe that more localized models will stimulated the demand for luxury cars. Recovery year for dealers? 2014 was a milestone year for China’s auto dealers, as we observe the several indicators in the market: 1. Change in regulation. Started from Oct. 2014, the State Administration for Industry and Commerce of the PRC (“SAIC”) stopped keeping record for the auto distributorship and auto franchise dealers, which means the opening up of the dealer business from government approval. Theoretically, dealers can sell different brands within one shops and form the so- called “auto supermarket”. Although auto franchise is a common way in auto sales, this will Industry moving in favor of open up new choices for dealers. dealers 2. Change in policy. The revised draft of Auto Sales Management Regulation (“汽车销售管理办法”) has been submitted for approval and is expected to become effective in 2015. The new regulation is expected to put more restrictions on OEMs for tie-in sales, inventory pushing, etc. The balance of dealer-OEM will be more favorable to dealers. 3. Dealers forming associations to defend their rights. In 2H14, Chinese auto dealers formed associations to negotiate with OEMs for more rebates, less inventory and more reasonable sales targets. BMW’s granting of RMB 5.1bn special rebate to Chinese dealers was a symbol that large dealers started to get a fairer position towards OEMs. Although the sales volume growth of dealers may decelerate, margins should become more stable thanks to the negotiation. Therefore, we believe that 2015 will be a recovery year for auto dealers.

Guosen Securities (HK) 14

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Stock-picking criteria:

Methodology We observe and study the sales performance of major MPV/SUV/sedan models every month. As of end-2014, our auto database includes 258 models, including 92/21/145 MPV/SUV/sedan models. The database includes 95% of the total sales volume of these three main PV categories in 2014. We collected the best-seller option of these models from AutoHome.com, take their ASP as the representative ASP, and performed the company-wide analysis by sales volume and estimated revenue. We then analysis the models by product type, company, brand, engine size, country, etc. As of 2014, our models cover 95% of the sales volume in MPV/SUV/sedan segments.

Figure 25 Model VS actual sales volume (in ‘000 units) Item Model sales volume Actual sales volume Model/Actual MPV 1,732 1,914 90% SUV 3,980 4,078 98% Sedan 11,769 12,377 95% Total 17,481 18,369 95% Source: Guosen Securities(HK) Research

Please note that the models in our database include only MPV/SUV/sedan models. For most OEMS, our database covered over 90% of their annual sales in 2014 (see appendix II). Although our database did not include commercial vehicles and cross PVs, we believe its good enough to analyze the competitive edge of OEMS, given that: 1. Combined sales volume of MPV/SUV/PV accounted for 78.2% of auto sales in 2014. 2. The margins of MPV/SUV/Sedans are generally higher than CVs and cross PVs. As such, we believe our database can cover the main auto OEM well. Here we present the analysis of sales volume contribution by company.

Figure 26 Sales volume contribution estimates of major listed OEMs (Only including MPV/SUV/Sedan) Listed Company MPV:A MPV:B MPV:C Sedan:A00 Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:C SAIC (600104.SH) 20% 0% 2% 1% 10% 44% 12% 1% 2% 8% 0% 0% DFG (0489.HK) 2% 11% 0% 0% 6% 50% 7% 0% 0% 23% 0% 0% CHANGAN AUTO(000625.SZ) 11% 0% 0% 5% 11% 37% 8% 0% 11% 18% 0% 0% BAIC (1958.HK) 5% 0% 0% 0% 20% 31% 17% 3% 1% 15% 8% 0% GAC (2238.HK) 2% 6% 0% 0% 14% 29% 25% 0% 7% 9% 9% 0% GWM (2333.HK) 0% 0% 0% 0% 9% 6% 0% 0% 25% 59% 0% 1% GEELY AUTO (0175.HK) 0% 0% 0% 6% 23% 55% 1% 0% 0% 15% 0% 0% BYD (1211.HK) 2% 0% 0% 10% 0% 63% 0% 0% 0% 26% 0% 0% Brilliance China (1114.HK) 0% 0% 0% 0% 0% 17% 25% 37% 0% 21% 0% 0% FAW Sedan (000800.SZ) 5% 0% 0% 16% 0% 22% 33% 0% 0% 24% 0% 0% HAIMA AUTO (000572.SZ) 0% 0% 0% 0% 0% 63% 0% 0% 0% 37% 0% 0% JAC (600418.SH) 0% 37% 0% 0% 0% 18% 0% 0% 0% 45% 0% 0% LIFAN AUTO (601777.SH) 0% 0% 0% 0% 0% 29% 0% 0% 0% 71% 0% 0% JMC (000550.SZ) 0% 0% 0% 0% 0% 0% 0% 0% 0% 56% 44% 0% Total 9% 3% 1% 2% 10% 39% 12% 2% 4% 18% 2% 0% Note: Based on Guosen Securities (HK) research auto database Source: CAAM, Wind, AutoHome, Guosen Securities(HK) Research

And revenue contribution estimation of major listed OEMs.

Guosen Securities (HK) 15

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Figure 27 Revenue contribution estimates of major listed OEMs (Only including MPV/SUV/Sedan) Listed Company MPV:A MPV:B MPV:C Sedan:A00 Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:C SAIC (600104.SH) 9% 0% 6% 0% 6% 41% 21% 2% 2% 12% 1% 0% DFG (0489.HK) 2% 7% 0% 0% 5% 41% 11% 0% 0% 34% 0% 0% BAIC (1958.HK) 2% 0% 0% 0% 10% 24% 21% 9% 0% 16% 17% 0% CHANGAN AUTO(000625.SZ) 5% 0% 0% 2% 7% 34% 14% 0% 11% 28% 0% 0% GAC (2238.HK) 2% 7% 0% 0% 7% 22% 32% 0% 7% 9% 14% 0% Brilliance China (1114.HK) 0% 0% 0% 0% 0% 4% 24% 55% 0% 16% 0% 0% GWM (2333.HK) 0% 0% 0% 0% 6% 5% 0% 0% 20% 67% 0% 2% FAW Sedan (000800.SZ) 3% 0% 0% 6% 0% 17% 47% 0% 0% 27% 0% 0% BYD (1211.HK) 3% 0% 0% 5% 0% 59% 0% 0% 0% 32% 0% 0% GEELY AUTO (0175.HK) 0% 0% 0% 4% 16% 58% 2% 0% 0% 21% 0% 0% JAC (600418.SH) 0% 43% 0% 0% 0% 15% 0% 0% 0% 43% 0% 0% HAIMA AUTO (000572.SZ) 0% 0% 0% 0% 0% 52% 0% 0% 0% 48% 0% 0% JMC (000550.SZ) 0% 0% 0% 0% 0% 0% 0% 0% 0% 49% 51% 0% LIFAN AUTO (601777.SH) 0% 0% 0% 0% 0% 18% 0% 0% 0% 82% 0% 0% Total 4% 2% 2% 1% 6% 32% 18% 5% 3% 22% 4% 0% Note: Based on Guosen Securities (HK) research auto database Source: CAAM, Wind, AutoHome, Guosen Securities(HK) Research

Guosen Securities (HK) 16

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Criterion 1: companies with strong SUV product lines We like SUVs. We prefer the companies that have strong SUV product lines, especially companies with high exposure to A0 class SUVs. We like GWM (2333.HK, BUY, TP HK$55.0) and maintain our BUY rating for the counter, TP raised to HK$55.0 based on 12.3x 2015PE. According to our database, GWM not only has the highest exposure in SUVs in terms of both sales volume (85%) and revenue (89%), but also has the highest exposure in the A0 class SUV market (20% revenue). Apart from GWM, we also like DFG (0489.HK, BUY, TP HK$ 15.0) for its low valuation and high exposure in SUVs. In 2014, we estimate that DFG generated 34% revenue from SUVs (in its PV business). In 2015, DFG has three major A0 class SUVs, X-RV by Dongfeng Honda, 2008 by Dongfeng-Peugeot and C3-XR by Dongfeng-Citroen, and it is set to benefit from the high growth in this segment.

Figure 28 Revenue contribution estimates of major listed OEMs (Only including MPV/SUV/Sedan) Listed Company MPV:A MPV:B MPV:C Sedan:A00 Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:C SAIC (600104.SH) 9% 0% 6% 0% 6% 41% 21% 2% 2% 12% 1% 0% DFG (0489.HK) 2% 7% 0% 0% 5% 41% 11% 0% 0% 34% 0% 0% BAIC (1958.HK) 2% 0% 0% 0% 10% 24% 21% 9% 0% 16% 17% 0% CHANGAN AUTO(000625.SZ) 5% 0% 0% 2% 7% 34% 14% 0% 11% 28% 0% 0% GAC (2238.HK) 2% 7% 0% 0% 7% 22% 32% 0% 7% 9% 14% 0% Brilliance China (1114.HK) 0% 0% 0% 0% 0% 4% 24% 55% 0% 16% 0% 0% GWM (2333.HK) 0% 0% 0% 0% 6% 5% 0% 0% 20% 67% 0% 2% FAW Sedan (000800.SZ) 3% 0% 0% 6% 0% 17% 47% 0% 0% 27% 0% 0% BYD (1211.HK) 3% 0% 0% 5% 0% 59% 0% 0% 0% 32% 0% 0% GEELY AUTO (0175.HK) 0% 0% 0% 4% 16% 58% 2% 0% 0% 21% 0% 0% JAC (600418.SH) 0% 43% 0% 0% 0% 15% 0% 0% 0% 43% 0% 0% HAIMA AUTO (000572.SZ) 0% 0% 0% 0% 0% 52% 0% 0% 0% 48% 0% 0% JMC (000550.SZ) 0% 0% 0% 0% 0% 0% 0% 0% 0% 49% 51% 0% LIFAN AUTO (601777.SH) 0% 0% 0% 0% 0% 18% 0% 0% 0% 82% 0% 0% Total 4% 2% 2% 1% 6% 32% 18% 5% 3% 22% 4% 0% Note: Based on Guosen Securities (HK) research auto database Source: CAAM, Wind, AutoHome, Guosen Securities(HK) Research

Guosen Securities (HK) 17

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Criterion 2: high exposure to luxury/German brands We believe that the German brands have secured a dominant position in China’s PV market, and it is likely that their position will be further strengthened in 2015. Both Brilliance China (1114.HK, BUY, TP HK$ 18.0) and BAIC (1958.HK, NR) have high exposure to German brands and luxury brands. We maintained our BUY rating for Brilliance China with a TP of HK$ 18.0. Brilliance China generated 96% of its revenue from B class sedan and above (on a consolidated basis with Brilliance BMW) and 92% of its revenue comes from German brands in 2014.

Figure 29 Revenue contribution estimates of major listed OEMs (Only including MPV/SUV/Sedan) Listed Company MPV:A MPV:B MPV:C Sedan:A00 Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:C SAIC (600104.SH) 9% 0% 6% 0% 6% 41% 21% 2% 2% 12% 1% 0% DFG (0489.HK) 2% 7% 0% 0% 5% 41% 11% 0% 0% 34% 0% 0% BAIC (1958.HK) 2% 0% 0% 0% 10% 24% 21% 9% 0% 16% 17% 0% CHANGAN AUTO(000625.SZ) 5% 0% 0% 2% 7% 34% 14% 0% 11% 28% 0% 0% GAC (2238.HK) 2% 7% 0% 0% 7% 22% 32% 0% 7% 9% 14% 0% Brilliance China (1114.HK) 0% 0% 0% 0% 0% 4% 24% 55% 0% 16% 0% 0% GWM (2333.HK) 0% 0% 0% 0% 6% 5% 0% 0% 20% 67% 0% 2% FAW Sedan (000800.SZ) 3% 0% 0% 6% 0% 17% 47% 0% 0% 27% 0% 0% BYD (1211.HK) 3% 0% 0% 5% 0% 59% 0% 0% 0% 32% 0% 0% GEELY AUTO (0175.HK) 0% 0% 0% 4% 16% 58% 2% 0% 0% 21% 0% 0% JAC (600418.SH) 0% 43% 0% 0% 0% 15% 0% 0% 0% 43% 0% 0% HAIMA AUTO (000572.SZ) 0% 0% 0% 0% 0% 52% 0% 0% 0% 48% 0% 0% JMC (000550.SZ) 0% 0% 0% 0% 0% 0% 0% 0% 0% 49% 51% 0% LIFAN AUTO (601777.SH) 0% 0% 0% 0% 0% 18% 0% 0% 0% 82% 0% 0% Total 4% 2% 2% 1% 6% 32% 18% 5% 3% 22% 4% 0% Note: Based on Guosen Securities (HK) research auto database Source: CAAM, Wind, AutoHome, Guosen Securities(HK) Research

Figure 30 Product portfolio by country (sales volume contribution) Figure 31 Product portfolio by country (estimated revenue contribution) Company Domestic Germany Japanese S. Korean U.S. French Others Company Domestic Germany Japanese S. Korean U.S. French Others SAIC (600104.SH) 3% 37% 0% 0% 60% 0% 0% SAIC (600104.SH) 2% 41% 0% 0% 56% 0% 0% DFG (0489.HK) 14% 0% 54% 0% 0% 29% 2% DFG (0489.HK) 9% 0% 60% 0% 0% 28% 3% CHANGAN AUTO(000625.SZ) 40% 0% 12% 0% 47% 1% 0% CHANGAN AUTO(000625.SZ) 26% 0% 13% 0% 58% 3% 1% BAIC (1958.HK) 17% 9% 0% 74% 0% 0% 0% BAIC (1958.HK) 7% 23% 0% 70% 0% 0% 0% GAC (2238.HK) 15% 0% 81% 0% 0% 0% 4% GAC (2238.HK) 12% 0% 85% 0% 0% 0% 3% GWM (2333.HK) 100% 0% 0% 0% 0% 0% 0% GWM (2333.HK) 100% 0% 0% 0% 0% 0% 0% GEELY AUTO (0175.HK) 100% 0% 0% 0% 0% 0% 0% GEELY AUTO (0175.HK) 100% 0% 0% 0% 0% 0% 0% BYD (1211.HK) 100% 0% 0% 0% 0% 0% 0% BYD (1211.HK) 100% 0% 0% 0% 0% 0% 0% Brilliance China (1114.HK) 25% 75% 0% 0% 0% 0% 0% Brilliance China (1114.HK) 8% 92% 0% 0% 0% 0% 0% FAW Sedan (000800.SZ) 73% 0% 27% 0% 0% 0% 0% FAW Sedan (000800.SZ) 59% 0% 41% 0% 0% 0% 0% HAIMA AUTO (000572.SZ) 100% 0% 0% 0% 0% 0% 0% HAIMA AUTO (000572.SZ) 100% 0% 0% 0% 0% 0% 0% JAC (600418.SH) 100% 0% 0% 0% 0% 0% 0% JAC (600418.SH) 100% 0% 0% 0% 0% 0% 0% LIFAN AUTO (601777.SH) 100% 0% 0% 0% 0% 0% 0% LIFAN AUTO (601777.SH) 100% 0% 0% 0% 0% 0% 0% JMC (000550.SZ) 100% 0% 0% 0% 0% 0% 0% JMC (000550.SZ) 100% 0% 0% 0% 0% 0% 0% Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research We also like dealers that concentrate on luxury brands. We reiterate our BUY call on Baoxin Auto (1293.HK, BUY, TP HK$ 6.0) and China ZTA (1728.HK, BUY, TP HK 5.4), given more stable margins outlook and growth visibility. We estimate that luxury cars will account for 80% of Baoxin’s 2014 total sales volume, and generates 84% of its total revenue in the same year. The main brands of Baoxin Auto includes BMW and JLR, which have established successful brand image in China and will have more localized models coupled with capacity expansion in the coming two years. We estimate that 66% of sales, and 77% of revenue of ZTA will come from luxury cars as of 2014. The main brands of ZTA are BMW and Volvo, both of which have established strong brand image in China.

Guosen Securities (HK) 18

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Criterion 3: Cautious on Japanese and domestic brands Both Japanese and domestic brands were market share losers in the past three years, and the situation is still going adversely for them. We are especially cautious over the domestic brands that have high exposure to A/A0 class sedan and have weak product cycle in 2015. We have a Neutral rating on GAC (2238.HK, Neutral, TP HK$ 7.1), because it generates 85% of revenue (on a consolidated basis) from Japanese brands. On the other hand, we believe that domestic companies with high exposure in the A/A0 class sedan segment would face more challenges in 2015, as the market is shrinking and it would be difficult to achieve sales growth in such situation. Hence, we also have a Neutral rating on Geely Auto (0175.HK, Neutral, TP HK 3.2), because it has 73% revenue exposure on A/A0 domestic sedans.

Figure 32 Revenue contribution estimates of major listed OEMs (Only including MPV/SUV/Sedan) Listed Company MPV:A MPV:B MPV:C Sedan:A00 Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:C SAIC (600104.SH) 9% 0% 6% 0% 6% 41% 21% 2% 2% 12% 1% 0% DFG (0489.HK) 2% 7% 0% 0% 5% 41% 11% 0% 0% 34% 0% 0% BAIC (1958.HK) 2% 0% 0% 0% 10% 24% 21% 9% 0% 16% 17% 0% CHANGAN AUTO(000625.SZ) 5% 0% 0% 2% 7% 34% 14% 0% 11% 28% 0% 0% GAC (2238.HK) 2% 7% 0% 0% 7% 22% 32% 0% 7% 9% 14% 0% Brilliance China (1114.HK) 0% 0% 0% 0% 0% 4% 24% 55% 0% 16% 0% 0% GWM (2333.HK) 0% 0% 0% 0% 6% 5% 0% 0% 20% 67% 0% 2% FAW Sedan (000800.SZ) 3% 0% 0% 6% 0% 17% 47% 0% 0% 27% 0% 0% BYD (1211.HK) 3% 0% 0% 5% 0% 59% 0% 0% 0% 32% 0% 0% GEELY AUTO (0175.HK) 0% 0% 0% 4% 16% 58% 2% 0% 0% 21% 0% 0% JAC (600418.SH) 0% 43% 0% 0% 0% 15% 0% 0% 0% 43% 0% 0% HAIMA AUTO (000572.SZ) 0% 0% 0% 0% 0% 52% 0% 0% 0% 48% 0% 0% JMC (000550.SZ) 0% 0% 0% 0% 0% 0% 0% 0% 0% 49% 51% 0% LIFAN AUTO (601777.SH) 0% 0% 0% 0% 0% 18% 0% 0% 0% 82% 0% 0% Total 4% 2% 2% 1% 6% 32% 18% 5% 3% 22% 4% 0% Note: Based on Guosen Securities (HK) research auto database Source: CAAM, Wind, AutoHome, Guosen Securities(HK) Research

Figure 33 Product portfolio by country (sales volume contribution) Figure 34 Product portfolio by country (estimated revenue contribution) Company Domestic Germany Japanese S. Korean U.S. French Others Company Domestic Germany Japanese S. Korean U.S. French Others SAIC (600104.SH) 3% 37% 0% 0% 60% 0% 0% SAIC (600104.SH) 2% 41% 0% 0% 56% 0% 0% DFG (0489.HK) 14% 0% 54% 0% 0% 29% 2% DFG (0489.HK) 9% 0% 60% 0% 0% 28% 3% CHANGAN AUTO(000625.SZ) 40% 0% 12% 0% 47% 1% 0% CHANGAN AUTO(000625.SZ) 26% 0% 13% 0% 58% 3% 1% BAIC (1958.HK) 17% 9% 0% 74% 0% 0% 0% BAIC (1958.HK) 7% 23% 0% 70% 0% 0% 0% GAC (2238.HK) 15% 0% 81% 0% 0% 0% 4% GAC (2238.HK) 12% 0% 85% 0% 0% 0% 3% GWM (2333.HK) 100% 0% 0% 0% 0% 0% 0% GWM (2333.HK) 100% 0% 0% 0% 0% 0% 0% GEELY AUTO (0175.HK) 100% 0% 0% 0% 0% 0% 0% GEELY AUTO (0175.HK) 100% 0% 0% 0% 0% 0% 0% BYD (1211.HK) 100% 0% 0% 0% 0% 0% 0% BYD (1211.HK) 100% 0% 0% 0% 0% 0% 0% Brilliance China (1114.HK) 25% 75% 0% 0% 0% 0% 0% Brilliance China (1114.HK) 8% 92% 0% 0% 0% 0% 0% FAW Sedan (000800.SZ) 73% 0% 27% 0% 0% 0% 0% FAW Sedan (000800.SZ) 59% 0% 41% 0% 0% 0% 0% HAIMA AUTO (000572.SZ) 100% 0% 0% 0% 0% 0% 0% HAIMA AUTO (000572.SZ) 100% 0% 0% 0% 0% 0% 0% JAC (600418.SH) 100% 0% 0% 0% 0% 0% 0% JAC (600418.SH) 100% 0% 0% 0% 0% 0% 0% LIFAN AUTO (601777.SH) 100% 0% 0% 0% 0% 0% 0% LIFAN AUTO (601777.SH) 100% 0% 0% 0% 0% 0% 0% JMC (000550.SZ) 100% 0% 0% 0% 0% 0% 0% JMC (000550.SZ) 100% 0% 0% 0% 0% 0% 0% Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research We also hold a neutral view on Japanese and domestic brand dealers. Due to slower growth in Japanese brands and the pricing pressure of mid-high-end vehicles, margins of Japanese dealers are likely to remains slim with not much chance to rebound. We maintain our Neutral rating on DCH (1828.HK, Neutral, HK$ 4.7), because we estimate around 60% of the vehicles it sold were Japanese mid-high-end brands in 2013.

Guosen Securities (HK) 19

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Stock picking and ratings We initiate cover on DFG (0489.HK) with a BUY rating and TP of HK$ 15.0 based on 8.0x 2015PE, which implies 32% upside. The PE target is lower than other peers due to slower net profit growth CAGR in FY14 to FY16 (6%) compared with other OEMs and the larger of scale of the company. We initiate cover on GAC (2238.HK) with a Neutral rating and TP of HK$ 7.1 based on 10.0x 2015PE, which offers 2% upside. The PE target is in line with sector average for OEMs, as we believe GAC will be adversely affected by the shrinking market share of Japanese brands. We initiate cover on Geely (0175.HK) with a Neutral rating and TP of HK$ 3.2 based on 10.0x 2015PE, which implies -2% upside. The PE target was in line with market average for OEMs, as we believe Geely will be adversely affected by the shrinking market share of domestic brands. We maintain our BUY rating for GWM (2333.HK) with TP raised to HK$ 55.0, which implies 12.3x 2015PE and offers 19% upside. The PE target is 22% higher than sector average for OEMs (10.1x) thanks to strong product cycle in 2015 and a high net profit growth CAGR of 21% from FY14 to FY16. We maintain BUY for Brilliance China (1114.HK) and TP at HK$ 18.0, which implies 11.8x 2015PE and offers 33% upside. The PE target is 17% higher than sector average for OEMs (10.1x) thanks to strong product cycle from 2015 to 2017, and a high net profit growth CAGR of 21% from FY14 to FY16. As for dealers, we maintain our Neutral rating for DCH (1828.HK) and raised TP by 12% from HK$4.21 to HK$4.7, which implies 8.0x 2015PE. The PE target reflects DCH’s weaker position in the Japanese auto dealership business and slower net profit growth CAGR of 9% from FY14 to FY16. We maintain BUY on Baoxin Auto (1293.HK) maintained our TP at HK$ 6.0 based on a 2015 PE target of 10.3x, which is 13% higher than sector average for dealers (9.1x), but we think is justifies for the 20% net profit growth CAGR from FY14 to FY16; We maintain BUY on ZTA (1728.HK) and revise down TP by 7% from HK$5.8 to HK$5.4, which implies 9.0x 2015PE. The PE target was in line with the sector average for dealers (9.1x), and we believe is justified by the 15% net profit growth CAGR from FY14 to FY16.

Figure 35 Ratings and target prices 14-16 Target Target 2015 14-16 NP Company Ticker Rating Upside average Price PE(2015) growth CAGR ROE DFG 0489.HK BUY 15.0 8.0 36% 2% 6% 16% GAC 2238.HK Neutral 7.1 10.0 1% 17% 15% 9% Geely 0175.HK Neutral 3.2 10.0 -3% 62% 33% 10% GWM 2333.HK BUY 55.0 12.3 19% 30% 23% 24% Brilliance China 1114.HK BUY 18.0 11.8 33% 21% 21% 27% DCH 1828.HK Neutral 4.7 8.0 2% 12% 9% 10% Baoxin 1293.HK BUY 6.0 10.3 27% 19% 20% 19% ZTA 1728.HK BUY 5.4 9.0 39% 15% 15% 12% Source: Guosen Securities(HK) Research

Guosen Securities (HK) 20

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Peers comparison

The following exhibit shows the peers comparison.

Figure 36 Peers comparison PER (x) PBR (x) ROE (%)

Bloomberg Estimates 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Total 15.8 10.4 8.7 2.1 1.8 1.5 16.6 17.7 18.0 Dealer 20.9 9.1 7.1 1.4 1.2 1.0 16.0 17.0 16.6 0881.HK Zhongsheng Hldgs 9.6 7.6 6.3 1.0 0.9 0.8 11.7 12.3 13.3 1293.HK Baoxin Auto 8.5 6.9 5.3 1.7 1.4 1.1 22.2 23.7 23.9 1728.HK China ZTA 7.2 6.0 5.0 0.8 0.7 0.6 12.2 13.0 13.9 1828.HK DCH 8.9 7.8 7.0 0.9 0.8 0.8 10.3 11.0 11.4 3669.HK Yongda Auto 7.4 5.5 4.4 1.3 1.0 0.9 18.2 20.2 21.8 3836.HK Harmony Auto 9.6 7.3 5.7 1.9 1.5 N/A 21.2 22.4 N/A 600297.SH Merro Pharmaceutical N/A N/A N/A N/A N/A N/A N/A N/A N/A 600335.SH Sinomach Auto 15.4 12.5 11.6 2.4 2.0 1.7 16.2 16.5 15.5 601258.SH Pangda Auto trade 101.0 18.9 11.9 N/A N/A N/A N/A N/A N/A OEM 13.1 10.1 9.0 2.1 1.7 1.5 16.0 17.5 17.9 0175.HK Geely Auto 12.3 8.8 7.7 1.3 1.1 1.0 10.3 13.4 13.7 0489.HK DFG 6.2 5.9 5.2 1.1 0.9 0.8 18.5 17.1 16.7 1114.HK Brilliance China 10.8 9.5 8.0 3.2 2.4 1.9 33.2 29.0 27.0 2238.HK GAC 10.5 8.2 6.6 1.0 0.9 0.8 9.8 11.3 12.4 2333.HK GWM 13.9 10.4 8.9 3.3 2.7 2.2 25.9 28.3 27.0 3808.HK SinoTruck 19.9 14.7 11.9 0.5 0.5 0.5 2.5 3.1 3.8 000572.SZ Haimai Auto N/A N/A N/A N/A N/A N/A N/A N/A N/A 000625.SZ Chang'an Auto 12.6 9.0 7.4 3.7 2.8 2.1 31.2 32.4 31.3 000800.SZ FAW Car 17.1 15.2 14.3 2.8 2.4 2.1 8.6 12.8 15.1 600066.SH Yutong Bus 15.1 12.6 10.8 3.1 2.7 2.3 21.9 22.1 22.2 600104.SH SAIC 8.9 7.7 6.9 1.6 1.4 1.3 18.5 18.9 18.8 600166.SH Feiqi Foton 9.6 6.9 10.7 1.1 1.0 0.9 2.7 6.0 8.6 600418.SH JAC 20.2 12.8 9.6 2.2 1.9 1.6 9.4 15.2 17.7 Parts 14.8 11.8 9.5 2.6 2.2 1.8 17.8 18.4 19.1 0425.HK Minth Group 12.3 10.6 9.2 1.7 1.5 1.4 14.4 14.9 15.3 1148.HK Xinchen Power 11.9 8.2 5.3 1.3 1.1 0.9 9.3 11.2 12.8 1316.HK Nexteer Automotive 15.1 11.8 9.8 3.3 2.7 2.2 24.6 24.7 24.7 2338.HK Weichai Power 10.0 10.4 9.2 1.5 1.3 1.2 16.4 13.4 13.7 0868 HK Xinyi Glass 12.1 7.4 6.3 1.3 1.2 1.1 13.8 16.8 17.3 000030.SZ FAWER Auto Parts 16.9 14.8 12.6 2.5 2.2 2.0 15.0 15.2 15.7 000581.SZ Weifu High-Tech 17.5 12.6 10.2 2.7 2.2 1.9 15.6 18.2 18.8 000887.SZ Zhongding Sealing Parts 30.6 22.8 15.3 6.7 5.4 4.4 21.7 23.7 28.7 600660.SH Fuyao Glass 12.0 11.0 9.7 2.8 2.2 1.9 26.7 26.6 25.0 600741.SH Huayu Autoparts 9.5 8.7 7.8 1.9 1.7 1.5 20.4 19.4 18.9

PER (x) PBR (x) ROE (%)

Guosen HK research estimates 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

0489.HK DFG 6.0 5.9 5.3 1.0 0.9 0.8 17.3 15.3 14.8 2238.HK GAC 11.6 9.9 8.7 1.0 0.9 0.9 8.8 9.5 10.0 0175.HK Geely Auto 16.8 10.4 9.5 1.3 1.2 1.1 8.0 11.5 11.3 2333.HK GWM 14.0 10.3 8.8 3.3 2.7 2.2 23.7 23.7 23.7 1114.HK Brilliance China 10.7 8.8 7.3 3.3 2.5 2.0 29.3 27.3 25.7 1828.HK DCH 8.8 7.9 7.3 0.8 0.8 0.7 10.1 10.5 10.6 1293.HK Baoxin Auto 9.7 8.1 6.8 1.8 1.5 1.3 18.5 19.1 19.7 1728.HK China ZTA 7.5 6.5 5.7 0.8 0.7 0.7 11.1 11.6 11.9 Note: 600297.SH Guanghui Auto will inject its assets into Merro Pharmaceutical Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 21

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Risk factors:

Slower auto sales growth will hurt the margins of OEMs Due to high level of operating leverage, net profit growth has a high elasticity versus the sales volume growth of OEMs. Should market growth in 2015 turns out to be slower than our already conservative assumption, margins of OEMs might be lower than our forecasts. Overcapacity and price war We estimate that the capacity of major OEMs will increase by 13%, mostly from JV companies. Given slower PV sales volume growth forecast in 2015, the utilization rate of the PV sector may drop below 80%. Overcapacity will hurt both the sales volume and ASP in the auto market, leading to lower profitability of both OEMs and dealers. More cities putting restrictions on car license As the cities getting more crowded with cars, local governments tend to set limits on car licenses. Currently, there are eight cities having such restrictions. We estimate that there will be more cities to do so in future, which will affect auto sales growth.

Guosen Securities (HK) 22

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Appendix:

Representativeness of Guosen Securities (HK) auto database

Figure 37 Representativeness of the database: Model sales volume VS actual sales volume OEM Model Actual Model/actual FAW-Volkswagen 1,748,383 1,780,888 98% SAIC-Volkswagen 1,687,290 1,725,006 98% SAIC-GM 1,687,017 1,723,940 98% Beijing-Hyundai 1,112,440 1,120,048 99% Dongfeng-Nissan 944,202 951,710 99% SAIC-GM-Wuling 931,605 1,586,383 59% Changan-Ford 801,000 805,988 99% Changan Auto 680,819 975,431 70% Dongfeng-Peugeot-Citroen 615,844 704,016 87% GWM 610,519 646,036 95% Dongfeng-Yueda-Kia 605,458 612,486 99% FAW-Toyota 580,886 582,174 100% GAC-Honda 475,507 480,060 99% Geely Auto 416,034 425,773 98% BYD 400,584 437,857 91% Chery Auto 390,433 476,162 82% Dongfeng Liuzhou 334,579 447,845 75% GAC-Toyota 373,809 374,108 100% Dongfeng-Honda 291,427 308,224 95% Brilliance BMW 278,195 278,195 100% BAW 257,325 300,300 86% FAW sedan 245,729 287,177 86% Hima Auto 165,892 180,813 92% JAC 158,409 195,799 81% SAIC 143,608 180,018 80% GAC Motors 102,101 116,758 87% Beijing-Benz 129,069 129,069 100% Zotye Auto 124,414 166,652 75% Brilliance Auto 110,020 153,668 72% Changan-Suzuki 108,001 165,268 65% Changhe-Suzuki 107,599 120,146 90% Changan-Mazda 100,676 102,123 99% FAW-Mazda 89,346 102,500 87% Lifan Auto 84,842 174,013 49% Youngman Auto 64,311 64,311 100% GAC-Mitsubishi 63,197 63,197 100% JMC 60,538 60,857 99% Soueast-Motor 50,670 65,611 77% Dongfeng-Yulong 44,203 52,203 85% GAC-Fiat 43,922 68,090 65% Zhengzhou Nissan 22,314 49,253 45% GAC-Changfeng 21,160 21,160 100% Chuanqi Yema 10,773 12,326 87% GAC-Ji'ao Auto 45,042 57,002 79% Huanghai Auto 7,616 7,616 100% Jonway Auto 6,812 7,106 96% Others 78,657 355,634 22% Total 17,412,277 19,701,000 88% Note: the discrepancy mainly lies in the lack of cross PV and CV in our model Source: Guosen Securities(HK) Research

Guosen Securities (HK) 23

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Product lines of major auto OEM groups (2014)

Figure 38 Product line of major auto OEMs

ASP (RMB '000) SAIC Products ASP (RMB '000) FAW Products 450 450 400 400 350 350 300 300 250 Sedan 250 Sedan 200 SUV 200 SUV 150 MPV 150 MPV 100 100 50 50 Sales vol. Sales vol. - - 0 100,000 200,000 300,000 400,000 0 100,000 200,000 300,000 400,000 ASP (RMB '000) DFG Products ASP (RMB '000) Chang'an Products 450 450 400 400 350 350 300 300 250 250 Sedan 200 Sedan 200 SUV 150 SUV 150 MPV 100 MPV 100 50 50 Sales vol. Sales vol. - - 0 100,000 200,000 300,000 400,000 0 100,000 200,000 300,000 400,000 ASP (RMB '000) BAIC Products ASP (RMB '000) GAC Products 450 450 400 400 350 350 300 300 Sedan 250 Sedan 250 SUV 200 SUV 200 MPV 150 MPV 150 100 100 50 50 Sales vol. Sales vol. - - 0 100,000 200,000 300,000 400,000 0 100,000 200,000 300,000 400,000 ASP (RMB '000) Brilliance Products ASP (RMB '000) GWM Products 450 450 400 400 350 350 300 300 250 Sedan 250 Sedan 200 SUV 200 SUV 150 MPV 150 MPV 100 100 50 50 Sales vol. Sales vol. - - 0 100,000 200,000 300,000 400,000 0 100,000 200,000 300,000 400,000

Guosen Securities (HK) 24

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

ASP (RMB '000) Geely Products ASP (RMB '000) BYD Products 450 450 400 400 350 350 300 300 250 Sedan 250 Sedan 200 SUV 200 SUV 150 MPV 150 MPV 100 100 50 Sales vol. 50 - Sales vol. 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 - 0 100,000 200,000 300,000 400,000 * Note: Sales volume of “Wuling Hongguang” (750,019 units) was deleted from the above graphs due to scaling problem Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research

Product lines of major Hong Kong listed OEMs

Figure 39 Product lines of major Hong Kong listed OEMs

ASP ('000 RMB)

500

450

400

350

300

250

200

150

100

Sales Vol. - - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

GWM (2333.HK) GEELY AUTO (0175.HK) GAC (2238.HK) BAIC (1958.HK) DFG (0489.HK) BYD (1211.HK) Brilliance China (1114.HK)

Source: Guosen Securities(HK) Research

Guosen Securities (HK) 25

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Company Section

Guosen Securities (HK) 26

Company Research Initiating Coverage

Dongfeng Motor (489 HK) China / Auto 2015 the year of SUVs 11 February 2015 BUY Target price HK$15.00 Through the five JVs with international auto giants, DFG provides a Last price (9 Feb 15) HK$11.34 full portfolio of products. 2015 will be a year of SUV for DFG, and we Upside/downside (%) 32.3 estimate that the SUV sales volume will soar by 65%, thanks to the HSI 24521 launch of new models. With enhanced cooperation with international Mkt cap (HK$bn/US$bn) 97.7/12.6 52 week range (HK$) 9.60 - 15.20 auto giants, we expect DFG to enjoy stronger competitiveness in Avg trading volume daily (US$mn) 22.13 future. We believe the 40% discount compared to sector average is Free float (%) 33.14 Source: Bloomberg unjustified. Initiate cover of DFG with BUY rating and TP of HK$ 15.0.

Second largest automaker with a diversified product portfolio Performance DFG is the main asset of China’s second largest auto OEM Group, DFMC, and with HK$ annual sales of 2.7m units in 2014, or 11.6% share in China. With 85.6% PV and 15.00 120% 14.4% CV sales contribution in 2014, DFG is an integrated OEM with a balanced 14.00 product portfolio. DFG has formed multiple JVs with five international auto giants. 13.00 110% As of 2014, domestic/Japanese/French brands accounted for 15%/59%/26% of 12.00 100% 11.00 DFG’s total PV sales, which covered a series of products such as sedan, MPV, and 90% SUV. 10.00 9.00 80% 2015 year of SUVs for DFG 8.00 70% DFG was a major SUV provider in China with estimated market share of around Feb-14 Oct-14 12.5% in 2014. In 2015, sales volume of the three A0 class SUV models are Price(LHS) Rel. to HSI(RHS) estimated to increase by 5x and contribute to 64% of the incremental sales of DFG in the year. Driven by strong SUV models, we estimate that DFG’s total SUV sales volume will increase by 65% in 2015, taking 18% of the share in the company. Performance 1M 3M 12M Enhanced corporation with international giants Absolute (%) 0.4 1.6 0.4 Absolute (US$, %) 0.4 1.6 0.4 After acquiring a 14% stake in PSA, DFG has become the largest shareholder of the Relative to HSI (%) (2.2) (2.5) (13.0) PSA Group and the cooperation between the two is set to improve, benefiting the Source: Bloomberg

DPCA JV. The delivery of more high-end Nissan brand products and the launch of Dongfeng-Infinity is a landmark between the DFG-Nissan cooperation. Dongfeng-

Honda has also brought in new products to help the aging product line. We are seeing an upgrade of the cooperation between DFG with its international auto Company background giant counterparts, which increase the long-term growth potential for DFG. Dongfeng Motor Group Company Limited, through joint ventures, designs, manufactures, and markets diesel engines, Attractive valuation and increasing competitiveness, initiate BUY. light trucks, automobiles, castings, and related spare parts. Source: Bloomberg DFG is entering a new stage in 2015 thanks to the strong SUV product line and promoting cooperation with counterparts. We estimate that the sales volume of DFG will increase by 6%/13%/5% in FY14/15/16, and core net profit will grow by 5%/18%/11% to RMB11.0bn/13.0bn/14.4bn, respectively. We believe the 40% 2015PE discount compared to sector average is unjustified. Initiate with BUY and TP of HK$ 15.0, which represents 8.0x 2015PE. Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 124,036 37,263 58,382 61,888 64,913 Operating Profit 12,580 (547) 564 492 1,108 Reported Profit 9,092 10,528 12,771 12,965 14,393 Underlying Profit 9,092 10,528 12,771 12,965 14,393 Underlying EPS (CNY) 1.06 1.22 1.48 1.50 1.67 John Luo Core profit* 9,092 10,528 11,031 12,965 14,393 SFC CE No.: AVT518 DPS (CNY) 0.15 0.18 0.22 0.23 0.25 +852 2899 8300 BVPS (CNY) 6.26 7.33 8.59 9.87 11.29 [email protected] P/E (x) 8.7 7.5 6.2 6.1 5.5 Dividend Yield (%) 1.6 2.0 2.4 2.5 2.7

P/B (x) 1.5 1.2 1.1 0.9 0.8

* excluding the one-off effect from the PSA take-over Source: Guosen Securities(HK)

27 See the last page of this report for important disclosures

公司报告首次覆盖

东风集团股份 (489 HK) 中国 / 汽车 2015:SUV 之年 2015 年 2 月 11 日买入通过与五个国际汽车巨头的合资公司，东风集团股份提供一系列齐目标价 HK$15.00 全的汽车产品。2015 年将会是公司的 SUV 之年，我们预计公司将收盘价 (9 Feb 15) HK$11.34 在新产品的推动下，SUV 销量大幅增长 65%。随着与国际巨头的进 Upside/downside (%) 32.3 一步加深合作，公司将会取得更加有利的竞争优势。我们相信公司恒生指数 24521 目前相对行业平均水平 40%的折价是不合理的，首次覆盖给予买入总市值 (HK$/US$bn) 97.7/12.6 52 周最高/最低 (HK$) 9.60 - 15.20 评级以及 15.0 港元的目标价。日均成交额 (US$mn) 22.13

流通量（%） 33.14 全国第二大车厂，产品种类丰富多样资料来源: 彭博东风集团股份是全国第二大汽车集团——东风汽车公司旗下最主要的资产。 2014 年，公司总销量 270 万辆，占中国市场 11.6%的份额。公司 2014 年股价表现的销售结构中，85.6%为乘用车，14.4%为商用车，因而公司拥有相对平衡 HK$ 而丰富的产品线。公司已经于五家国际汽车巨头组成了多家合资公司。在 15.00 120% 2014 年，公司的乘用车销量中自主 / 日系/ 法系品牌的占比分别为 14.00 15%/59%/26%，品种也包含了轿车，MPV 以及 SUV。 13.00 110% 12.00 100%

11.00 2015 年为 SUV 产品之年 90% 10.00 东风集团股份是在国内主要的 SUV 生产商，我们预计 2014 年的市场份额 9.00 80% 约为 12.5%。2015 年，我们预计三款 A0 级 SUV 车型的销量将会同比增长 8.00 70% 5 倍，占公司新增销量的 64%。在 SUV 产品的强劲推动下，2015 年公司的 Feb-14 Oct-14 SUV 销量有望同比增长 65%，占总销量的 18%。 Price(LHS) Rel. to HSI(RHS)

与国际巨头加深合作在收购 PSA 集团 14%股份以后，东风集团股份成为 PSA 集团最大的股东之股票数据 1M 3M 12M 绝对回报 (%) 一，二者的合作势必升级，神龙汽车将会受益。而日产品牌引入更多高端 0.4 1.6 0.4 绝对回报 (US$, %) 0.4 1.6 0.4 车型、东风英菲尼迪公司的投产将使东风和日产的合作升级。东风本田也相对 HSI 回报 (%) (2.2) (2.5) (13.0) 已经在积极引进新的车型而克服老旧的产品线。总体而言，东风集团股份资料来源: 彭博

与各家外资合资方的合作都在深化，有助于增加公司的长期增长潜力。

公司簡介低估值+竞争力提升，首次覆盖评级为买入. 东风汽车集团有限公司设计、制造并销售柴油发动机、轻 2015 年，东风集团股份将会在 SUV 产品放量以及与外资合作升级的支撑型卡车、汽车、铸件及相关零件。

下进入新的增长阶段。我们预计公司在 FY14/15/16 年的销量将会增长资料来源: 彭博 6%/13%/5%，核心净利润会增长 5%/18%/11%至 110 亿/130 亿/144 亿人民

币。我们认为公司相对于行业平均水平 40%的折价是不合理的，首次覆盖给予买入评级，目标价 15.0 港元，相当于 2015 年 8.0x PE.

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 124,036 37,263 58,382 61,888 64,913 经营盈利 12,580 (547) 564 492 1,108 净利润 9,092 10,528 12,771 12,965 14,393 实际盈利 9,092 10,528 12,771 12,965 14,393 每股实际盈利 (CNY) 1.06 1.22 1.48 1.50 1.67 核心盈利* 9,092 10,528 11,031 12,965 14,393 每股股息 (CNY) 0.15 0.18 0.22 0.23 0.25 罗文安每股账面价值 (CNY) 6.26 7.33 8.59 9.87 11.29 证监会中央编号:AVT518 市盈率 (x) 8.7 7.5 6.2 6.1 5.5 +852 2899 8300 股息率 (%) 1.6 2.0 2.4 2.5 2.7 [email protected] 市净率 (x) 1.5 1.2 1.1 0.9 0.8

* 扣除收购 PSA 的一次性价值重估影响

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 28

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

A diversified and balanced product portfolio Introduction to DFG Dongfeng Motor Group (“DFG”, 0489.HK) is the main subsidiary of Dongfeng Motor Corporation (“DFMC”), which is the second largest auto OEM group in China with annual sales volume of 3.8m DFMC was the second units as of 2014. largest auto OEM group in China in 2014 Figure 3 DFMC (parent company of DFG) was the second largest OEM group in China in 2014

SAIC DFMC FAW CHANG'AN BAIC GAC BRILLIANCE GWM CHERY JAC BYD GEELY

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2014 2013

Source: CAAM, Guosen Securities(HK) Research

DFG took up 71% of DFMC’s DFG took up around 71% of total sales in DFMC in 2014. As of 2014, sales volume of DFG reached total sales volume in 2014 around 2.7m units, of which 2.3m (85.6%) were PVs and the rest 0.4m (14.4%) were CVs. In 2014, DFG has 11.6% share in China’s auto market, with PV taking up 11.9% share and CV 10.4%.

Figure 4 Product sales breakdown of DFG (2014) Figure 5 Market share of DFG (2014)

12.5% CV 14% 12.0% 11.9% 11.5% 11.6%

11.0%

10.5% 10.4% 10.0% PV 9.5% 86% Total PV CV

Source: Company, Guosen Securities(HK) Research Source: Company, Guosen Securities(HK) Research DFG is 66.86% held by DFMC, and 33.14% held by public shareholders. The shares held by DFMC are domestic shares, while the rest are H-shares. A state-owned auto OEM group

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 6 Shareholding structure of DFG Figure 7 Shareholding structure of DFG

H-share others 33% 33%

Dongfeng Domestic Motor share Corporati 67% on 67%

Source: Company, Guosen Securities(HK) Research Source: Company, Guosen Securities(HK) Research DFG produces commercial vehicles and passenger vehicles through a number of JVs and subsidiaries, including Dongfeng Honda, Dongfeng Passenger Vehicle, Dongfeng-Peugeot-Citron, Dongfeng Commercial Vehicle, Dongfeng Motor Co., Ltd (DFM), Dongfeng Commercial Vehicles Co., Ltd, etc.

Figure 8 Shareholding structure of Dongfeng Motor Group Dongfeng-Honda Dongfeng Passenger Dongfeng Honda Engine Vehicle Dongfeng Electric Dongfeng-Yueda-Kia 50% 50% 100% Vehicle 90.07% Dongfeng Off-road Dongfeng-Yulong 25% 东风汽车集团股份有限公司 vehicle 东风汽车公司 (DFMC) (DFG) 100% Dongfeng-Peugeot- 50% Dongfeng Motor 66.86% Dongfeng Motor 50% Citron PSA Corporation Group (0489.HK) Dongfeng-Nissan Diesel 10% 55% Honda (China) 100% Dongfeng Commercial 50% 75% Vehicle Dongfeng Chaoyang Dongfeng Liuzhou 50% Diesel Engine 东风汽车股份有限公司(DFAC) 东风汽车有限公司(DFM) Motor

Dongfeng Auto 60.1% Dongfeng Motor Dongfeng Renault Company (600006.SH) Company Limited

50% 51% 28.63% 100% 99.9% Dongfeng Auto Parts Dongfeng Nissan PV Dongfeng Cummins Zhengzhou Nissan and Components 65% Dongfeng Electronic Technology (600081.SH) Source: Company, Guosen Securities(HK) Research Formed JVs with five international giants DFG’s CV business has secured a leading position in the PRC commercial vehicle industry. Its commercial vehicle business is principally operated by Dongfeng Commercial Vehicles Co., Ltd. (currently a 55%:45% JV of DFG and Volvo) and Dongfeng Liuzhou Motor Co., Ltd (a 75%:25% JV of DFG and Volvo). In Jan. 2013, DFG restructured its CV business. DFG and its subsidiaries purchased the CV assets from DFM, and sold 45% stake in Dongfeng Commercial Vehicles to AB Volvo, Formed JVs with five forming another 55%:45% with Volvo to expand the CV business. international auto OEM giants DFG’s PV business is principally operated by Dongfeng Passenger Vehicles Company (domestic brand), and 5 JV companies: Dongfeng Motor Co., Ltd (“DFM”, a 50%:50% JV of DFG and Nissan), Dongfeng Peugeot Citroën Automobiles Company Ltd (DPCA, a 50%:50% JV of DFG and PSA),

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Dongfeng Honda Automobile Co., Ltd (a 50%:50% JV of DFG and Honda) and Dongfeng Liuzhou Motor Co., Ltd.. At December 2013, DFG and Renault S.A. set up another 50%:50% JV (Dongfeng- Renault) and it is expected to launch products by 2016.

Figure 9 Major business and subsidiaries of DFG(489.HK) Business Subsidiaries Note Dongfeng Commercial Vehicles 55%:45% JV of DFG:Volvo Commercial vehicle Dongfeng Liuzhou Motor 75%:25% JV of DFG:Volvo DFG (0489.HK) DFM 50%:50% JV of DFG:Nissan Dongfeng Peugeot Citroen 50%:50% JV of DFG:PSA Passenger vehicle Dongfeng Honda 50%:50% JV of DFG:Honda Dongfeng Liuzhou Motor 75%:25% JV of DFG:Volvo Dongfeng Renault 50%:50% JV of DFG:Renault Source: Company, Guosen Securities(HK) Research

Thanks to a wide range of products including sedan, SUV, MPV, trucks and buses, DFG has outperformed the auto industry with 14.2% sales CAGR from 2009 to 2015, as compared with 11.5% for the industry.

Figure 10 Sales breakdown of DFG (2014, units) Figure 11 Sales growth of DFG VS industry

Total 2,733,508 45% PV 2,339,120 40% Sedan 1,482,683 35% SUV 496,844 30% MPV 357,139 25% Cross PV 2,454 20% CV 394,388 15% LDT 154,160 10% HDT 145,819 5% MDT 49,185 0% Bus 44,040 -5% 2010A 2011A 2012A 2013A 2014E 2015E 2016E Mini-truck 1,184 -10% DFG Industry

Source: Company, Guosen Securities(HK) Research Source: CAAM, Guosen Securities(HK) Research A diversified product portfolio with strong market place According to the company, as at 31 December 2013, DFG produced 41 series of CVs, including 34 series of trucks and 7 series of buses, and 43 series of PVs, including 28 series of sedan, 7 series of Diversified product protfolio MPV and 8 series of SUV. We estimate that DFM accounted for around 44% of total sales volume in 2014 in DFG, while Dongfeng-PSA (Dongfeng-Peugeot-Citroen) another 26%. In the PV segment, we estimate that the proportion of Japanese JVs accounted for 54% of DFG’s total sales volume in 2014, while French brand accounts for 30%.

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 12 Brand name structure of DFG’s PV (2014) Figure 13 Sales volume contribution of DFG’s subsidiaries (2014)

100% Dongfeng 90% Dongfeng 27% 24% 25% 26% 30% CV 80% Liu zhou 5% 70% Dongfeng 10% 60% PV 50% 3% 63% 61% 59% 40% 66% 54% 30% Dongfeng 20% Honda 10% 12% 13% 14% 15% 16% 0% 8% 2010A 2011A 2012A 2013A 2014E Dongfeng DFM 44% Domestic Japanese French PSA 26% Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research In the China auto space, DFG is strong in the A class/ B class sedan market, and the B class SUV market. DFG’s SUV models enjoy higher ASP and sales volume compared to most sedan models. The company was also strong in the MPV market, where it took up 20.7% share in 2013. Strong position in China’s PV landscape Figure 14 Major PV product lines of DFG

ASP (RMB '000) DFG Products 450

400

350

300

250

200 Sedan

150 SUV

100 MPV

50 Sales vol. - 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000

Note: on consolidated basis Source: Guosen Securities(HK) Research auto database Annual capacity of 3.28m units in 2014

Annual capacity of 3.28m We estimate that DFG has a total year-end capacity of 3.28m units as of 2014, of which PV units in 2014 accounted for 2.68m, or 81.7% of the total capacity. DFM, Dongfeng-PSA, and Dongfeng-Honda have PV capacity of 1,260k/ 700k/ 360k units, accounting for 44%/24%/13% of DFG’s total PV capacity, respectively. DFM also has 250k units capacity for CVs, mainly for Dongfeng brand trucks. However, these asset were bought by DFG and some other subsidiaries in 2013. Dongfeng Commercial Vehicle has capacity of 240k units, mainly producing heavy-duty-trucks (HDT).

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 15 PV capacity of DFG's main subsidiaries (2014E) Figure 16 CV Capacity of DFG’s main subsidiaries (2014E) Dongfeng Dongwo Dongfeng Dongfeng Infinity, (Hangzho Special PV, 160 200 u) Truck , Vehicle 1 Automoti Dongfeng Dongfeng ve, 10 Honda JV, Liu zhou 360 DFM, Automobi 1,260 le, 100

Dongfeng Dongfeng DFM, PSA JV, Liu zhou, Dongfeng 250 700 200 CV, 240 Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research 2015: year of SUVs A traditional SUV giant DFG was a big player in the SUV space. Dongfeng Honda’s CR-V model was the first localize SUV model in China and has long been the best-seller SUV model for many years. As of 2013, DFG has 13.0% market share in China’s SUV market. In 2014, we estimate that DFG was the second largest SUV provider after GWM, taking 12.4% share in the SUV market. We estimate that DFG was the second largest SUV Figure 17 Estimated SUV market share by listed company (2014) provider in 2014 GWM (2333.HK), 13.1%

Others, 34.1% DFG (0489.HK), 12.4%

BYD (1211.HK), 2.6% SAIC (600104.SH), 11.1% GAC (2238.HK), 7.0% CHANGAN BAIC (1958.HK), AUTO(000625.SZ) 8.9% , 10.9% Note: on consolidated basis Source: Guosen Securities(HK) Research auto database

In 2014, we estimate that SUV accounted for 21% of DFG’s total PV sales. The star SUV models include X-Trail and Qashqai by Dongfeng-Nissan, 3008/2008 by Dongfeng- Peugeot, CR-V by Dongfeng Honda. As of 2014, we estimate that these models account for 98% of the total SUV sales by DFG.

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 18 DFG market share by product type (2013A) Figure 19 Major SUV products by DFG (2014E)

Others 25.0 2008 2% 20.7 9% 20.0 CR-V 3008 15.0 13.0 34% 11.8 12.1 14%

10.0

5.0 0.3 Qashqai - Passenger sedan MPV SUV Cross type 18% X-Trail Vehicles 23%

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research Rising A0 class SUV stars: C3-XR/X-RV/2008 to contribute 64% incremental sales volume in 2015 We believe that the small SUV market will be the star segment in China’s 2015 auto market, and DFG has reacted fast to capture this trend. A0 class SUV will be the highlight in 2015 By the end of 2014, Dongfeng Honda launched the brand-new small SUV model X-RV, and Dongfeng Citroen launched its first SUV model C3-XR. Together with 2008 by Dongfeng-Peugeot, DFG has three A0 class SUV models. We believe these three models will be crucial for DFG in 2015, as we estimate that the total sales volume of them will increase from 47K in 2014 to 251k units in 2015, contributing to 64% of the total sales volume net adds for DFG in the year.

Figure 20 Dongfeng-Citroen – C3-XR Figure 21 Dongfeng-Honda X-RV

Source: AutoHome, Guosen Securities(HK) Research Source: AutoHome, Guosen Securities(HK) Research Driven by strong sales volume growth in these three models, we estimate that the share of A0 class SUVs in DFG’s total sales will increase from 0% in 2013 to 9% in 2016.

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 22 Sales volume shares of DFG by product type (2013) Figure 23 DFG market share by product type (2016E) Others Sedan: A0 Others Sedan: A0 8% 2% 9% 0% CV CV 10% Sedan: A 15% 33% Sedan: A 42% MPV MPV 13% 11% SUV: B SUV: B 0% 2% Sedan: B SUV: A SUV: A0 Sedan: B SUV: A SUV: A0 7% 15% 0% 7% 17% 9% Source: Company, CAAM, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research SUV sales will grow by 65% in 2015 Apart from the three A0 class SUV models, other SUV models are seeing increasing momentum in 2015. In 2014, the new generation of X-Trail by Dongfeng-Nissan was a huge success, with monthly sales volume increased from around 1k in 2013 to 10k in 2014. In 2015, Dongfeng-Nissan will launch the Expect SUV sales volume to next generation of Qashqai, whose sales volume dropped by 30% in 2014. Judging from the soar by 65% in 2015 success of X-Trail, we estimate that the new Qashqai will increase by 35% in 2015 to 118k units.

Figure 24 Sales volume of X-Trail

16,000

14,000 ~10,000 units/ month 12,000

10,000

8,000

6,000

4,000

2,000 ~1,000 units/ month

0 2013-01 2014-01

Source: Company, CAAM, Guosen Securities(HK) Research

Helped with new SUV models, we believe that DFG will record a soar in its SUV sales in 2015. We estimate that the total SUV sales volume will increase by 65%, from 490k units in 2014 to 806k units in 2015, accounting for 18% of DFG’s total sales.

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 25 Segment sales volume - SUV will growth 65% in 2015 Figure 26 DFG PV product sales breakdown

70% 1,600,000 1,400,000 60% 1,200,000 50% 1,000,000 40% 800,000

30% 600,000 400,000 20% 200,000 10% - 2010A 2011A 2012A 2013A 2014E 2015E 2016E 0% 2012A 2013A 2014E 2015E 2016E Sedan MPV SUV -10% PV Sedan MPV SUV

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research Closer cooperation with international auto giants DPCA: from JV cooperation to largest shareholder in PSA DPCA, the first Sino-French auto OEM JV Dongfeng-Peugeot-Citroen (“DPCA”) was the first French auto OEM JV in China. As of end-2014, DPCA had 14 localized models in China, of which 7 were from Dongfeng-Peugeot and 7 from Dongfeng-Citroen. Although the model portfolio was quite diversified, 75% of the sales volume come from the A class sedan segment in 2014.

Figure 27 Sales volume breakdown of DPCA (2014) Figure 28 Sales volume breakdown of DPCA (2014) Others Others Peugeot Peugeot SUV: A Citoen C3- 1% 1% 3008 508 10% XR 10% SUV: A0 10% 3% 6% Citroen Peugeot C4L 408 8% 8% Sedan: B Peugeot 8% Citroen 308 Elysee 11% 15% Peugeot Citroen C- 307 Quatre Peugeot Peugeot1% Sedan: A 11% Citroen C5 2008 301 75% 4% 10% 8%

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research DFG become the largest shareholder of PSA in 2014 In Apr. 2014, DFG acquired 14.1% share in PSA group for a consideration of EUR 800m. Together with the French government and the Peugeot family, DFG will be the largest shareholder of PSA. We believe this alliance with two OEM giants will further release the potential of their cooperation. Enhanced coorporation They will further enhance the collaboration in research, including joint establishment of a research through the acquisition of shares in PSA Group and development center in China. DFG and PSA would establish a new 50%:50% sales JV, DPCA-International, to explore the opportunities in the ASEAN region. More importantly, the sales channel would be optimized with the combination of DPCA and Dongfeng’s own brand, Dongfeng Passenger Vehicle.

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Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

It was reported that1 DFG and PSA has agreed to expand and deepen their cooperation in the DPCA JV, and aim to sell 1.5 million vehicles under Dongfeng, Peugeot and Citroen brands per year starting from 2020. It is also reported that 2 DPCA would launch 11 brand new models in 2015- 2018, which is almost 80% increase compared to the current 14 models based on our data. DPCA also announced the launch of its second-generation engines, and the introduction of new gearbox production lines. We expect to see a fuller product line and higher competitive for future models. Overall speaking, enhanced cooperation between DFG and PSA will set to create bilateral benefits for the two giants. Kicked-off a strong SUV cycle starting from 2014 DPCA used to have only sedan models and most sales come from A class sedans. Starting from 2013, the company entered into a strong product cycle in SUVs. As of end-2014, Dongfeng-PSA already had three SUV models. Strong SUV cycle since 2013 for DPCA We expect that SUV will be the main sales driver for DPCA from 2014 to 2016, and the sales volume CAGR for SUV products from 2014-2016 will be 57%. We forecast that the share of SUV products in DPCA’s total sales volume will increase from 16% in 2014 to 32% in 2016.

Figure 29 Segment sales volume forecast of DPCA Figure 30 Sales portfolio forecast of DPCA (2016E) Others 1,000,000 SUV: A 4% 900,000 10% 800,000 700,000 600,000 500,000 SUV: A0 400,000 22% 300,000 200,000 Sedan: A 100,000 58% - 2010E 2011E 2012E 2013E 2014E 2015E 2016E Sedan: B Sedan: A Sedan: B SUV: A0 SUV: A Others 6%

Source: Company, CAAM, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research Enhanced cooperation with DF-Nissan and DF-Honda Dongfeng-Nissan: exploring high-end products DFM (including Dongfeng-Nissan PV and DFAC) is the largest JV of DFG, accounting for 44% of DFG’s total sales in 2014. The models of Dongfeng-Nissan cover A-class sedan (Sylphy), A-class SUV (X-Trail, Qashqai), B-class sedan (Teana), A-class sedan (Sunny, Tiida) and B-class SUV (Murano). Nissan was the largest Japanese auto brand in As of 2014, Sylphy, the best-seller Japanese A-class sedan, accounted for 32% of total sales in China in 2014 Dongfeng-Nissan.

1 http://www.yicai.com/news/2014/02/3482317.html 2 http://auto.sina.com.cn/news/2014-12-24/07001372221.shtml Guosen Securities (HK) 37

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 31 Sales breakdown of Dong-feng Nissan (2014) Sunny Murano Others 7% 0% 8% Sylphy 32% Qashqai 9%

Tiida 10% Venucia R50/D50 Teana X-Trail 10% 12% 12% Source: Company, CAAM, Guosen Securities(HK) Research

Nissan sold 1.22m units of cars in China in 2014, the most among the Japanese “Big Three” auto OEMs. Dongfeng-Nissan was also the biggest among all Japanese auto JVs in China with over 952k unit sales in 2014.

Figure 32 Sales volume of Honda/ Toyota/ Nissan in China (2014) Figure 33 Sales volume of main Japanese auto JVs

Dongfeng-Nissan FAW-Toyota Nissan GAC-Honda GAC-Toyota Dongfeng-Honda Toyota Changan-Suzuki Changhe-Suzuki FAW-Mazda Changan-Mazda Honda GAC-Mitsubishi Sales vol. ('000 units) Zhengzhou Nissan Sales vol. ('000 untis)

0 200 400 600 800 1000 1200 1400 - 200 400 600 800 1,000

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research Compared to Honda and Toyota, Nissan has more localized models in China. Based on our data, Nissan has a total of 15 models in China, as compared to 13 models by each of Toyota and Honda.

Figure 34 Nissan has a wide range of products in China OEMs Sedan:A0 Sedan:A Sedan:B Sedan:C SUV:A0 SUV:A SUV:B SUV:D MPV:A MPV:B Total Nissan 1 6 1 1 3 2 1 15 Dongfeng-Nissan 1 6 1 2 1 11 Zhengzhou-Nissan 1 1 1 3 Dongfeng-Infinity 1 1 Toyota 2 3 2 1 1 2 1 1 13 FAW-Toyota 1 2 1 1 1 1 1 8 GAC-Toyota 1 1 1 1 1 5 Honda 1 4 3 2 1 2 13 GAC-Honda 1 2 2 1 1 7 Dongfeng-Honda 2 1 1 1 1 6 Total 4 13 6 2 2 5 4 1 2 2 41 Source: Company, CAAM, Guosen Securities(HK) Research

Compared with Honda and Toyota, Nissan products has lower failure rate (models with annual sales volume < 50,000 units) in China. Dongfeng-Nissan’s Sylphy was the most successful A-class sedan among Japanese brands, which we think is crucial for the company to maintain a solid market position and the foundation for the company to launch more upgraded models.

Guosen Securities (HK) 38

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 35 Product sales volume and ASP of Nissan/Honda/Toyota JVs in China

ASP ('000 RMB) 500

450

400

350

300

250

200

150

100

Sales Vol. - - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

DF-Nissan DF-Honda FAW-Toyota GAC-Toyota GAC-Honda

Source: Company, CAAM, Guosen Securities(HK) Research

Two new models in 2015 In 2015, Dongfeng-Nissan will launch the next generation Murano. Murano was the first crossover SUV that Nissan introduced to the U.S. and Canada. However, due to high price and low brand name recognition, the sales performance of the current generation Murano was very poor in China (2014 total sales merely 208 units). On the contrary, the average sales volume for the top 10 B- class SUVs in China was 42k units in 2014. With the new generation, we estimate that the ASP of new Murano will decrease while options will increase, hence the sales performance of Murano is expected to improve. Our sales estimation of 15k units in 2015 might be conservative given the growing demand in B-class SUV market and enhanced competitive edge by the new generation model.

Figure 36 Dongfeng-Nissan Murano Figure 37 Sales volume of Murano Comparable (2014)

Model Sales Audi Q5 106,999 Toyota Highlander 84,490 Hyundai new SantaFe 71,424 Zoyte T600 64,383 Benz GLK300 47,172 JMC Yusheng 26,855 Buick Envision 19,683 Hawtai Baoliger 17,267 Toyota Prado 12,635 Gonow Aoxuan 9,330 Average 46,024

Source: AutoHome, Guosen Securities(HK) Research Source: CAAM, Guosen Securities(HK) Research Milestone cooperation with the launch of Dongfeng-Infinity We believe 2015 would be the milestone for the DFG Nissan cooperation, thanks to the launch of Dongfeng-Infinity was a milestone for the Dongfeng Dongfeng-Infinity JV by end-2014. Hence, Infinity will be the first Japanese high-end auto brand to Nissan cooporation be localized in China.

Guosen Securities (HK) 39

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Dongfeng-Infinity has launched the first localized model: Q50L, which we believe is a very competitive model in the C-class sedan market. In order to capture to booming China SUV market, we believe that Dongfeng-Infinity will launch the first SUV model, QX50, in as early as 1H15.

Figure 38 Dongfeng-Infinity Q50L Figure 39 Infinity QX50

Source: AutoHome, Guosen Securities(HK) Research Source: AutoHome, Guosen Securities(HK) Research We expect that sales volume of Dongfeng-Nissan JV will increase by 5% to 996k units in 2015. However, thanks to increasing mix of higher ASP products, we expect total revenue will increase by 20% (including Dongfeng-Infinity).

Figure 40 Sales volume forecast of Dongfeng-Nissan (units) Model 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E Sylphy 96,175 142,511 125,427 133,900 259,545 300,058 255,049 242,297 X-Trail 24,058 32,011 28,264 22,869 15,327 114,459 137,351 144,218 Teana 108,504 140,842 156,165 90,072 106,220 109,290 92,897 88,252 Venucia R50/D50 - - - 41,805 105,425 99,245 84,358 75,922 Tiida 155,850 153,906 111,908 144,215 129,346 92,465 73,972 70,273 Qashqai 33,877 62,075 111,304 105,143 124,589 87,448 118,055 123,958 Others 100,536 129,654 118,566 96,224 72,433 79,165 83,123 108,060 Sunny - - 156,954 137,820 112,963 69,372 58,966 58,966 Murano - - - 947 381 208 41,808 45,989 Bluebird ------20,000 22,000 Infinity Q50L ------20,000 22,000 Infinity QX50 ------10,000 11,000 Source: Company, CAAM, Guosen Securities(HK) Research Dongfeng-Honda: bringing-in more competitive products Dongfeng-Honda is one of the JVs that Honda formed in China with the other being GAC-Honda. As of 2014, sales volume of Dongfeng-Honda was down by 4% to 308k units. The sales volume gap between GAC-Honda and Dongfeng-Honda has widened from 34k units in 2012 to 172k units in Dongfeng-Honda also 2014. bringing new models Due to the lack of new models and the aging star model (CR-V), Dongfeng-Honda’s sales performance was poor in 2014 (-4%). However, we believe this situation will revert in 2015, thanks to the introduction of the small X-RV model and the new generation of B-class sedan Spirior.

Guosen Securities (HK) 40

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 41 Dongfeng-Honda sales breakdown (2014) Figure 42 Sales volume of Dongfeng-Honda and GAC-Honda Elysion Spirior X-RV 600,000 Ciimo 2% 2% 0% 4% 500,000 Civic 400,000 17% 300,000

200,000

CR-V 100,000 55% - 2012 2013 2014

Jade Dongfeng-Honda GAC-Honda 20%

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research X-RV is the first small SUV model by Dongfeng-Honda, and it is the twin model of GAC-Honda’s Vesel. We are positive on X-RV’s sales performance because: 1) The small SUV market is booming, replacing A-class sedans 2) Stronger SUV brand name awareness of Dongfeng-Honda thanks to the star CR-V models We estimate that the sales volume of X-RV will be 85k units, 19% of Dongfeng-Honda’s total sales or 61% of its sales net add in 2015.

Figure 43 Dongfeng-Honda new Spirior Figure 44 Dongfeng-Honda X-RV

Source: AutoHome, Guosen Securities(HK) Research Source: AutoHome, Guosen Securities(HK) Research Dongfeng-Honda will also launch the next generation model of Spirior, the B-class sedan. The new generation of Spirior has upgraded both its powertrain system but also other configurations, making it a competitive model in the B-class sedan market. We notice that the average sales volume of Japanese B-class sedans is around 88k units in 2014, and believe our 2015E estimate of 52k units is conservative.

Guosen Securities (HK) 41

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 45 Sales estimate of Dongfeng-Honda in 2015 Figure 46 Sales volume of Spirior comparable (units)

Elysion Model 2011 2012 2013 2014 Ciimo Camry 143,703 145,402 177,649 139,401 Civic

Spirior Teana 156,165 90,072 106,220 97,949

Jade Accord 160,735 104,114 118,920 79,303

X-RV Reiz 65,523 59,846 64,553 36,882

CR-V Average 131,532 99,859 116,836 88,384

- 50,000 100,000 150,000 200,000 Spirior 17,376 12,417 6,551 3,447

2015 2014

Source: Company, CAAM, Guosen Securities(HK) Research Source: Company, CAAM, Guosen Securities(HK) Research Thanks to the new X-RV and Spirior, we estimate that Dongfeng-Honda will record a strong sales growth of 41% in 2015 to 435k units. Moreover, the product portfolio of Dongfeng-Honda will become more balanced, as the sales volume contribution of CR-V will decrease from 54% in 2010 to 36% in 2016.

Figure 47 Sales estimate of Dongfeng-Honda's major models

200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Elysion Jade CR-V Spirior Ciimo Civic X-RV

Source: Company, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 42

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Key assumptions Modeling revenue and attributable profits from JVs DFG consolidate the revenue in the main subsidiaries (mainly Dongfeng Commercial Co., Ltd and Dongfeng Liuzhou Auto), and record the attributable profits from JVs. We believe these two factors are most important in modeling DFG.

Figure 48 Sales volume estimation of DFG’s main subsidiaries Sales Volume ('000 units) 2010A 2011A 2012A 2013A 2014E 2015E 2016E Total Sales 2,015,232 2,222,093 2,147,962 2,558,921 2,720,194 3,065,358 3,225,337 DFM 961,757 1,127,630 1,036,205 1,198,605 1,190,819 1,246,644 1,276,553 - Dongfeng Nissan PV JV 660,999 808,588 772,995 926,229 951,710 995,579 1,012,935 # Sylphy 142,511 125,427 133,900 259,545 300,058 255,049 242,297 # X-Trail 32,011 28,264 22,869 15,327 114,459 137,351 144,218 # Qashqai 62,075 111,304 105,143 124,589 87,448 118,055 123,958 # Tiida 153,906 111,908 144,215 129,346 92,465 73,972 70,273 # Teana 140,842 156,165 90,072 106,220 109,290 92,897 88,252 # Sunny - 156,954 137,820 112,963 69,372 58,966 58,966 # Bluebird - - - - - 20,000 22,000 # Murano - - 947 381 208 41,808 45,989 # Infinity Q50L - - - - - 20,000 22,000 # Infinity QX50 - - - - - 10,000 11,000 # Venucia R50/D50 - - 41,805 105,425 99,245 84,358 75,922 # Others (Venucia & others) 129,654 118,566 96,224 72,433 79,165 83,123 108,060 - DFAC 300,758 319,042 263,210 272,376 239,109 251,064 263,618 -- PV (Zhengzhou Nissan SUV/MPV) 106,358 120,592 102,716 117,356 107,870 113,264 118,927 # MPV 36,159 40,998 40,975 49,893 46,400 48,721 51,157 # SUV 9,270 10,511 6,658 5,398 5,020 5,271 5,535 # Pick-up (CV) 60,929 69,083 55,083 62,065 56,449 59,271 62,235 -- CV 194,400 198,450 160,494 155,020 131,239 137,801 144,691 -- Dongfeng Kummins Engins 230,541 222,664 163,296 181,146 192,876 202,520 212,646 Dongfeng CV 287,000 230,000 161,311 181,233 157,000 164,850 164,850 Dongfeng Liu zhou Automobile 104,500 144,858 168,036 227,590 280,028 329,382 388,407 - PV (MPV) 33,800 102,268 136,638 180,189 240,899 289,079 346,895 - CV 70,700 42,590 31,398 47,401 39,129 40,303 41,512 Dongfeng PSA JV 373,366 404,139 440,028 550,007 704,016 820,986 880,182 # Peugeot 3008 - - - 52,318 67,791 77,960 89,654 # Peugeot 508 - 15,285 26,926 26,641 24,679 23,445 23,211 # Peugeot 408 41,981 53,619 53,533 55,283 63,921 62,003 61,383 # Peugeot 308 - 9,399 67,583 81,634 94,466 91,632 90,716 # Peugeot 307 65,506 50,489 34,748 15,548 11,510 11,165 11,053 # Peugeot 301 - - - 5,034 70,753 68,630 67,944 # Peugeot 207/208 41,878 45,649 33,437 33,227 - - - # Peugeot 2008 - - - - 44,977 85,456 98,275 # Citroen C5 35,001 33,678 35,242 39,021 33,872 32,178 31,857 # Citroen C-Quatre 106,357 120,013 117,042 101,550 92,517 89,741 88,844 # Citroen Elysee 71,819 65,474 55,559 72,212 126,479 122,685 121,458 # Citroen C4L - - - 57,185 65,896 69,191 72,650 # Citroen C2 8,111 10,468 14,645 9,997 - - - # Citoen C3-XR - - - - 1,246 80,990 93,139 # Others 2,713 65 1,313 357 5,909 5,909 30,000 Dongfeng Honda JV 260,456 255,466 282,183 321,409 308,224 435,406 443,850 # Elysion - - 6,866 12,510 7,634 7,252 7,180 # Jade - - - 27,436 63,212 66,373 69,691 # CR-V 140,053 160,003 169,037 189,972 168,184 164,820 159,876 # Spirior 19,403 17,376 12,428 7,462 5,783 52,047 50,486 # Ciimo - - 14,089 15,087 11,014 9,913 9,417 # Civic 101,198 78,087 79,763 68,942 51,871 50,315 49,812 # X-RV - - - - 526 84,686 97,389 # Others ------Dongfeng PV 28,153 60,000 60,199 80,077 80,107 68,091 71,495 Dongfeng Honda Engine 386,000 362,000 316,000 435,000 456,000 433,200 411,540 Source: Company, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 43

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

The following table shows the estimates of sales volume growth by main models.

Figure 49 Sales volume estimation of DFG’s main subsidiaries Sales volume growth(%) 2011A 2012A 2013A 2014E 2015E 2016E Total Sales 19% 6% 13% 5% 13% 5% DFM 16% -1% 5% 2% 5% 2% - Dongfeng Nissan PV JV 22% -4% 20% 3% 5% 2% # Sylphy -12% 7% 94% 16% -15% -5% # X-Trail -12% -19% -33% 647% 20% 5% # Qashqai 79% -6% 18% -30% 35% 5% # Tiida -27% 29% -10% -29% -20% -5% # Teana 11% -42% 18% 3% -15% -5% # Sunny -12% -18% -39% -15% 0% # Bluebird 10% # Murano -60% -45% 20000% 10% # Infinity Q50L 10% # Infinity QX50 10% # Venucia R50/D50 152% -6% -15% -10% # Others (Venucia & others) -9% -19% -25% 9% 5% 30% - DFAC 6% -17% 3% -12% 5% 5% -- PV (Zhengzhou Nissan SUV/MPV) 13% -15% 14% -7% 5% 5% # MPV 0% 22% -7% 5% 5% # SUV -7% 5% 5% # Pick-up (CV) -7% 5% 5% -- CV 2% -19% -3% -15% 5% 5% -- Dongfeng Kummins Engins -3% -27% 11% 6% 5% 5% Dongfeng CV -20% -30% 12% -13% 5% 5% Dongfeng Liu zhou Automobile 39% 16% 35% 23% 18% 18% - PV (MPV) 203% 34% 32% 34% 20% 20% - CV -40% -26% 51% -17% 3% 3% Dongfeng PSA JV 8% 9% 25% 28% 17% 7% # Peugeot 3008 32% 15% 15% # Peugeot 508 76% -1% 0% -5% -1% # Peugeot 408 28% 0% 3% 15% -3% -1% # Peugeot 308 619% 21% 20% -3% -1% # Peugeot 307 -23% -31% -55% -60% -3% -1% # Peugeot 301 1300% -3% -1% # Peugeot 207/208 9% -27% -1% -100% # Peugeot 2008 90% 15% # Citroen C5 -4% 5% 11% -12% -5% -1% # Citroen C-Quatre 13% -2% -13% -10% -3% -1% # Citroen Elysee -9% -15% 30% 80% -3% -1% # Citroen C4L 23% 5% 5% # Citroen C2 29% 40% -32% -100% # Citoen C3-XR 6400% 15% # Others -98% 1920% -73% -100% 0% 0% Dongfeng Honda JV -2% 10% 14% -4% 41% 2% # Elysion 82% -37% -5% -1% # Jade 130% 5% 5% # CR-V 14% 6% 12% -15% -2% -3% # Spirior -10% -28% -40% -48% 800% -3% # Ciimo 7% -30% -10% -5% # Civic -23% 2% -14% -28% -3% -1% # X-RV 16000% 15% # Others 5% 5% 5% Dongfeng PV 113% 0% 33% 0% -15% 5% Dongfeng Honda Engine -6% -13% 38% 5% -5% -5% Total Sales 10% -3% 19% 6% 13% 5% Source: Company, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 44

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

The following exhibit shows the result of our estimation by product type.

Figure 50 Sales volume estimates by product type By type 2010A 2011A 2012A 2013A 2014E 2015E 2016E Sedan: A0 49,989 56,117 48,082 43,224 - - - Sedan: A 683,278 771,370 880,057 1,079,754 1,149,567 1,067,621 1,042,736 Sedan: B 195,246 222,504 164,668 179,344 173,624 220,567 215,804 SUV: A0 - - - - 46,749 251,132 288,802 SUV: A 243,409 310,082 303,707 387,604 442,902 503,457 523,240 SUV: B - - 947 381 208 51,808 56,989 MPV 69,959 143,266 184,479 270,028 358,145 411,424 474,922 CV 552,100 471,040 353,203 383,654 327,368 342,954 351,053 Others 221,449 247,714 212,819 214,932 221,630 216,395 271,791 Source: Company, CAAM, Guosen Securities(HK) Research

By multiplying the estimated representing MSRP by each model, we get the revenue estimation of major subsidiaries.

Figure 51 Retail revenue estimation of DFG’s major subsidiaries Revenue estimation (RMB m) 2010A 2011A 2012A 2013A 2014E 2015E 2016E DFM 110,374 126,088 112,389 128,473 138,496 162,568 167,362 - Dongfeng Nissan PV JV 84,879 98,727 89,686 104,526 117,270 140,281 143,961 # Sylphy 14,223 12,518 13,363 25,903 29,946 25,454 24,181 # X-Trail 6,972 6,156 4,981 3,338 24,929 29,915 31,411 # Qashqai 8,678 15,560 14,699 17,418 12,225 16,504 17,329 # Tiida 19,592 14,246 18,359 16,466 11,771 9,417 8,946 # Teana 25,042 27,766 16,015 18,886 19,432 16,517 15,691 # Sunny - 12,996 11,411 9,353 5,744 4,882 4,882 # Bluebird - - - - - 2,400 2,640 # Murano - - 284 114 62 12,542 13,797 # Infinity Q50L - - - - - 6,196 6,816 # Infinity QX50 - - - - - 4,000 4,400 # Venucia R50/D50 - - 2,876 7,253 6,828 5,804 5,223 # Others (Venucia & others) 10,372 9,485 7,698 5,795 6,333 6,650 8,645 - DFAC 25,496 27,361 22,703 23,948 21,225 22,287 23,401 -- PV 11,822 13,404 11,417 13,044 11,990 12,589 13,219 -- CV 13,647 13,931 11,267 10,882 9,213 9,674 10,157 -- Dongfeng Kummins Engins 27 26 19 21 23 24 25 0 Dongfeng CV 80,360 64,400 45,167 50,745 43,960 46,158 46,158 Dongfeng Liu zhou Automobile 15,999 14,143 13,795 19,391 21,075 23,960 27,382 - PV (MPV) 1,859 5,625 7,515 9,910 13,249 15,899 19,079 - CV 14,140 8,518 6,280 9,480 7,826 8,061 8,302 Dongfeng PSA JV 40,430 45,348 50,713 68,264 85,757 101,130 108,218 # Peugeot 3008 - - - 8,983 11,640 13,386 15,394 # Peugeot 508 - 2,777 4,892 4,841 4,484 4,260 4,217 # Peugeot 408 6,041 7,716 7,703 7,955 9,198 8,922 8,833 # Peugeot 308 - 995 7,157 8,645 10,004 9,704 9,607 # Peugeot 307 6,341 4,887 3,364 1,505 1,114 1,081 1,070 # Peugeot 301 - - - 426 5,993 5,813 5,755 # Peugeot 207/208 3,132 3,415 2,501 2,485 - - - # Peugeot 2008 - - - - 6,148 11,682 13,434 # Citroen C5 6,647 6,395 6,692 7,410 6,432 6,111 6,050 # Citroen C-Quatre 11,465 12,937 12,617 10,947 9,973 9,674 9,577 # Citroen Elysee 6,018 5,487 4,656 6,051 10,599 10,281 10,178 # Citroen C4L - - - 8,286 9,548 10,026 10,527 # Citroen C2 568 733 1,025 700 - - - # Citoen C3-XR - - - - 150 9,719 11,177 # Others 217 5 105 29 473 473 2,400 Dongfeng Honda JV 47,435 48,038 52,512 60,235 56,830 78,673 79,129 # Elysion - - 2,017 3,675 2,243 2,131 2,109 # Jade - - - 4,329 9,975 10,474 10,997 # CR-V 29,103 33,249 35,126 39,476 34,949 34,250 33,222 # Spirior 5,196 4,653 3,328 1,998 1,549 13,938 13,520 # Ciimo - - 1,688 1,807 1,319 1,188 1,128 # Civic 13,136 10,136 10,353 8,949 6,733 6,531 6,466 # X-RV - - - - 63 10,162 11,687 Dongfeng PV 1,971 4,200 4,214 5,605 5,607 4,766 5,005 Dongfeng Honda Engine 6,948 6,516 5,688 7,830 8,208 7,798 7,408 Source: Company, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 45

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

We estimate the revenue of main subsidiaries by dividing the 17% VAT and 4% dealer GPM. Then we estimate the net profit of JVs. We can also get the revenue from Dongfeng CV and Dongfeng Liuzhou Auto, which consisted most part of the consolidated revenue for DFG.

Figure 52 Revenue estimation of DFG’s major subsidiaries Estimated revenue of main JVs (RMB m) Ex 17%VAT+4%dealer 2010A 2011A 2012A 2013A 2014E 2015E 2016E Stake @ GPM 21% 50% DFM 21% 91,219 104,205 92,883 106,176 114,459 134,353 138,316 50% Dongfeng PSV JV 21% 33,413 37,478 41,912 56,416 70,873 83,579 89,437 50% Dgonfeng Honda JV 21% 39,202 39,701 43,399 49,781 46,967 65,019 65,396 50% Dongfeng Honda Engine 17% 5,938 5,569 4,862 6,692 7,015 6,665 6,331 Total 169,772 186,952 183,055 219,066 239,315 289,616 299,480 VS disclosed in footnote 227,495 237,570 estimated @ a % of disclosed 80% 92% 55% Dongfeng CV 21% 66,413 53,223 37,328 41,938 36,331 38,147 38,147 75% Dongfeng Liu zhou Automobile 21% 13,222 11,688 11,401 16,025 17,418 19,802 22,629 100% Dongfeng PV 21% 1,629 3,471 3,483 4,633 4,634 3,939 4,136 OR Consolidating CV 78,099 60,263 42,518 49,773 42,798 44,809 45,009 PV 3,165 8,120 9,693 12,823 15,584 17,079 19,904 Total Revenue (>50%) consolidated 81,264 68,382 52,211 62,596 58,382 61,888 64,913 Note: In 2012, Dongfeng CV and Dongfeng Liuzhou are included in JVs. Note: The consolidating part before 2013A are for estimation use, as the shareholding has changed in Dongfeng CV and Dongfeng Liuzhou Source: Guosen Securities(HK) Research

Figure 53 Revenue growth of main JVs Figure 54 NPM estimate of main JVs Revenue growth of main JVs(%) 2011A 2012A 2013A 2014E 2015E 2016E Main JV NPM estimates(%) 2011A 2012A 2013A 2014E 2015E 2016E DFM 14% -11% 14% 8% 17% 3% DFM 13.0% 10.0% 9.5% 9.0% 8.0% 8.5% Dongfeng PSV JV 12% 12% 35% 26% 18% 7% Dongfeng PSV JV 7.0% 8.0% 8.5% 8.0% 8.5% 8.5% Dgonfeng Honda JV 1% 9% 15% -6% 38% 1% Dgonfeng Honda JV 13.0% 11.0% 10.5% 10.5% 10.0% 10.0% Dongfeng Honda Engine -6% -13% 38% 5% -5% -5% Dongfeng Honda Engine 15.0% 15.0% 15.0% 15.0% 14.0% 13.0% Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research Then we derive the profit attributable from main JVs.

Figure 55 Net profit estimation of DFG’s major subsidiaries Estimated net profit of main JVs (RMBm, 50% consolidated) 2010A 2011A 2012A 2013A 2014E 2015E 2016E DFM 6,773 4,644 5,043 5,151 5,374 5,878 Dongfeng PSV JV 1,312 1,676 2,398 2,835 3,552 3,801 Dgonfeng Honda JV 2,581 2,387 2,614 2,466 3,251 3,270 Dongfeng Honda Engine 418 365 502 526 467 412 Total 11,083 9,072 10,557 10,978 12,644 13,361 VS profit attrbitable from JVs from footnote - 9,929 11,292 11,742 13,525 14,292 estimated @ a % of disclosed 91.4% 93.5% 93% 93% 93% Source: Company, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 46

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Financial analysis Revenue growth in 2014 shot up to 57% mainly due to the consolidation of the CV asset from Dongfeng Liuzhou Auto and DFM, but it will slow down to 6%/5% in FY15/16 due to the slow growth of the CV sector. GPM will improve from 12.6% in FY13 to 14.0%/14.5%/14.7% in FY14/15/16 mainly due to the better economies of scale. Share of profits of JVs will grow by 5% in FY14, mainly due to the slow growth in Dongfeng Honda, which is expected to grow by 15 %/6% in FY15/16 due to sales growth and launch of new models. Share of profits of associates soared to 2,392m in FY14 due to the one-off gain from the revaluation of fair value in the PSA investment. We expect that net profit attributable to shareholders will increase by 21%/2%/11% in FY14/15/16 to RMB 12.8bn/13.0bn/14.4bn, respectively. However, if we exclude the one-off gain (and the tax effect) from the take-over of PSA Group’s stock, the core profit in FY14/15/16 will be RMB 11.0bn/13.0bn/14.4bn, or 4%/18%/11% YoY growth, respectively.

Figure 56 Net profit estimation of DFG’s major subsidiaries Income Statement (RMBm) 2010A 2011A 2012A* 2013A* 2014E* 2015E 2016E Revenue 122,395 131,441 124,036 37,263 58,382 61,888 64,913 Growth (%) 7% -6% -70% 57% 6% 5% Cost of sales -96,033 -105,051 -100,160 -32,582 -50,209 -52,914 -55,401 Gross profit 26,362 26,390 23,876 4,681 8,174 8,974 9,512 GPM (%) 21.5% 20.1% 19.2% 12.6% 14.0% 14.5% 14.7% Other income 2,322 2,853 3,129 1,281 841 800 1,008 Selling and distribution expenses -6,417 -6,275 -6,716 -2,268 -2,627 -3,094 -3,246 % of revenue 5.2% 4.8% 5.4% 6.1% 4.5% 5.0% 5.0% Administrative expenses -3,580 -3,641 -3,937 -2,179 -3,503 -3,713 -3,570 % of revenue 2.9% 2.8% 3.2% 5.8% 6.0% 6.0% 5.5% Other expenses, net -4,171 -4,943 -3,772 -2,062 -2,335 -2,476 -2,597 Finance costs -229 -402 -288 -170 -380 -149 -156 Share of profits and losses of JVs 296 379 - 11,176 11,742 13,525 14,292 Growth (%) 28% NA NA 5% 15% 6% Share of profits and losses of associates - - 406 253 2,192 309 325 Profit before tax 14,583 14,361 12,698 10,712 14,103 14,176 15,568 Income tax expense -3,006 -3,401 -2,919 -109 -1,269 -1,134 -1,090 Profit for the year 11,577 10,960 9,779 10,603 12,834 13,042 14,478 Equity holders of the parent 10,981 10,481 9,092 10,528 12,757 12,964 14,392 Growth (%) -5% -13% 16% 21% 2% 11% Non-controlling interests 596 479 687 75 76 78 86 EPS (RMB) 1.16 1.22 1.06 1.22 1.48 1.50 1.67 Core net profit 10,981 10,481 9,092 10,528 10,997 12,964 14,392 Growth (%) -5% -13% 16% 4% 18% 11% Core EPS (RMB) 1.27 1.22 1.06 1.22 1.28 1.50 1.67

* note: numbers in 2012/2013/2014 may not be comparable due to consolidation problem Source: Guosen Securities(HK) Research

We further estimate that ROE will maintain stable at 17.3%/15.3%/14.8% thanks to steady net profit growth. The company has been in net cash position since 2009 and we forecast it will maintain such position in FY14/15/16.

Guosen Securities (HK) 47

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Valuation and recommendation Thanks to strong product cycle in SUVs in 2015, we are positive at the sales growth of the main subsidiaries of DFG. DPCA is on track to deliver strong sales growth in the coming years, and Dongfeng-Nissan and Dongfeng-Honda are improving their product mix. DFG is currently trading at 6.2x/6.1x/5.5x FY 14/15/16PE, which is at a 40% discount compared to the average of major HK listed auto OEMs of 10.1x 2015PE. We believe that the deep discount of DFG is unjustified. Initiate cover on DFG with BUY rating and TP of HK$ 15.0, which represents 8.0x 2015PE.

Guosen Securities (HK) 48

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Figure 57 12 months forward PE band chart Figure 58 12 months forward PB band chart

HK$ 35.00 25.00 max 2.6X 30.00 max 11.3X 20.00 +1sd 9.5X 25.00 +1sd 2.0X 15.00 avg 7.8X 20.00 avg 1.5X -1sd 6.2X 10.00 15.00 PE(x) 6.0X -1sd 1.0X min 5.6X 10.00 min 0.9X 5.00 PB(x) 0.9X 5.00 0.00 0.00 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 49

Dongfeng Motor (489 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 124,036 37,263 58,382 61,888 64,913 Revenue growth (%) (5.6) (70.0) 56.7 6.0 4.9 Cost of sales (100,160) (32,582) (50,209) (52,914) (55,401) Operating profit growth (%) (12.5) (104) (203) (12.9) 125 Gross profit 23,876 4,681 8,174 8,974 9,512 Reported profit growth (%) (13.3) 15.8 21.3 1.5 11.0 Other income/(expense) (643) (781) (1,479) (1,674) (1,588) Underlying profit growth (%) (13.3) 15.8 21.3 1.5 11.0 Operating expenses (10,653) (4,447) (6,130) (6,808) (6,816) Underlying EPS growth (%) (13.3) 15.8 21.3 1.5 11.0 Operating profit 12,580 (547) 564 492 1,108 Dividend growth (%) (16.7) 20.0 23.5 1.5 11.0 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 19.2 12.6 14.0 14.5 14.7 Finance income 0 0 0 0 0 Operating profit margin (%) 10.1 (1.5) 1.0 0.8 1.7 Finance expenses (288) (170) (380) (149) (156) Underlying profit margin (%) 7.3 28.3 21.9 20.9 22.2 Associates & JCE 406 11,429 13,934 13,834 14,616 Net debt/equity (%) (47.2) (29.3) (23.5) (27.3) (31.1) Profit before taxation 12,698 10,712 14,118 14,177 15,569 Net debt/total assets (%) (22.1) (16.0) (13.0) (16.7) (19.7) Taxation (2,919) (109) (1,271) (1,134) (1,090) Current ratio (%) 135 118 117 129 140 Non-controlling interests (687) (75) (77) (78) (86) Dividend payout (%) 14.2 14.7 15.0 15.0 15.0 Net profit 9,092 10,528 12,771 12,965 14,393 Interest cover (x) 43.7 (3.2) 1.5 3.3 7.1 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 7.0 6.8 6.7 6.7 6.7 Underlying Profit 9,092 10,528 12,771 12,965 14,393 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 71.6 98.3 90.5 91.5 92.4 Interest burden (%) 101 (1,958) 2,502 2,884 1,405 Operating profit margin (%) 10.1 (1.5) 1.0 0.8 1.7 Asset turnover (x) 1.1 0.3 0.5 0.5 0.4 Leverage ratio (x) 2.3 2.0 1.8 1.7 1.6 ROA (%) 7.8 9.1 10.2 9.5 9.8 ROE (%) 18.1 18.0 18.6 16.3 15.8 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 25,823 9,418 9,548 9,686 9,831 Operating profit 12,698 10,712 14,118 14,177 15,569 Associates & JCE 1,578 35,903 41,599 46,073 50,808 Depreciation & amortization 3,197 763 876 928 974 Others 13,018 13,055 18,114 19,118 20,019 Interest income (1,154) (544) (300) (280) (353) Non-current assets 40,419 58,376 69,261 74,877 80,658 Change in working capital (10,243) (8,825) (1,685) 810 493 Inventories 11,386 4,245 6,542 6,894 7,218 Tax paid (3,929) (206) (1,271) (1,134) (1,090) Debtors & prepayments 28,453 25,266 25,725 26,986 28,254 Other operating cashflow (262) (11,594) (17,769) (15,066) (15,248) Bank deposits & cash 32,101 21,739 26,046 23,907 30,987 Operating activities 307 (9,694) (6,031) (565) 345 Others 2,451 6,372 6,044 6,363 6,657 Purchase of non-current assets (Capex) (7,074) (750) (1,175) (1,246) (1,307) Current assets 74,391 57,622 64,356 64,150 73,116 Free cash flow (6,767) (10,444) (7,206) (1,811) (962) Bank & other borrowings 6,391 5,875 12,671 4,951 5,193 Disposal of non-current assets 64 108 169 179 188 Trade & payables 28,303 25,202 26,272 27,850 29,211 Associates & JCE (net) (235) 8,341 0 0 0 Taxation 1,253 837 876 928 974 Interest received 1,203 540 300 280 353 Others 19,117 16,775 15,033 15,934 16,712 Dividends received 102 8,937 8,238 9,360 9,881 Current liabilities 55,064 48,689 54,851 49,663 52,090 Other investing cashflow 3,022 806 2,994 (484) (464) Bank & other borrowings 1,328 0 0 0 0 Investing activities (2,918) 17,982 10,527 8,090 8,652 Others 785 3,275 3,800 3,300 3,300 New loans raised 10,241 3,614 12,634 (1,531) 6,733 Non-current liabilities 2,113 3,275 3,800 3,300 3,300 Repayment of loans (13,216) (3,759) (5,838) (6,189) (6,491) Net assets 57,633 64,034 74,966 86,064 98,384 Dividends paid (1,551) (1,504) (1,916) (1,945) (2,159) Share capital 8,616 8,616 8,616 8,616 8,616 Other financing cashflow (356) (257) 0 0 0 Premium & reserves 45,302 54,519 65,374 76,395 88,629 Financing activities (4,882) (1,906) 4,880 (9,664) (1,917) Shareholders' funds 53,918 63,135 73,990 85,011 97,245 Inc/(dec) in cash (7,493) 6,382 9,376 (2,139) 7,080 Non-controlling interests 3,715 899 976 1,053 1,140 Cash at beginning of year 31,381 10,288 16,670 26,046 23,907 Total equity 57,633 64,034 74,966 86,064 98,384 Foreign exchange effect 0 0 0 0 0 Source: Guosen Research estimates Cash at end of year 23,888 16,670 26,046 23,907 30,987 Source: Guosen Research estimates

Guosen Securities (HK) 50

Company Research Initiating Coverage

Guangzhou Auto (2238 HK) China / Auto Compacting for more shares 11 February 2015 NEUTRAL Target price 7.10 GAC is the sixth largest auto OEM group in China with 78% volume Last price (9 Feb 15) HK$6.99 exposure in Japanese brands. GAC may benefit from Honda and Upside/downside (%) 1.6 Toyota’s strategy to downsize their new models in order to capture HSI 24521 more shares in the A class market. Toyota is betting on hybrid electric Mkt cap (HK$bn/US$bn) 58.1/7.5 52 week range (HK$) 6.60 - 9.90 localization, but we do not see it as a big short-term catalyst because Avg trading volume daily (US$mn) 8.4 of the lack of support by the government and the long payback period. Free float (%) 42.0 Source: Bloomberg

Initiate with Neutral rating and TP of HK$ 7.10.

The sixth largest auto OEM group in China GAC is the sixth largest auto OEM group in China with 5.0% market share. GAC has Performance three Japanese OEM JVs and one Italian OEM JV, and Japanese models accounted HK$ for 78% of total sales in 2014. GAC-Honda and GAC-Toyota were the two largest JV 120% by GAC, contributing 73% sales in 2014. GAC has a strong presence in the B-class 9.50 9.00 110% market, with both successful sedan and SUV models in the segment. 8.50 100% Compacting to capture more market share 8.00 7.50 90% We observe that Japanese brands’ weak position in the A class market has 7.00 80% threatened their dominant position in the B class market. Both Toyota and Honda 6.50 are launching more compact models to secure a firmer stance in the A class market. 6.00 70% We estimate that the sales of A0 class models in GAC-Honda will increase from 23% Feb-14 Oct-14 in 2014 to 35% in 2016, and the A/A0 class models in GAC-Toyota will increase Price(LHS) Rel. to HSI(RHS) from 33% in 2014 to 49% in 2016. Overall, we estimate that the share of A0/A class products will account for 63% of total sale in FY16, as compared with 42% in FY13.

Sink or swim? Toyota’s hybrid-localization strategy not a ST catalyst Performance 1M 3M 12M Toyota is betting on the hybrid electric vehicles in China. It will localize its hybrid Absolute (%) (2.0) (1.0) (8.9) electric powertrain system through TEMC, and launch the hybrid electric version of Absolute (US$, %) (2.0) (1.0) (8.8) Relative to HSI(%) (4.5) (5.1) (22.2) A class sedan models in 2015. Longer-term speaking, Toyota will gain comparative Source: Bloomberg advantage thanks to more rigorous policy towards PV enterprise average fuel consumption. However, without the support of government policy, the payback period of hybrid electric vehicles is still too long to attractive customers’ attention in short-term. Hence, we estimate hybrid models will only take up c. 5% sales in GAC-Toyota’s portfolio by 2016. Company background Guangzhou Automobile Group Company, Ltd. manufactures, sells, and services automobiles. The Company is also involved Initiate with Neutral rating and TP of HK$7.10 in automobile parts and components, and auto finance and GAC is a Japanese-brand concentrated OEM, with main JVs downsizing their related services for both overseas and domestic markets. models to gain higher market shares. We expect that the total sales volume of GAC Source: Bloomberg will grow at a CAGR of 10.1% between FY14 and FY16, and the net profit will achieve a 12.5% CAGR. We believe the current 9.9x 2015PE of GAC is fair, given its high exposure in Japanese brands and margins might have further downside risk. Initiate coverage with Neutral rating and TP of HK$ 7.10, which represents 10x 2015PE. Figure 1: Financial Summary 2012A 2013A 2014E 2015E 2016E Revenue 12,964 18,824 19,508 21,948 23,849 Operating Profit (1,164) (848) (488) (66) 119 Reported Profit 1,134 2,653 3,133 3,654 4,154 Underlying Profit 1,134 2,653 3,133 3,654 4,154 John Luo Underlying EPS (CNY) 0.18 0.41 0.49 0.57 0.65 SFC CE No.: AVT518 DPS (CNY) 0.09 0.10 0.12 0.14 0.16 +852 2899 8300 BVPS (CNY) 5.07 5.18 5.54 5.97 6.45 [email protected] P/E (x) 30.5 13.7 11.6 9.9 8.7 Dividend Yield (%) 1.7 1.8 2.2 2.5 2.9 P/B (x) 1.1 1.1 1.0 0.9 0.9

Source: Guosen Securities(HK)

51 See the last page of this report for important disclosures

公司报告首次覆盖

广汽集团 (2238 HK) 中国 / 汽车 “瘦身”为增长 2015 年 2 月 11 日中性广汽集团是中国第六大汽车企业集团，日系车销量占比 78%。广汽目标价 7.10 集团有望受益于本田和丰田的小型车战略，在 A 级车市场中攫取更收盘价 (9 Feb 15) HK$6.99 多份额。丰田正押注在混合动力汽车的本地化生产，但是我们并不恒生指数 24521 认为这是个重大的短期催化剂，因为缺乏政府支持以及回本期太长总市值 (HK$/US$bn) 58.1/7.5 都会使得混动车型的普及受阻。首次覆盖给予中性评级，目标价为 52 周最高/最低 (HK$) 6.60 - 9.90 日均成交额 (US$mn) 8.4 7.1 港币。流通量（%） 42.0

资料来源: 彭博中国第六大汽车企业集团广汽集团是中国第六大汽车企业集团，市场份额 5%。广汽集团拥有三个中日合资整车厂和一个中意合资整车厂。日系车在 2014 年占广汽集团股价表现 2014 年总销量的 78%。广汽本田和广汽丰田是广汽集团的两个最大的合资 HK$ 公司，2014 年销量占比达到 73%。广汽集团在 B 级车领域市场地位较强。 120% 9.50

新车小型化以攫取更多市场份额 9.00 110% 8.50 100% 我们注意到日系车在 A 级车市场的弱势地位已经危及到他们在 B 级车市场 8.00 的领先地位。有鉴于此，本田和丰田都在发布更多了紧凑型车以期在 A 级 7.50 90% 7.00 车市场取得更好的地位。我们预计广汽本田的 A0 级车型销量占比将从 80% 6.50 2014 年的 23%提升至 2016 年的 35%，而广汽丰田的 A/A0 级车型的销量占 6.00 70% 比将会从 2014 年的 33%提升至 2016 年的 49%。总体而言，我们预计 2016 Feb-14 Oct-14 年广汽集团的 A0/A 级车产品将会占公司总销量的 63%，而这一比例在 Price(LHS) Rel. to HSI(RHS) 2013 年只有 42%。

孤注一掷？丰田的混动本土化策略短期难成功股票数据 1M 3M 12M 丰田正在押注中国的混合动力汽车市场。通过丰田（中国）研发中心，丰绝对回报 (%) (2.0) (1.0) (8.9) 绝对回报 (US$, %) (2.0) (1.0) (8.8) 田将会实现混合动力汽车动力系统的国产化，并且在 2015 年推出搭配混相对 HSI 回报 (%) (4.5) (5.1) (22.2) 合动力系统的 A 级车。长期而言，丰田将会受益于更加严格的汽车企业排资料来源: 彭博放标准。然而，在没有政府补贴的情况下，我们认为混合动力汽车的回收期依然太长，难以引起消费者的兴趣。因此，我们预计 2016 年混动车型公司簡介仅占广汽丰田销量的 5%左右。广州汽车集团股份有限公司从事汽车生产，销售和服务。

该公司的业务还包括为海外和国内市场提供汽车零部件，首次覆盖给予中性评级，目标价 7.1 港元. 汽车金融及相关服务。资料来源: 彭博广汽集团的产品非常集中于日系车，而合资公司正在小型化其产品以求更

大市场份额。我们预计广汽集团 FY14 至 FY16 的销量复合增长率为 10.1%，净利润复合增长率为 12.5%。由于公司较高的日系车风险暴露，目前 9.9x 2015 年 PE 的估值是合理的。首次覆盖给予中性评级以及 7.1 港元的目标价，相当于 10x 2015 年 PE.

Figure 2: 盈利预测 2012A 2013A 2014E 2015E 2016E

营业额 12,964 18,824 19,508 21,948 23,849 经营盈利 (1,164) (848) (488) (66) 119 罗文安净利润 1,134 2,653 3,133 3,654 4,154 证监会中央编号:AVT518 实际盈利 1,134 2,653 3,133 3,654 4,154 +852 2899 8300 每股实际盈利 (CNY) 0.18 0.41 0.49 0.57 0.65 [email protected] 每股股息 (CNY) 0.09 0.10 0.12 0.14 0.16 每股账面价值 (CNY) 5.07 5.18 5.54 5.97 6.45 市盈率 (x) 30.5 13.7 11.6 9.9 8.7 股息率 (%) 1.7 1.8 2.2 2.5 2.9 市净率 (x) 1.1 1.1 1.0 0.9 0.9

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 52

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

The Sixth largest auto OEM group in China Introduction to GAC

th Sixth largest auto OEM Guangzhou Automobile Corporation (GAC) is the 6 largest auto OEM group in China in 2014. In group in China 2014, sales volume of GAC reached 1.17m units, taking 5.0% market share in China’s auto market.

Figure 3 GAC was the 6th largest auto OEM group in China (2014)

SAIC DFMC FAW CHANG'AN BAIC GAC BRILLIANCE GWM CHERY JAC BYD GEELY

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2014 2013

Source: CAAM, Guosen Securities(HK) Research

GAC is listed in both A share and Hong Kong market. The largest shareholder is the state-owned Guangzhou Automobile Industries Group, which holds 57.6% of the total shares. H-share accounted for 34.3% of the total shares as of 2013. Other major shareholders include Wanxiang Group Coporation (2.4%), China National Machinery Industry Corporation (1.6%), Guangzhou Iron & Steel Enterprise Group (0.1%), etc. A state-owned auto OEM Figure 4 Shareholding structure of GAC

Others 42%

Guangzhou Automobile Industry Group 58%

Source: Company, Guosen Securities(HK) Research Three Japanese JVs and one Italian JV GAC produces vehicles mainly through its four JVs and propriatary brand. The four JVs include GAC-Honda, GAC-Toyota, GAC-Mitsubishi and GAC-Fiat. GAC also produces propriatary brand “Trumpchi” through GAMC, and “Gonow” brand through GAC-Gonow. GAC produces CVs through GAC-Hino, GAC-Bus and GAC-Gonow. Just like most other China major auto OEMs, the four JVs 3 Sino-Japanese OEM JVs + were all 50%:50% help by GAC and the respective counter-parties. 1 Sino-Italian OEM JV GAC sold around 1.17m units of vehicles in 2014. In the year, GAC-Honda was the largest sales contributor that took up 41% share in GAC’s total sales volume, and GAC-Toyota was the second with 32% share. GAC-Fiat and GAC-Mitsubishi, both of which went into operation in 2013, contributed to a combined share of 11% in volume terms. In 2014, the “Trumpchi” proprietery

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Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

78% of volume was from brand sold 135k units of vehicles, contributing to 11.5% sales volume, and other proprietery Japanese brands in 2014 brands account for the remaining 4.5%. As of 2014, Japanese brands accounted for 78% of the total sales in GAC, and domestic and Italian brands the other 16% and 6%, respectively.

Figure 5 GAC auto sales breakdown by subsidiary (2014) Figure 6 GAC auto sales breakdown by brands (2014) Propriatery Domestic brands 16% 16%

GAC- Italian Mitsubishi GAC-Honda 6% 5% 41%

GAC-Fiat 6%

GAC- Toyota Japanese 32% 78% Source: Company, Wind, Guosen Securities(HK) Research Source: Company, Wind, Guosen Securities(HK) Research Complete product line in PV GAC produces sedan, SUV, MPV and other cars (including commercial cars and buses). As of 2014, total sales of GAC reached 1,172k units, of which 67% were sedan, 23% were SUV, 4% were MPV and 6% others. Products include PVs and CVs Figure 7 Product line of GAC MPV others 4% 6%

SUV 23%

Sedan 67%

Source: Company, Wind, Guosen Securities(HK) Research

Among the major JVs of GAC, GAC-Honda and GAC-Toyota provide the most complete portfolio of products, including A0/A/B class sedans, SUV and MPVs, and they provide a total of 8/6 models as of 2014. GAC-Fiat mainly provides A class sedan while GAC-Mitsubishi mainly provides SUVs. GAC- Trumpchi offeres A /B class sedan and SUVs.

Figure 8 Product line of GAC Product type GAC-Honda GAC-Toyota GAC-Fiat GAC-Mitsubishi GAC-Trumpchi A0 class sedan Fit / Everus S1 Yaris L A class sedan Crider / City Levin Viaggo / Ottimo GA3 B class sedan Accord Camry/ Camry hybrid GA5 SUV Crosstour / Vezel Highlander ASX/ Pajero/ Pajero Sport GS5 MPV Odyssey E'Z Source: Company, Wind, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 54

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Strong in B-class market in China’s auto landscape GAC’s products were stronger in the B-class market (priced around RMB 200,000) and weaker in the A-class market (priced around RMB 100,000), both in terms of absolute and relative sales volume. In 2014, there were 3 GAC models with sales volume over 100,000 units, all of which were sedans. The company also has one very successful B-class SUV model that is priced above RMB 250,000 and with sales volume over 85k units. Strong in the B class PV market Figure 9 GAC products in China’s auto landscape (2014)

ASP (RMB '000) GAC Products 450

400

350

300 Sedan 250 SUV 200 MPV 150

100

50 Sales vol. - 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000

Source: AutoHome, CAAM, Guosen Securities(HK) Research

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Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Compacting to capture more market share Japanese brands falling behind in the A class market Japanese brands were Because GAC has high exposure in Japanese brands (78% of total sales volume as of 2014), we stronger in B class market than A class market believe it is important to analyze the postiton of Japanese brands in the China market. Japanese brands used to dominant China’s B class market. However, their position in the A class market was relatively weak. In 2014, only 3 Japanese models sold more than 100,000 units in the A-class market, despite the large number of models they have in this segment. The A class market is the largest segment in China’s PV market, and auto OEMs are fighting fiercely for higher sales volume in order to establish brand name and capture potential customers for the higher-end products. As such, the weak position of Japanese brands will threaten their future position in the B class market. In order to make up the weakness, Japanese brands, notably Toyota and Honda, has started to launch more compact models.

Figure 10 Japanese brands were weak in the A class market and strong in the B class market

ASP (RMB '000) 450

400

350

300

250

200 B-Class market

150

100 A-Class market

Sales vol.(2014) 0 - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000

S. Korean German U.S. Domestic French Japanese

Source: AutoHome, CAAM, Guosen Securities(HK) Research GAC-Honda: small SUV - Vezel to bring 27% volume growth in 2015 Sales volume of GAC-Honda reached 480k units in 2014, up by 10.2% compared to 2013. The major sales contributor includes Crider (33% of total sales), Accord (22%), Fit (18%) and City(9%). By product type, sedan accounted for 83% of GAC-Honda’s total sales, among which A class sedan was the largest category with 43% share.

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Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Figure 11 Product mix of GAC-Honda by model (2014) Figure 12 Product mix of GAC-Honda by type (2014) Vezel Everus MPV Sedan:A0 SUV:B Odyssey 5% 1% 7% class 7% class 18% 5% Crider SUV:A0 33% class Fit 5% 18%

Crosstour Sedan:B class 5% Sedan:A 22% City Accord class 9% 43% 22% Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Company, Wind, CAAM, Guosen Securities(HK) Research GAC-Honda used to have a strong position in the B class sedan market, as the flagship model, Accord was once the best-seller in this segment. However, due to the rising demand of first-time car buyers and the decrease competitiveness of Japanese B class sedans, GAC-Honda is striving to expand its presence in the A class market. In 2013, GAC-Honda launched Crider, an A class sedan that is “tailormade” for the China market. With very spacious internal design, Crider suits Chinese customers’ need and its sales volume increased from 92k units in 2013 to 157k units in 2014, becoming the best-seller of GAC-Honda. A0 class products will account for 35% of GAC- By the end of 2014, GAC-Honda launched the first A0 class SUV, Vezel, in order to capture the Honda’s sales volume in booming demand in this segment. Driven by Vezel, we estimate that thet total sales volume of 2016 GAC-Honda will increase by 27%/4% in FY15/16 to 611k/637k units. Through the launch of Crider and Vezel, we believe that GAC-Honda is downsizing its products, and by 2016, the proportion of A0 class products (including A0 class sedan & SUV) will increase from the 23% in 2014 to 35% in 2016E.

Figure 13 Vezel will be the major growth driver of GAC-Honda in 2015 Figure 14 Product mix of GAC-Honda by type (2016E) MPV Sedan:A0 700 SUV:B 9% class 600 class 10% 4% 500 400 300 Sedan:A class 200 30% 100 SUV:A0 class - 25% 2010A 2011A 2012A 2013A 2014E 2015E 2016E Sedan:B Crider Accord City Crosstour class Fit Odyssey Vezel Everus 22%

Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research GAC-Toyota: driven only by Levin in 2015 GAC-Toyota is the second Toyota auto OEM JV in China besides FAW-Toyota. GAC-Toyota has an annual capacity of 380k units and the main products include Camry, Highlander, Yaris L etc. As of 2014, Camry, Highlander and Yaris L accounted for 39%, 23% and 20% of the total sales in GAC-Toyota, respectively. The JV also produces hybrid models such as Camry hybrid, but the sales volume is low at hundreds per month.

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Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

By product type, GAC-Toyota’s main product is B-class sedan (Camry), which accounted for 40% of total sales. The company’s Highlander model is the star model in the B class SUV market.

Figure 15 Product mix of GAC-Toyota by model (2014) Figure 16 Product mix of GAC-Toyota by type (2014) Levin MPV Sedan:A0 Camry 13% 4% class hybrid 20% 1% SUV:B class EZ Camry 23% 4% 39%

Sedan:A class YARiS L 13% 20%

Sedan:B Highlander class 40% 23% Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Company, Wind, CAAM, Guosen Securities(HK) Research The strategy of Toyota in China in recent years has been 1) compacting, 2) twin model, and 3) hybrid localization. In 2013, GAC-Toyota launched the improved A0 class sedan model called Yaris L, which is specially designed for the China market. In 2014, Yaris L accounted for 20% of total sales in GAC-Toyota. As the first model under Toyota’s twin model strategy, Levin was launched in mid-2014 as the twin model for FAW-Toyota’s best-seller Corolla. Levin was the first and only A class sedan by GAC- Toyota. Given lack of new models in 2015, we believe Levin will be the only growth driver. We forecast A/A0 class products will account for 49% of GAC- that the sales volume of GAC-Toyota will increase only by 4%/3% in FY15/16 to 387k/400k units. Toyota’s sales volume in 2016 Just like GAC-Honda, GAC-Toyota is downsizing its models in order to capture more market share. We estimate that the share of A/A0 class sedan will increase from 33% in 2014 to 49% in 2016 for GAC-Toyota.

Figure 17 Product mix of GAC-Toyota by model Figure 18 Product mix of GAC-Toyota by type (2016E) MPV others Sedan:A0 450 4% 0% class 400 14% SUV:B class 350 17% 300 250 200 150 100 50 Sedan:A class - 35% 2010A 2011A 2012A 2013A 2014E 2015E 2016E Sedan:B Camry Highlander YARiS L class EZ Camry hybrid Levin 30% Levin hybrid Yaris Others Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research

Guosen Securities (HK) 58

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

GAC-Mitsubishi and GAC-Fiat hardly any profit driver in short-term Both GAC-Mitsubishi and GAC-Fiat started operation in 2013, and as of 2014, these two JVs accounted for 11.2% of the total sales in GAC. The main products by GAC-Mitsubishi are A class SUV models. Thanks to higher ASP and less

GAC-Mitsubishi and GAC- competition in the SUV market, GAC-Mitsubishi was already near break-even at the first year of Fiat accounted for only operation. 11.2% sales in GAC in 2013 The main products of GAC-Fiat are A class sedans, where the competition is most fierce. In 2014, sales volume of GAC-Fiat grew by 47% to 68k units, accouting for 5.9% in GAC’s total sales. Although these two JVs are expected to grow faster than other JVs, their base is too low to have significant impact on total sales. We expect that the combined sales volume of these two JVs to account for 12.5% share in GAC by 2016. Sink or swim? Toyota’s hybrid-localization strategy TEMC will bring the hybrid electric version of Toyota’s A class sedans As the largest seller of hybrid vehicles around the globe, Toyota has sold more than 6 million hybrid vehicles by the end of 2013. Toyota has sold more than 1.2 million hybrid vehicles only in 2012 and 2013. In the world’s largest auto market, Toyota was trying to introduce more hybrid models. The sales performance of Toyota’s hybrid models was poor in China. Take Camry hybrid by GAC- Toyota as an example, the total sales volume in 2014 was merely 5.7k units, only 1% of GAC- Toyota’s total sales in the year. One of the main reasons is that the hybrid powertrain system has to import from Japan and the ASP is so high to attract customers. TEMC will localized Toyota’s hybrid powertrain system In view of this, Toyota set up Toyota Motor Engineering & Manufacturing China (TEMC) Co., Ltd in Changshu, Jiangsu Province in China in end-2010, and it was launched in late 2013. The target of TEMC is to research and localize the hybrid powertrain system in China. It is reported that 1Toyota will launch the hybrid version of its A-class model, the Levin hybrid by GAC-Toyota and Corolla hybrid by FAW-Toyota in 2015. We view this as an important step for Toyota’s future strategy in China. Payback period still too long without government support We estimate that the cost of the current hybrid powertrain of Toyota is around RMB 30,000 to RMB 40,000, or 15%-20% of the total cost of an A class hybrid model. After the localitzation, the cost of hybrid powertrain system is expected to reduce by 30%-40%. According to our payback period analysis of hybrid electric vehicles, assume the gasoline price was RMB 8/L (which is a generous assumption, as the most recent #93 gasoline price in Shenzhen was only RMB 5.8/L),when the MSRP difference (between hybrid and normal gasoline models) is RMB 25,000 and the reduction in fuel consumption is 3L/100KM, the payback period is 5.2 years ( when average car user would change their cars in China), which is still not attractive. We believe that the popularity of hybrice electric vehicles will be boosted only when the payback period narrows to below 3 years, which means that the MSRP differnce should limit to RMB 15,000 and the save in Payback period seems too fuel consumption should be over 3L/100KM. Even though our Energy team expects crude oil price long to attract consumers will rebound to US$70/80 levels by end of 2015/16 from current ~US$50/bbl level, the attractiveness of hybrid may still too low for consumers.

1 http://news.16888.com/a/2015/0112/789642.html Guosen Securities (HK) 59

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Figure 19 Gasoline price in Shenzhen (#93, gasoline) Figure 20 Payback period analysis of HEV

Payback Peirod (year) 10.938 15,000 20,000 25,000 30,000 40,000 1.5 6.3 8.3 10.4 12.5 16.7 2.0 4.7 6.3 7.8 9.4 12.5 Difference in 2.5 3.8 5.0 6.3 7.5 10.0 fuel consumption 3.0 3.1 4.2 5.2 6.3 8.3 (L/100KM) 3.5 2.7 3.6 4.5 5.4 7.1 4.0 2.3 3.1 3.9 4.7 6.3

Source: http://www.bitauto.com/youjia/shenzhen/, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research There is barely any government support for hybrid electric vehicles in China. The Chinese government supports the development of pure electric vehicles or plug-in hybrid electric vehicles, instead of hybrid vehicles. That’s why in most cities with car license limit, hybrid elctric vehicles are treated as normal vehicles and can not benefit from the supporting policies to new energy vehicles. Going forward, we don’t see the policy towards hybrid electric vehicles will change. As a result, it might be difficult for Toyota to boost the sales of hybrid electric vehicles, even if the powertrain system is localized. Opportunity lies in strict adoption of fuel consumption policy In Oct. 2014, several government departments jointly annouced The Notice on Strengthening the Management of Average Fuel Consumption of Passenger Vehicle Enterprises (《关于加强乘用车企业平均燃料消耗量管理的通知》)，and the notice reiterated the regulation in PV enterprise average fuel consumption management. Overall speaking, the policy requires PV enterprises to lower the average fuel consumption of their PV products, and targeted to lower the average fuel Policy on auto enterprise consumption of the PV industry from 6.5L/100km in 2015 to 5L/100kum in 2020. If PV enterprises fuel consumption may be a key for Toyota’s success in failed to meet the target, they would be limited to expand capacity or launch new products. the hybrid strategy We believe most PV enterprises will strive to lower their products’ average fuel consumption based on the new policy. Currently most companies do so mainly through the adpotion of turbo- charged engines. However, according to industry experts, if PV enterprises were to meet the 5L/100km target in 2020, turbo-chared engines are not enough. Instead, they will have to use new energy vehicles, such as electric vehicles or hybrid electric vehicles.

Figure 21 The average fuel consumption target: China and other regions

Source: MIIT, Guosen Securities(HK) Research

Guosen Securities (HK) 60

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

As the pioneer in hybrid vehicles, Toyota will have comparative advantage when the fuel consumption policy gets more regorous, especially when Toyota finishes the localization of its hybrid powertrain system. Still not a short-term catalyst

Expect hybrid products only In the short-run before 2016, we take a wait-and-see attitude towards Toyota’s hybrid-localization account for c.5% volume in strategy. We believe that under current situation, the sales volume of Toyota’s hybrid models will 2016 in GAC-Toyota not be significant in its product portfolio due to lack of economic benefit for customers. We estimate that the combined sales volume of Camry hybrid and Levin hybrid would only be 17k/21k units, 4.4% and 5.1% of GAC-Toyota’s total sales volume in FY15/16 .

Guosen Securities (HK) 61

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Key assumptions and forecasts The main profit contributor of GAC includes the PV JVs and its own brands. GAC consolidates the revenue from its domestic brands in the income statement, and the net profits from JVs were through the “share of profit of JVs and associates”. Hence, we model both the net profit attributable from JVs and the revenue from domestic brands. The following table shows our estimation in the sales volume and growth of GAC’s major models. We estimate that the total sales volume of GAC will grow by 16%/14%/6% in FY14/15/16, and GAC-Honda will be the growth driver in FY15 with 24% growth. Sales volume growth of GAC- Toyota will be fairly flat due to lack of new models and the small contribution of hybrid models.

Figure 22 Sales volume forecast of GAC Figure 23 Sales volume growth forecast of GAC Volume ('000 units) 2010A 2011A 2012A 2013A 2014E 2015E 2016E Growth (%) 2010A 2011A 2012A 2013A 2014E 2015E 2016E Total 640 740 698 1,008 1,172 1,340 1,420 Total sales volume 16% -6% 44% 16% 14% 6% GAC-Honda 303 362 316 435 480 596 622 GAC-Honda 20% -13% 38% 10% 24% 4% Crider - - - 92 157 118 121 Crider 72% -25% 3% Accord 170 161 104 120 108 130 130 Accord -5% -35% 15% -9% 20% 0% City 51 124 97 95 45 68 66 City 140% -22% -2% -52% 50% -3% Crosstour 2 2 34 47 22 23 25 Crosstour -15% 1673% 39% -53% 5% 6% Fit 34 21 36 41 85 68 64 Fit -37% 71% 13% 108% -20% -5% Odyssey 45 30 21 27 35 52 57 Odyssey -33% -31% 31% 28% 50% 10% Vezel - - - - 23 135 156 Vezel 500% 15% Everus - 25 25 14 5 1 2 Everus -43% -68% -80% 100% GAC-Toyota 269 274 250 305 374 387 400 GAC-Toyota 2% -9% 22% 22% 4% 3% Camry 161 144 145 172 145 116 118 Camry -11% 1% 18% -16% -20% 2% Highlander 81 95 75 95 84 68 70 Highlander 17% -21% 27% -11% -20% 3% YARiS L - - - 3 73 62 60 YARiS L 2820% -15% -3% EZ - 16 17 17 17 17 18 EZ 5% -1% -1% 0% 5% Camry hybrid - - - 6 6 7 8 Camry hybrid 4% 20% 10% Levin - - - - 49 108 113 Levin 120% 5% Levin hybrid - - - - - 10 13 Levin hybrid 30% Yaris 13 19 12 11 - - - Yaris 47% -36% -14% -100% 0% 0% Others 15 0 - 2 - - - Others -98% -100% -100% 0% 0% GAC-Fiat - - - 48 68 78 90 GAC-Fiat 41% 14% 16% Viaggio 48 44 46 48 Viaggio 5% 5% Others - 24 31 36 Others 30% 15% Jeep Jeep GAC-Mitsubishi - - - 43 63 75 89 GAC-Mitsubishi 47% 19% 18% ASX - - - 36 55 67 78 ASX 54% 20% 18% Pajero Sport - - - 3 5 6 7 Pajero Sport 78% 10% 25% Others - - - 4 2 3 3 Others -39% 5% 5% Propriatery brands 68 104 132 176 187 204 221 Propriatery brands 53% 27% 33% 6% 9% 8% GAMC 39 48 59 109 135 158 175 GAMC 22% 86% 24% 17% 10% Gonow - 25 37 37 26 21 22 Gonow 47% 1% -31% -20% 5% Honda (China) 24 24 29 24 23 22 21 Honda (China) 20% -17% -6% -5% -3% GAC Hino 3 5 6 4 3 3 3 GAC Hino 26% -24% -31% 5% 1% GAC Bus 2 2 2 1 1 1 1 GAC Bus -6% -45% -11% 5% 1% GAC-Toyota GAC-Toyota 269 274 250 305 374 387 400 22% 22% 4% 3% engine engine Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Company, Wind, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 62

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Figure 24 Revenue and earnings estimates 2010A 2011A 2012A 2013A 2014E 2015E 2016E Total retail revenue (RMBm) 118,321 126,567 116,856 167,100 181,168 205,135 217,976 GAC-Honda 55,036 56,849 49,629 69,723 72,765 91,973 96,389 GAC-Toyota 53,681 56,421 50,836 63,080 66,037 64,757 67,070 GAC-Fiat - - - 5,940 8,361 9,521 10,997 GAC-Mitsubishi - - - 6,619 10,400 12,326 14,663 Propriatery brands 9,605 13,297 16,391 21,738 23,605 26,557 28,857 GAC-Toyota engine 6,305 6,421 5,852 7,149 8,747 9,058 9,349 Total revenue of main JVs (Ex VAT &dealer GPM,RMBm) GAC-Honda 45,484 46,983 41,015 57,622 60,137 76,011 79,660 GAC-Toyota 44,364 46,629 42,013 52,132 54,576 53,518 55,430 GAC-Fiat - - - 4,909 6,910 7,869 9,089 GAC-Mitsubishi - - - 5,470 8,595 10,186 12,118 Propriatery brands 7,938 10,989 13,547 17,965 19,508 21,948 23,849 GAC-Toyota engine 5,389 5,488 5,002 6,110 7,476 7,742 7,990 NPM(%) 2010A 2011A 2012A 2013A 2014E 2015E 2016E GAC-Honda 10.0% 8.0% 5.0% 5.9% 5.6% 5.0% 5.0% GAC-Toyota 12.0% 9.0% 6.0% 7.2% 7.0% 6.4% 6.3% GAC-Fiat 0.0% 0.0% 0.0% -10.0% -6.0% -4.0% -1.0% GAC-Mitsubishi 0.0% 0.0% 0.0% -1.0% 1.0% 2.0% 3.0% GAC-Toyota engine 19.9% 19.9% 15.0% 19.9% 19.9% 19.9% 19.9% Net profit of major JVs (RMBm) GAC-Honda 2,274 1,879 1,025 1,700 1,684 1,900 1,991 GAC-Toyota 2,662 2,098 1,260 1,877 1,910 1,713 1,746 GAC-Fiat - - - -245 -207 -157 -45 GAC-Mitsubishi - - - -27 43 102 182 GAC-Toyota engine 322 328 225 365 446 462 477 Estimated attributable profit from JVs (RMBm) Actual attributable profit from 5,690 4,639 2,637 4,020 4,123 4,276 4,629 all JVs Estimated attributable profit 5,258 4,305 2,511 3,669 3,876 4,020 4,351 from main JVs Estimated/ actual 92% 93% 95% 91% Source: Company, Wind, CAAM, Guosen Securities(HK) Research

We estimate that the revenue of GAC will grow by 4%/13%/9% in FY14/15/16 to RMB 19.5bn/21.9bn/23.8bn, respectively. The growth in FY14 would be dragged by the poor performance in GAC-Gonow, but in FY15, GAMC is expected to drive the growth again. GPM is expect to improve slightly from 10.6% to 11.0%/11.5%/11.5% in FY14 to FY16, thanks to higher proportion of SUV products in propriatery brands. Due to economies of scale, SG&A ratio is expected to improve from 14.8% in FY13 to 15.0%/13.3%/13.0% in FY14/15/16, respectively. Thanks to the strong growth in share of profit from JVs and associates, net profit is expected to grow by 18%/17%/14%% to RMB 3.1bn/3.7bn/4.2bn in FY14/15/16. Fulled diluted EPS is estiamted to be RMB 0.49/0.57/0.65.

Guosen Securities (HK) 63

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Figure 25 Financial model of GAC 2010A 2011A 2012A 2013A 2014E 2015E 2016E Revenue 8,742 10,984 12,964 18,824 19,508 21,948 23,849 Growth (%) 26% 18% 45% 4% 13% 9%

Cost of sales -7,999 -10,560 -12,274 -16,830 -17,460 -19,534 -21,106 Gross profit 743 424 690 1,994 2,048 2,414 2,743 GPM (%) 8.5% 3.9% 5.3% 10.6% 10.5% 11.0% 11.5% Selling and distribution costs -326 -589 -815 -1,071 -1,366 -1,317 -1,431 % of revenue 3.7% 5.4% 6.3% 5.7% 7.0% 6.0% 6.0% Administrative expenses -516 -1,216 -1,333 -1,713 -1,561 -1,602 -1,669 % of revenue 5.9% 11.1% 10.3% 9.1% 8.0% 7.3% 7.0% Interest income 210 316 280 374 293 329 358 Other (losses)/gains – net 58 840 13 -433 98 110 119 Operating loss 169 -225 -1,164 -848 -488 -66 119 Finance costs -362 -415 -529 -645 -497 -526 -549 Interest income 25 58 56 103 102 104 106 Share of profit of JVs and associates 5,690 4,639 2,637 4,020 4,123 4,276 4,629 Profit before income tax 5,522 4,057 1,000 2,629 3,241 3,788 4,305 Income tax (expense)/credit -2 110 65 -101 -123 -152 -172 Profit for the year 5,520 4,167 1,065 2,529 3,118 3,636 4,133 Profit/(loss) attributable to:

Equity holders of the Company 4,295 4,272 1,134 2,653 3,133 3,654 4,154 Growth (%) -1% -73% 134% 18% 17% 14%

Non-controlling interests 1,225 -105 -69 -124 -16 -18 -21 Diluted EPS (RMB) 0.92 0.69 0.18 0.41 0.49 0.57 0.65

Source: Guosen Securities(HK) Research

In the coming three years, we believe that GAC will maintain high level of input in research, expansion and production efficiency promotion, thus we estimate the the CAPEX of the company will be RMB2.0bn/2.2bn/2.4bn. ROE will improve slightly from 8.0% in FY13 to 8.8%/9.5%/10.0% in FY14/15/16, thanks to growth in net profits.

Figure 26 CAPEX estimation Figure 27 ROE Estimation RMB m 3,500 18.0% 16.0% 3,000 14.0% 2,500 12.0% 2,000 10.0%

1,500 8.0% 6.0% 1,000 4.0% 500 2.0% - 0.0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research

Guosen Securities (HK) 64

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Recommendation and Valuation GAC is currently trading at 9.9x 2015PE, which is 2% lower than auto OEM sector average of 10.1x based on Bloomberg. We believe that due to the high exposure in Japnaese brands, both sales volume growth and margins would be under pressure. We initiate cover of GAC with a Neutral rating and TP of HK$ 7.10, which represents 10x 2015PE.

Figure 28 12M forward PE band chart Figure 29 12M forward PB band chart

14.00 35.00 12.00 30.00 max 1.7X

25.00 10.00 +1sd 1.4X avg 1.2X 20.00 8.00 max 29.9X PB(x) 1.0X 15.00 6.00 -1sd 1.0X +1sd 19.4X min 0.8X 10.00 avg 14.3X 4.00 5.00 PE(x) 11.5X -1sd 9.1X 2.00 0.00 min 7.6X 0.00 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 65

Guangzhou Auto (2238 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 12,964 18,824 19,508 21,948 23,849 Revenue growth (%) 18.0 45.2 3.6 12.5 8.7 Cost of sales (12,274) (16,830) (17,460) (19,534) (21,106) Operating profit growth (%) 418 (27.1) (42.5) (86.5) (281) Gross profit 690 1,994 2,048 2,414 2,743 Reported profit growth (%) (73.5) 134 18.1 16.6 13.7 Other income/(expense) 293 (59) 390 439 477 Underlying profit growth (%) (73.5) 134 18.1 16.6 13.7 Operating expenses (2,147) (2,784) (2,926) (2,919) (3,100) Underlying EPS growth (%) (73.5) 124 18.1 16.6 13.7 Operating profit (1,164) (848) (488) (66) 119 Dividend growth (%) (55.0) 11.1 21.7 16.6 13.7 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 5.3 10.6 10.5 11.0 11.5 Finance income 56 103 102 104 106 Operating profit margin (%) (9.0) (4.5) (2.5) (0.3) 0.5 Finance expenses (529) (645) (497) (526) (549) Underlying profit margin (%) 8.7 14.1 16.1 16.7 17.4 Associates & JCE 2,637 4,020 4,123 4,276 4,629 Net debt/equity (%) (17.0) (16.8) (14.4) (13.5) (12.9) Profit before taxation 1000 2,629 3,241 3,788 4,305 Net debt/total assets (%) (10.7) (9.6) (9.1) (8.5) (8.2) Taxation 65 (101) (123) (152) (172) Current ratio (%) 225 147 156 149 146 Non-controlling interests 69 124 16 18 21 Dividend payout (%) 51.1 24.3 25.0 25.0 25.0 Net profit 1,134 2,653 3,133 3,654 4,154 Interest cover (x) (2.2) (1.3) (1.0) (0.1) 0.2 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 2.0 4.1 4.0 4.0 4.0 Underlying Profit 1,134 2,653 3,133 3,654 4,154 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 113 101 96.7 96.5 96.5 Interest burden (%) (85.9) (310) (665) (5,753) 3,611 Operating profit margin (%) (9.0) (4.5) (2.5) (0.3) 0.5 Asset turnover (x) 0.3 0.4 0.3 0.4 0.4 Leverage ratio (x) 1.6 1.7 1.7 1.6 1.6 ROA (%) 2.4 4.9 5.5 6.2 6.6 ROE (%) 3.8 8.2 9.1 9.9 10.4 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 5,927 7,366 8,667 10,093 11,559 Operating profit 1,593 3,174 3,614 4,162 4,682 Associates & JCE 16,882 18,425 19,354 20,342 21,467 Depreciation & amortization 668 951 907 1,071 1,249 Others 6,350 5,539 5,943 6,382 6,830 Interest income (336) (476) (394) (433) (464) Non-current assets 29,160 31,329 33,964 36,817 39,856 Change in working capital 1,555 566 (133) 177 121 Inventories 1,397 2,036 2,057 2,301 2,486 Tax paid (117) (172) (123) (152) (172) Debtors & prepayments 3,303 4,725 4,810 5,412 5,880 Other operating cashflow (2,878) (3,495) (4,102) (4,218) (4,541) Bank deposits & cash 9,316 14,083 9,894 10,063 10,335 Operating activities 485 548 (232) 608 875 Others 6,258 5,669 5,881 6,491 6,966 Purchase of non-current assets (Capex) (2,948) (1,904) (2,723) (3,064) (3,329) Current assets 20,274 26,514 22,642 24,267 25,668 Free cash flow (2,463) (1,356) (2,955) (2,455) (2,454) Bank & other borrowings 2,515 9,397 5,852 6,584 7,155 Disposal of non-current assets 16 257 111 128 165 Trade & payables 6,376 8,637 8,610 9,633 10,408 Associates & JCE (net) (1,324) (1,333) 0 0 0 Taxation 139 25 25 25 25 Interest received 2 3 4 5 6 Others 0 0 0 0 0 Dividends received 3,642 3,026 3,194 3,288 3,504 Current liabilities 9,030 18,059 14,487 16,242 17,588 Other investing cashflow 2,942 663 (212) (610) (475) Bank & other borrowings 7,776 4,775 4,775 4,775 4,775 Investing activities 2,331 711 374 (253) (129) Others 564 893 893 893 893 New loans raised 4,561 6,395 (618) 4,024 4,147 Non-current liabilities 8,340 5,668 5,668 5,668 5,668 Repayment of loans (4,522) (2,354) (2,926) (3,292) (3,577) Net assets 32,064 34,116 36,451 39,173 42,268 Dividends paid (1,757) (538) (783) (914) (1,038) Share capital 6,435 6,435 6,435 6,435 6,435 Other financing cashflow (31) 9 0 0 0 Premium & reserves 24,707 26,876 29,226 31,967 35,082 Financing activities (1,749) 3,512 (4,328) (181) (468) Shareholders' funds 31,142 33,311 35,661 38,402 41,517 Inc/(dec) in cash 1,067 4,770 (4,186) 174 278 Non-controlling interests 922 805 789 771 751 Cash at beginning of year 8,239 9,316 14,083 9,894 10,063 Total equity 32,064 34,116 36,451 39,173 42,268 Foreign exchange effect 11 0 0 0 0 Source: Guosen Research estimates Cash at end of year 9,318 14,086 9,898 10,068 10,341 Source: Guosen Research estimates

Guosen Securities (HK) 66

Company Research Initiating Coverage

Geely Automobile (175 HK) Hong Kong / Auto Swimming in the red ocean 11 February 2015 NEUTRAL Target price HK$3.20 Like other domestic brands, Geely is in a weak position in China’s PV Last price (9 Feb 15) HK$3.25 market, with low ASP and low sales per model. Although Geely is Upside/downside (%) (1.5) striving to upgrade its product line, we see more challenges due to HSI 24521 weak brand recognition. With export market losing momentum and Mkt cap (HK$bn/US$bn) 28.6/3.7 52 week range (HK$) 2.40 - 3.70 hardly profitable EV business, we forecast FY16 net profit remains 8.6% Avg trading volume daily (US$mn) 18.89 short of the 2013 peak. Initiate with Neutral and TP of HK$3.20. Free float (%) 50.4

Source: Bloomberg

The fourth largest private auto OEM in China Geely Auto is one of the main private auto OEMs in China. As of 2014, the sales Performance volume of Geely was 417k units, taking up 2.1% share in China’s PV market, ranked HK$ fourth among private auto OEMs. As of 2014, Geely has 8 production bases with annual capacity of 670k units. Geely is streamlining and upgrading its production 3.50 100% platforms for cost reduction and higher production efficiency. 90% 3.00 Relative weak position in the China auto market 80% Private domestic brands used to be weak in the China auto market, and Geely is no 2.50 exception. Although the no. of “effective models” increased from 7 to 15 from 70% 2008 to 2014, the sales volume per model has dropped significantly. Most of Geely 2.00 60% models are priced below RMB 100,000 and it was difficult to enhance the ASP due Feb-14 Oct-14 to weak brand name recognition. Compared to other brands, Geely’s products Price(LHS) Rel. to HSI(RHS) were low in both ASP and sales volume.

Upgrades in domestic sedan models set to face more challenges

Geely is striving to promote its brand name image through the launch of GC9. Performance 1M 3M 12M Although we agree that GC9 will be value-for-the-money, there are more Absolute (%) 16.5 (10.0) 2.2 challenges than chances for the upgrade. Unlike SUVs, the brand recognition of Absolute (US$, %) 16.5 (10.0) 2.3 domestic sedans is lower, especially in the high-end market, and there has virtually Relative to HSI (%) 14.0 (14.1) (11.1) Source: Bloomberg no successful domestic B-class sedans. Export losing steam, electric cars can hardly be a profit driver Export took up 14% of Geely’s 2014 total sales, but we are expecting 16% drop in sales in 2015 due to weak external environment. On the other side, although the Company background strategy to form JVs to capture the electric vehicle market opportunity is wise for Geely Automobile Holdings Limited, through its subsidiaries, Geely, we can barely see any chance to earn a decent profit in the market. manufactures and sells automobiles and related components. Source: Bloomberg Initiate with Neutral rating with TP of HK$3.20 Although Geely is upgrading its product mix, we still see it as a traditional domestic OEM, which is losing competitive edge facing fierce competition from JV giants. We expect Geely to achieve 7.6% CAGR in sales volume and 33% net profit CAGR from FY14-FY16, yet FY16 net profit would still be 8.6% lower than the record in 2013. The current price represents 10.3x 2015PE, which we think is fair. Initiate with Neutral rating and TP of HK$ 3.20, which represents 10x 2015PE. Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 24,628 28,708 23,371 28,042 29,569 Operating Profit 2,725 3,354 1,804 2,841 3,094 John Luo Reported Profit 2,040 2,663 1,379 2,228 2,434 SFC CE No.: AVT518 Underlying Profit 2,040 2,663 1,379 2,228 2,434 +852 2899 8300 Underlying EPS (CNY) 0.25 0.30 0.16 0.25 0.28 [email protected] DPS (CNY) 0.03 0.03 0.02 0.03 0.03 BVPS (CNY) 1.59 1.83 1.97 2.19 2.44 P/E (x) 10.4 8.7 16.7 10.3 9.5 Dividend Yield (%) 1.1 1.3 0.7 1.1 1.2

P/B (x) 1.6 1.4 1.3 1.2 1.1

Source: Guosen Securities(HK)

67 See the last page of this report for important disclosures

公司报告首次覆盖

吉利汽车 (175 HK) 香港 / 汽车依然在红海挣扎 2015 年 2 月 11 日中性和其他很多自主品牌一样，吉利汽车在中国乘用车市场中处于弱势目标价 HK$3.20 地位，产品的单价以及单品销量都很低。虽然吉利汽车正在努力升收盘价 (9 Feb 15) HK$3.25 级其产品线，我们认为由于品牌认可度太低，挑战可谓重重。展望 Upside/downside (%) (1.5) 来年，我们认为出口市场将萎缩，电动车业务难以获利，预计公司恒生指数 24521 在 FY16 的净利润依然会比 2013 年的高峰低 8.6%。首次覆盖给予总市值 (HK$/US$bn) 28.6/3.7 52 周最高/最低 (HK$) 2.40 - 3.70 中性评级，目标价为 3.20 港元。日均成交额 (US$mn) 18.89

流通量 (%) 50.4 中国第四大私人汽车企业资料来源: 彭博吉利汽车是中国最主要的私人汽车企业之一。在 2014 年，吉利汽车的销量达到 41.7 万辆，占中国乘用车市场 2.1%的份额，排名私人汽车企业第股价表现四。2014 年，吉利汽车有 8 个生产基地，年产能达到 67 万辆。吉利汽车 HK$ 正在精简和升级其生产平台以达至降低成本，提升效率的目的。 3.50 100%

在中国汽车市场处于弱势地位 90% 3.00 自主品牌在国内的汽车市场中通常处于弱势地位，吉利汽车也一样。虽然 80% 公司的“有效车型”数量从 2008 年的 7 个上升到 2014 年的 15 个，但是 2.50 单车销量下降严重。吉利汽车的多数车型都定价在人民币 10 万元以内， 70%

而由于品牌认可度差，提价变得非常困难。总体而言，相比于其他汽车品 2.00 60% 牌，吉利汽车的产品在单价以及销量方面都较低。 Feb-14 Oct-14

Price(LHS) Rel. to HSI(RHS)

自主品牌轿车的品牌升级困难重重吉利汽车正致力于通过最新的 GC9 车型来提升其品牌美誉度。虽然我们认为 GC9 将会性价比非常高，但是产品升级的难度可能更大。和 SUV 产品不股票数据 1M 3M 12M 绝对回报 (%) 同，国内轿车品牌的认可度远远低于 SUV，尤其是在中高端市场。事实上， 16.5 (10.0) 2.2 绝对回报 (US$, %) 16.5 (10.0) 2.3 我们还没有看到成功的自主品牌 B 级轿车。相对 HSI 回报 (%) 14.0 (14.1) (11.1) 资料来源: 彭博

出口市场失速，电动车业务难以贡献盈利

出口占吉利汽车 2014 年总销量 14%，但是我们预计 2015 年出口量可能会公司簡介下跌 16%。另一方面，虽然通过合资公司进入电动车行业比较明智，但是吉利汽车控股有限公司及其附属公司制造及销售汽车及配我们几乎看不到这个行业会产生大规模利润的可能性。件.

资料来源: 彭博首次覆盖给予中性评级，目标价 3.20 港元

虽然吉利汽车正在升级其产品线，我们依然认为公司是一家传统的自主品牌汽车厂，并且在合资公司压迫下竞争力可能逐渐丧失。我们预计吉利汽车在 FY14 到 FY16 的销量复合增长率为 7.6%,净利润复合增长率为 33%。然而 FY16 的净利润依然低于 2013 年高点 8.6%。目前公司的估值为 10.3x 2015PE，我们认为估值合理。首次覆盖给予中性评级，目标价 3.2 港元，

相当于 10x 2015PE.

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 24,628 28,708 23,371 28,042 29,569 经营盈利 2,725 3,354 1,804 2,841 3,094 净利润 2,040 2,663 1,379 2,228 2,434 罗文安实际盈利 2,040 2,663 1,379 2,228 2,434 证监会中央编号:AVT518 每股实际盈利 (CNY) 0.25 0.30 0.16 0.25 0.28 +852 2899 8300 每股股息 (CNY) 0.03 0.03 0.02 0.03 0.03 [email protected] 每股账面价值 (CNY) 1.59 1.83 1.97 2.19 2.44 市盈率 (x) 10.4 8.7 16.7 10.3 9.5 股息率 (%) 1.1 1.3 0.7 1.1 1.2

市净率 (x) 1.6 1.4 1.3 1.2 1.1

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 68

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Fourth largest private auto OEM in China Introduction to Geely Auto Geely Auto (0175.HK) is the listed subsidiary of Geely Group. Headquartered in Zhejiang Province, th Geely Group was the 4 Geely Group is one of the largest private auto OEMs in China. largest private auto OEM group in 2014 As of 2014, Geely Group was the 12th largest auto OEM group and the 4th largest private group in terms of sales volume in China.

Figure 3 Sales volume of major auto OEM groups (2014)

SAIC DFMC FAW CHANG'AN BAIC GAC BRILLIANCE GWM CHERY JAC BYD GEELY

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2014 2013

Source: CAAM, Guosen Securities(HK) Research

Geely Auto is 42.6% held by Geely Holdings, which is beneficially owned by Mr. Li Shu Fu and his associate. BlackRock Inc. holds another 7% share, and the rest are public holdings. In 2010, Geely Auto’s parent company, Geely Holdings, acquired 100% stake in Volvo Cars. Since then, Geely Auto has cooperation with the Volvo team in terms of research and development.

Figure 4 Shareholding structure of Geely Auto

Geely Holding 42.6% Others 50.4%

BlackRock, Inc. 7.0% Source: Company, Guosen Securities(HK) Research

Products include sedan, Geely Auto manufactures sedan, SUV, taxi, and auto components. The main models of Geely SUV, taxi and components include Xin Dihao series, LG-1, GX7, Maple etc. Geely Auto used to sell car through three brands, Emgrand, Gleagle and Englon. In 2014, Geely consolidated these three brands into one Geely brand, so the new products are all names after Geely. The Xin Dihao series was actually the rebranded Emgrand series.

Guosen Securities (HK) 69

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 5 Major models by Geely Auto ( The three brands were consolidated into one “Geely” brand in 2014)

Source: AutoHome, Guosen Securities(HK) Research

Dihao series was the largest In 2014, Geely sold 418k units of cars, of which 40% are from the Dihao series (Xindihao, Emgrand volume contributor EC7, and Emgrand EC8), and 17% from the A0-class sedan LG-1. As of 2014, sedan accounted for 85% of Geely’s sales, and SUV the remaining 15%. Furthermore, A-class and A0-class sedan took up 49% and 35% of total sales, respectively.

Figure 6 Sales breakdown of Geely (2014) Figure 7 Sales breakdown of Geely (2014) Sedan: B- GC7 New SC6 SUV Vision class 3% Vision 2% Emgrand 15% 4% 2% EC7 1% FreeCruis 20% er 4% Panda 6% Maple 6% Xindihao 20% Sedan: A0-class GX7 Sedan: A- 35% class 14% LG-1 49% 17% Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Company, Wind, CAAM, Guosen Securities(HK) Research Capacity of 670k units as of 2014 Geely has eight production facilities located in Linhai, Luqiao, Ningbo, Lanzhou, Xiangtan, Shanghai, Jinan, and Chengdu, each producing different types of models. The Ningbo plant was the largest one with capacity of 200k units/year and mainly produced the star product EC7. The combined capacity of Geely Auto was 670k units/year as of 2014. Given the total sales volume 2014 capacity of 670k units in 2014 was 418k units, the utilization rate was 62.4%. In Feb. 2015, Geely announced the acquisition of the Chunxiao manufacturing plant from Zhejiang Geely for a consideration of RMB 1.14bn, and that will add another 100k/year high-end product capacity to the company.

Guosen Securities (HK) 70

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 8 Geely has annual capacity of 670k units (2014A) Capacity 2011A 2012A 2013A 2014E Interest Total Products 600,000 625,000 670,000 670,000 99% Linhai plant Geely Panda (1.0L, 1.3L, 1.5L) / GX2 (1.3L, 1.5L) 75,000 75,000 50,000 50,000 99% Luqiao plant Geely Kingkong (1.5L) / SC5 (1.5L) / SC6 (1.5L) 100,000 100,000 100,000 100,000 99% Ningbo/Cixi plants Free Cruiser (1.0L, 1.3L, 1.5L) / EC7 (1.5L, 1.8L) / EC7-RV (1.5L, 1.8L) 160,000 160,000 200,000 200,000 99% Lanzhou plant Free Cruiser (1.0L, 1.3L, 1.5L) / SC3 (1.3L) 25,000 40,000 40,000 40,000 99% Xiangtan plant Vision (1.5L, 1.8L) / SC7 (1.5L, 1.8L) / GC7 (1.5L, 1.8L) 50,000 100,000 100,000 100,000 Shanghai plant (Phase I) - 99% TX4 (2.4L, 2.5L diesel) 10,000 30,000 30,000 30,000 (Leased to Shanghai LTI) 99% Jinan plant EC8 (2.0L, 2.4L) 60,000 60,000 50,000 50,000 99% Chengdu plant GX7 (1.8L, 2.0L, 2.4L) / SX7 (1.8L, 2.0L, 2.4L) 60,000 60,000 100,000 100,000 99% Shanghai Plant (phase II) Englon SC7 (1.5L, 1.8L) 60,000 - - - Source: Company data, Guosen Securities(HK) Research Improving production platforms Geely is streamlining its production platforms in order to make better use of its capacity. It has six production platforms, which includes mini sedan, small sedan, and compact sedan platforms. Geely’s mini sedan and small sedan platforms mainly produce Panda and Kingkong series sedans. The FE platform mainly manufactures Vision and Dihao series sedans and SUVs. By the end of 2014, Geely launched the B-class sedan platform (through the acquisition of the Chunxiao plant), which will produce high-end products such as GC9 and GC-2 (next generation of EC8). Going into 2016, the company will launch the first module platform, CMA platform, in order to produce jointly developed products with Volvo. Overall speaking, Geely is on its way to improve both the production process and efficiency.

Figure 9 Production platforms of Geely Platform Class Models Start production Mini sedan A00 sedan Panda series

Small sedan A0 sedan Kingkong series

FE platform A- compact sedan Vision series 2015 FE platform A compact Dihao series(Xin Dihao, Dihao Cross, Dihao SUV) 2015 CMA platform A+ compact New products with Volvo 2016 KC platform B class GC9, GC-2 2014

Source: News, Guosen Securities(HK) Research

Guosen Securities (HK) 71

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Relatively weak position in China’s auto market More models, less average volume The auto manufacturing business is highly dependent on economies of scale, so we believe it is of vital important for auto OEM to produce models with high sales volume instead of many models with low sales volume. As a common criterion for compact models, we take 50k units/year as a threshold to evaluate whether a model is successful or not. We found that four models (three, if we take Xin Dihao and Emgrand EC7 as one model) of Geely has sales volume over 50k units in 2014. We also found that the number of “effective models”1increased from 7 to 15 from 2008 to 2014, Sales volume per “effective model” dropped 49% since however, the average sales volume per effective model decreased by 49% from 54,251 units to 2008 27,807 units in 2014. Hence, Geely is having more models in 2014 than in any year in the past 10 years, but the average sales volume per model has dropped significantly.

Figure 10 Annual sales volume of major models by Geely Model / Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Type Emgrand EC7 ------10,198 71,360 91,693 142,503 192,226 83,257 591,237 Sedan: A-class Xindihao ------81,488 81,488 Sedan: A-class LG-1 - - - 10,740 34,337 57,215 83,590 85,063 84,969 78,444 51,247 70,250 555,855 Sedan: A0-class GX7 ------36 30,793 49,578 58,879 139,286 SUV: A-class Maple 6,417 10,455 24,502 28,492 31,196 37,017 39,814 57,360 46,349 45,569 45,306 26,382 398,859 Sedan: A0-class Panda - - - - - 1,389 28,500 40,588 43,250 31,471 35,085 24,770 205,053 Sedan: A00-class FreeCruiser - - 22,668 52,029 68,258 74,274 110,700 95,189 82,702 66,481 37,857 17,406 627,564 Sedan: A0-class Vision - - - 1,518 11,540 23,516 52,702 63,421 51,478 33,306 36,590 15,492 289,563 Sedan: A-class GC7 ------138 14,948 35,589 13,184 63,859 Sedan: A-class New Vision ------9,642 9,642 Sedan: A-class SC6 ------11,377 27,607 7,168 46,152 Sedan: A0-class Emgrand EC8 ------1,300 14,983 12,771 10,284 3,186 42,524 Sedan: B-class SX7 ------14,722 2,834 17,556 SUV: A-class GX9 ------1,587 1,587 SUV: B-class SC3 ------12,952 12,241 1,585 26,778 Sedan: A0-class SC515 ------432 5,015 2,144 1,090 741 9,422 Sedan: A0-class Haoqing 32,909 55,600 37,505 16,733 4,075 7 ------146,829 Sedan: A0-class Ulion 14,780 18,442 34,376 39,159 20,890 8,239 468 - - - - - 136,354 Sedan: A0-class Merrie 22,118 10,581 10,947 11,980 9,751 2,264 54 - - - - - 67,695 Sedan: A0-class Mybo 50 1,615 3,043 3,844 1,470 284 421 97 126 -1 - - 10,949 Sportscar TX4 ------263 1,033 872 725 46 - 2,939 Taxi Average 19,056 19,339 22,174 20,562 22,690 29,131 54,251 51,914 52,555 40,230 42,263 27,807 165,295 Effective models 4 5 6 8 8 7 6 8 8 12 13 15 * Green-background-color: models with annual sales vol. > 50,000 units * The average line: the average sales volume of effective models * Effective models: means the number of models with annual sales over 1,000 units Source: Company data, Guosen Securities(HK) Research Most models are priced below RMB 100,000 Most of Geely Auto’s models are priced below RMB 10,000. The highest-end model, Emgrand EC8, is priced within a wide range from RMB 89,800 to RMB 209,800. The price range of the best-seller Xin Dihao model was from RMB 69,800 to RMB 100,800. Just like other OEMs, the two SUV models of Geely, GX7 and SX7, are priced higher than normal Most models are priced below RMB 100,000 sedan models.

1 We define “effective model” as the models with annual sales over 1,000 units. These models are failure products for OEMs, but when evaluating the average sales volume per model of an OEM, they will drag down the average significantly, which is unfair. Guosen Securities (HK) 72

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 11 Geely major models: ASP and sales volume (2014)

250 90,000 80,000 200 70,000 60,000 150 50,000 40,000 100 30,000 50 20,000 10,000 0 -

ASP('000 RMB,LHS) 2014 sales vol.(RHS)

Source: Company, AutoHome, Guosen Securities(HK) Research Low sales volume per model compared to other brands As of 2014, although Geely has 16 models in the market, but most of these models are poor in sales performance in China’s auto landscape. Only three models are with annual sales volume over 50,000 units, they are Dihao series (Emgrand EC7 and Xin Dihao), LG-1 and GX7. Other models are Weak position in China’s PV low in both sales volume and ASP. landscape Figure 12 Sales volume of Geely's major models in China’s auto landscape (2014)

ASP (RMB '000) 450 400 350 300 Sedan 250 SUV 200 MPV 150 100 50 Sales vol. - 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 * Note 1: ASP was represented by the best-seller option’s MSRP; sales volume was the total wholesale number in 2014 * Note 2: sales volume of several models are too low to be included in our database * Note 3: the sales volume of Emgrand EC7 and Xin Dihao are combined as one model Source: Wind, AutoHome, CAAM, Guosen Securities(HK) Research

Guosen Securities (HK) 73

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Headwinds in upgrading domestic sedan models 2015 a weak product-cycle year Geely’s major new models in 2015 include the annual facelift of Kingkong (LG-1) and Free Cruiser, a major improvement version of new Emgrand EC7, GC9, Dihao Cross and another compact SUV. Geely also prepared a hybrid model, but the launch time may depend on market situation. We believe the product cycle for Geely in 2015 is weak, based on: 1. Most new models are only facelifts: the 2015 version of Kingkong, Free Cruiser and EC7 are facelifts. 2. Hybrid model and GC9 not volume driver. Since the sales volume of hybrid model and domestic B-class sedans are not likely to be very strong, we believe these two new models cannot provide significant sales growth in 2015. Weak product cycle in 2015 3. We expect most models will be launched in 2H15: Dihao cross and compact SUV are expected to be launched by year-end.

Figure 13 Major new models of Geely in 2015 Model Note Hybrid models Launch time depend on market situation Compact SUV A-class SUV, launch by year-end Kingkong / Free Cruiser Facelift Dihao cross launch by year-end New EC7 major improvement GC9 New B-class sedan, launch in March

Source: Company, Guosen Securities(HK) Research Domestic B-class sedan likely to face stronger headwinds than SUVs As foreign brands continued to lower their product mix to lower price ranges in recent years, the pressure on domestic brands was increasing. Therefore, it is important for domestic brands to fight back and launch more competitive higher-end products. However, due to historical reasons, recognition of domestic brands was very weak in China, Weak recognition for domestic sedans especially in the high-end market. We found that most domestic brand models were in a very weak position in China’s auto market, as evidenced that they used to have low ASP but also low sales volume per model. The models outside the yellow line are more “successful” than the ones inside the line, as they either has higher ASP, or has higher sales volume. We can see clearly from the chart that most of the successful domestic models are SUVs. For products that are priced above RMB 100,000 (above the green line), there were rarely any sedan models.

Guosen Securities (HK) 74

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 14 Sales performance of main domestic brand products (2014)

RMB ('000) 500

450

400

350

300

250

200

斯柯达晶锐 150

中华H330 斯柯达昕锐

宝骏乐驰

马自达3

东风风神S30

铃木雨燕

英伦SC7 斯柯达速派

全球鹰自由舰奇瑞艾瑞泽7 奔驰E级 Domestic SUVs were more 100 铃木天语SX4 凯美瑞海马M3 铃木奥拓长丰猎豹黑金刚

海马福美来

迈腾本田思域英伦金刚启辰R50

福特嘉年华奔驰GLK300 迈锐宝速腾 “successful” than domestic 现代全新胜达天籁起亚K5 青年莲花L3 花冠长安悦翔比亚迪F0 奥迪Q3

众泰Z300 标致408 高尔夫江铃驭胜本田凌派帕萨特海马骑士奥迪A4L 宝骏630 荣威350 桑塔纳标致508 sedans 铃木北斗星

马自达6 马自达CX-5 POLO 50 比亚迪L3 长安逸动雪铁龙爱丽舍三菱新劲炫奇瑞QQ 明锐

长安悦翔 Sales volume 0 - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Domestic SUV Domestic sedan Japanese S. Korean German U.S.

Source: Wind, AutoHome, Guosen Securities(HK) Research

There are three models for domestic brands upgrading their product lines: 1) GWM model - through SUVs 2) Geely model – through technology upgrade through partnership and sedan 3) BYD model- through new energy vehicles So far, we view the GWM model as the most successful one in the brand name promotion process, as the market awareness and recognition of domestic SUVs are much higher than domestic sedans. On the other hand, Geely is seeking to promote its brand name through bringing-in the technology of Volvo and through more sedan models. However, due to weaker brand name recognition of domestic sedan models, we believe that Geely Auto will face more challenges in this process. A closer look at Geely GC9 – a “Volvo made, Geely brand” B class sedan Geely GC9 is the joint development product by the Geely and Volvo research teams, and Geely has high expectation on this model to promote its brand image. We believe Geely wants to deliver the message to the market that this model is designed and made by Volvo, only that the brand belongs to Geely. As a result, customers should have a higher confidence and recognition of this model. GC9 was the first B-class sedan model by the KC platform, which the company intended to build more high-end products. The market expects GC9 will be priced above RMB 150,000.

Guosen Securities (HK) 75

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 15 Geely GC9 – exterior design Figure 16 Geely GC9 – interior design

Source: AutoHome, Guosen Securities(HK) Research Source: AutoHome, Guosen Securities(HK) Research Judging on the design and quality of GC9, we believe that GC9 would be a product value for the money. However, we also worry supply-demand mismatch of this model. The length of GC9 is higher than that of Audi A4L/ BMW 3 series/ Mercedes-Benz C class sedans, GC9 should be a B-class sedan mainly for business while lower than that of C-class luxury sedans such as Audi A6L. GC9 offers with three engine use options: 1.8T/2.4L/3.5L, all of which are large engines. Hence, this model is B+ class and the potential customer might mostly from business users.

Figure 17 Length comparison of GC9

Audi A6L

BMW 5 series

Benz E class

Accord

BMW 3 series

Benz C class

Audi A4L

Roewe 950

Changan Raeton

GC9

4,400 4,500 4,600 4,700 4,800 4,900 5,000 5,100

Source: AutoHome, Guosen Securities(HK) Research

However, due to the weak brand name recognition, we expect that there will be limited demand for this model in business use. We examined the comparable models of GC9 and found that the average annual sales volume of these models from 2011-2014 only ranged from around 7k units to 13k units. Moreover, the sales volume declined rapidly one or two years after launch. There was literally no successful domestic B-class If the sales performance of GC9 is similar to the comparable models, it will not be able to create a sedan model positive-enough image for the Geely brand in the mid-high-end market.

Guosen Securities (HK) 76

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 18 Sales volume of comparable models of GC9 Models 2011 2012 2013 2014M11 Total BYD G6 7,668 41,075 25,556 7,997 82,296 BYD Sirui - - 22,264 15,576 37,840 Changan Raeton - 98 7,186 8,211 15,495 GAC Trumpchi GA5 - - 7,726 3,071 10,797 Emgrand EC8 17,130 14,001 10,281 2,742 44,154 Chery Eastar 1,261 1,158 584 195 3,198 Roewe 950 - 4,905 3,804 2,175 10,884 Besturn B70 27,773 14,233 7,903 20,022 69,931 Besturn B90 - 3,865 8,346 3,551 15,762 Average 13,458 11,334 10,406 7,060 32,262 * 2014M11 means the total sales volume for the first 11 months in 2014 Source: Wind, Guosen Securities(HK) Research

Another headwind comes from the fierce competition in the B-class sedan market. In 2H14, the deep price discount in luxury A class sedan (such as BMW 3 series) has put huge pressure on other Another headwind from the pricing pressure of current non-luxury-brand models. If this situation continues, the sales performance of GC9 would be B-class models seriously affected. Based on the foregoing reasons, we only have a conservative sales volume estimate for the model in 2015 to 2016 of 20k/30k units. Export market losing steam, electric cars hardly a profit driver Export took up 14% of sales in 2014 Geely was one of the main auto exporters in previous years. From 2010 to 2013, Geely’s export volume increased 4.8 times from 21k units to 109k units. In 2013, export accounted for 22% of Geely’s total sales volume. The export destinations of Geely are mainly developing countries, and mostly oil producers. In 2014, due to the plunge in oil price and strong RMB, Geely’s export business was seriously hurt. Geely exported around 6.0k units of cars in 2014, down by 50% YoY, contributing to 14% of its total sales.

Figure 19 Sales destination of Geely (2014) Figure 20 Export destination of Geely Auto (2013A) Export Others 14% 15% Russia 27% Chile 4% Belarus 5%

Egypt 10%

Ukraine 16% Domestic Iran 86% 11% Saudi Arabia 12% Source: Company, Wind, CAAM, Guosen Securities(HK) Research Source: Company, Wind, CAAM, Guosen Securities(HK) Research 2015 export growth under pressure The biggest export market of Geely, Russia, was in an economic turmoil after the plummet of oil price. The Russian Rubble dropped over 50% compared to the U.S dollar. Partly due to the adverse Expect 16% drop in export volume in 2015 market situation, Geely announced a profit warning in Dec. 2014. Given the adverse situation in the export market, we estimate that Geely’s export volume will shrink by 16% to 50k units.

Guosen Securities (HK) 77

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 21 Sales volume by destination (units) Figure 22 Sales volume by destination (proportion)

600,000 100% 90% 500,000 80% 70% 400,000 60% 300,000 50% 40% 200,000 30% 20% 100,000 10% - 0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2010A 2011A 2012A 2013A 2014E 2015E 2016E

- Domestic - Export - Domestic - Export

Source: Company, Guosen Securities(HK) Research Source: Company, Guosen Securities(HK) Research Electric cars: wise move to invest through JVs, yet low chance to earn decent profit Geely is closely observing the booming electric car industry and investing in this space mainly through JVs. Geely formed the first 50%:50% JV with Zhejiang Kangdi in April 2013 to produce low-speed electric cars. The first model of the JV was K11, a small electric car based on the Panda production platform of Geely. This K11 model only has a range of 80km to 90km (if air-conditioner is turned on, the range will shorten to around 60km), and only suitable for in-city transportation. Geely and Kangdi formed another rental JV to buy these electric cars and rent them to citizens. Kangdi Electric announced that by the end of 2014, the company delivered 14,398 units of electric cars. In Jan. 2015 Geely further announce that it will form another JV with Xin Dayang Mechanical and Electrical Group Company to produce electric cars. The potential model is similar to the ones produced by the Kangdi-Geely JV.

Figure 23 Electric car model by Kangdi-Geely JV Figure 24 Electric car model by Xin Dayang-Geely JV

Source: AutoHome, Guosen Securities(HK) Research Source: AutoHome, Guosen Securities(HK) Research

Although electric cars are highly encouraged by the government, we are cautious on the sustainable growth of these low-speed electric vehicles, given: We are no fan of low-speed electric cars 1. Low economic benefit to customers. Battery cost consists of around 30%-50% of the total cost in an electric car, and that means the car price will have to almost twice the original model. However, given the high price-sensitive nature of potential customers, they will be very reluctant to buy such models without heavy government subsidies, let alone the short mileage range. That is why most current electric cars are sold through two ways, one is to government-subsidy-oriented rental companies (such as the rental company by Geely and Kangdi), and the other is to customers in cities with license limits (such as Shanghai).

Guosen Securities (HK) 78

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

2. Loss without subsidy. Currently, the central government subsidizes OEMs RMB 47,000 per qualified electric car, and some local government will give similar subsidies to customers. However, with an MSRP only at around RMB 70,000, Kangdi-Geely JV’s electric car can hardly be profitable without subsidy. 3. First-movers may not have advantage. The structure of low-speed electric cars is much simpler compared to normal cars, and the key for mass production is about battery cost. As a result, we believe the first-mover advantage in the low-speed electric car production is rather limited. On the contrary, late-entrants will benefit from the adoption of new technologies. We are conservative over the development of electric cars, especially low-speed electric cars. We believe that Geely is wise to invest in this space through JVs, which will not only increase the utilization rate of existing production facilities, but also limit the inputs of resources. However, even if these JVs can generate net profit, we will view that as “virtual” profit, as they will evaporate once the government stops the subsidy.

Guosen Securities (HK) 79

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Financial analysis Financial forecasts Due to the slowdown in auto market both in the domestic market and abroad, we are cautious on the sales growth of Geely. We expect that sales volume will grow by 10% in FY15 to 462k units, which is largely in line with the company’s 2015 target. However, FY16 sales growth will slow to 5% to 483k units, still 12% lower than the record in 2013. The Xin Dihao series will be the largest revenue source with 42% contribution in FY15.

Figure 25 Sales volume estimates Figure 26 Sales volume growth estimates Sales volume (units) 2010A 2011A 2012A 2013A 2014E 2015E 2016E Sales volume growth(%) 2011A 2012A 2013A 2014E 2015E 2016E Total 415,843 421,611 483,483 549,468 417,851 461,691 483,471 Total 1% 15% 14% -24% 10% 5% Mybo 97 126 -1 - - - - Mybo 30% -101% -100% -100% -100% FreeCruiser 95,189 82,702 66,481 37,857 17,406 14,795 12,576 FreeCruiser -13% -20% -43% -54% -15% -15% LG-1 85,063 84,969 78,444 51,247 70,250 42,150 46,365 LG-1 0% -8% -35% 37% -40% 10% SC515 432 5,015 2,144 1,090 741 148 163 SC515 1061% -57% -49% -32% -80% 10% Vision 63,421 51,478 33,306 36,590 15,492 3,098 310 Vision -19% -35% 10% -58% -80% -90% New Vision - - - - 9,642 57,852 63,637 New Vision 500% 10% Panda 40,588 43,250 31,471 35,085 24,770 17,339 12,137 Panda 7% -27% 11% -29% -30% -30% TX4 1,033 872 725 46 - - - TX4 -16% -17% -94% -100% -100% -100% Xindihao - - - - 81,488 187,422 178,051 Xindihao 130% -5% Emgrand EC7 71,360 91,693 142,503 192,226 83,257 8,326 9,158 Emgrand EC7 28% 55% 35% -57% -90% 10% Emgrand EC8 1,300 14,983 12,771 10,284 3,186 3,027 3,027 Emgrand EC8 1053% -15% -19% -69% -5% 0% GC7 - 138 14,948 35,589 13,184 11,866 11,272 GC7 10732% 138% -63% -10% -5% GX7 - 36 30,793 49,578 58,879 50,047 47,545 GX7 85436% 61% 19% -15% -5% SX7 - - - 14,722 2,834 2,692 2,288 SX7 -81% -5% -15% SC3 - - 12,952 12,241 1,585 1,744 1,918 SC3 -5% -87% 10% 10% SC6 - - 11,377 27,607 7,168 6,093 5,484 SC6 143% -74% -15% -10% GX9 - - - - 1,587 6,348 6,983 GX9 300% 10% EC9 - - - - - 20,000 30,000 EC9 50% Others - - - - - 5,000 30,000 Others 200% Maple 57,360 46,349 45,569 45,306 26,382 23,744 22,557 Maple -19% -2% -1% -42% -10% -5% Source: Company, Wind, CAAM, AutoHome, Guosen Securities(HK) Research Source: Company, Wind, CAAM, AutoHome, Guosen Securities(HK) Research

Figure 27 Retail revenue estimates ( RMB m) Figure 28 Revenue contribution estimates Revenue 2010A 2011A 2012A 2013A 2014E 2015E 2016E Contribution 2010A 2011A 2012A 2013A 2014E 2015E 2016E Total 23,502 25,433 30,239 35,734 28,278 33,931 35,779 Total 100% 100% 100% 100% 100% 100% 100% Mybo 5 6 -0 - - - - Mybo 0% 0% 0% 0% 0% 0% 0% FreeCruiser 3,988 3,465 2,786 1,586 729 620 527 FreeCruiser 17% 14% 9% 4% 3% 2% 1% LG-1 5,104 5,098 4,707 3,075 4,215 2,529 2,782 LG-1 22% 20% 16% 9% 15% 7% 8% SC515 22 251 107 55 37 7 8 SC515 0% 1% 0% 0% 0% 0% 0% Vision 3,672 2,981 1,928 2,119 897 179 18 Vision 16% 12% 6% 6% 3% 1% 0% New Vision - - - - 558 3,350 3,685 New Vision 0% 0% 0% 0% 2% 10% 10% Panda 2,431 2,591 1,885 2,102 1,484 1,039 727 Panda 10% 10% 6% 6% 5% 3% 2% TX4 236 199 165 10 - - - TX4 1% 1% 1% 0% 0% 0% 0% Xindihao - - - - 6,258 14,394 13,674 Xindihao 0% 0% 0% 0% 22% 42% 38% Emgrand EC7 4,995 6,419 9,975 13,456 5,828 583 641 Emgrand EC7 21% 25% 33% 38% 21% 2% 2% Emgrand EC8 182 2,095 1,785 1,438 445 423 423 Emgrand EC8 1% 8% 6% 4% 2% 1% 1% GC7 - 9 985 2,345 869 782 743 GC7 0% 0% 3% 7% 3% 2% 2% GX7 - 3 2,460 3,961 4,704 3,999 3,799 GX7 0% 0% 8% 11% 17% 12% 11% SX7 - - - 1,368 263 250 213 SX7 0% 0% 0% 4% 1% 1% 1% SC3 - - 607 574 74 82 90 SC3 0% 0% 2% 2% 0% 0% 0% SC6 - - 569 1,380 358 305 274 SC6 0% 0% 2% 4% 1% 1% 1% GX9 - - - - 238 952 1,047 GX9 0% 0% 0% 0% 1% 3% 3% EC9 - - - - - 3,000 4,500 EC9 0% 0% 0% 0% 0% 9% 13% Others 250 1,500 Others 0% 0% 0% 0% 0% 1% 4% Maple 2,868 2,317 2,278 2,265 1,319 1,187 1,128 Maple 12% 9% 8% 6% 5% 3% 3% Source: Company, Wind, CAAM, AutoHome, Guosen Securities(HK) Research Source: Company, Wind, CAAM, AutoHome, Guosen Securities(HK) Research We estimate that the total revenue of Geely will grow by -19%/20%/5% in FY14/15/16 to RMB 23.4bn/28.0bn/29.6bn. Thanks to improving product mix, we estimate that the ASP of Geely will increase from RMB 55.9k in 2013 to 61.2k in 2016.

Guosen Securities (HK) 80

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 29 Revenue estimation (ex-VAT @17% and dealer profit @ 4%) Revenue estimate (RMB m) 2010A 2011A 2012A 2013A 2014E 2015E 2016E Total revenue estimate 19,423 21,019 24,991 29,532 23,371 28,042 29,569 VS actual revenue 20,099 20,965 24,628 28,708 23,371 28,042 29,569 diff -676 54 363 824 - - - diff (%) -3% 0% 1% 3% 0% 0% 0%

Average ASP (RMB) 48,334 49,726 50,939 52,246 55,930 60,737 61,160 Source: Company, Guosen Securities(HK) Research

We forecast that the GPM of Geely will drop from 20.1% in FY13 to 18.5%, due to the drop in sales volume. GPM will improve to 19.0%/19.5% in FY15/16 due to higher sales estimates. The SG&A and selling & distribution cost ratio would stay largely the same at 6.0%/5.9% from FY14 to FY16. We estimate that the net profit of Geely will grow by -48%/62%/9% in FY14/15/16, and fully diluted EPS would be RMB 0.16/0.25/0.28, respectively.

Figure 30 Financial model of Geely Auto 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Revenue 20,099 20,965 24,628 28,708 23,371 28,042 29,569 Growth (%) 4.3% 17.5% 16.6% -18.6% 20.0% 5.4%

Cost of sales -16,379 -17,145 -20,069 -22,942 -19,047 -22,714 -23,803 Gross profit 3,720 3,820 4,559 5,766 4,324 5,328 5,766 GPM (%) 18.5% 18.2% 18.5% 20.1% 18.5% 19.0% 19.5% Other income 819 1,041 1,048 1,062 342 946 948 Distribution and selling expenses -1,190 -1,359 -1,483 -1,705 -1,388 -1,666 -1,756 % of revenue (%) 5.9% 6.5% 6.0% 5.9% 5.9% 5.9% 5.9% Administrative expenses, excluding share-based payments -923 -963 -1,319 -1,682 -1,402 -1,683 -1,774 % of revenue (%) 4.6% 4.6% 5.4% 5.9% 6.0% 6.0% 6.0% Share-based payments -273 -137 -79 -87 -71 -85 -90 Finance costs, net -245 -211 -195 -40 -17 -29 -22 Share of results of associates -7 -7 -2 -0 -0 -0 -0 Share of result of a joint venture - - - -9 -8 -9 -10 Profit before taxation 1,900 2,183 2,529 3,304 1,779 2,803 3,062 EBT margin (%) 9.5% 10.4% 10.3% 11.5% 7.6% 10.0% 10.4% Taxation -351 -467 -479 -624 -391 -561 -612 Profit for the year 1,550 1,716 2,050 2,680 1,388 2,242 2,450 Attributable to:

Equity holders of the Company 1,368 1,543 2,040 2,663 1,379 2,228 2,434 Non-controlling interests 181 172 10 17 9 14 16 Fully diluted EPS (RMB) 0.17 0.19 0.26 0.30 0.16 0.25 0.28

Source: Company data, Guosen Securities(HK) Research

The margins of Geely have been quite stable in the past years. We estimate that the GPM in FY14 to FY16 to be 18.5%/19.0%/19.5%, respectively, and EBT margin estimated to be 7.6%/10.0%/10.4% in FY14/15/16, respectively.

Guosen Securities (HK) 81

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 31 ASP assumptions Figure 32 Margins estimation

65,000 25.0%

60,000 20.0%

55,000 15.0%

50,000 10.0%

45,000 5.0%

40,000 0.0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Average ASP (RMB) GPM EBT margin

Source: Company data, Guosen Securities(HK) Research Source: Company data, Guosen Securities(HK) Research We estimate that the CAPEX of Geely will be RMB 701m/1,402m/887m in FY 14/15/16, respectively, and the jump in CAPEX in FY 15 would mainly due to the investment in new product lines and models. We estimate the ROE of Geely in FY14 to FY16 would be 8%/12%/11%, the level is lower than before 2013 due to more fierce market competition and lower profitability.

Figure 33 CAPEX assumptions Figure 34 ROE Estimation RMB m 1800 18% 1600 16% 1400 14% 1200 12% 1000 10% 800 8% 600 6% 400 4% 200 2% 0 0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2010A 2011A 2012A 2013A 2014E 2015E 2016E

CAPEX ROE

Source: Company data, Guosen Securities(HK) Research Source: Guosen Securities(HK) Research Valuation and recommendation We estimate that the net profit of Geely will grow at a CAGR of 32.9% from FY14 to FY16, mainly due to the low base in 2014. Our FY16 net profit forecast of RMB 2,434 is still 8.6% lower than the peak in 2013. We view Geely Auto as a domestic OEM that has weak position in the China auto market. Although the company is striving to upgrade its product line, the challenge is big due to low brand name recognition. The company is currently trading at 10.3x 2015PE, which we believe is fair. Initiate cover of Geely Auto with Neutral rating and TP of HK$ 3.20, which represents 10x 2015PE.

Guosen Securities (HK) 82

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Risk factors Fluctuation in government subsidy The Chinese government is supportive of the research and development in the auto industry, and Geely has long been a beneficiary of government subsidies. From 2010 to 2013, we estimate that government subsidy accounted for 47%/57%/43% of Geely’s net profit, which is significant. Going forward, although we expect there will still be government subsidy, but the amount would be volatile.

Figure 35 Government subsidy was an important source of net profit for Geely

3,000 70%

2,500 60% 50% 2,000 40% 1,500 30% 1,000 20% 500 10% - 0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E Subsidy income from government (RMBm, LHS) Net profit (RMBm, LHS) Government subsidy as a % of net profit (RHS) Source: Company, Guosen Securities(HK) Research Margin pressure We expect the growth in auto sales in China will decelerate from 6.9% in 2014 to 6.1% in 2015. Historically, the operating margin growth and auto sales growth were highly correlated. Under such background, the margins of Geely Auto are subject to pressure in 2015.

Guosen Securities (HK) 83

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Appendix Geely sales volume by model Figure 36 Geely sale volume breakdown by model

New Emgrand Emgrand Xindihao Vision Ulion TX4 SX7 SC6 SC515 SC3 Panda Mybo Merrie Maple LG-1 Haoqing GX9 GX7 GC7 FreeCruis Total Vision EC8 EC7 er 2003 - - 14,780 ------50 22,118 6,417 - 32,909 ------76,274 2004 - - 18,442 ------1,615 10,581 10,455 - 55,600 ------96,693 2005 - - 34,376 ------3,043 10,947 24,502 - 37,505 - - - 22,668 - - 133,041 2006 - 1,518 39,159 ------3,844 11,980 28,492 10,740 16,733 - - - 52,029 - - 164,495 2007 - 11,540 20,890 ------1,470 9,751 31,196 34,337 4,075 - - - 68,258 - - 181,517 2008 - 23,516 8,239 - - - - - 1,389 - 284 2,264 37,017 57,215 7 - - - 74,274 - - 204,205 2009 - 52,702 468 263 - - - - 28,500 - 421 54 39,814 83,590 - - - - 110,700 - 10,198 326,710 2010 - 63,421 - 1,033 - - 432 - 40,588 - 97 - 57,360 85,063 - - - - 95,189 1,300 71,360 415,843 1 - 7,092 - 15 - - - - 4,612 - 9 - 3,965 9,663 - - - - 14,805 - 3,716 43,877 2 - 3,884 - 40 - - - - 3,315 - 13 - 3,497 5,156 - - - - 9,460 - 3,347 28,712 3 - 6,078 - 11 - - - - 3,221 - 9 - 5,332 4,686 - - - - 6,591 - 4,321 30,249 4 - 4,233 - 39 - - - - 4,333 - 13 - 5,680 7,141 - - - - 5,588 - 5,414 32,441 5 - 6,721 - 30 - - - - 3,723 - 9 - 4,235 5,849 - - - - 4,525 - 5,949 31,041 6 - 3,367 - 41 - - - - 2,300 - 13 - 3,817 5,887 - - - - 6,803 - 7,186 29,414 7 - 2,777 - 1 - - - - 2,435 - 5 - 3,275 4,179 - - - - 4,858 - 4,154 21,684 8 - 2,619 - 40 - - - - 1,728 - 5 - 3,271 5,188 - - - - 6,258 - 6,194 25,303 9 - 4,357 - 2 - - - - 3,553 - 9 - 4,743 7,255 - - - - 6,235 - 6,105 32,259 10 - 7,294 - 39 - - - - 3,770 - - - 6,441 8,646 - - - - 6,385 62 7,381 40,018 11 - 6,481 - 2 - - - - 2,945 - 5 - 5,338 9,411 - - - - 11,141 352 8,480 44,155 12 - 8,518 - 773 - - 432 - 4,653 - 7 - 7,766 12,002 - - - - 12,540 886 9,113 56,690 2011 - 51,478 - 872 - - 5,015 - 43,250 - 126 - 46,349 84,969 - - 36 138 82,702 14,983 91,693 421,611 1 - 7,564 - 27 - - 259 - 4,310 - - - 6,172 9,194 - - - - 9,115 696 8,297 45,634 2 - 4,286 - 3 - - 393 - 3,000 - - - 4,070 6,694 - - - - 7,736 675 4,949 31,806 3 - 6,167 - 57 - - 571 - 4,236 - - - 4,076 8,752 - - - - 7,149 936 8,314 40,258 4 - 4,612 - 127 - - 1,041 - 4,024 - 54 - 3,200 6,971 - - - - 5,449 1,535 7,889 34,902 5 - 3,492 - 246 - - 542 - 4,223 - 1 - 3,269 5,104 - - - - 5,374 1,719 7,137 31,107 6 - 2,702 - 30 - - 529 - 2,652 - - - 3,348 6,037 - - - - 5,282 1,506 7,588 29,674 7 - 1,033 - 15 - - 308 - 2,750 - - - 3,360 4,315 - - - - 2,895 998 6,154 21,828 8 - 2,476 - 204 - - 56 - 2,676 - - - 2,160 4,523 - - - - 5,701 1,118 6,679 25,593 9 - 3,270 - 67 - - 415 - 4,273 - - - 3,511 7,158 - - - - 5,199 1,306 7,231 32,430 10 - 4,362 - -4 - - 151 - 3,828 - - - 2,269 7,368 - - - - 8,355 1,621 7,928 35,878 11 - 4,686 - -1 - - 420 - 3,654 - - - 4,603 9,267 - - - - 10,032 1,832 10,027 44,520 12 - 6,828 - 101 - - 330 - 3,624 - 71 - 6,311 9,586 - - 36 138 10,415 1,041 9,500 47,981 2012 - 33,306 - 725 - 11,377 2,144 12,952 31,471 - - - 45,569 78,444 - - 30,793 14,948 66,481 12,771 142,503 483,484 1 - 4,161 - 501 - - 74 - 3,237 - - - 5,444 6,886 - - 52 670 6,387 2,125 8,564 38,101 2 - 3,129 - - - - 172 - 2,583 - - - 4,574 7,208 - - 550 1,194 6,458 2,439 10,789 39,096 3 - 3,001 - 73 - - 165 - 3,120 - - - 4,935 8,600 - - 1,616 2,509 4,659 1,754 10,868 41,300 4 - 2,512 - 2 - - 255 - 3,080 - - - 3,893 7,600 - - 1,615 1,760 5,891 784 9,190 36,582 5 - 1,892 - 70 - - 330 - 2,351 - - - 3,397 7,758 - - 1,750 818 4,183 513 9,755 32,817 6 - 1,500 - 4 - - 161 575 2,165 - - - 4,304 5,729 - - 2,001 792 4,598 817 11,849 34,495 7 - 1,542 - 7 - 167 64 1,118 2,127 - - - 2,084 4,887 - - 2,904 1,113 2,728 268 9,313 28,322 8 - 1,070 - 26 - 1,376 60 1,420 1,944 - - - 2,249 5,106 - - 3,113 482 4,205 591 8,529 30,171 9 - 2,735 - 27 - 2,413 345 2,414 1,898 - - - 1,525 5,644 - - 4,544 1,058 5,067 454 14,931 43,055 10 - 2,587 - 7 - 2,557 106 2,865 3,067 - - - 3,417 7,113 - - 4,581 625 6,332 476 14,876 48,609 11 - 3,344 - 7 - 2,411 271 2,153 2,885 - - - 4,453 5,028 - - 4,650 2,271 6,862 504 16,443 51,282 12 - 5,833 - 1 - 2,453 141 2,407 3,014 - - - 5,294 6,885 - - 3,417 1,656 9,111 2,046 17,396 59,654 2013 - 36,590 - 46 14,722 27,607 1,090 12,241 35,085 - - - 45,306 51,247 - - 49,578 35,589 37,857 10,284 192,226 549,468 1 - 6,241 - 46 1,992 3,852 201 2,380 3,159 - - - 5,299 6,938 - - 5,314 1,820 5,948 1,802 18,516 63,508 2 - 3,558 - - 892 1,160 11 863 1,809 - - - 2,639 2,939 - - 2,109 1,718 2,225 988 10,557 31,468 3 - 4,345 - - 1,467 2,345 84 1,548 3,240 - - - 4,377 5,171 - - 3,534 2,416 3,552 1,370 14,437 47,886 4 - 3,425 - - 1,566 1,857 274 1,407 4,553 - - - 3,795 5,090 - - 3,024 2,028 3,080 655 13,736 44,490 5 - 2,849 - - 1,034 1,774 135 730 4,433 - - - 3,877 3,931 - - 2,985 1,509 2,448 1,017 14,811 41,533 6 - 2,245 - - 1,020 698 62 387 4,191 - - - 2,750 2,257 - - 3,309 983 2,254 407 14,046 34,609 7 - 1,921 - - 794 934 47 460 3,047 - - - 2,324 1,876 - - 3,630 928 2,501 239 15,221 33,922 8 - 2,517 - - 1,172 1,539 161 441 1,900 - - - 3,356 3,273 - - 3,365 1,783 2,194 440 13,176 35,317 9 - 2,427 - - 1,062 2,235 51 535 1,607 - - - 4,797 3,067 - - 4,653 4,607 2,522 392 15,072 43,027 10 - 2,568 - - 1,163 2,994 55 609 1,894 - - - 4,652 4,803 - - 6,273 5,846 3,898 755 20,275 55,785 11 - 2,330 - - 1,272 4,181 - 1,270 2,370 - - - 3,527 5,390 - - 5,063 6,116 3,049 1,585 20,954 57,107 12 - 2,164 - - 1,288 4,038 9 1,611 2,882 - - - 3,913 6,512 - - 6,319 5,835 4,186 634 21,425 60,816 2014 81,488 15,492 - - 2,834 7,168 741 1,585 24,770 9,642 - - 26,382 70,250 - 1,587 58,879 13,184 17,406 3,186 83,257 417,851 1 - 1,470 - - 602 781 - 490 1,529 - - - 4,595 5,645 - - 2,158 2,848 1,883 270 11,274 33,545 2 - 702 - - 468 606 - 283 868 - - - 1,682 3,590 - - 2,147 1,712 1,287 155 7,915 21,415 3 - 947 - - 728 602 9 230 1,881 - - - 3,255 5,482 - - 5,169 2,066 1,777 196 12,415 34,757 4 - 689 - - 367 1,100 2 311 3,176 - - - 2,514 4,628 - - 6,771 1,803 1,655 142 12,486 35,644 5 - 1,141 - - 289 1,166 - 143 4,442 - - - 1,474 5,176 - - 5,131 903 1,069 199 9,481 30,614 6 - 1,899 - - 169 1,108 1 - 1,852 - - - 2,168 6,136 - - 5,335 672 1,443 63 10,475 31,321 7 1,711 803 - - 68 771 39 - 673 - - - 1,261 4,453 - - 3,935 745 1,789 90 3,786 20,124 8 7,169 1,130 - - 57 117 57 50 1,491 - - - 1,923 5,241 - - 4,518 511 1,342 666 3,404 27,676 9 13,794 1,686 - - 35 271 160 3 2,008 - - - 1,584 6,459 - 348 5,731 558 1,799 425 4,158 39,019 10 15,864 1,905 - - 49 243 129 - 2,133 - - - 3,038 7,995 - 184 6,270 942 2,039 322 3,144 44,257 11 19,597 1,780 - - 2 262 23 - 1,399 2,512 - - 1,139 6,969 - 661 6,983 252 494 214 2,230 44,517 12 23,353 1,340 - - - 141 321 75 3,318 7,130 - - 1,749 8,476 - 394 4,731 172 829 444 2,489 54,962 Source: Company data, Guosen Securities(HK) Research

Guosen Securities (HK) 84

Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Figure 37 12 months forward PE band chart Figure 38 12 months forward PB band chart

HK$ 12.00 9.00 8.00 10.00 max 3.5X 7.00 6.00 max 20.1X 8.00 5.00 +1sd 15.8X +1sd 2.4X 6.00 4.00 avg 12.1X avg 1.7X 3.00 PE(x) 10.1X -1sd 8.3X 4.00 PB(x) 1.2X 2.00 min 5.4X 2.00 -1sd 1.0X 1.00 min 0.9X 0.00 0.00 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

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Geely Automobile (175 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 24,628 28,708 23,371 28,042 29,569 Revenue growth (%) 17.5 16.6 (18.6) 20.0 5.4 Cost of sales (20,069) (22,942) (19,047) (22,714) (23,803) Operating profit growth (%) 13.5 23.1 (46.2) 57.5 8.9 Gross profit 4,559 5,766 4,324 5,328 5,766 Reported profit growth (%) 28.5 30.5 (48.2) 61.6 9.3 Other income/(expense) 969 975 271 861 859 Underlying profit growth (%) 28.5 30.5 (48.2) 61.6 9.3 Operating expenses (2,802) (3,387) (2,790) (3,348) (3,530) Underlying EPS growth (%) 35.3 20.1 (48.2) 61.6 9.3 Operating profit 2,725 3,354 1,804 2,841 3,094 Dividend growth (%) 41.0 28.0 (50.3) 61.6 9.3 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 18.5 20.1 18.5 19.0 19.5 Finance income 42 59 64 69 81 Operating profit margin (%) 11.1 11.7 7.7 10.1 10.5 Finance expenses (237) (99) (82) (98) (103) Underlying profit margin (%) 8.3 9.3 5.9 7.9 8.2 Associates & JCE (2) (10) (8) (9) (10) Net debt/equity (%) (20.3) (28.8) (30.8) (28.9) (31.3) Profit before taxation 2,529 3,304 1,779 2,803 3,062 Net debt/total assets (%) (8.3) (13.8) (16.5) (15.0) (16.7) Taxation (479) (624) (391) (561) (612) Current ratio (%) 119 129 135 131 136 Non-controlling interests (10) (17) (9) (14) (16) Dividend payout (%) 11.7 11.5 11.0 11.0 11.0 Net profit 2,040 2,663 1,379 2,228 2,434 Interest cover (x) 11.5 33.8 22.1 28.9 29.9 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 8.6 8.7 9.1 9.1 9.1 Underlying Profit 2,040 2,663 1,379 2,228 2,434 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 80.7 80.6 77.5 79.5 79.5 Interest burden (%) 92.8 98.5 98.6 98.7 99.0 Operating profit margin (%) 11.1 11.7 7.7 10.1 10.5 Asset turnover (x) 0.8 0.9 0.7 0.8 0.8 Leverage ratio (x) 2.6 2.2 2.0 1.9 1.9 ROA (%) 6.9 8.2 4.2 6.4 6.3 ROE (%) 18.2 18.4 8.3 12.2 11.9 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 7,008 6,209 6,255 6,872 6,931 Operating profit 2,529 3,304 1,779 2,803 3,062 Associates & JCE 195 673 1,226 1,638 1,835 Depreciation & amortization 860 1,078 584 701 739 Others 4,322 4,466 5,027 5,700 6,410 Interest income (42) (59) (64) (69) (81) Non-current assets 11,525 11,348 12,509 14,210 15,176 Change in working capital 1,503 (449) 618 (62) (88) Inventories 1,822 1,784 1,524 1,817 1,904 Tax paid (711) (610) (391) (561) (612) Debtors & prepayments 13,476 14,785 11,685 14,021 14,785 Other operating cashflow 299 297 160 193 203 Bank deposits & cash 4,189 5,478 6,402 6,863 8,073 Operating activities 4,438 3,562 2,686 3,004 3,222 Others 368 204 185 202 208 Purchase of non-current assets (Capex) (1,076) (930) (701) (1,402) (887) Current assets 19,855 22,251 19,796 22,903 24,969 Free cash flow 3,361 2,631 1,985 1,602 2,335 Bank & other borrowings 1,379 966 1,169 1,402 1,478 Disposal of non-current assets 102 654 70 84 89 Trade & payables 15,183 16,075 13,333 15,900 16,662 Associates & JCE (net) (112) (537) (561) (421) (207) Taxation 131 197 197 197 197 Interest received 42 59 64 69 81 Others 0 0 0 0 0 Dividends received 0 0 0 0 0 Current liabilities 16,693 17,237 14,698 17,499 18,337 Other investing cashflow (1,026) (111) (541) (690) (715) Bank & other borrowings 525 0 0 0 0 Investing activities (2,071) (865) (1,669) (2,360) (1,639) Others 958 133 133 133 133 New loans raised 2,463 848 1,605 1,916 1,851 Non-current liabilities 1,483 133 133 133 133 Repayment of loans (3,924) (1,778) (1,402) (1,683) (1,774) Net assets 13,204 16,230 17,474 19,482 21,675 Dividends paid (170) (264) (152) (245) (268) Share capital 153 161 170 180 191 Other financing cashflow 425 (172) (144) (173) (182) Premium & reserves 12,734 15,907 17,134 19,117 21,283 Financing activities (1,206) (1,366) (93) (184) (374) Shareholders' funds 12,887 16,068 17,304 19,297 21,474 Inc/(dec) in cash 1,160 1,330 925 461 1,210 Non-controlling interests 317 162 171 185 200 Cash at beginning of year 3,030 4,189 5,478 6,402 6,863 Total equity 13,204 16,230 17,474 19,482 21,675 Foreign exchange effect (2) (41) 0 0 0 Source: Guosen Research estimates Cash at end of year 4,189 5,478 6,402 6,863 8,073 Source: Guosen Research estimates

Guosen Securities (HK) 86

Company Research Target price Upgrade

China Auto Great Wall Motor (2333 HK) Automotive Dancing SUV giant 11 February 2015 BUY We estimate GWM has become the largest SUV producer in 2014, Target price ▲ HK$55.00 demonstrating its dominant position in the SUV market. In 2015, the Last price (8 Feb 15) HK$46.15 company is still in a strong product cycle with star models such as Upside/downside (%) 19.2 H6/H2/H1/H9/Coupe C, which will help the company to maintain HSI 24679.39 Mkt cap (HK$bn/US$bn) 168/21.7 sound financial position and improving GPM. We believe the company 52 week range (HK$) 26.10 - 46.70 is best positioned for the A0 class SUV boom. Lift TP to HK$ 55.0 Avg trading volume daily (US$mn) 45 Free float (%) 44.0% based on 12.3x 2015PE, maintain BUY. Source: Bloomberg

The largest SUV producer in 2014 Performance We estimate that GWM was the largest SUV producer in 2014 in China with 13.1% HK$ 44.0 market share. Although GWM’s total sales volume was down by 4% in 2014, sales 110% of SUV still soared by 24%, taking 71% share in total sales. We estimate that GWM 39.0 100% has the highest exposure in SUV products among all major HK listed OEMs. The th 90% star product H6 sold more than 315k units in 2014, ranking the 4 best-selling 34.0 model among all the existing models in the China auto space, and 33% higher than 80% 29.0 the second SUV model. 70%

24.0 60% Strong product cycle in 2015, A0 class SUV the momentum driver Feb-14 Oct-14 Another star A0 class SUV, Haval H2, is ramping up sales volume. In 2015, we Price(LHS) Rel. to HSI(RHS) estimate that the A0 class SUV of GWM will grow by 188% YoY, taking 31% share in the company’s total sales. Moreover, GWM has extended its product range to mid- high-end segment with the launch of H9 and potential re-launch of H8, which we think will be the first successful domestic model to penetrate in this market. Going Performance 1M 3M 12M forward, star products such as H1/H7/Coupe C will back up growth. Absolute (%) 10.8 28.2 36.5 Absolute (US$, %) 10.8 28.2 36.6 Solid financials remain Relative to HSI (%) 7.3 23.4 22.5 GWM has maintained net cash position since 2005, and the ROE shot up to above Source: Bloomberg

20% after 2010. We estimate that in FY14/15/16, GWM will remain in net cash position with ROE at 23.7%/26.2%/25.2%. We estimate that the GPM of GWM to remain high at 28.2%/28.3%/28.0% in FY14/15/16, and NPM will improve to

12.9%/13.4%/13.7% over the same period. Although the CAPEX level will be high at Company background RMB 4.4bn/4.8bn/5.5bn for the construction of new plants, the company can Great Wall Motor Company Limited, through its subsidiaries, generate more than enough operating cash to meet the need. manufactures and sells pick-up trucks and sport-utility vehicles (SUVs) in China under branded names. The Company also researches and develops, and manufactures principal Earnings revised up, lift TP to HK$ 55.0 automotive parts and components for use in the assembly of We believe that GWM is best positioned to benefit from the boom in China’s SUV pick-up trucks and SUVs. market, especially the A0 class SUV boom. We revised up our revenue estimation Source: Bloomberg by 1.9%/1.3% in FY15/16, and tune up net profit forecast by 7.4%/7.7% based on higher GPM assumption. We Lift TP from HK$46.0 to HK$ 55.0, which represents 12.3x 2015PE (old: 11x), 22% higher than the sector average of 10.1x based on Bloomberg. We believe this premium is justified for its dominant position in China’s best auto segment and strong product cycle in 2015. Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 43,160 56,784 62,599 81,037 93,191 Operating Profit 6,716 9,777 10,128 12,710 14,873 Reported Profit 5,692 8,224 8,368 10,897 12,725 Underlying Profit 5,692 8,224 8,368 10,897 12,725 Underlying EPS (CNY) 1.87 2.70 2.75 3.58 4.18 John Luo DPS (CNY) 0.57 0.82 0.79 1.07 1.25 SFC CE No.: AVT518 BVPS (CNY) 7.07 9.20 11.16 13.67 16.59 +852 2899 8300 P/E (x) 19.9 13.8 13.5 10.4 8.9 [email protected] Dividend Yield (%) 1.5 2.2 2.1 2.9 3.4

P/B (x) 5.3 4.0 3.3 2.7 2.2

Source: Guosen Securities(HK)

87 See the last page of this report for important disclosures

公司报告升级目标价

长城汽车 (2333 HK) 中国汽车汽车 SUV 巨头起舞 2015 年 2 月 11 日买入我们估计长城汽车在 2014 年是国内最大的 SUV 提供商，进一步彰显其在 SUV 市场的领先地位。在 2015 年，公司依然处于强劲的产目标价 ▲ HK$55.00 品周期，H6/H2/H1/H9/Coupe C 等产品会驱动公司维持高速增长以收盘价 (8 Feb 15) HK$46.15 及良好的财务表现。我们相信公司做好了准备迎接 A0 级 SUV 市场 Upside/downside (%) 19.2 恒生指数 24679.39 爆发性增长的准备。公司是国信香港覆盖中增长最快的汽车企业，总市值 (HK$/US$bn) 168/21.7 提升目标价至 55.0 港元，相当于 12.3x 2015PE，维持买入评级。 52 周最高/最低 (HK$) 26.10 - 46.70 日均成交额 (US$mn) 45 2014 年最大的 SUV 生产商流通量 (%) 44.0% 资料来源: 彭博我们预计长城汽车在 2014 年成为中国汽车市场最大的 SUV 生产商，市场份额达到 13.1%。虽然 2014 年公司总销量下滑了 4%，但是 SUV 的销量大股价表现幅增长 24%，占总销量份额达到 71%。我们预计长城汽车在香港上市的主要汽车厂商中有最高的 SUV 产品敞口。公司的明星产品 H6 在 2014 年的销 HK$

量达到 31.5 万台，是中国市场销量第四高的产品，比第二位 SUV 产品销 44.0 120% 量高出 33%。 110% 39.0

100% 2015 年处于强劲的产品周期，A0 级 SUV 开始发力 34.0 另外一个 A0 级 SUV 产品,哈弗 H2，正处于销量爬升阶段。2015 年，我们 90% 29.0 预计长城汽车的 A0 级 SUV 产品将会同比增长 188%，占公司总销量的 31%。 80% 另外，公司已经将产品延伸至更高端的产品，例如目前的 H9 以及很可能 24.0 70% Feb-14 Oct-14 重新发布的 H8，我们认为公司最有可能成为第一家成功打进中高级 SUV Price(LHS) Rel. to HSI(RHS) 市场的自主品牌。更远期而言，H1/H7/Coupe C 等明星产品将会驱动增长。

继续保持稳健的财务状况公司从 2005 年以来一直保持着净现金的水平，而在 2010 年以后净资产回股票数据 1M 3M 12M 绝对回报 (%) 10.8 28.2 36.5 报率一直维持在 20%以上。我们预计在 FY14/15/16，长城汽车依然会维持绝对回报 (US$, %) 10.8 28.2 36.6 净现金水平，净资产回报率会维持在 23.7%/26.2%/25.2%的高水平。我们相对 HSI 回报 (%) 7.3 23.4 22.5 预计在 FY14/15/16，长城汽车的毛利率会维持在 28.2%/28.3%/28.0%，净资料来源: 彭博

利润率则会改善至 12.9%/13.4%/13.7%。虽然资本支出依然会由于新工厂

的建设而维持在 440 亿/480 亿和 550 亿人民币的高位，公司的经营现金公司簡介流完全能够覆盖资本支出的需求。长城汽车股份有限公司透过其附属公司在中国生产与销售

长城牌载货卡车与多功能休闲车。该公司亦研发与生产用调升盈利预测，提升目标价至 55.0 港元于组装载货卡车与多功能休闲车使用的零组件。我们认为长城汽车在中国繁华的 SUV 市场中具有最好的布局，尤其是在资料来源: 彭博 A0 级 SUV 市场。我们提升 FY15/16 年收入预测 1.9%/1.3%,基于更加乐观的毛利率假设，调升净利润 7.4%/7.7%至 109 亿/127 亿人民币。我们将目标价从 46.0 港元提升至 55.0 港元，相当于 12.3x 2015 年 PE。这一估值比汽车行业平均 10.1x 的估值高 22%。基于公司在中国汽车行业最好的领域中有最领先的地位，以及 2015 年强劲的产品周期，我们认为这一溢价是合理的。

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 43,160 56,784 62,599 81,037 93,191 经营盈利 6,716 9,777 10,128 12,710 14,873 净利润 5,692 8,224 8,368 10,897 12,725 实际盈利 5,692 8,224 8,368 10,897 12,725 每股实际盈利 1.87 2.70 2.75 3.58 4.18 (CNY) 罗文安每股股息 (CNY) 0.57 0.82 0.79 1.07 1.25 证监会中央编号:AVT518 每股账面价值 (CNY) 7.07 9.20 11.16 13.67 16.59 +852 2899 8300 市盈率 (x) 19.9 13.8 13.5 10.4 8.9 [email protected] 股息率 (%) 1.5 2.2 2.1 2.9 3.4 市净率 (x) 5.3 4.0 3.3 2.7 2.2

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 88

Great Wall Motor (2333 HK) John Luo, +852 2899 8300, [email protected]

Figure 3 Key assumptions Key assumptions 2012A 2013A 2014E 2015E 2016E ASP (RMB) 69.4 74.5 85.7 85.8 85.8 Sales volume (units) 621,660 761,885 730,772 944,000 1,086,000 Growth (%) 34.4% 22.6% -4.1% 29.2% 15.0% Gross profit margin (%) 26.9% 28.6% 28.2% 28.3% 28.0% CAPEX (RMBm) 4,445 7,133 4,382 4,862 5,591 Change in estimates Revenue (RMBm, old) 79,514 92,017

Revenue (RMBm, new) 81,037 93,191

Change (%) 1.9% 1.3%

Sales volume (units, old) 937,000 1,086,000

Sales volume (units, new) 944,000 1,086,000

Change (%) 0.7% 0.0%

GPM (old) 27.20% 27.20%

GPM (new) 28.3% 28.0%

Change (ppt) 1.1 0.8

Net profit (RMBm, old) 10,150 11,811

Net profit (RMBm, new) 10,897 12,725

Change (%) 7.4% 7.7%

Source: Guosen Securities(HK) Research

Figure 4 Financial model 2012A 2013A 2014E 2015E 2016E Total operating income 43,160 56,784 62,599 81,037 93,191 Growth (%) 43.4% 31.6% 10.2% 29.5% 15.0% Total operating costs 36,526 47,168 52,517 68,380 78,407 Including: Operating costs 31,562 40,538 44,968 58,128 67,054 Business tax and surcharges 1,595 2,057 2,128 2,836 3,075 Selling expenses 1,656 1,895 1,941 2,917 3,262 % of revenue 3.8% 3.3% 3.1% 3.6% 3.5% Administrative expenses 1,744 2,747 3,568 4,619 5,125 % of revenue 4.0% 4.8% 5.7% 5.7% 5.5% Financial expenses -105 -84 -88 -121 -109 Impairment loss on assets 75 14 - - - Add: Gains or losses from changes in fair values 10 -7 - - - Investment income 19 59 65 84 97 Including: share of profit of associates and 2 11 13 16 19 jointly controlled entities Operating profit 6,663 9,668 10,147 12,741 14,880 Growth (%) 66.1% 45.1% 5.0% 25.6% 16.8% Add: Non-operating income 221 279 188 243 280 Less: Non-operating expenses 43 27 54 70 80 Total profit 6,841 9,920 10,282 12,915 15,080 Less: Income tax expenses 1,119 1,688 1,851 1,937 2,262 Net profit 5,722 8,232 8,431 10,978 12,818 Net profit attributable to shareholders 63.0% 43.9% 2.4% 30.2% 16.8% Growth (%) 5,692 8,224 8,051 10,897 12,725 Minority interests 30 8 63 81 93 Fully diluted EPS (RMB) 1.87 2.70 2.65 3.58 4.18 DPS (RMB) 0.57 0.82 0.79 1.07 1.25 BVPS (RMB) 7.07 9.20 11.16 13.67 16.59 Gross profit 11,598 16,246 17,631 22,909 26,136 Gross profit margin (%) 26.9% 28.6% 28.2% 28.3% 28.0% Operating profit margin (%) 15.4% 17.0% 16.2% 15.7% 16.0% Net profit margin (%) 13.2% 14.5% 12.9% 13.4% 13.7%

Note: income statement based on A share form Source: Guosen Securities(HK) Research

Guosen Securities (HK) 89

Great Wall Motor (2333 HK) John Luo, +852 2899 8300, [email protected]

Figure 5 12 months forward PE band chart Figure 6 12 months forward PB band chart

HK$ 70.00 70.00 60.00 60.00 max 13.7X max 3.4X

50.00 50.00 +1sd 10.0X PB(x) 2.6X 40.00 PE(x) 9.9X 40.00 +1sd 2.6X avg 7.5X avg 1.9X 30.00 30.00 -1sd 5.1X 20.00 20.00 -1sd 1.2X min 3.7X min 0.9X 10.00 10.00 0.00 0.00 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 90

Great Wall Motor (2333 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 43,160 56,784 62,599 81,037 93,191 Revenue growth (%) 43.4 31.6 10.2 29.5 15.0 Cost of sales (31,562) (40,538) (44,968) (58,128) (67,054) Operating profit growth (%) 64.7 45.6 3.6 25.5 17.0 Gross profit 11,598 16,246 17,631 22,909 26,136 Reported profit growth (%) 68.9 44.5 1.8 30.2 16.8 Other income/(expense) (1,482) (1,827) (1,994) (2,663) (2,876) Underlying profit growth (%) 68.9 44.5 1.8 30.2 16.8 Operating expenses (3,400) (4,643) (5,509) (7,536) (8,387) Underlying EPS growth (%) 56.2 44.5 1.8 30.2 16.8 Operating profit 6,716 9,777 10,128 12,710 14,873 Dividend growth (%) 218 43.1 (3.2) 35.3 16.8 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 26.9 28.6 28.2 28.3 28.0 Finance income 105 84 88 121 109 Operating profit margin (%) 15.6 17.2 16.2 15.7 16.0 Finance expenses 0 0 0 0 0 Underlying profit margin (%) 13.2 14.5 13.4 13.4 13.7 Associates & JCE 19 59 65 84 97 Net debt/equity (%) (26.0) (19.1) (26.0) (29.0) (21.7) Profit before taxation 6,841 9,920 10,282 12,915 15,080 Net debt/total assets (%) (13.1) (10.2) (14.0) (15.5) (12.0) Taxation (1,119) (1,688) (1,851) (1,937) (2,262) Current ratio (%) 134 136 141 146 155 Non-controlling interests (30) (8) (63) (81) (93) Dividend payout (%) 30.6 30.3 28.9 30.0 30.0 Net profit 5,692 8,224 8,368 10,897 12,725 Interest cover (x) Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 3.3 3.3 3.5 3.3 3.3 Underlying Profit 5,692 8,224 8,368 10,897 12,725 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 83.2 82.9 81.4 84.4 84.4 Interest burden (%) 102 101 102 102 101 Operating profit margin (%) 15.6 17.2 16.2 15.7 16.0 Asset turnover (x) 1.1 1.2 1.1 1.2 1.1 Leverage ratio (x) 2.0 1.9 1.9 1.9 1.8 ROA (%) 15.0 17.3 14.5 15.5 15.1 ROE (%) 29.8 33.2 27.0 28.9 27.6 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 9,019 14,657 17,553 20,472 23,689 Operating profit 5,722 8,232 8,431 10,978 12,818 Associates & JCE 42 53 53 53 53 Depreciation & amortization 890 1,095 1,360 1,633 1,943 Others 7,661 6,869 6,994 7,305 7,737 Interest income 10 10 (88) (121) (109) Non-current assets 16,722 21,579 24,601 27,830 31,479 Change in working capital (2,145) 93 363 104 (5,708) Inventories 2,695 2,559 3,885 5,246 6,015 Tax paid 0 0 0 0 0 Debtors & prepayments 16,728 18,660 22,948 29,704 39,749 Other operating cashflow (140) (391) (1,326) (1,361) (769) Bank deposits & cash 5,596 5,523 8,839 12,062 10,936 Operating activities 4,337 9,039 8,740 11,233 8,173 Others 829 4,285 2,817 2,817 2,817 Purchase of non-current assets (Capex) (4,445) (7,133) (4,382) (4,862) (5,591) Current assets 25,848 31,026 38,489 49,828 59,516 Free cash flow (108) 1,906 4,358 6,371 2,582 Bank & other borrowings 0 182 0 0 0 Disposal of non-current assets 179 76 0 0 0 Trade & payables 13,039 15,252 17,985 23,418 26,852 Associates & JCE (net) 0 0 0 0 0 Taxation 537 527 527 527 527 Interest received 0 0 0 0 0 Others 5,743 6,878 8,796 10,224 11,126 Dividends received 0 0 0 0 0 Current liabilities 19,319 22,839 27,309 34,169 38,505 Other investing cashflow 329 361 0 0 0 Bank & other borrowings 0 0 0 0 0 Investing activities (3,936) (6,696) (4,382) (4,862) (5,591) Others 1,607 1,757 1,757 1,757 1,757 New loans raised 282 182 0 0 0 Non-current liabilities 1,607 1,757 1,757 1,757 1,757 Repayment of loans (281) 0 (182) 0 0 Net assets 21,643 28,008 34,024 41,732 50,733 Dividends paid (1,036) (1,831) (2,327) (3,148) (3,708) Share capital 3,042 3,042 3,042 3,042 3,042 Other financing cashflow (70) (756) 0 0 0 Premium & reserves 18,472 24,953 30,906 38,534 47,441 Financing activities (1,105) (2,405) (2,509) (3,148) (3,708) Shareholders' funds 21,514 27,996 33,949 41,577 50,484 Inc/(dec) in cash (705) (62) 1,849 3,223 (1,126) Non-controlling interests 129 12 75 156 249 Cash at beginning of year 6,306 5,596 5,523 8,839 12,062 Total equity 21,643 28,008 34,024 41,732 50,733 Foreign exchange effect (8) (11) 0 0 0 Source: Guosen Research estimates Cash at end of year 5,594 5,523 7,372 12,062 10,936 Source: Guosen Research estimates

Guosen Securities (HK) 91

Company Research Company update

Hong Kong Auto Brilliance China Auto (1114 HK) Automotive Eyes on a growing pie 11 February 2015 BUY Despite the slowdown in BMW sales in 2H14, sales momentum of BBA Target price HK$18.00 kept strong and beat its target by 3%. BBA has become the beneficiary Last price (9 Feb 15) HK$13.50 on BMW’s localization strategy amid the slowing market. With one Upside/downside (%) 33.3 HSI 24521 new model every year since 2015, BBA will double its product line by Mkt cap (HK$bn/US$bn) 67.8/8.8 2017. Although we cut net profit forecast by 2.1%/6.6%/9.6% based 52 week range (HK$) 9.50 - 16.10 Avg trading volume daily (US$mn) 17.81 on lower BBA margins estimates, valuation is still attractive for this Free float (%) 39.69 fast-growing BMW arm in China. Maintain BUY and TP of HK$ 18.0. Source: Bloomberg

Strong BBA sales despite slowdown in BMW sales growth Performance HK$ Sales volume of Brilliance BMW (“BBA”) reached 278,195 units in 2014, beating the company’s target of 270k units by 3.0%. Sales volume of BMW 5/3/X1 series 16.00 120% increased by 12%/54%/109% to 138k/94k/47k units, respectively. Thanks to 14.00 110% BMW’s strategy to increase the localization rate, BBA’s FY14 sales growth (+35%) 100% 12.00 was much higher than the growth in imported BMW (-2%). The full-year 90% 10.00 localization rate of BMW has increased from 55% in FY13 to 62% in FY14. 80% Growing No. of models and ample growth room for current models 8.00 70% Feb-14 Oct-14 Currently, BBA has three localized models, and it will bring in three models from Price(LHS) Rel. to HSI(RHS) 2015 to 2017, doubling the product line by 2017. On current models, sales volume of BBA’s BMW 3 series and X1 only account for 12% and 14% of their respective global sales in 2013, as compared with 20% share China took in BMW’s global sales.

Hence, we believe there is ample growth room for these two models. In 2016, the Performance 1M 3M 12M capacity of BBA’s Tiexi Plant will double to 400k units/year compared with 2014, Absolute (%) 2.0 10.7 12.7 hence we forecast the combined sales volume of 3 series and X1 will increase by Absolute (US$, %) 2.0 10.7 12.8 Relative to HSI (%) (0.6) 6.5 (0.6) 65% to 231k units in 2016 compared to 2014. Source: Bloomberg

Growing pie more important than smaller share in profits We view the BMW special rebate to dealers as an initiative for BMW to build a healthier relationship between the two, which is to the benefit of the brand in the Company background long term. We estimate that luxury market in China will still grow at around 15% in Brilliance China Automotive Holdings Limited, through its FY15, still much higher than the sector growth of 6%. Although we cut the segment subsidiaries, manufactures and distributes minibuses and sedans in the People's Republic of China. The Company also margin estimate of BBA to 15.4%/15%/15% in FY14/15/16 due to more support to manufactures and trades automotive components. dealers, the net profit of BBA will grow by 56%/16%/20% due to higher volume. Source: Bloomberg

Undemanding valuation We cut our net profit forecast by 2.1%/6.6%/9.6% in FY14/15/16 to factor in the lower margins of BBA, yet the net profit CAGR from FY14 to FY16 still stood at 21%. As the fast-growing arm of the world’s largest luxury brand, we believe the current 8.9x 2015PE is attractive. Maintain BUY and TP of HK$18.0 based on 11.8x 2015PE. Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 5,916 6,103 6,058 6,540 6,867 Operating Profit (57) (178) (408) (199) (210) Reported Profit 2,301 3,374 5,085 6,178 7,424 Underlying Profit 2,301 3,374 5,085 6,178 7,424 John Luo Underlying EPS (CNY) 0.46 0.67 1.01 1.22 1.47 SFC CE No.: AVT518 DPS (CNY) 0.00 0.10 0.15 0.18 0.22 +852 2899 8300 BVPS (CNY) 1.98 2.58 3.44 4.48 5.73 [email protected] P/E (x) 23.8 16.3 10.8 8.9 7.4 Dividend Yield (%) 0.0 0.9 1.4 1.7 2.0 P/B (x) 5.5 4.2 3.2 2.4 1.9

Source: Guosen Securities(HK)

92 See the last page of this report for important disclosures

公司报告公司快讯

华晨中国汽车 (1114 HK) 香港汽车汽车着眼于更大的蛋糕 2015 年 2 月 11 日买入虽然宝马汽车在 2H14 的销量增速有所放缓，华晨宝马的销量一直维持强劲增长，全年销量高于公司目标 3%。华晨宝马已经成为宝目标价 HK$18.00 马在中国推行本地化战略的重大受益者。随着 2015 年以后每年一收盘价 (9 Feb 15) HK$13.50 Upside/downside (%) 33.3 款新车型的推出，华晨宝马将会在 2017 年将其产品线翻一番。虽恒生指数 24521 然我们基于更加保守的华晨宝马利润率假设下调了 FY14/15/16 盈总市值 (HK$/US$bn) 67.8/8.8 利预测 2.1%/6.6%/9.6%，目前的估值依然十分吸引。维持买入评 52 周最高/最低 (HK$) 9.50 - 16.10 日均成交额 (US$mn) 17.81 级以及 18.0 港元的目标价。流通量 (%) 39.69 资料来源: 彭博华晨宝马销量强劲增长

华晨宝马 2014 年的销量达到了 278,195 辆，高于公司年初定下 27 万辆的股价表现目标 3.0%。华晨宝马 5 系/3 系/X1 的销量分别增长了 12%/54%/109%至 HK$ 13.8 万/9.4 万/4.7 万。得益于宝马提升本地化率的战略，华晨宝马 2014 年的销量增长（+35%）远远高于进口宝马（-2%）的增速。我们预计宝马 16.00 120%

的本地化率已经从 2013 年的 55%迅速提升至 2014 年的 62%。 14.00 110%

100% 车型数量增长+现有车型增长潜力巨大 12.00 90% 目前，华晨宝马只有 3 款国产车型，而公司将会在 2015-2017 年每年引进 10.00 80% 一款新的车型，在 2017 年将车型数量翻番。现有的车型中，华晨宝马的 8.00 70% 3 系以及 X1 仅仅占到这两个车型全球销量的 12%和 14%，相比于中国在宝 Feb-14 Oct-14 马全球销量中 20%的份额，我们认为这两个车型的销量增长潜力巨大。在 Price(LHS) Rel. to HSI(RHS) 2016 年，华晨宝马的铁西工厂产能将会从 2014 年的 20 万台翻一番至 40 万台，因此，我们预计宝马 3 系和 X1 的合计销量将会在 2014 年的基础上

增长 65%至 2016 年的 23.1 万台。股票数据 1M 3M 12M 绝对回报 (%) 2.0 10.7 12.7 更大的蛋糕比下降的利润占比更重要绝对回报 (US$, %) 2.0 10.7 12.8 我们将宝马在 2014 年给予经销商的特别返利看作宝马为了建设更加健康相对 HSI 回报 (%) (0.6) 6.5 (0.6) 资料来源: 彭博的整车厂-经销商关系的重要一步，而这在长远而言有利于宝马品牌的建设。我们预计中国的豪华车市场在 FY15 依然会保持 15%左右的增长，依然大幅高于行业大约 6%的增速。虽然我们基于宝马会给予经销商更多帮公司簡介助而下调华晨宝马 FY14/15/16 的分部利润率至 15.4%/15%/15%，华晨中华晨中国汽车控股有限公司透过其子公司于中国境内制造国的净利润在更高销量的支撑下依然预计会增长 56%/16%/20%。及分销小型客车和轿车。该公司兼制造及销售汽车零件。

资料来源: 彭博估值吸引. 基于更加保守的华晨宝马利润率假设，我们下调公司 FY14/15/16 盈利预测 2.1%/6.9%/9.6%至 50.85 亿/61.78 亿/74.24 亿人民币，然而净利润的复合增长率依然高达 21%。作为全球最大的豪华汽车品牌迅速增长的一极，我们认为公司目前 8.9x 2015PE 的估值是吸引的。维持买入评级以及 18.0 港元的目标价，相当于 2015 年 11.8x PE.

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 5,916 6,103 6,058 6,540 6,867 经营盈利 (57) (178) (408) (199) (210) 净利润 2,301 3,374 5,085 6,178 7,424 实际盈利 2,301 3,374 5,085 6,178 7,424 每股实际盈利 0.46 0.67 1.01 1.22 1.47 (CNY) 罗文安每股股息 0.00 0.10 0.15 0.18 0.22 (CNY) 证监会中央编号:AVT518 每股账面价值 (CNY) 1.98 2.58 3.44 4.48 5.73 +852 2899 8300 市盈率 (x) 23.8 16.3 10.8 8.9 7.4 [email protected] 股息率 (%) 0.0 0.9 1.4 1.7 2.0 市净率 (x) 5.5 4.2 3.2 2.4 1.9

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 93

Brilliance China Auto (1114 HK) John Luo, +852 2899 8300, [email protected]

Figure 3 Key assumptions and change in estimates Key Assumptions 2010A 011A 2012A 2013A 2014E 2015E 2016E GPM (%) 13.7% 13.3% 11.8% 11.2% 8.6% 12.0% 12.0% Sales volume of BBA 70,488 107,521 160,849 206,729 278,195 344,717 430,768 Growth (%) 52.5% 49.6% 28.5% 34.6% 23.9% 25.0% ASP of BBA ('000 RMB) 305 349 349 354 334 322 309 Pre-tax Margin of BBA 9.9% 9.2% 12.6% 13.3% 15.4% 15.0% 15.0% Change in estimates Pre-tax Margin of BBA (Old) 15.7% 15.4% 15.4% Pre-tax Margin of BBA (New) 15.4% 15.0% 15.0% Change (ppt) -0.30 -0.40 -0.40 Net profit (Old) 5,197 6,614 8,214 Net profit (New) 5,085 6,178 7,424 Change (%) -2.1% -6.6% -9.6%

Source: Guosen Securities(HK) Research

Figure 4 Financial model of Brilliance China 2010A 2011A 2012A 2013A 2014E 2015E 2016E Revenue 8,949 6,443 5,916 6,103 6,058 6,540 6,867 Growth (%) -28.0% -8.2% 3.2% -0.8% 8.0% 5.0% Cost of sales -7,725 -5,587 -5,220 -5,417 -5,537 -5,755 -6,043 Gross profit 1,224 856 696 687 521 785 824 GPM (%) 13.7% 13.3% 11.8% 11.2% 8.6% 12.0% 12.0% Other income 92 48 50 96 42 46 48 Interest income 79 76 74 47 48 51 53 Selling expenses -462 -388 -539 -608 -563 -589 -618 General and administrative expenses -363 -361 -339 -399 -456 -492 -517 Operating profit 569 231 -57 -178 -408 -199 -210 OPM (%) 6.4% 3.6% -1.0% -2.9% -6.7% -3.0% -3.1% Finance costs -171 -194 -174 -139 -121 -78 -82 Share of results of: 1 0 0 Joint ventures 92 69 92 193 242 262 275 Associates 974 1,842 2,434 3,448 5,365 6,242 7,480 Profit before income tax expense 1,465 1,949 2,295 3,325 5,078 6,226 7,463 Income tax expense 54 -58 -58 -8 -61 -131 -137 Attributable to: 1,519 1,891 2,237 3,316 5,018 6,095 7,325 Equity holders of the Company 1,271 1,812 2,301 3,374 5,085 6,178 7,424 Growth (%) 42.6% 27.0% 46.6% 50.7% 21.5% 20.2% Non-controlling interests 248 79 -64 -58 -68 -82 -99 Fully diluted EPS (RMB) 0.25 0.36 0.46 0.67 1.01 1.22 1.47

Source: Guosen Securities(HK) Research

Guosen Securities (HK) 94

Brilliance China Auto (1114 HK) John Luo, +852 2899 8300, [email protected]

Figure 5 12 months forward PE band chart Figure 6 12 months forward PB band chart

HK$ 30.00 35.00 max 4.7X 30.00 max 19.6X 25.00

25.00 20.00 +1sd 3.6X +1sd 14.5X 20.00 avg 3.0X avg 11.6X 15.00 PB(x) 2.5X 15.00 PE(x) 9.2X -1sd 2.4X -1sd 8.8X 10.00 min 2.1X 10.00 min 8.2X 5.00 5.00 0.00 0.00 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 95

Brilliance China Auto (1114 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 5,916 6,103 6,058 6,540 6,867 Revenue growth (%) (8.2) 3.2 (0.8) 8.0 5.0 Cost of sales (5,220) (5,417) (5,537) (5,755) (6,043) Operating profit growth (%) (125) 213 129 (51.2) 5.4 Gross profit 696 687 521 785 824 Reported profit growth (%) 27.0 46.6 50.7 21.5 20.2 Other income/(expense) 125 143 90 97 101 Underlying profit growth (%) 27.0 46.6 50.7 21.5 20.2 Operating expenses (878) (1,008) (1,019) (1,081) (1,135) Underlying EPS growth (%) 27.0 46.6 50.7 21.5 20.2 Operating profit (57) (178) (408) (199) (210) Dividend growth (%) 0.0 0.0 50.7 21.5 20.2 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 11.8 11.2 8.6 12.0 12.0 Finance income 0 0 0 0 0 Operating profit margin (%) (1.0) (2.9) (6.7) (3.0) (3.1) Finance expenses (174) (139) (121) (78) (82) Underlying profit margin (%) 38.9 55.3 83.9 94.5 108 Associates & JCE 2,526 3,641 5,607 6,503 7,755 Net debt/equity (%) 2.8 4.8 1.8 1.6 1.6 Profit before taxation 2,295 3,325 5,078 6,226 7,462 Net debt/total assets (%) 1.8 3.3 1.4 1.2 1.3 Taxation (58) (8) (61) (131) (137) Current ratio (%) 93.6 96.0 90.1 87.8 86.0 Non-controlling interests 64 58 68 82 99 Dividend payout (%) 0.0 15.0 15.0 15.0 15.0 Net profit 2,301 3,374 5,085 6,178 7,424 Interest cover (x) (0.3) (1.3) (3.4) (2.5) (2.5) Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 6.7 6.7 6.7 6.7 Underlying Profit 2,301 3,374 5,085 6,178 7,424 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 100 101 100 99.2 99.5 Interest burden (%) (4,032) (1,866) (1,244) (3,128) (3,558) Operating profit margin (%) (1.0) (2.9) (6.7) (3.0) (3.1) Asset turnover (x) 0.4 0.3 0.3 0.2 0.2 Leverage ratio (x) 1.7 1.5 1.4 1.3 1.3 ROA (%) 15.9 19.3 24.0 23.6 23.0 ROE (%) 27.1 29.3 33.5 30.9 28.8 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 1,442 1,686 1,903 2,129 2,356 Operating profit 2,295 3,325 5,078 6,226 7,463 Associates & JCE 6,840 9,418 13,923 19,144 25,362 Depreciation & amortization 161 141 230 255 281 Others 1,360 1,362 1,309 1,252 1,191 Interest income (75) (46) (48) (51) (53) Non-current assets 9,641 12,466 17,135 22,526 28,909 Change in working capital (108) (83) 770 277 117 Inventories 838 769 834 788 828 Tax paid (3) (9) (61) (131) (137) Debtors & prepayments 1,811 2,220 1,826 1,971 2,069 Other operating cashflow (2,271) (3,482) (5,486) (6,425) (7,672) Bank deposits & cash 837 903 892 956 909 Operating activities (2) (154) 484 151 (2) Others 2,931 2,632 2,682 2,769 2,828 Purchase of non-current assets (Capex) (526) (616) (394) (425) (446) Current assets 6,417 6,524 6,235 6,485 6,634 Free cash flow (528) (770) 91 (274) (448) Bank & other borrowings 1,119 1,528 1,212 1,308 1,373 Disposal of non-current assets 1 30 0 0 0 Trade & payables 4,828 4,289 4,730 5,106 5,362 Associates & JCE (net) 0 0 0 0 0 Taxation 0 0 0 0 0 Interest received 0 0 0 0 0 Others 911 975 975 975 975 Dividends received 580 1,084 1,102 1,282 1,537 Current liabilities 6,858 6,793 6,917 7,390 7,710 Other investing cashflow 248 (27) (51) (87) (59) Bank & other borrowings 0 0 0 0 0 Investing activities 303 470 657 770 1,031 Others 2 56 56 56 56 New loans raised 1,551 1,818 289 750 752 Non-current liabilities 2 56 56 56 56 Repayment of loans (1,729) (1,409) (606) (654) (687) Net assets 9,198 12,141 16,396 21,565 27,776 Dividends paid 0 (394) (763) (927) (1,114) Share capital 396 396 396 396 396 Other financing cashflow 67 (265) (73) (27) (29) Premium & reserves 9,619 12,619 16,942 22,193 28,504 Financing activities (110) (250) (1,153) (858) (1,078) Shareholders' funds 10,014 13,015 17,338 22,589 28,900 Inc/(dec) in cash 191 67 (11) 64 (48) Non-controlling interests (817) (874) (942) (1,024) (1,123) Cash at beginning of year 586 837 903 892 956 Total equity 9,198 12,141 16,396 21,565 27,776 Foreign exchange effect 0 0 0 0 0 Source: Guosen Research estimates Cash at end of year 777 903 892 956 909 Source: Guosen Research estimates

Guosen Securities (HK) 96

Company Research Company update

China Auto Baoxin Auto (1293 HK) Auto Retail Largest BMW dealer pending rerate 11 February 2015 BUY We estimate that Baoxin would still be the largest BMW dealer in Target price HK$6.00 2014 in China with c. 9.4% market share. In 2015, we expect to see a Last price (9 Feb 15) HK$4.73 more balanced OEM-dealer relationship with slower growth but more Upside/downside (%) 27.0 HSI 24521 stable margins. Besides that, sector policy is also moving in favor of Mkt cap (HK$bn/US$bn) 12.1/1.6 dealers. As such, we believe that the financials of Baoxin will improve 52 week range (HK$) 4.30 - 7.10 in 2015. Maintain our forecasts and TP of HK$ 6.0. Avg trading volume daily (US$mn) 1.49 Free float (%) 28.9%

Source: Bloomberg The largest BMW dealer in China We estimate that Baoxin has become the largest BMW dealer in China after the Performance acquisition of Yanjun in 2012. We estimate the total BMW sales of Baoxin in 2014 HK$ would be c. 43k units, which accounted for around 9.4% of BMW’s total sales in 7.00 100% China. More importantly, because most of Baoxin’s stores are located in affluence 6.00 provinces in eastern China, the proportion of imported models would be higher 90% 80% than average, hence higher ASP. Thanks to the special rebate by BWM in end 2014, 5.00 we expect that the new car sales GPM of Baoxin to keep stable at 5.3% in FY14. 70% 4.00 More balanced OEM-dealer relationship and favorable policy 60% Looking into 2015, we expect that dealers will negotiate a more reasonable growth 3.00 50% Feb-14 Oct-14 target with OEMs, hence the sales volume growth would slow but margins will be stable. On the policy side, as the launch of the revision of the Auto Sales Price(LHS) Rel. to HSI(RHS)

Management Regulation, we expect that dealers would be given more autonomy in the daily operations, such as inventory management, price, product mix, decoration, publications, etc. The new policy may also set a minimum limit on the Performance 1M 3M 12M duration of franchise, which gives more protection to dealers. Overall speaking, we Absolute (%) (5.4) (11.1) (26.0) are seeing a trend in policy in favor of auto dealers. Absolute (US$, %) (5.4) (11.1) (25.9) Relative to HSI (%) (7.9) (15.2) (39.3) Financials will improve in 2015 Source: Bloomberg Thanks to higher contribution of after-sales service business, we expect the GPM will increase from 9.4% in FY14 to 10.0% in FY16. CAPEX is expect to slow down from RMB 1,141m in FY13 to RMB 662m/542m/579m in FY14/15/16, due to slower store-openings and lower cost per store. Hence, net gearing would drop Company background from 75% in FY14 to 43% in FY16 thanks to less inventory pressure and less CAPEX. Baoxin Auto Group Ltd is an owner operator of luxury ROE of the company will improve from 18% in FY14 to 20% in FY16. automobile dealerships in China. The Company's focus is on luxury and ultr-luxury branded cars. Baoxin operates 4S dealership stores, showrooms and repair centers. Earnings still expect to grow at 20% CAGR in FY14-16 Source: Bloomberg We maintain our earnings forecast from FY14 to FY16 at RMB 992m/1,183m/1,418m, with growth of -2%/19%/20%, respectively. With 20% net profit growth CAGR from FY14 to FY16, we believe the current valuation of 8.1x 2015PE is attractive. Maintain BUY rating and TP of HK$ 6.0, which represents 10x 2015PE, or 0.5x PEG.

Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 18,093 30,082 33,107 35,557 37,391 Operating Profit 1,240 1,904 1,967 2,221 2,515 Reported Profit 716 1,007 992 1,183 1,418 Underlying Profit 716 1,007 992 1,183 1,418 John Luo Underlying EPS (CNY) 0.28 0.40 0.39 0.47 0.56 SFC CE No.: AVT518 +852 2899 8300 DPS (CNY) 0.08 0.12 0.12 0.14 0.17 [email protected] BVPS (CNY) 1.53 1.85 2.12 2.45 2.84 P/E (x) 13.5 9.6 9.7 8.1 6.8 Dividend Yield (%) 2.1 3.1 3.1 3.7 4.4 P/B (x) 2.5 2.1 1.8 1.6 1.3

Source: Guosen Securities(HK)

97 See the last page of this report for important disclosures

公司报告公司快讯

宝信汽车集团 (1293 HK) 中国汽车汽车零售最大的宝马经销商，静候价值重估 2015 年 2 月 11 日买入我们预计宝信汽车在 2014 年仍然会是中国最大的宝马经销商，市场份额大概 9.4%。在 2015 年，我们预计整车厂与经销商之间的关目标价 HK$6.00 系将会改善，销量增速虽然放缓，但是利润率将会趋于稳定。另外，收盘价 (9 Feb 15) HK$4.73 Upside/downside (%) 27.0 行业政策也正朝着有利于经销商的方向发展。因此，我们认为宝信恒生指数 24521 汽车 2015 年的财务表现将会改善。维持盈利预测以及 6.0 港元的总市值 (HK$/US$bn) 12.1/1.6 52 周最高/最低 (HK$) 4.30 - 7.10 目标价。日均成交额 (US$mn) 1.49

宝马中国最大的经销商流通量 (%) 28.9% 资料来源: 彭博我们预计在 2012 年收购燕骏之后，宝信汽车已经成为在中国最大的宝马

经销商。我们预计宝信 2014 年的宝马销量达到 4.3 万台左右，占宝马在股价表现中国总销量约 9.4%。更重要的是，宝信的门店大部分位于富庶的华东省份，进口车型的比例应该更高，因此单价水平也会更高。得益于宝马在 HK$ 7.00 2014 年末给予的特别返利，我们预计宝信 2014 年的新车销售净利润会维 100% 持在 5.3%的平稳水平。 6.00 90%

80% 5.00 更加均衡的整车厂-经销商关系，以及有利的行业政策 70% 展望 2015 年，我们预计经销商们会与整车厂商讨决定一个更加合理的销 4.00 60% 量增长目标，因此虽然销量增速可能会放缓，但是毛利率很有可能会保持 3.00 50% 平稳。政策方面，随着《汽车销售管理办法》修改完成，我们预计经销商 Feb-14 Oct-14

会在日常经营过程中获得更多的自主权，例如库存管理，销售价格，产品 Price(LHS) Rel. to HSI(RHS) 搭配，门店装潢以及宣传等方面。新的政策也有可能会设定特许经营权的

最低年限，给予经销商更多的保护。总体而言，我们看到行业政策正在朝着有利于经销商的方向调整。股票数据 1M 3M 12M 绝对回报 (%) (5.4) (11.1) (26.0) 2015 年的财务情况将会改善绝对回报 (US$, %) (5.4) (11.1) (25.9) 相对 HSI 回报 (%) (7.9) (15.2) (39.3) 得益于售后业务占比的提升，我们预计毛利率将会从 FY14 的 9.4%提升到资料来源: 彭博 FY16 的 10.0%。由于新开门店放缓以及单店投入减少，资本支出有望从 FY13 的 11.41 亿人民币逐渐放缓到 FY14/15/16 的 6.62 亿/5.42 亿/5.79 亿人民币。因此，在资本支出放缓和库存压力减少的帮助下，净负债率有公司簡介宝新汽车集团有限公司是一家中国豪华汽车经销商的所有望从 FY14 的 75%下降到 FY16 的 43%，净资产回报率将从 FY14 的 18%增长者和经营者。该公司的业务主要集中在豪华和超豪华品牌到 FY16 的 20%。汽车。宝新经营 4S 经销店，展示厅和维修中心。资料来源: 彭博

净利润预计在 FY14-FY16 年复合增长率达到 20% 我们维持 FY14/15/16 的盈利预测在人民币 9.92 亿/11.83 亿/14.18 亿，分别增长-2%/19%/20%。我们认为在从 FY14 到 FY16 净利润复合增长 20% 的背景下，公司目前 8.1x2015PE 的估值是吸引的。维持买入评级以及 6.0 港元的目标价，相当于 10x 2015PE,或者 0.5x PEG.

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 18,093 30,082 33,107 35,557 37,391 经营盈利 1,240 1,904 1,967 2,221 2,515 净利润 716 1,007 992 1,183 1,418 实际盈利 716 1,007 992 1,183 1,418 罗文安每股实际盈利 (CNY) 0.28 0.40 0.39 0.47 0.56 证监会中央编号:AVT518 每股股息 (CNY) 0.08 0.12 0.12 0.14 0.17 +852 2899 8300 每股账面价值 (CNY) 1.53 1.85 2.12 2.45 2.84 [email protected] 市盈率 (x) 13.5 9.6 9.7 8.1 6.8 股息率 (%) 2.1 3.1 3.1 3.7 4.4

市净率 (x) 2.5 2.1 1.8 1.6 1.3

资料来源：国信证券(香港)

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。 98

Baoxin Auto (1293 HK) John Luo, +852 2899 8300, [email protected]

Figure 3 Key assumptions Key Assumptions 2010A 2011A 2012E 2013A 2014E 2015E 2016E GPM (%) 8.9% 10.7% 8.7% 9.7% 9.4% 9.5% 10.0% - new car sales 6.0% 8.2% 5.7% 6.0% 5.3% 5.2% 5.2% - after-sales service 47.5% 48.5% 47.7% 47.5% 47.0% 46.0% 46.0% Auto sales volume (Units) 22,314 29,499 43,253 69,852 79,179 86,826 93,486 Auto sales volume growth (%) 30.2% 32.2% 46.6% 61.5% 13.4% 9.7% 7.7% ASP (RMB '000) 321 382 388 392 377 372 364 After-sales service revenue growth (%) 25.8% 37.8% 71.3% 108.7% 21.0% 18.8% 17.0%

Source: Guosen Securities(HK) Research

Figure 4 Financial model of Baoxin Auto 2010A 2011A 2012E 2013A 2014E 2015E 2016E Revenue 7,717 12,011 18,093 30,082 33,107 36,149 38,587 Growth (%) 55.7% 50.6% 66.3% 10.1% 9.2% 6.7% Cost of sales and services provided -7,029 -10,721 -16,510 -27,161 -29,980 -32,698 -34,732 Gross profit 688 1,290 1,583 2,920 3,127 3,451 3,855 GPM (%) 8.9% 10.7% 8.7% 9.7% 9.4% 9.5% 10.0% Other income and gains, net 37 94 379 469 442 530 560 Selling and distribution costs -177 -257 -461 -947 -960 -1,048 -1,119 % of revenue -2.3% -2.1% -2.5% -3.1% -2.9% -2.9% -2.9% Administrative expenses -91 -167 -261 -539 -642 -705 -772 % of revenue -1.2% -1.4% -1.4% -1.8% -1.9% -2.0% -2.0% Profit from operations 457 960 1,240 1,904 1,967 2,228 2,524 OPM (%) 5.9% 8.0% 6.9% 6.3% 5.9% 6.2% 6.5% Finance costs -48 -128 -337 -545 -617 -621 -601 Share of profit of a joint venture 3 5 14 11 7 8 8 Profit before tax 412 837 918 1,370 1,357 1,615 1,931 EBTM (%) 5.3% 7.0% 5.1% 4.6% 4.1% 4.5% 5.0% Income tax expense -104 -221 -191 -355 -339 -404 -483 Profit for the period 308 616 727 1,014 1,018 1,211 1,448 Owners of the parent 304 602 716 1,007 992 1,183 1,418 NPM (%) 3.9% 5.0% 4.0% 3.3% 3.0% 3.3% 3.7% Non-controlling interests 4 14 11 8 26 29 30 Diluted EPS (RMB) 0.14 0.27 0.28 0.40 0.39 0.47 0.56

Source: Guosen Securities(HK) Research

Guosen Securities (HK) 99

Baoxin Auto (1293 HK) John Luo, +852 2899 8300, [email protected]

Figure 5 12 months forward PE band chart Figure 6 12 months forward PB band chart

HK$ 16.00 16.00 max 4.9X max 25.7X 14.00 14.00 12.00 12.00 +1sd 3.5X 10.00 +1sd 17.9X 10.00 8.00 avg 13.4X 8.00 avg 2.6X 6.00 6.00 -1sd 9.0X -1sd 1.8X 4.00 min 7.6X 4.00 min 1.4X PE(x) 7.6X PB(x) 1.4X 2.00 2.00 0.00 0.00 Jan-12 Jan-13 Jan-14 Jan-15 Jan-12 Jan-13 Jan-14 Jan-15

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 100

Baoxin Auto (1293 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 18,093 30,082 33,107 35,557 37,391 Revenue growth (%) 50.6 66.3 10.1 7.4 5.2 Cost of sales (16,510) (27,161) (29,980) (32,141) (33,605) Operating profit growth (%) 29.2 53.5 3.3 12.9 13.2 Gross profit 1,583 2,920 3,127 3,416 3,787 Reported profit growth (%) 18.9 40.6 (1.5) 19.3 19.9 Other income/(expense) 379 469 442 530 560 Underlying profit growth (%) 18.9 40.6 (1.5) 19.3 19.9 Operating expenses (722) (1,486) (1,602) (1,725) (1,832) Underlying EPS growth (%) 4.2 40.6 (1.5) 19.3 19.9 Operating profit 1,240 1,904 1,967 2,221 2,515 Dividend growth (%) 0.0 50.0 (2.0) 19.3 19.9 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 8.7 9.7 9.4 9.6 10.1 Finance income 0 0 0 0 0 Operating profit margin (%) 6.9 6.3 5.9 6.2 6.7 Finance expenses (337) (545) (617) (614) (593) Underlying profit margin (%) 4.0 3.3 3.0 3.3 3.8 Associates & JCE 14 11 7 7 8 Net debt/equity (%) 39.5 53.9 74.8 59.2 43.9 Profit before taxation 918 1,370 1,357 1,615 1,930 Net debt/total assets (%) 9.2 14.1 21.0 18.3 15.0 Taxation (191) (355) (339) (404) (482) Current ratio (%) 109 112 113 117 123 Non-controlling interests (11) (8) (26) (28) (30) Dividend payout (%) 28.3 30.1 30.0 30.0 30.0 Net profit 716 1,007 992 1,183 1,418 Interest cover (x) 3.7 3.5 3.2 3.6 4.2 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 3.5 3.3 3.3 3.3 3.3 Underlying Profit 716 1,007 992 1,183 1,418 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 78.0 73.5 73.1 73.3 73.5 Interest burden (%) 74.0 71.9 69.0 72.7 76.7 Operating profit margin (%) 6.9 6.3 5.9 6.2 6.7 Asset turnover (x) 1.5 1.7 1.8 1.8 1.8 Leverage ratio (x) 3.5 4.0 3.7 3.4 3.1 ROA (%) 5.9 5.8 5.4 6.0 6.9 ROE (%) 20.8 23.6 19.8 20.5 21.2 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 2,720 3,310 3,820 4,186 4,564 Operating profit 1,255 1,914 1,987 2,243 2,537 Associates & JCE 28 38 45 53 60 Depreciation & amortization 122 228 153 167 183 Others 1,580 1,873 1,873 1,873 1,873 Interest income (34) (32) (13) (14) (15) Non-current assets 4,328 5,222 5,738 6,111 6,498 Change in working capital (933) (1,226) (1,908) (361) (285) Inventories 2,175 3,002 3,285 3,170 3,222 Tax paid (214) (130) (339) (404) (482) Debtors & prepayments 4,703 4,767 5,674 6,091 6,403 Other operating cashflow (116) (51) (7) (7) (8) Bank deposits & cash 2,668 2,021 1,324 1,422 1,496 Operating activities 79 704 (127) 1,624 1,930 Others 2,703 2,860 3,069 3,290 3,455 Purchase of non-current assets (Capex) (1,334) (1,141) (662) (533) (561) Current assets 12,248 12,650 13,353 13,973 14,576 Free cash flow (1,255) (437) (789) 1,091 1,369 Bank & other borrowings 5,758 5,858 6,865 6,841 6,564 Disposal of non-current assets 83 230 0 0 0 Trade & payables 4,415 4,364 4,082 4,384 4,610 Associates & JCE (net) 0 0 0 0 0 Taxation 168 340 340 340 340 Interest received 34 32 13 14 15 Others 880 722 497 356 374 Dividends received 0 0 0 0 0 Current liabilities 11,220 11,284 11,783 11,921 11,887 Other investing cashflow (766) (117) 0 0 0 Bank & other borrowings 1,145 1,539 1,539 1,539 1,539 Investing activities (1,984) (996) (649) (519) (546) Others 269 326 326 326 326 New loans raised 9,043 12,884 6,635 6,021 6,079 Non-current liabilities 1,415 1,864 1,864 1,864 1,864 Repayment of loans (6,392) (12,400) (5,628) (6,045) (6,357) Net assets 3,941 4,723 5,444 6,300 7,322 Dividends paid 0 0 0 0 0 Share capital 21 21 21 21 21 Other financing cashflow (964) (638) (928) (983) (1,033) Premium & reserves 3,859 4,649 5,343 6,171 7,164 Financing activities 1,687 (154) 79 (1,007) (1,311) Shareholders' funds 3,880 4,670 5,364 6,192 7,185 Inc/(dec) in cash (217) (447) (697) 98 73 Non-controlling interests 61 53 79 107 137 Cash at beginning of year 2,884 2,668 2,021 1,324 1,422 Total equity 3,941 4,723 5,444 6,300 7,322 Foreign exchange effect 1 7 0 0 0 Source: Guosen Research estimates Cash at end of year 2,668 2,228 1,324 1,422 1,496 Source: Guosen Research estimates

Guosen Securities (HK) 101

Company Research Company update

China Auto Zhengtong Auto (1728 HK) Auto Retail Steadier growth 11 February 2015 BUY Although sales volume growth of BMW slowed in 2H14, that of Volvo Target price ▼ HK$5.40 remained robust, and we estimate that ZTA will record a 15% growth Previous Rec/Target Buy | HK$5.80 in new car sales volume in 2014. After-sales service and extension Last price (9 Feb 15) HK$3.89 business will drive earnings growth by 15%/14% for FY15/FY16. Upside/downside (%) 38.8 HSI 24521 Financial performance will improve in the coming two years thanks to Mkt cap (HK$bn/US$bn) 8.6/1.1 lower inventory pressure and stabling margins. Cut earnings 52 week range (HK$) 3.30 - 4.90 estimates by 7.3%/8.4%/8.8% in FY 14/15/16 based on more Avg trading volume daily (US$mn) 1.87 Free float (%) conservative assumption in new car sales ASP, maintain BUY on Source: Bloomberg positive outlook. TP revised down from HK$ 5.8 to HK$5.4.

Performance Sales volume growth remained solid HK$

Although sales volume growth of BMW slowed from 23.1% in 1H14 to 11.1% in 4.50 100% 2H14 in China, that of Volvo remained robust at 31.5% YoY in 1H14 and 34.3% YoY 4.00 in 2H14. We estimate these two brands account for over 35% in ZTA’s total sales, 90% 3.50 and expect ZTA’s FY14 new car sales volume to increase by 15% to 90.6k units. 80% 3.00 70% After-sales and extension business drive earnings 2.50 We expect that the after-sales service business will grow by 16%/15%/15% in 2.00 60% FY14/15/16, and margins will be largely flat at 46.0%/45.5%/45.5%. Hence the Feb-14 Oct-14 gross profit contribution from after-sales service will increase from 48.8% in 2013 Price(LHS) Rel. to HSI(RHS) to 56% in 2016. Extension business will benefit from larger customer base and higher penetration rate both in insurance and auto finance. We forecast the revenue in extension business will grow by 27%/27%/21% in FY14/15/16.

Improving financial situation Performance 1M 3M 12M We believe that the improving dealer-OEM relationship will lead to more stable Absolute (%) (6.5) (5.6) (14.9) Absolute (US$, %) (6.5) (5.6) (14.8) margins. Hence, we estimate that the GPM will increase from 8.7% in 2013 to Relative to HSI (%) (9.0) (9.7) (28.2) 8.9%/9.1%/9.4% in FY14/15/16, thanks to higher contribution from after-sales Source: Bloomberg service business. Inventory turnover days will decrease from 39 days in 2013 to 33 days in 2016, thanks to less inventory pressure from OEMs. CAPEX will be around RMB 1.0bn per year in the coming two years to cater for new store openings. Net gearing will decrease from 30.2% in 2013 to 13.1% in 2016. Company background China ZhengTong Auto Services Holdings Limited operates Estimates revised down, maintain BUY on positive outlook automotive dealerships throughout China. The Company We revised our estimates in new car sales volume by 0.6%/-1.6%/-3.0% in specializes in retailing luxury automobiles as well as providing FY14/15/16, and cut ASP assumptions by 1.8%/4.4%/5.0% to factor in the impact maintenance services for the cars it sells. of quicker localization of luxury models. We lower net profit estimates by Source: Bloomberg

7.7%/8.4%/8.8% in FY14/15/16 to RMB 918m/1,058m/1,208m. The downtrend in new car sales margins should stabilize in the coming years, and net profit growth should remain steady at 15% CAGR from FY14 to FY16. We maintain our BUY rating and cut TP from HK$ 5.8 to HK$ 5.4 due to lower earnings estimates, which represents 9.0X 2015 PE or 0.6x PEG. Figure 1: Financial Summary Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E Revenue 27,649 29,840 32,198 34,036 36,050 Operating Profit 1,300 1,674 1,792 2,055 2,283 Reported Profit 604 837 918 1,058 1,208 Underlying Profit 604 837 918 1,058 1,208 Underlying EPS (CNY) 0.27 0.38 0.42 0.48 0.55 John Luo DPS (CNY) 0.00 0.08 0.08 0.10 0.11 SFC CE No.: AVT518 BVPS (CNY) 3.03 3.41 3.75 4.13 4.56 +852 2899 8300 P/E (x) 11.5 8.3 7.5 6.5 5.7 [email protected] Dividend Yield (%) 0.0 2.5 2.7 3.1 3.5

P/B (x) 1.0 0.9 0.8 0.8 0.7

Source: Guosen Securities(HK)

102 See the last page of this report for important disclosures

公司报告公司快讯

正通汽车 (1728 HK) 中国汽车汽车零售稳定增长 2015 年 2 月 11 日买入虽然宝马汽车在 2H14 的销量增长有所放缓，沃尔沃的增长依然强劲，因此我们预计正通汽车在 2014 年的总销量增长将达到 15%。目标价 ▼ HK$5.40 售后业务以及延伸业务预计将能驱动净利润在 FY15/16 增长上次评级/目标价买入 | HK$5.807 15%/14%。得益于更低的库存压力以及稳定的利润率，我们预计公收盘价 (9 Feb 15) HK$3.89 司的财务表现将在未来两年改善。基于更加保守的新车销售单价， Upside/downside (%) 38.8 恒生指数 24521 下调 FY14/15/16 的净利润预测 7.3%/8.4%/8.8%，而基于正面的行总市值 (HK$/US$bn) 8.6/1.1 52 周最高/最低 (HK$) 业展望维持买入评级。将目标价从 5.8 港元下调至 5.4 港元。 3.30 - 4.90 日均成交额 (US$mn) 1.87

销量增长维持稳健流通量 (%) 资料来源: 彭博虽然宝马汽车在中国的销量增速从 1H14 的 23.1%下降至 2H14 的 11.1%，但是沃尔沃汽车上下半年的销量增速分别达到了 31.5%和 34.3%。我们预计这两个品牌的销量占正通汽车总销量的 35%，因此公司 2014 年的销量股价表现增长 15%至 9.06 万辆。 HK$

4.50 100% 售后以及延伸业务驱动利润增长 4.00 90% 我们预计售后业务的收入在 FY14/15/16 将会增长 16%/15%/15%，而利润 3.50 率保持在 46.0%/45.5%/45.5%的平稳水平。因此售后业务的毛利贡献将从 80% 3.00 2013 年的 48.8%提升到 2016 年的 56%。另一方面，延伸业务得益于更大 70% 2.50 的客户基数以及金融/保险业务的渗透率提升而受益。因此我们预计来自 2.00 60% 延伸业务的收入将在 FY14/15/16 分别增长 27%/27%/21%。 Feb-14 Oct-14

Price(LHS) Rel. to HSI(RHS) 财务状况预料可改善我们相信更加平衡的经销商-整车厂关系将会带来更加稳定的经销商利润。

另外得益于售后业务占比提升，我们预计正通汽车的毛利率将会从 2013 股票数据 1M 3M 12M 年的 8.7%上升到 FY14/15/16 的 8.9%/9.1%/9.4%。由于压库压力减少，库绝对回报 (%) (6.5) (5.6) (14.9) 存周转天数将会从 2013 年的 39 天下降至 2016 年的 33 天。新开门店的资绝对回报 (US$, %) (6.5) (5.6) (14.8) 相对 HSI 回报 (%) (9.0) (9.7) (28.2) 本支出在未来两年将会维持在 10 亿人民币每年左右，净负债率将从 2013 资料来源: 彭博年的 30.2%下降至 2016 年的 13.1%。

下调盈利预测，维持买入评级公司簡介中国正通汽车服务控股有限公司经销和零售汽车，尤其豪我们将 FY14/15/16 的新车销量分别调整了 0.6%/-1.6%/-3.0%，并且基于华汽车。豪华车加快国产化进度而下调单价假设 1.8%/4.4%/5.0%。我们下调 FY14/15/16 的净利润预测 7.7%/8.4%/8.8%至人民币 9.18 亿/10.58 亿资料来源: 彭博 /12.08 亿。新车销售利润率的压力将在未来几年缓解，而净利润在 FY14 到 FY16 的复合增长率将维持在 15%的稳定增长。我们维持买入评级，而基于下调的盈利预测将目标价从 5.8 港元下调至 5.4 港元，相当于 2015 年 9x PE 或 0.6x PEG.

Figure 2: 盈利预测截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E 营业额 27,649 29,840 32,198 34,036 36,050 经营盈利 1,300 1,674 1,792 2,055 2,283 净利润 604 837 918 1,058 1,208 实际盈利 604 837 918 1,058 1,208 每股实际盈利 (CNY) 0.27 0.38 0.42 0.48 0.55 每股股息 (CNY) 0.00 0.08 0.08 0.10 0.11 每股账面价值 (CNY) 3.03 3.41 3.75 4.13 4.56 罗文安市盈率 (x) 11.5 8.3 7.5 6.5 5.7 证监会中央编号:AVT518 股息率 (%) 0.0 2.5 2.7 3.1 3.5 +852 2899 8300 市净率 (x) 1.0 0.9 0.8 0.8 0.7 [email protected]

资料来源：国信证券(香港)

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Zhengtong Auto (1728 HK) John Luo, +852 2899 8300, [email protected]

Figure 3 Key assumptions and change in major estimates Key assumptions 2010A 2011A 2012A 2013E 2014E 2015E 2016E New car sales GPM 5.4% 6.5% 5.4% 4.7% 4.6% 4.5% 4.6% After sales service GPM 44.0% 45.0% 45.1% 45.4% 46.0% 45.5% 45.5% Total sales volume (units) 22,292 38,185 70,493 79,054 90,641 98,157 104,710 New car sales ASP (RMB '000) 314 339 352 336 314 304 299 Change in major estimates Turnover (Old) 32,107 35,212 39,242 Turnover (New) 32,198 34,036 36,050 Change (%) 0.3% -3.3% -8.1% Net profit (Old) 995 1155 1321 Net profit (New) 918 1,058 1,208 Change (%) -7.7% -8.4% -8.8% Total sales volume (Old) 90,122 99,705 107,973 Total sales volume (New) 22,292 38,185 70,493 79,054 90,641 98,157 104,710 Change (%) 0.6% -1.6% -3.0% New car sales GPM (Old) 4.7% 4.6% 4.6% New car sales GPM (New) 4.6% 4.5% 4.6% Change (ppt) -0.05 -0.05 -0.05 New car sales ASP (Old) 320 318 315 New car sales ASP (New) 314 304 299 Change (%) -1.8% -4.4% -5.0%

Source: Guosen Securities(HK) Research

Figure 4 Financial model of ZTA RMB m 2010A 2011A 2012A 2013E 2014E 2015E 2016E Turnover 8,034 14,444 27,649 29,840 32,198 34,036 36,050 Growth (%) 80% 91% 8% 8% 6% 6% Cost of sales -7,308 -13,058 -25,198 -27,252 -29,335 -30,937 -32,660 Gross profit 726 1,386 2,452 2,588 2,863 3,099 3,391 GPM (%) 9.0% 9.6% 8.9% 8.7% 8.9% 9.1% 9.4% Other revenue 39 107 224 323 459 538 640 Other net income 7 13 46 42 80 85 90 Selling and distribution expenses -192 -330 -694 -698 -837 -885 -973 % of revenue -2.4% -2.3% -2.5% -2.3% -2.6% -2.6% -2.7% Administrative expenses -176 -320 -728 -581 -773 -783 -865 % of revenue -2.2% -2.2% -2.6% -1.9% -2.4% -2.3% -2.4% Profit from operations 405 856 1,300 1,674 1,792 2,055 2,282 OPM (%) 5.0% 5.9% 4.7% 5.6% 5.6% 6.0% 6.3% Finance costs -56 -128 -404 -489 -478 -537 -553 Share of profit of a joint venture 10 21 19 22 23 25 26 Profit before taxation 390 749 915 1,206 1,338 1,542 1,755 EBTM (%) 4.9% 5.2% 3.3% 4.0% 4.2% 4.5% 4.9% Income tax -91 -187 -282 -352 -401 -463 -527 Profit for the period 299 562 634 854 936 1,080 1,229 Attributable to: Equity shareholders of the Company 276 524 604 837 918 1,058 1,208 NPM (%) 3.4% 3.6% 2.2% 2.8% 2.9% 3.1% 3.3% Non-controlling interests 23 38 29 17 18 21 21 Diluted EPS (RMB) 0.18 0.25 0.27 0.38 0.42 0.48 0.55

Source: Guosen Securities(HK) Research

Guosen Securities (HK) 104

Zhengtong Auto (1728 HK) John Luo, +852 2899 8300, [email protected]

Figure 5 12 months forward PE band chart Figure 6 12 months forward PB band chart

HK$ 16.00 25.00 max 2.9X 14.00

20.00 max 33.1X 12.00

10.00 +1sd 2.0X 15.00 +1sd 22.5X 8.00 avg 1.4X 10.00 avg 14.5X 6.00

5.00 4.00 PB(x) 0.8X -1sd 6.6X -1sd 0.8X PE(x) 6.5X 2.00 min 0.7X 0.00 min 5.8X 0.00 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 105

Zhengtong Auto (1728 HK) John Luo, +852 2899 8300, [email protected]

Summary financial statements Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 27,649 29,840 32,198 34,036 36,050 Revenue growth (%) 91.4 7.9 7.9 5.7 5.9 Cost of sales (25,198) (27,252) (29,335) (30,937) (32,660) Operating profit growth (%) 51.8 28.8 7.1 14.6 11.1 Gross profit 2,452 2,588 2,863 3,099 3,391 Reported profit growth (%) 15.3 38.5 9.6 15.3 14.1 Other income/(expense) 269 365 540 624 730 Underlying profit growth (%) 15.3 38.5 9.6 15.3 14.1 Operating expenses (1,422) (1,279) (1,610) (1,668) (1,838) Underlying EPS growth (%) 8.3 38.8 9.6 15.3 14.1 Operating profit 1,300 1,674 1,792 2,055 2,283 Dividend growth (%) 0.0 0.0 5.7 15.3 13.8 Other non operating inc/(exp) 0 0 0 0 0 Gross profit margin (%) 8.9 8.7 8.9 9.1 9.4 Finance income 0 0 0 0 0 Operating profit margin (%) 4.7 5.6 5.6 6.0 6.3 Finance expenses (404) (489) (478) (537) (552) Underlying profit margin (%) 2.2 2.8 2.9 3.1 3.3 Associates & JCE 19 22 23 25 26 Net debt/equity (%) 35.7 30.2 30.2 15.0 13.1 Profit before taxation 915 1,206 1,338 1,542 1,757 Net debt/total assets (%) 14.2 11.9 12.6 6.5 5.8 Taxation (282) (352) (401) (463) (527) Current ratio (%) 110 126 127 128 131 Non-controlling interests (29) (17) (18) (21) (24) Dividend payout (%) 0.0 20.7 20.0 20.0 20.0 Net profit 604 837 918 1,058 1,208 Interest cover (x) 3.2 3.4 3.7 3.8 4.1 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 4.8 5.0 5.0 5.0 Underlying Profit 604 837 918 1,058 1,208 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 66.1 69.4 68.6 68.6 68.7 Interest burden (%) 70.4 72.1 74.6 75.1 77.0 Operating profit margin (%) 4.7 5.6 5.6 6.0 6.3 Asset turnover (x) 1.7 1.7 1.6 1.7 1.6 Leverage ratio (x) 2.5 2.5 2.5 2.4 2.3 ROA (%) 3.7 4.6 4.7 5.1 5.5 ROE (%) 9.4 11.8 11.6 12.2 12.6 Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E Fixed assets 1,646 2,283 3,023 3,699 4,338 Operating profit 1,319 1,696 1,845 2,114 2,345 Associates & JCE 141 166 189 214 240 Depreciation & amortization 363 299 327 376 434 Others 6,320 6,353 6,253 6,153 6,053 Interest income (16) (16) (29) (35) (37) Non-current assets 8,106 8,803 9,466 10,067 10,631 Change in working capital (556) (508) (395) 773 (471) Inventories 3,270 2,528 3,376 2,712 3,311 Tax paid (238) (147) (401) (463) (527) Debtors & prepayments 3,065 4,771 4,019 4,068 4,116 Other operating cashflow (49) (52) (23) (25) (26) Bank deposits & cash 1,203 1,468 1,441 2,665 2,819 Operating activities 822 1,271 1,322 2,742 1,719 Others 1,298 1,546 1,628 1,720 1,822 Purchase of non-current assets (Capex) (970) (1,016) (966) (953) (973) Current assets 8,836 10,313 10,464 11,166 12,067 Free cash flow (148) 255 357 1,789 746 Bank & other borrowings 3,694 2,942 3,220 3,404 3,605 Disposal of non-current assets 205 274 0 0 0 Trade & payables 3,909 4,628 4,411 4,662 4,938 Associates & JCE (net) 0 (3) 0 0 0 Taxation 395 636 636 636 636 Interest received 16 16 29 35 37 Others 0 0 0 0 1 Dividends received 20 0 0 0 0 Current liabilities 7,999 8,205 8,266 8,702 9,180 Other investing cashflow (123) (139) 0 0 0 Bank & other borrowings 1,205 2,353 2,353 2,353 2,353 Investing activities (852) (869) (937) (918) (936) Others 938 919 919 919 919 New loans raised 9,981 7,347 9,937 10,395 11,017 Non-current liabilities 2,143 3,272 3,272 3,272 3,272 Repayment of loans (9,302) (8,972) (9,659) (10,211) (10,815) Net assets 6,801 7,638 8,391 9,259 10,247 Dividends paid 0 (514) (184) (212) (241) Share capital 189 189 189 189 189 Other financing cashflow (543) 2,009 (507) (572) (590) Premium & reserves 6,520 7,354 8,089 8,935 9,899 Financing activities 136 (129) (413) (600) (630) Shareholders' funds 6,709 7,543 8,278 9,124 10,088 Inc/(dec) in cash 106 273 (27) 1,224 153 Non-controlling interests 92 95 113 134 159 Cash at beginning of year 1,097 1,203 1,468 1,441 2,665 Total equity 6,801 7,638 8,391 9,259 10,247 Foreign exchange effect 0 (8) 0 0 0 Source: Guosen Research estimates Cash at end of year 1,203 1,468 1,441 2,665 2,818 Source: Guosen Research estimates

Guosen Securities (HK) 106

Company Research Company update

Hong Kong Auto DCH (1828 HK) Auto Distributors Shifting away from auto dealer business 11 February 2015 NEUTRAL The dealer business margin of DCH was depressed in 1H14 due to the Target price ▲ HK$4.70 high exposure to Japanese brands and we forecast almost no recovery Last price (9 Feb 15) HK$4.68 in margins in the dealer business until FY16. DCH is diversifying into Upside/downside (%) 0.4 the food and consumer product business, which requires less capital, HSI 24521 Mkt cap (HK$bn/US$bn) 8.6/1.1 and net gearing is expected to drop from 62% in 1H14 to 50% in 2016. 52 week range (HK$) 3.90 - 5.30 Fine-tuned our forecasts, slightly revise our TP from HK$ 4.21 to 4.70, Avg trading volume daily (US$mn) 1.17 Free float (%) 43.9% maintain Neutral. Source: Bloomberg

Margins pressed by Japanese brands Performance As of 1H14, auto dealership business accounted for 78% of DCH’s total revenue. HK$ We estimate that 61% of the 4S shops and around 60% of the total vehicles sold by 5.00 110% DCH were Japanese brands as of 1H14. In 1H14, although revenue from domestic dealership business increased by 24.7% to RMB 13.3bn, segment margin shrank by 4.50 100%

0.5ppt to 2.0%, dragging total segment profit to decrease by 0.4%. Due to higher 4.00 90% inventory and growth pressure from Japanese brands, we estimate that the segment margins of DCH’s dealership business to be 3.1%/3.2%/3.2% in 3.50 80%

FY14/15/16. 3.00 70% Feb-14 Oct-14 Diversifying into the food and consumer product business Price(LHS) Rel. to HSI(RHS) DCH has been striving to expand its presence in the food and consumer product business to cope with the pressure in the dealership business. In Jan 2015, DCH acquired 70% stake in a leading Hong Kong based electrical and home appliances distributor with a consideration of HK$ 295m. We believe DCH will have more Performance 1M 3M 12M diversification move into the food and consumer product business in future, and Absolute (%) 9.4 4.5 6.6 expect the revenue contribution of this segment to increase from 21.9% in FY13 to Absolute (US$, %) 9.4 4.5 6.7 25.2% in FY16. Relative to HSI (%) 6.8 0.3 (6.7) Source: Bloomberg Net gearing expect to go down on less investment in dealership The net gearing ratio of DCH has reached 62% in 1H14, due to the high capital needs in the dealership business. We estimate that DCH will slow down investments in dealership business and put more resources to food and consumer Company background business, which will require less capital. As such, we expect that the net gearing Dah Chong Hong Holdings Limited is a diversified business can improve to 50% by 2016. conglomerate. The Group is involved in motor vehicle sales, motor vehicle related business and services, sales of food and consumer products, as well as logistics services. Fine-tune the estimates, maintain Neutral Source: Bloomberg We fine-tuned our model on more conservative estimates on domestic sales volume growth. We slightly revised down our FY14/15/16 net profit estimates by 0.6%/0.4%/2.4% to HK$962m/1,076m/1,152m. The counter is currently trading at 8.0x 2015PE, which is fair given the high exposure in Japanese brands and low FY14-16 CAGR estimate of 9.4%, the lowest compared to the other two dealers under Guosen HK coverage (Baoxin: 20%; ZTA: 15%).

Figure 1: Financial Summary Year to Dec 31 (HK$mn) 2012A 2013A 2014E 2015E 2016E Revenue 48,014 42,261 46,373 49,842 53,097 Operating Profit 1,775 1,451 1,623 1,794 1,911 Reported Profit 1,045 901 962 1,076 1,152 Underlying Profit 1,045 901 962 1,076 1,152 John Luo SFC CE No.: AVT518 Underlying EPS (HKD) 0.57 0.49 0.53 0.59 0.63 +852 2899 8300 DPS (HKD) 0.21 0.19 0.21 0.23 0.25 [email protected] BVPS (HKD) 4.68 4.91 5.22 5.58 5.95 P/E (x) 8.1 9.5 8.9 8.0 7.4 Dividend Yield (%) 4.4 4.1 4.5 5.0 5.4 P/B (x) 1.0 1.0 0.9 0.8 0.8

Source: Guosen Securities(HK)

107 See the last page of this report for important disclosures

公司报告公司快讯

大昌行控股有限公司 (1828 HK) 香港汽车汽车分销商淡化汽车经销业务 2015 年 2 月 11 日中性在 1H14，由于较高的日系车风险敞口，大昌行的汽车经销业务利润率受到了压制，而我们预计利润率在 2016 年之前不会有明显的目标价 ▲ HK$4.70 反弹。大昌行正在加大对食品以及消费品业务的投资，而这些业务收盘价 (9 Feb 15) HK$4.68 所需资本支出相对较小，因此净负债率有望从 1H14 的 62%下降至 Upside/downside (%) 0.4 恒生指数 24521 2016 年的 50%。我们微调盈利预测，轻微将目标价从 4.21 港元调总市值 (HK$/US$bn) 8.6/1.1 52 周最高/最低 (HK$) 整至 4.7 港元，维持中性评级。 3.90 - 5.30 日均成交额 (US$mn) 1.17

日系车经销业务挤压利润率流通量 (%) 43.9% 在 1H14，大昌行的总收入中 78%来自汽车经销业务。我们预计同期大昌行资料来源: 彭博 61%的 4S 门店和大约 60%的汽车销量为日系车。在 1H14，虽然大昌行的国内汽车经销业务收入增长 24.7%至 133 亿人民币，分部利润率却下降了股价表现 0.5 个百分点至 2.0%，拖累分部利润下降 0.4%。由于来自于日系品牌更 HK$

高的库存和增长压力，我们预计大昌行在 FY14/15/16 的汽车业务分部溢 5.00 110% 利率分别为 3.1%/3.2%/3.2%。 4.50 100%

多样化至食品以及消费品业务 4.00 90%

大昌行正在通过加强多元化至食品以及消费品业务来应对汽车经销业务的 3.50 80% 压力。在 2015 年 1 月大昌行以 2.95 亿港元的代价收购了一家香港领先的 3.00 70% 家电分销商 70%的股权。我们相信大昌行在未来将会有更多类似的活动， Feb-14 Oct-14 因此预计公司食品以及消费品业务的收入占比将从 2013 年的 21.9%上升 Price(LHS) Rel. to HSI(RHS) 至 2016 年的 25.2%。

净负债率将会随着汽车经销业务投入减少而降低股票数据 1M 3M 12M 由于汽车经销业务对于资本较高的需求，在 1H14，大昌行的净负债率已绝对回报 (%) 9.4 4.5 6.6 经攀升至 62%。我们预计大昌行将会放缓在汽车经销业务的投入，转而将绝对回报 (US$, %) 9.4 4.5 6.7 相对 HSI 回报 (%) 6.8 0.3 (6.7) 更多资源投放至资本需求更少的食品以及消费品业务。因为，我们预计净资料来源: 彭博负债率将改善至 2016 年的 50%。

微调盈利预测，维持中性评级. 公司簡介大昌行控股有限公司是一家经营多元化业务的综合企业。基于更加保守的内地汽车销量增长预测，我们轻微下调 FY14/15/16 的净该集团从事汽车销售、汽车相关业务和服务、食品和消费利润 0.6%/0.4%/2.4%至 9.62 亿/10.76 亿/11.52 亿港币。目前公司股价品销售及物流服务。相当于 8.0x 2015PE。由于在日系品牌方面风险敞口较高，我们预期公司资料来源: 彭博在 FY14-FY16 的净利润复合增长率为 9.4%，低于其他两家国信香港覆盖的经销商（宝信：20%；正通：15%）。因此我们认为公司的估值合理。

Figure 2: 盈利预测截至 Dec 31 (港元百万) 2012A 2013A 2014E 2015E 2016E 营业额 48,014 42,261 46,373 49,842 53,097 经营盈利 1,775 1,451 1,623 1,794 1,911 净利润 1,045 901 962 1,076 1,152 实际盈利 1,045 901 962 1,076 1,152 每股实际盈利 (HKD) 0.57 0.49 0.53 0.59 0.63 每股股息 (HKD) 0.21 0.19 0.21 0.23 0.25 每股账面价值 (HKD) 4.68 4.91 5.22 5.58 5.95 市盈率 (x) 8.1 9.5 8.9 8.0 7.4 股息率 (%) 4.4 4.1 4.5 5.0 5.4 罗文安市净率 (x) 1.0 1.0 0.9 0.8 0.8 证监会中央编号:AVT518 资料来源：国信证券(香港) +852 2899 8300 [email protected]

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DCH (1828 HK) John Lu+852 2899 8300 [email protected]

Figure 3 Financial model of DCH Key assumptions 2010A 2011A 2012A 2013A 2014E 2015E 2016E Segment margin of mainland dealer business 5.0% 4.2% 3.1% 2.4% 2.1% 2.2% 2.2% Mainland auto sales volume 58,833 85,448 81,000 84,600 95,598 103,246 110,473 GPM (%) 12.2% 11.2% 11.7% 11.5% 11.9% 11.8% 11.8% Change in estimates Revenue (Old) 46,373 49,842 53,097 Revenue (New) 46,373 49,842 53,097 Change (%) 0.0% 0.0% 0.0% mainland auto sales growth (Old) 13.5% 8.5% 8.0% mainland auto sales growth (New) 13.0% 8.0% 7.0% Change (ppt) -0.50 -0.50 -1.00 Net profit (Old) 964 1,081 1,161 Net profit (New) 962 1,076 1,152 Change (%) -0.2% -0.5% -0.8%

Source: Guosen Securities(HK) Research

Figure 4 Financial model of DCH HKD m 2010A 2011A 2012A 2013A 2014E 2015E 2016E Turnover 32,211 46,109 48,014 42,261 46,373 49,842 53,097 Growth (%) 43.1% 4.1% -12.0% 9.7% 7.5% 6.5% Cost of sales -28,269 -40,943 -42,411 -37,389 -40,855 -43,961 -46,831 Gross profit 3,942 5,166 5,603 4,872 5,518 5,881 6,265 GPM (%) 12.2% 11.2% 11.7% 11.5% 11.9% 11.8% 11.8% Other income 423 494 663 821 881 997 1,062 Selling and distribution expenses -1,691 -2,303 -2,752 -2,549 -2,875 -3,090 -3,292 Administrative expenses -1,180 -1,496 -1,739 -1,693 -1,901 -1,994 -2,124 Profit from operations 1,494 1,861 1,775 1,451 1,623 1,794 1,911 OPM (%) 4.6% 4.0% 3.7% 3.4% 3.5% 3.6% 3.6% Net gain on remeasurement of investment properties 122 81 43 12 - - - Wind down costs of manufacturing operation 331 124 78 19 21 22 24 Other net gains (losses) -106 -36 -55 2 2 2 3 Finance costs -115 -194 -326 -234 -313 -347 -362 Share of profit after tax of associates 21 4 -1 11 - - - Share of profit after tax of joint ventures 50 23 12 13 14 15 16 Profit before taxation 1,797 1,863 1,526 1,274 1,348 1,487 1,592 EBTM (%) 5.6% 4.0% 3.2% 3.0% 2.9% 3.0% 3.0% Income tax -352 -498 -516 -340 -350 -372 -398 Profit for the period 1,445 1,365 1,010 934 997 1,115 1,194 Attributable to: Shareholders of the Company 1,411 1,323 1,045 901 962 1,076 1,152 NPM (%) 4.4% 2.9% 2.2% 2.1% 2.1% 2.2% 2.2% Non-controlling interests 34 42 -35 33 35 39 42 Fully diluted EPS (HKD) 0.78 0.72 0.57 0.49 0.53 0.59 0.63

Source: Guosen Securities(HK) Research

Guosen Securities (HK) 109

DCH (1828 HK) John Lu+852 2899 8300 [email protected]

Figure 5 12 months forward PE band chart Figure 6 12 months forward PB band chart

HK$ 16.00 16.00 14.00 14.00 max 2.4X 12.00 12.00 max 19.6X +1sd 1.9X 10.00 10.00 +1sd 15.4X 8.00 8.00 avg 1.5X avg 11.8X 6.00 6.00 -1sd 8.2X -1sd 1.0X 4.00 PE(x) 7.7X 4.00 min 0.8X 2.00 min 4.8X PB(x) 0.8X 2.00 0.00 0.00 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

Guosen Securities (HK) 110

DCH (1828 HK) John Lu+852 2899 8300 [email protected]

Summary financial statements Profit & Loss (HK$mn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E Revenue 48,014 42,261 46,373 49,842 53,097 Revenue growth (%) 4.1 (12.0) 9.7 7.5 6.5 Cost of sales (42,411) (37,389) (40,855) (43,961) (46,831) Operating profit growth (%) (4.6) (18.3) 11.9 10.6 6.5 Gross profit 5,603 4,872 5,518 5,881 6,265 Reported profit growth (%) (21.0) (13.8) 6.8 11.8 7.1 Other income/(expense) 663 821 881 997 1,062 Underlying profit growth (%) (21.0) (13.8) 6.8 11.8 7.1 Operating expenses (4,491) (4,242) (4,776) (5,084) (5,416) Underlying EPS growth (%) (21.0) (14.4) 6.8 11.8 7.1 Operating profit 1,775 1,451 1,623 1,794 1,911 Dividend growth (%) (23.4) (5.8) 8.4 11.8 7.1 Other non operating inc/(exp) 66 33 23 25 26 Gross profit margin (%) 11.7 11.5 11.9 11.8 11.8 Finance income 0 0 0 0 0 Operating profit margin (%) 3.7 3.4 3.5 3.6 3.6 Finance expenses (326) (234) (313) (347) (362) Underlying profit margin (%) 2.2 2.1 2.1 2.2 2.2 Associates & JCE 11 24 14 15 16 Net debt/equity (%) 37.4 56.6 45.0 55.2 53.6 Profit before taxation 1,526 1,274 1,348 1,487 1,592 Net debt/total assets (%) 15.7 23.5 18.1 22.1 21.9 Taxation (516) (340) (350) (372) (398) Current ratio (%) 174 149 159 161 167 Non-controlling interests 35 (33) (35) (39) (42) Dividend payout (%) 36.1 39.4 40.0 40.0 40.0 Net profit 1,045 901 962 1,076 1,152 Interest cover (x) 5.4 6.2 5.2 5.2 5.3 Other Adjustments on UP 0 0 0 0 0 Dividend cover (x) 2.8 2.5 2.5 2.5 2.5 Underlying Profit 1,045 901 962 1,076 1,152 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 68.5 70.7 71.4 72.4 72.4 Interest burden (%) 86.0 87.8 83.0 82.9 83.3 Operating profit margin (%) 3.7 3.4 3.5 3.6 3.6 Asset turnover (x) 2.3 2.0 2.0 2.0 2.0 Leverage ratio (x) 2.5 2.4 2.4 2.5 2.5 ROA (%) 5.1 4.3 4.2 4.4 4.4 ROE (%) 12.7 10.3 10.4 10.9 10.9 Source: Guosen Research estimates

Balance Sheet (HK$mn) 2012A 2013A 2014E 2015E 2016E Cashflow (HK$mn) 2012A 2013A 2014E 2015E 2016E Fixed assets 3,923 4,164 4,343 4,491 4,486 Operating profit 1,852 1,515 1,679 1,850 1,971 Associates & JCE 490 650 664 680 696 Depreciation & amortization 510 641 628 693 750 Others 1,621 1,651 1,651 1,651 1,651 Interest income (33) (11) (19) (16) (17) Non-current assets 6,034 6,465 6,659 6,822 6,833 Change in working capital (408) (1,833) 365 (1,860) (929) Inventories 5,536 6,259 6,324 7,588 8,083 Tax paid (555) (340) (350) (372) (398) Debtors & prepayments 5,464 6,483 6,797 7,647 8,146 Other operating cashflow (113) (57) (37) (40) (43) Bank deposits & cash 2,951 2,173 3,749 3,199 3,381 Operating activities 1,253 (85) 2,265 255 1,335 Others 321 246 246 246 246 Purchase of non-current assets (Capex) (980) (849) (784) (816) (718) Current assets 14,272 15,161 17,116 18,679 19,857 Free cash flow 273 (934) 1,481 (561) 616 Bank & other borrowings 3,471 5,608 5,434 6,014 6,208 Disposal of non-current assets 559 0 0 0 0 Trade & payables 4,556 4,465 5,209 5,462 5,528 Associates & JCE (net) 0 0 0 0 0 Taxation 191 121 121 121 121 Interest received 0 0 0 0 0 Others 0 0 0 0 0 Dividends received 0 0 0 0 9 Current liabilities 8,218 10,194 10,764 11,597 11,857 Other investing cashflow 67 285 19 16 17 Bank & other borrowings 2,938 1,816 2,782 2,991 3,186 Investing activities (354) (564) (765) (800) (693) Others 246 243 243 243 243 New loans raised 19,096 15,965 18,631 19,962 20,814 Non-current liabilities 3,184 2,059 3,025 3,234 3,429 Repayment of loans (18,470) (16,257) (17,839) (19,173) (20,425) Net assets 8,904 9,373 9,985 10,670 11,404 Dividends paid (447) (355) (385) (430) (461) Share capital 274 275 275 275 275 Other financing cashflow (500) (241) (331) (363) (379) Premium & reserves 8,237 8,719 9,296 9,942 10,633 Financing activities (321) (888) 76 (5) (451) Shareholders' funds 8,511 8,994 9,571 10,217 10,908 Inc/(dec) in cash 578 (1,537) 1,576 (550) 191 Non-controlling interests 393 379 414 454 496 Cash at beginning of year 2,375 2,951 2,173 3,749 3,199 Total equity 8,904 9,373 9,985 10,670 11,404 Foreign exchange effect (2) 0 0 0 0 Source: Guosen Research estimates Cash at end of year 2,951 1,414 3,749 3,199 3,390 Source: Guosen Research estimates

Guosen Securities (HK) 111

Hong Kong / Auto John Luo +852 2899 8300 [email protected]

Information Disclosures Stock ratings, sector ratings and related definitions

Stock Ratings: Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months. Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months. Sell: A negative return of 10% or more relative to overall market within 6 –12 months. Sector Ratings: Overweight: The sector will outperform the overall market by 10% or higher within 6 –12 months. Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months. Underweight: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an officer of the listed companies covered in this report and has no financial interests in the companies. Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclo sable financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities (HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no individual employed by the listed companies.

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Hong Kong / Auto John Luo +852 2899 8300 [email protected]

信息披露公司评级、行业评级及相关定义

公司评级买入：我们预计未来 6-12 个月内，个股相对大盘涨幅在 10%以上；中性：我们预计未来 6-12 个月内，个股相对大盘涨幅介于-10%与 10%之间；减持：我们预计未来 6-12 个月内，个股相对大盘跌幅大于 10%。

行业评级超配：我们预计未来 6-12 个月内，行业整体回报高于市场整体水平 10%以上；中性：我们预计未来 6-12 个月内，行业整体回报介于市场整体水平-10%与 10%之间；低配：我们预计未来 6-12 个月内，行业整体回报低于市场整体水平 10%以上。

利益披露声明报告作者为香港证监会持牌人士，分析员本人或其有联系者并未担任本研究报告所评论的上市法团高级管理人员，也未持有其任何财务权益。

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免责条款证券价格有时可能非常波动。证券价格可升可跌，甚至变成毫无价值。买卖证券未必一定能够赚取利润，反而可能会招致损失。本研究报告内容既不代表国信证券（香港）的推荐意见，也并不构成所涉及的个别股票的买卖或交易要约。国信证券（香港）或其集团公司有可能会与本报告涉及的公司洽谈投资银行业务或其它业务（例如配售代理、牵头经办人、保荐人、包销商或从事自营投资于该股票）。国信证券（香港）不排除其员工有个人投资于本报告内所提及的上市法团。

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本报告仅向特定客户传送，未经国信证券香港书面授权许可，任何人不得引用、转载以及向第三方传播，否则可能将承担法律责任。研究报告所载的资料及意见，如有任何更改，本司将不作另行通知。在一些管辖区域内，针对或意图向该等区域内的市民、居民、个人或实体发布、公布、供其使用或提供获取渠道的行为会违反该区域内所适用的法律或规例或令国信证券（香港）受制于任何注册或领牌规定，则本研究报告不适用于该等管辖区域内的市民

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