China / Hong Kong Company Focus
BAIC Motor Corp
Bloomberg: 1958 HK Equity | Reuters: 1958.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 13 Oct 2016
BUY (Initiating coverage) Last Traded Price ( 12 Oct 2016):HK$8.15 (HSI : 23,407) Benz's new look wins over younger Price Target 12-mth: HK$9.60 (18% upside) drivers • Mercedes-Benz the fastest growing luxury brand with Potential Catalyst: Competitive new models to drive earnings sleek looking new models Where we differ: Our earnings forecast slightly higher than consensus • Various business entities launching new vehicles to boost
sales Analyst Rachel MIU +852 2863 8843 • Golden opportunity for company to implement the new [email protected] energy vehicle strategy
• Initiate coverage with BUY rating and TP of HK$9.60 Price Relative Benefits arising from vehicle refresh programmes. Beijing Benz is HK$ Relative Index becoming a fast-growing auto company after changing its products 215 12.3 195 11.3 and sales strategy 2-3 years ago. The newer models are more 10.3 175 appealing to younger car buyers. Since 2013, Mercedes-Benz's car 9.3 155 8.3 135 sales have been growing at a rapid rate and the trend is expected 7.3 115 to continue following the launch of new models recently. It has also 6.3 95 5.3 75 ventured into car engine production to further enhance profitability. 4.3 55 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Korean JV expected to turn around soon. The Korean JV is expected to post modest earnings expansion in FY17/18 as sales of new BAIC Motor Corp (LHS) Relative HSI (RHS) products start to ramp up and on lower A&P expense after the
Forecasts and Valuation older models are completely phased out. FY Dec (RMB m) 2015A 2016F 2017F 2018F Turnover 84,112 109,769 130,773 143,334 Strong cash generation on profit expansions. The healthy profit EBITDA 8,266 8,676 10,696 11,525 growth is generating strong cashflows for the company. This not Pre-tax Profit 8,321 12,180 14,551 15,733 Net Profit 3,319 5,082 6,197 6,708 only supports capex plans but also allows higher dividend payout Net Pft (Pre Ex) 3,319 5,082 6,197 6,708 for shareholders. EPS (RMB) 0.44 0.67 0.82 0.88 Valuation: EPS (HK$) 0.50 0.77 0.94 1.02 Undemanding valuation. We project FY16-17F earnings to grow at EPS Gth (%) (37.8) 53.1 21.9 8.2 c.15% per year to support valuation expansion. Our HK$9.60 TP is Diluted EPS (HK$) 0.50 0.77 0.94 1.02 pegged to FY17F PE of 10x, benchmarked to global luxury auto DPS (HK$) 0.17 0.27 0.33 0.36 BV Per Share (HK$) 5.32 6.09 7.03 8.05 brands, factoring in the company’s underlying fundamentals. PE (X) 16.2 10.6 8.7 8.0 Key Risks to Our View: P/Cash Flow (X) 5.2 4.3 3.9 3.6 Poor quality control. Profit could decline sharply and reputation P/Free CF (X) nm 39.7 13.6 11.3 damaged by defective products which may cause serious injuries or EV/EBITDA (X) 8.7 8.5 6.8 6.1 Net Div Yield (%) 2.1 3.3 4.0 4.4 deaths. Its self-brand may suffer a bigger operating loss if cost P/Book Value (X) 1.5 1.3 1.2 1.0 control is weak. Net Debt/Equity (X) 0.1 0.1 CASH CASH ROAE (%) 9.7 13.5 14.3 13.5 At A Glance Issued Capital - H shares (m shs) 2,101 Earnings Rev (%): New New New - Non H shrs (m shs) 5,495 Consensus EPS (RMB) 0.65 0.79 0.87 H shs as a % of Total 28 Other Broker Recs: B: 12 S: 1 H: 6 Total Mkt. Cap (HK$m/US$m) 61,902 / 7,984 Major Shareholders ICB Industry: Consumer Goods Automobiles & Parts Beijing Automotive Group (%) 45.0 ICB Sector: Beijing Shougang (%) 13.5 Principal Business: BAIC produces and sells a variety of passenger vehicles in China Major H Shareholders (%) Daimler AG (%) 38.2 Source of all data on this page: Company, DBSV, Thomson Reuters, H Shares-Free Float (%) 61.8 HKEX 3m Avg. Daily Val. (US$m) 4.2
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China / Hong Kong Company Focus
BAIC Motor Corp
INVESTMENT THESIS
Profile Rationale Product refresh cycle to boost sales. BAIC, through BAIC Motor has tie-ups with Daimler AG and Hyundai Motor • various entities, has planned for several new models to to assemble and sell Mercedes-Benz and Hyundai cars in drive future volume sales and revenue. China. It also has the Beijing proprietary brand, which
currently has three product series – Senova, BJ and Wevan. Luxury brand generating strong earnings. The launch of The group’s passenger vehicles comprise sedans, SUVs, MPVs • the new flagship E-Class model which has a strong and Crossovers. appeal is expected to create a solid earnings stream.
• Undemanding valuation. Upside potential is supported by good earnings stream, which is not factored in the share price yet.
Valuation Risks Overcapacity. Car sales in China are projected to slow in Our valuation is based on earnings multiples and • coming years while new capacity coming on stream benchmarked to listed luxury automakers globally. Our could result in severe market competition. valuation has factored in the growth prospects, stage of
product upgrade cycle, as well as its financial health. Based A steep climb for Chinese auto brands. The domestic on FY17 earnings and target 10x PE, we arrive at our target • brands have been facing rising competition from the price of HK$9.60. sino-foreign brands. BJ Motor may experience rising operating losses if its products are not competitive.
• Losses at Beijing Electric Vehicle Co may widen. Demand sentiment for NEVs may drop after the cut-back in government subsidy, thus affecting the company sales.
• Anti-sales policy. With more cities mulling the implementation of sales restrictions, BAIC may suffer slower deliveries across the various auto brands.
Source: DBS Vickers
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China / Hong Kong Company Focus BAIC Motor Corp
(H-share stake is 36.46%), the first for an international Benefits from reorganising luxury car business automaker to have a direct stake in a listed Chinese automobile company. Company Background Principal business. BAIC is engaged in the design, manufacture Corporate history. BAIC Group is the fifth largest automobile and sales of passenger vehicles. It has the Beijing proprietary group in China (based on 2015 volume sales). The auto business brand as well as foreign brands under the Beijing-Benz JV with was set up in 1958 under Beijing Automobile Factory. The Daimler and Beijing-Hyundai. The Beijing-Benz is a 51%-owned company was renamed as BAIC Group which apart from subsidiary of the company, while it has a 50% share in Beijing- engaging in automobile and related businesses, also had Hyundai. education, investment, financing and developed emerging industries. On September 2010, the automobile business was The range of vehicles comprises sedans, SUVs, MPVs and carved out under the umbrella of BAIC Motor (BAIC). The crossovers, covering various engine sizes. The cars are sold company was subsequently listed on the HK Stock Exchange on through appointed dealerships under the respective brands. 19 December 2014. BAIC Group currently holds 44.98% in
BAIC. The second largest shareholder is Shougang Ltd which has a 13.54% stake. Daimler, a strategic partner, holds 10.08%
Corporate structure
Daimler AG Other Domestic Shougang (H Share H Share public Shareholders Shares BAIC Group Shareholders Shareholders)
13.82% 13.54% 44.98% 10.08% 17.58%
BAIC Motor Corp
100% 100% 100% 100% 51% 49% BAIC (Hong Beijing Guangzhou BAIC Motor Kong) Mercedes-Benz Beijing Branch Beijing Benz Branch Sales Co. Ltd. Investment Co., Sales Service Co., Ltd. Ltd.
100% 100% 100% 50% 97.95%
Beijing Beijing Beinei Automotive Zhuzhou (BAIC) Engine Parts and Zhuzhou Branch Motor Sales Co., BAIC Investment Powertrain Co., Components Ltd. Ltd. Co., Ltd.
50%
Beijing Hyundai
Source: Company 2015 Annual Report
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China / Hong Kong Company Focus
BAIC Motor Corp
Earnings of key operating units Sales volume of Beijing Benz Beijing-Benz: a cash cow. BAIC raised its stake in Beijing Benz (BJ Benz) to 51% from 50% in November 2013. It produces unit vehicles under the premium German marquee, licensed to 300,000 Beijing Benz by its owner, Daimler AG. The JV has an operating 29% term of 50 years which will expire in 2033. In FY15, the JV 250,000 produced an operating profit of Rmb7.8bn, up from Rmb3.3bn CAGR: 28% the previous year. The JV generated cash of Rmb10bn last year. 200,000 We expect the earnings strength to continue after it changed the business strategy in China, including faster new model 150,000 implementation and sales network reorganisation. 100,000 Business strategy change key reason for earnings improvement. Together with Daimler, the company has restructured its 50,000 distributor and dealership network to improve sales efficiency as well as intensified its product renewal cycle, by launching new 0 models more frequently. Mercedes-Benz is currently one of the 2011 2012 2013 2014 2015 9M15 9M16 best-selling brands in China. The JV produces the C-Class, E- Class, and two SUV models - GLA & GLC. In August 2016, the Source: Company JV launched the new E-Class, an important catalyst for the JV’s future growth. The new E-Class (sedan) is an important volume and profit driver. This model has also incorporated the latest autonomous and safety features. Beijing Benz network in China To enhance the value chain, the JV ventured into engine production in 2013 in China. The plant has an annual capacity No. of outlets % of 300,000 units. In mid-2014, BJ Benz began exporting engine 600 35 cylinder blocks, cylinder heads, crankshafts and other parts to 500 30 Daimler’s engine plants in Germany. 25 The vehicle assembly capacity has more than doubled to 400 20 250,000 units in 2016 since 2013. Besides, its dealership 300 network is widening too, from 166 outlets in 2010 to 502 15 200 shops by 2015. 10 To consolidate its business in China, BAIC acquired a 35% stake 100 5 in Fujian Benz from Fujian Motor in September 2016, further 0 0 strengthening its long-term partnership between the company 2010 2011 2012 2013 2014 2015 and Daimler. Fujian Benz manufactures minivans, MPVs and special purpose vehicles. Number of outlets (LHS) YoY growth (RHS)
Source: Company
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China / Hong Kong Company Focus BAIC Motor Corp
Beijing Benz - Revenue Sales volume of Beijing Benz C-class & E-class
RMB m % units 140,000 60 12,000 10,000 120,000 50 100,000 8,000 40 80,000 6,000 30 60,000 4,000 20 40,000 2,000 20,000 10 0 0 0 /14 /15 /16 /14 /15 /14 /15 /16 /14 /15 l l l y y y v v FY14A FY15A FY16F FY17F FY18F p p Ju Ju Ju Jan/14 Jan/15 Jan/16 Se Se No No Mar/14 Mar/15 Mar/16 Ma Ma Ma Revenue (LHS) YoY growth (RHS) Beijing Benz E-class Beijing Benz C-class
Source: Company, DBS Vickers Source: CAAM Note: Drop in E-class related to the old model
Beijing Benz – Gross Profit and Margins Beijing Benz SUV monthly sales RMB m % 35,000 30 units 9,000 30,000 25 8,000 25,000 7,000 20 6,000 20,000 5,000 15 4,000 15,000 3,000 10 10,000 2,000 1,000 5 5,000 0 0 0 /16 /14 /15 /14 /14 /15 /16 /14 l l l y y y v FY14A FY15A FY16F FY17F FY18F p Ju Ju Ju Jan/16 Jan/14 Jan/15 Se Sep/15 No Nov/15 Mar/16 Mar/14 Mar/15 Ma Ma Ma Gross profit (LHS) Gross margin (RHS) Beijing Benz GLA Beijing Benz GLC
Beijing Benz GLK Source: Company, DBS Vickers Source: CAAM Note: GLC to replace GLK
Beijing-Hyundai: recovery insight. Beijing Hyundai (BJ Hyundai) produces largely mid-end cars and is positioned slightly below the Japanese players in term of pricing. The JV was set up in 2002 and annual sales had crossed the 1m mark in 2013. The key product lines are the Sonata (sedan), Elantra (sedan), Mistra (entry level compact sedan), ix35 (SUV), and Santa Fe (mid-sized SUV). The JV also has some NEV models, including the Sonata Hybrid.
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China / Hong Kong Company Focus
BAIC Motor Corp
Old models phase-out dampened FY15 earnings. The Beijing Hyundai JV is one of the major contributors to BAIC’s earnings. Beijing Hyundai - Revenue However, its FY15 earnings fell 28%, which we attribute to a weak product portfolio and partly to old models phase-out RMB m % exercise. Volume sales at the JV fell by 5.1% y-o-y in 2015 and 114,000 6 the management is forecasting sales to increase by 5.4% this 112,000 4 year. This growth projection looks decent since it has achieved 110,000 2 70% of its full-year budget in 8M16. 108,000 0 106,000 The JV’s earnings trend is expected to improve next year at a (2) modest rate, supported by new models in the pipeline. A new 104,000 (4) compact passenger vehicle “Verna” is scheduled for launch in 102,000 4Q16. The new Elantra, Santa Fe (facelift) and Santa Fe Sport 100,000 (6) are expected to lift future earnings. The Elantra series account 98,000 (8) for 30-40% of the JV volume sales per year and hence a model 96,000 (10) revamp will be crucial for its earnings outlook. New energy FY14A FY15A FY16F FY17F FY18F vehicle strategy is also part of the JV’s plan to enrich its product Revenue (LHS) YoY growth (RHS) competitiveness. To handle the new model roll-out plans, the JV has expanded Source: Company, DBS Vickers capacity to 1.25m units, up from 1.05m units last year.
Sales volume of Beijing Hyundai Beijing Hyundai – Operating Profit & Margins unit CAGR: 9% 1,200,000 RMB m % 18,000 16 1,000,000 7% 16,000 14 14,000 800,000 12 12,000 10 10,000 600,000 8 8,000 6 400,000 6,000 4,000 4 200,000 2,000 2 0 0 0 FY14A FY15A FY16F FY17F FY18F 2011 2012 2013 2014 2015 9M15 9M16 Operating profit (LHS) Operating margin (RHS) Source: Company Source: Company, DBS Vickers
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China / Hong Kong Company Focus BAIC Motor Corp
Sales volume of Beijing Hyundai Average selling price of Beijing Hyundai cars
'000 units Model ASP (RMB) 1,200 Elantra Lingdong 99,800 Sonata hybrid 209,800 1,000 Sonata 174,800 Elantra Langdong 105,800 800 Mistra 129,800 600 V erna (three boxes) 73,900 V erna (two boxes) 72,900 400 Elantra Yuedong 99,800 Moinca 116,800 200 Elantra 89,800 0 Tucson 159,900 2014 2015 ix25 119,800 Elantra Mistra Sonata Tucson Others New Santa Fe 224,800 ix35 149,800
Source: Company Source: Company
Beijing Motor: still loss-making. The self-brand is held under Beijing Motor (BJ Motor), which has three product series – New Hyundai Elantra (2017) Senova series (mid- to high-end passenger vehicles), BJ and Wevan series (mainly economic vehicles). BAIC started the Wevan in 2011 and followed with Senova and BJ in 2013 to diversify its product lines. The Senova product series are mainly based on the Saab derived technology, which BAIC acquired in 2009 for US$207m. The deal includes the architecture for three Saab models, two turbo engines and two transmissions and other related core technologies and intellectual property rights. Senova's current models include five sedans and four SUVs, of which two new SUVs (X55 and X35) were introduced in 1H16. Source: Company The BJ series have military appeal and are largely cross-country vehicles. Recently, to soften the appeal, the company introduced a light urban jeep to attract city drivers. Wevan's
target customers are small and micro businesses, as well as individuals, thus this line produces mini-MPVs and economical New Santa Fe Sport (2017) SUVs. The small car segment currently benefits from the government's favourable tax policy (vehicles below 1.6L capacity are entitled to a 50% reduction in vehicle purchase tax). Once the favourable tax policy expires at end-2016, we see some uphill tasks for the Chinese automakers. While the favourable tax policy helps, BJ Motor is still growing its scale and has to incur development and promotion costs to raise brand awareness. Coupled with intense market competition from the other Chinese and Sino-foreign brands, BJ Source: Company Motor has being incurring huge operating losses, which amounted to Rmb3.3bn in FY15, up from Rmb1.9bn in FY14. We project operating losses to remain high because of new vehicle developments (covering from traditional and NEVs), on- going sales network expansion and high promotion and marketing expenses. The potential swing factor is the level of subsidy from the government on its NEV development.
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China / Hong Kong Company Focus
BAIC Motor Corp
Sales volume of Beijing Brand Beijing Motor – Operating Losses
unit RMB m 400,000 51% 0 350,000 (500)
300,000 CAGR: 93% (1,000) 250,000 (1,500)
200,000 (2,000)
150,000 (2,500)
100,000 (3,000)
50,000 (3,500)
0 (4,000) 2011 2012 2013 2014 2015 9M15 9M16 FY14A FY15A FY16F FY17F FY18F
Source: Company Source: Company, DBS Vickers
Beijing Motor - Revenue Market share of China brand PV manufacturers by sales volume (2015) RMB m % Shanghai 30,000 50 FAW Others Auto 45 4% 14% 23% 25,000 40 Jianghuai 35 20,000 4% 30 BYD 15,000 25 5% 20 10,000 Chery Changan 15 6% 13% 10 5,000 Geely 5 6% 0 0 FY14A FY15A FY16F FY17F FY18F Beijing Auto Dongfeng Revenue (LHS) YoY growth (RHS) 9% Works Great Wall 7% 9% Source: Company, DBS Vickers Source: CAAM
NEV strategy. Apart from gasoline-based cars, the company also develops and sells new energy vehicles (NEV), in line with the Beijing government’s promotion of the NEV industry. The EV series include E150EV, EV160, EV200, EU260 and ES210 models. New models for 2016 include EX200 (first pure electric car) and EH400 sedan. In 2015, the company sold slightly over 20,000 units of NEV, a y-o-y expansion of 270%. This sales performance is decent, compared to market peers such as BYD. For 8M16, its NEV sales shot up 160% y-o-y.
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China / Hong Kong Company Focus BAIC Motor Corp
Industrial Development Investment Management Co Ltd, Beijing BAIC NEV monthly sales State-owned Capital Management Centre, and Beijing Electronics Holding Co Ltd. BJEV collaborates with Atieva, unit Siemens, SK Group and others to strengthen its technology and 8,000 R&D capabilities. 7,000 6,000 5,000 EV series (E150 EV) 4,000 3,000 2,000 1,000 0 Jul Jan Jun Feb Oct Sep Apr Dec Nov Mar Aug May
2014 2015 2016
Source: Company Source: Company BJEV is still a loss-making entity. In FY15, after-tax losses To widen its NEV presence, BAIC had subscribed for 208m amounted to approximately Rmb251.2m, some 15% lower shares or a 6.5% stake in Beijing Electric Vehicle Co Ltd (BJEV) than FY14. for Rmb532.48min March 2016 to enhance its exposure in the NEV business. The largest shareholder is BAIC Corp, which has a 60% interest. The other shareholders in BJEV are Beijing
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China / Hong Kong Company Focus
BAIC Motor Corp
Financial Projections Critical earnings drivers Revenue and volume sales supported by new models. The main High product refresh rate. This comes from the various auto revenue drivers are the strong Mercedes-Benz models, which brands. BJ Benz's new E-Class should continue to drive sales in are helping volume growth during the forecast period. Despite the next two years while BJ Hyundai also has the mid-size sedan the high sales expansion, we still project volume to expand at (Elantra) and SUV (Santa Fe) to boost sales prospect. For BJ 33%/20% for FY16/17F. The BJ Benz JV contributes the bulk of Motor, the new models are primarily focused on SUVs and a top-line expansion for BAIC. For the self-brand, we estimate front-wheel drive mini-MPV for families. In the NEV field, new mid-single-digit volume expansion in FY17, following the expiry models for 2016 include EX200 (first pure electric car) and of the favourable vehicle purchase tax policy. However, the NEV EH400 sedan. business should remain robust on government support. To be the top three self-brand players by 2020. To achieve this Therefore, we forecast BAIC to post 30%/19%/10% revenue goal from the current 8th position, the company plans to expansion for FY16/17/18 respectively. develop more quality vehicles that are competitive in the market. It will strengthen the Senova series that focuses on the mid- to Group profit margins trends. We estimate GP margins of high-end sedans, SUVs and MPVs. As the western regions around 21-22% over the forecast period, due to strong profit develop, BAIC expects car consumption to rise. Hence, Wevan margins from BJ Benz, while BJ Motor is expected to post a and BJ will be the two key product lines that target these small profit as its business scale is still small. As such, gross markets. It comprises durable and economy sedans, mini MPVs, profit trend is stable. Overall, we expect operating margins to and small SUVs. To address the quality issue, the company will hover around 8% during FY16-18F as operating costs are tap into its three major research centres in China, Germany and projected to increase in tandem with volume and business the US to raise its car development standard. The sales target by growth. 2020 is 800,000 units, meaning a substantial jump from BJ Hyundai modest recovery trend. We estimate BJ Hyundai to 300,000-400,000 sales units in the near term. post a 10% drop in FY16 earnings. However, the new models in Capacity expansion. BAIC is expanding capacity in anticipation the pipeline should lift FY17/18F profits at a high-single-digit of rise in demand. At BJ-Benz JV, total designed capacity is growth. But challenges remain as competition in the mid- 300,000 units per annum, although it is currently running at market segment stays fierce in the coming years. 250,000 units capacity. Based on the five-year plan, BJ Hyundai Profits from foreign brands offset by operating losses at self- intends to increase capacity to 1.65m units by 2020. BJ Motor's brand. We estimate FY16-18F net profit CAGR of c.15% total production capacity has reached 450,000 units this year. because of continual operating losses at its self-brand unit from BAIC EV to challenge rivals. Being close to the central the termination of the favourable vehicle tax policy and high government does give BAIC some advantage to pursue the NEV NEV spending to build this business. strategy. For 8M16, sales of NEV have surpassed the volume Improvement in current ratio should help its balance sheet. The achieved in 2015. With the Beijing government’s more relaxed company has leveraged on the suppliers’ credit and short-term policy toward NEV car buyers, volume sales are expected to stay borrowings to support its operations. In the past three years, its high. To expand the range of NEV models, the company will net current liabilities have been on the rise to Rmb15.4bn last have to rely on the three R&D centres on power trains and core year. However, we expect this trend to reverse as the company electrical and electronics parts development. BAIC EV is a expands its business operations and manages its trade payables. potential threat to the incumbent in the NEV market. Hence, its current ratio is projected to range between 0.8x and Tighter cost control on its loss-making unit. Production 1x over 2016-2018. Meanwhile, net gearing is low and likely to efficiency and better sales strategy should help to reduce the turn net cash in the coming 1-2 years. losses at BJ Motor. This unit has turned in a gross profit of Good operating cashflow outlook. We project robust operating about Rmb400m in 1H16, though small relative to its revenue cashflow on strong profits from BJ Benz. In fact, the company size of Rmb10bn. We expect the profitability to gradually has achieved positive free cashflow in 2015 and the trend is improve over time. expected to sustain. BAIC has to maintain a high level of capex for its new product developments. The ability to generate strong cashflow should also support a good dividend policy.
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China / Hong Kong Company Focus BAIC Motor Corp
Group revenue breakdown Profit margins
RMB m % 160,000 400 25 140,000 350 20 120,000 300 100,000 250 15 80,000 200 10 60,000 150 40,000 100 5 20,000 50 0 0 0 FY13 FY14 FY15 FY16F FY17F FY18F FY14 FY15 FY16F FY17F FY18F Beijing Motor (LHS) Beijing Benz (LHS) Gross margin Operating margin YoY, % (RHS) Net margin
Group net profit Net gearing
RMB m % % 8,000 80 25 7,000 60 20 6,000 15 40 5,000 10 4,000 20 3,000 5 0 2,000 0 (20) 1,000 (5)
0 (40) (10) FY13 FY14 FY15 FY16F FY17F FY18F (15) Net profit (LHS) YoY, % (RHS) FY13 FY14 FY15 FY16F FY17F FY18F
Operating cashflow Capex
RMBm RMBm 16,000 14,000 14,000 12,000 12,000 10,000 10,000
8,000 8,000 6,000 4,000 6,000 2,000 4,000 0 2,000 (2,000) (4,000) 0 FY13 FY14 FY15 FY16F FY17F FY18F FY13 FY14 FY15 FY16F FY17F FY18F
Source: Company, DBS Vickers
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China / Hong Kong Company Focus
BAIC Motor Corp
Valuation historical average PE is about 11x. We forecast 2-year EPS growth of c.15% (FY16-18F). Benchmarked to peers. Our valuation is based on earnings multiples and makes reference to HK-listed and luxury Our forward PE of 10x has considered its growth outlook, stage automakers globally. The global luxury brand players are trading of product upgrade cycle, as well as its financial health (both at FY17F PE of 5-23x, while Brilliance China (1114 HK) is valued balance sheet and cashflows). We arrive at target price of at about 9x. BAIC's trading history is relatively short and its HK$9.60 per share. Initiate with a BUY rating.
Peers valuation – luxury stocks
Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE Currency Price Cap Fiscal 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F Company Code Local$ US$m Yr x x % % x x x x % % Brilliance China* 1114 HK HKD 8.79 5,711 Dec 10.6 8.6 1.0 1.0 1.6 1.4 11.1 9.0 16.7 17.3 BAIC Motor 'H'* 1958 HK HKD 8.15 7,984 Dec 10.6 8.7 3.3 4.0 1.3 1.2 8.5 6.8 13.5 14.3 BMW BMW GR EUR 77.63 56,117 Dec 7.9 7.9 4.3 4.5 1.1 1.0 2.9 2.9 14.5 13.2 Porsche PAH3 GR EUR 47.538 16,023 Dec 6.3 4.5 2.9 4.1 0.5 0.4 n.a. n.a. 6.3 9.4 Daimler DAI GR EUR 64.475 75,916 Dec 8.0 7.6 5.1 5.3 1.2 1.1 3.4 3.3 15.4 15.4 Audi NSU GR EUR 619.4 29,313 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Ferrari (Mil) RACE IM EUR 48.21 10,024 Dec 25.5 23.2 1.1 1.3 37.3 17.5 10.2 9.5 300.2 96.2 V olvo 'B' V OLV B SS SEK 97.95 23,604 Dec 15.0 13.7 3.2 3.5 2.2 2.0 6.4 6.0 15.4 16.0
Source: Thomson Reuters, *DBS Vickers
Share price performance. BAIC's trading history is short, as it tax to 5% which benefits many of the domestic automakers, was listed only in late December 2014. Looking at the share effective from 1 October 2015 to 31 December 2016. price chart, the key share price movers are:- 4) However, the broad market correction in early 2016 again 1) The HK-Shanghai connect helped to lift its share price from sent the share price lower. Mar-May15 5) Subsequently, its share price moved up in 3Q16 following the 2) The A-share market meltdown sent the share price down strong industry vehicle volume sales numbers as well as decent south from May-Aug15 interim earnings growth, contributed largely by Beijing Benz. 3) Its share price recovered in 4Q15 after the central government announced the 50% reduction in vehicle purchase
Share price of BAIC vs sales volume
HK$ % 14 60 1 12 50 23 40 10 4 5 30 8 20 6 10 0 4 (10) 2 (20) 0 (30) Jul-15 Jul-16 Jan-15 Jan-16 Jun-15 Jun-16 Feb-15 Oct-15 Feb-16 Apr-15 Sep-15 Apr-16 Sep-16 Dec-14 Dec-15 Nov-15 Mar-15 Mar-16 Aug-15 Aug-16 May-15 May-16 BAIC (LHS) BJ Benz & BJ Hyundai sales growth (RHS)
Source: Thomson Reuters Note: Beijing Benz and Beijing Hyundai sales
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China / Hong Kong Company Focus BAIC Motor Corp
Losses at BJEV may widen. Although the losses were relatively Key Risks small in 2015, with the cutback of NEV subsidies by the Overcapacity. Car sales in China are projected to slow in coming government, the demand for NEV may drop and thus affect years, as the industry is heading towards maturity. However, the sales. BJEV's losses may increase substantially as a result. new capacity coming on stream by various automakers is quite Slowdown in car purchases. More c ities may implement sales alarming, which could result in severe market competition. restrictions and the Chinese economy could head south. These A steep climb for Chinese auto brands. The domestic brands may cause the car purchase to slow down and in turn impact have been facing rising competition from the sino-foreign BAIC’s sales. brands. BJ Motor may see its operating losses widen in the coming years if its products are not competitive.
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China / Hong Kong Company Focus
BAIC Motor Corp
Key Assumptions FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Beijing-Benz sales ('000 116.0 145.5 250.2 332.8 392.6 443.7 units) Beijing - Hyundai sales 1,030.8 1,120.0 1,062.9 1,120.3 1,198.7 1,258.6 ('000 units) Self brand ('000 units) 202.3 309.6 337.1 389.2 417.2 444.8 Source: Company, DBS Vickers
Segmental Breakdown (RMB m)
FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Revenues (RMB m) Beijing Motor 6,847 12,434 17,849 21,639 23,661 24,718 Beijing Benz 5,934 43,937 66,263 88,130 107,113 118,617 Total 12,782 56,370 84,112 109,769 130,773 143,334 Segment Gross Profit (RMB m) Beijing Motor (978) (69) (1,420) 649 473 618 Beijing Benz 1,393 9,052 16,697 22,914 27,849 30,129 Total 415 8,983 15,277 23,563 28,322 30,747 Segment Gross Profit Margins (%) Beijing Motor (14.3) (0.6) (8.0) 3.0 2.0 2.5 Beijing Benz 23.5 20.6 25.2 26.0 26.0 25.4 Total 3.2 15.9 18.2 21.5 21.7 21.5 Source: Company, DBS Vickers
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China / Hong Kong Company Focus BAIC Motor Corp
Income Statement (RMB m) Margins Trend FY Dec 2013A 2014A 2015A 2016F 2017F 2018F 9.0% Revenue 12,782 56,370 84,112 109,76 130,77 143,33 Cost of Goods Sold (12,367 (47,387 (68,835 (86,206 (102,45 (112,58 8.0% Gross Profit 415 8,983 15,277 23,563 28,322 30,747 7.0% Other Opng (Exp)/Inc (2,899) (7,562) (10,798 (14,887 (17,626 (19,222 6.0% Operating Profit (2,484) 1,422 4,479 8,676 10,696 11,525 5.0%
Other Non Opg (Exp)/Inc 0 0 0 0 0 0 4.0%
Associates & JV Inc 6,022 5,809 4,257 4,011 4,378 4,767 3.0% Net Interest (Exp)/Inc (474) (533) (416) (506) (523) (559) 2.0% Dividend Income 0 0 0 0 0 0 2014A 2015A 2016F 2017F 2018F
Exceptional Gain/(Loss) 0 0 0 0 0 0 Operating Margin % Net Income Margin % Pre-tax Profit 3,065 6,698 8,321 12,180 14,551 15,733 Tax (114) (857) (1,999) (3,105) (3,866) (4,167) Minority Interest (237) (1,331) (3,003) (3,993) (4,488) (4,858) Preference Dividend 0 0 0 0 0 0 Net Profit 2,714 4,511 3,319 5,082 6,197 6,708 Net Profit before Except. 2,714 4,511 3,319 5,082 6,197 6,708 EBITDA (1,666) 3,786 8,266 8,676 10,696 11,525 Growth Revenue Gth (%) 263.2 341.0 49.2 30.5 19.1 9.6 EBITDA Gth (%) N/A N/A 118.3 5.0 23.3 7.7 Opg Profit Gth (%) N/A N/A 215.0 93.7 23.3 7.7 Net Profit Gth (%) (20.6) 66.2 (26.4) 53.2 21.9 8.2 Margins & Ratio Gross Margins (%) 3.2 15.9 18.2 21.5 21.7 21.5 Opg Profit Margin (%) (19.4) 2.5 5.3 7.9 8.2 8.0 Net Profit Margin (%) 21.2 8.0 3.9 4.6 4.7 4.7 ROAE (%) 13.7 15.8 9.7 13.5 14.3 13.5 ROA (%) 4.6 4.6 2.8 3.7 4.0 3.9 ROCE (%) (5.7) 1.9 4.4 7.5 8.0 7.7 Div Payout Ratio (%) 83.8 50.5 34.3 35.0 35.0 35.0 Net Interest Cover (x) (5.2) 2.7 10.8 17.2 20.5 20.6 Source: Company, DBS Vickers
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China / Hong Kong Company Focus
BAIC Motor Corp
Interim Income Statement (RMB m) Margins Trend FY Dec 2H2013 1H2014 2H2014 1H2015 2H2015 1H2016 80%
60% Revenue 10,488 25,127 31,243 36,522 47,589 49,039 40% Cost of Goods Sold (9,759) (21,712) (25,675) (30,337) (38,498) (38,284) 20% Gross Profit 729 3,415 5,568 6,185 9,091 10,754 0% -20% Other Oper. (Exp)/Inc (2,169) (3,366) (4,196) (3,474) (7,324) (6,725) 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Operating Profit (1,441) 49 1,373 2,712 1,767 4,030 -40% Other Non Opg (Exp)/Inc 0 0 0 0 0 0 -60% Associates & JV Inc 3,059 2,813 2,996 2,035 2,222 1,979 Operating Margin % Net Income Margin % Net Interest (Exp)/Inc (267) (233) (300) (409) (7) (255) Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 1,351 2,629 4,069 4,338 3,983 5,754 Tax (105) (318) (538) (847) (1,152) (1,334) Minority Interest (183) (530) (801) (1,320) (1,683) (2,009) Net Profit 1,064 1,781 2,730 2,171 1,148 2,411 Net profit bef Except. 1,064 1,781 2,730 2,171 1,148 2,411
Growth Revenue Gth (%) N/A 995.4 197.9 45.4 52.3 34.3 Opg Profit Gth (%) N/A N/A N/A 5,436.8 28.7 48.6 Net Profit Gth (%) N/A 7.9 156.6 21.9 (58.0) 11.1
Margins Gross Margins (%) 6.9 13.6 17.8 16.9 19.1 21.9 Opg Profit Margins (%) (13.7) 0.2 4.4 7.4 3.7 8.2 Net Profit Margins (%) 10.1 7.1 8.7 5.9 2.4 4.9
Source: Company, DBS Vickers
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China / Hong Kong Company Focus BAIC Motor Corp
Balance Sheet (RMB m) Asset Breakdown FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Net Fixed Assets - Debtors - 10.7% 38.7% Net Fixed Assets 24,755 34,218 38,353 43,457 46,983 49,832 Invts in Associates & JVs 12,649 14,066 14,582 17,234 19,973 22,828 Other LT Assets 14,228 17,255 22,221 23,576 24,890 26,149 Cash & ST Invts 16,794 21,923 23,946 28,657 35,230 42,882 Inventory 7,479 11,068 9,871 10,858 11,944 13,138 Assocs'/JVs - Inventory - 15.4% Debtors 6,004 6,422 10,949 12,043 13,248 14,573 9.7% Other Current Assets 3,486 4,905 7,471 8,480 9,712 11,227 Bank, Cash and Liquid Total Assets 85,396 109,859 127,393 144,305 161,979 180,629 Assets - 25.5% ST Debt 7,833 15,983 21,280 21,280 21,280 21,280 Creditors 11,112 14,978 21,382 23,521 25,873 28,460 Other Current Liab 17,975 20,539 24,965 28,501 31,962 35,263 LT Debt 15,122 13,935 8,986 10,986 11,986 12,986 Other LT Liabilities 2,300 2,455 3,711 3,872 4,049 4,244 Shareholder’s Equity 23,692 33,355 35,010 40,092 46,290 52,998 Minority Interests 7,362 8,614 12,059 16,053 20,541 25,398 Total Cap. & Liab. 85,396 109,859 127,393 144,305 161,979 180,629
Non-Cash Wkg. Capital (12,118) (13,121) (18,057) (20,641) (22,931) (24,785) Net Cash/(Debt) (6,161) (7,995) (6,320) (3,609) 1,964 8,616 Debtors Turn (avg days) 93.2 40.2 37.7 38.2 35.3 35.4 Creditors Turn (avg days) 199.2 105.8 102.0 95.1 88.0 88.1 Inventory Turn (avg days) 131.4 75.2 58.7 43.9 40.6 40.7 Asset Turnover (x) 0.2 0.6 0.7 0.8 0.9 0.8 Current Ratio (x) 0.9 0.9 0.8 0.8 0.9 1.0 Quick Ratio (x) 0.6 0.6 0.5 0.6 0.6 0.7 Net Debt/Equity (X) 0.2 0.2 0.1 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.3 0.2 0.2 0.1 0.0 (0.2) Capex to Debt (%) 31.5 39.4 39.8 34.1 30.1 29.2 Z-Score (X) NA NA NA NA NA NA
Source: Company, DBS Vickers
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China / Hong Kong Company Focus
BAIC Motor Corp
Cash Flow Statement (RMB m) Capital Expenditure
FY Dec 2013A 2014A 2015A 2016F 2017F 2018F RMBm 14,000.0 12,000.0 Pre-Tax Profit 3,065 6,698 8,321 12,180 14,551 15,733 10,000.0 Dep. & Amort. 818 2,364 3,787 4,541 5,160 5,893 8,000.0 Tax Paid (258) (1,365) (1,674) (1,999) (3,105) (3,866) 6,000.0 Assoc. & JV Inc/(loss) (6,022) (5,809) (4,257) (4,011) (4,378) (4,767) 4,000.0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 2,000.0 Chg in Wkg.Cap. (45) 1,282 4,649 1,639 1,706 1,748 0.0 Other Operating CF (15) (907) (460) 0 0 0 2014A 2015A 2016F 2017F 2018F Capital Expenditure (-) Net Operating CF (2,457) 2,262 10,365 12,351 13,934 14,741 Capital Exp.(net) (7,236) (11,785) (12,052) (11,000) (10,000) (10,000) Other Invts.(net) 10,176 (2,370) 0 0 0 0 Invts in Assoc. & JV (7,248) (1,129) (1,541) (2,000) (1,500) (1,500) Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 7,240 5,343 5,149 3,359 3,139 3,411 Net Investing CF 2,933 (9,941) (8,444) (9,641) (8,361) (8,089) Div Paid (285) (2,793) (2,780) 0 0 0 Chg in Gross Debt 7,194 7,396 343 2,000 1,000 1,000 Capital Issues 6,132 7,910 613 0 0 0 Other Financing CF 214 309 1,897 0 0 0 Net Financing CF 13,254 12,822 74 2,000 1,000 1,000 Currency Adjustments (3) (9) 28 0 0 0 Chg in Cash 13,727 5,133 2,023 4,711 6,573 7,652 Opg CFPS (RMB) (0.43) 0.15 0.75 1.41 1.61 1.71 Free CFPS (RMB) (1.73) (1.48) (0.22) 0.18 0.52 0.62
Source: Company, DBS Vickers
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China / Hong Kong Company Focus BAIC Motor Corp
Appendix
PE chart PB chart
x x 20.0 2.20 18.0 2.00 16.0 1.80 +1SD: 14.5x 14.0 1.60 +1SD: 1.6x 12.0 1.40 Avg: 10.7x Avg: 1.2x 10.0 1.20 8.0 1.00 -1SD: 7x -1SD: 0.9x 6.0 0.80 4.0 0.60 Jul-16 Jul-16 Jun-15 Feb-16 Oct-16 Apr-16 Dec-14 Nov-15 Jun-15 Oct-16 Feb-16 Mar-15 Aug-15 Apr-16 Dec-14 Nov-15 Mar-15 Aug-15 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Company Focus
BAIC Motor Corp
Products & ASP
Beijing Benz Model New E-Class C-class GLC GLA ASP (RMB) 436,800 - 499,800 369,000 - 479,000 396,000 - 579,000 269,800 - 398,000
Source: Company
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China / Hong Kong Company Focus BAIC Motor Corp
Key management team
Name Age Position / Title Mr. Xu is the chairman of the Board, as well as the secretary of the party committee and a non-executive Mr. Xu Heyi 58 Director of the Company. He has more than 30 years of experience in the industry and in management. Mr. Zhang is a non-executive Director of the Company. He has more than 30 years of experience in the Mr. Zhang Xiyong 52 industry and in management. Mr. Li is a non-executive Director of the Company. He has more than 30 years of experience in the industry Mr. Li Zhili 60 and in management. Mr.Li is the executive Director, president and deputy secretary of the party committee of the Company. He Mr. Li Feng 52 has more than 30 years of experience in the industry and in management. Mr. Ma is a non-executive Director of the Company. He has more than 30 years of experience in finance Mr. Ma Chuanqi 60 and management. Mr. Qiu is a non-executive Director of the Company. He has more than 20 years of experience in the Mr. Qiu Yinfu 48 industry and in management. Mr. Troska is a non-executive Director of the Company. He has nearly 30 years of experience in the Mr. Hubertus Troska 56 automobile industry. Mr. Uebber is a non-executive Director of the Company. He has 30 years of experience in finance and Mr. Bodo Uebber 56 management. Ms. Wang is a non-executive Director of the Company. She has more than 20 years of experience in the Ms. Wang J ing 44 industry and management. Mr. Yang is a non-executive Director of the Company. He has more than 30 years of experience in the law Mr. Yang Shi 60 industry and management. Mr. Li is a vice president of the Company responsible for the operation center production and technology Mr. Li J ikai 51 center and various manufacturing bases of the Company. Mr. Wu is the vice president of the Company with responsibility over research and development of new Mr. Wu Xuebin 50 energy products, and is also the head of the automotive research institute of the Company. Mr. Chen is a vice president of the Company, and mainly responsible for procurement center and quality Mr. Chen Bao 54 center. Mr. Zhou is a vice president of the Company, responsible for the planning and development, capital Mr. Zhou Yanming 58 management and investment management. Mr. Chen is a v ice president and also the senior executiv e v ice-president and the secretary of the party Mr. Chen Hongliang 50 committee of Beijing Benz, responsible for the human resource management, IT management, company affairs and legal work of Beijing Benz. Mr. Liu is a vice president of the Company, and is also a standing deputy general manager of Beijing Mr. Liu Zhifeng 43 Hyundai. Mr. Wang is a vice president of the Company. He is also the general manager of the off-road branch Mr. Wang Zhang 52 company. Mr. Chen Guixiang 53 Mr. Chen is the vice president of the Company and is also the general manager of the Wevan business unit. Mr. Cai is the v ice president of the Company with responsibilities ov er BAIC Motor Sales Co. Ltd. where he Mr. Cai J ianjun 42 is also the party secretary of the party committee, executive Director and general manager. Mr Gu is a v ice president of the Company . He is also the general manager of the technical center of Mr. Gu Lei 56 MBtech. Mr. Jiang is a vice president of the Company with responsibility over the finance and economic center of Mr. J iang Xiaodong 46 which he is a director. Mr. Yun is a vice president of the Company and the head of the production and technology center, with Mr. Yun Tae Hwa 52 responsibility over production and technology management. Mr. Zhang Huaxie 60 Zhang is a v ice president of the Company . Mr. Liang is a vice president of the Company with responsibility over the product center where he is also a Mr. Liang Guofeng 44 supervisor. Mr. Xie is the vice president of the Company with responsibility over the management center where he is Mr. Xie Wei 46 also the director. Mr. Yan Xiaolei 40 Mr. Yan is the secretary to the Board of the Company and the company secretary of the Company . Source: Company
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Industry Focus China Auto Sector
DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 13 Oct 2016 21:45:05 Dissemination Date: 13 Oct 2016 23:09:25
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Industry Focus China Auto Sector
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Industry Focus China Auto Sector
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