Deutsche Bank Markets Research

Rating Company Date 11 August 2015 Buy BAIC Motor Alert Forecast Change Asia China Reuters Bloomberg Exchange Ticker Price at 11 Aug 2015 (HKD) 6.72 Automobiles & 1958.HK 1958 HK HSI 1958 Price target - 12mth (HKD) 9.30 Components 52-week range (HKD) 11.50 - 6.48

HANG SENG INDEX 24,521

Earnings and TP cuts on mass market Vincent Ha, CFA Fei Sun, CFA brands' weakness; maintaining Buy Research Analyst Research Associate (+852) 2203 6247 (+852) 2203 6130 Market concerns on Beijing Hyundai and local brands more than priced in [email protected] [email protected] BAIC Motor’s share price fell by 31% since April 2015 vs. HSCEI Index’s 9% correction. While we have maintained our Buy recommendation on this name Key changes since initiation in January, we have also been hearing investors concerns on the outlook of Beijing Hyundai and Beijing Motor local brands. The concerns Price target 10.10 to 9.30 ↓ -7.9% appeared to magnify in July when the company reported that 2Q15 sales Sales (FYE) 78,833 to 80,133 ↑ 1.6% volume of Beijing Hyundai and Beijing Motor were down by 14.3% and 28.1%, Op prof 6.9 to 6.7 ↓ -3.6% respectively. We admit that the two brands’ performance was below our margin (FYE) expectations, considering that Beijing Hyundai’s July sales volume YoY decline Net profit 6,117.0 to ↓ -10.7% widened to 32.4% while Beijing Motor’s Senova X65 SUV just had a round of (FYE) 5,461.6 RMB15k price cuts. Nevertheless, we think that market concerns are already Source: Deutsche Bank more than priced in, and we still envision a gradual recovery in 2H15E given easing inventory and more new model contribution, e.g. Beijing Hyundai new Stock data Tucson and more SUV models from Beijing Motor. Market cap (HKDm) 50,454 Strong Benz JV momentum helps to compensate other business’s shortfall Market cap (USDm) 6,508 In 1H15, Beijing Benz delivered 59.8% YoY sales volume growth, thanks to the Shares outstanding (m) 7,508.0 successful launch of the new C Class (in August 2014) and surprisingly resilient Major shareholders BAIC Group aging GLK Class SUV sales. Going forward, we expect the JV’s (45%) outperformance to sustain, given the new GLA Class SUV launched in April, Free float (%) 28 widening of the new C Class trim selections, and the year-end 2015 launch of a Source: Deutsche Bank GLC Class SUV (to replace the GLK Class). Cutting earnings and target price on a lower mass market brands’ forecast Key data Considering the most recent sales and pricing softness of BAIC’s Motor’s mass FYE 12/31 2014A 2015E 2016E market brands, we trim our sales and earnings forecast for Beijing Hyundai Sales (CNYm) 56,370 80,133 94,132 and Beijing Motor. Yet we mildly tone up our sales and earnings forecast for Net Profit 4,510.8 5,461.6 7,029.8 Beijing Benz given Benz’s strong China sales in July. Overall, that leads to our (CNYm) 10.7-10.8% FY15-17E earnings cut for BAIC Motor. We adopt a DCF analysis DB EPS (CNY) 0.70 0.72 0.93 to derive the valuations of Beijing Benz, Beijing Hyundai and Beijing Motor PER (x) 10.1 7.4 5.8 separately. Our WACC is based on Deutsche Bank's latest China risk-free rate Yield (net) (%) 4.3 6.0 7.7 Source: Deutsche Bank of 3.9%, a risk premium of 5.6% and a beta of 2.0; we use a 20% ultimate debt-to-asset ratio (with a 3.0-3.8% after-tax cost of debt). Our new SOTP- derived target price of HKD9.3/share for BAIC Motor (down from HKD10.1) comprises 1) HKD5.3/share for Beijing Benz (with an implied average FY15/16E P/E of 11.3x); 2) HKD5.5/share for Beijing Hyundai (with implied target average FY15/16E P/E of 6.9x) and 3) minus HKD1.5/share for the loss-making Beijing Motor. On a blended basis, BAIC Motor’s implied average FY15/16E target P/E of 9.1x should be well supported, in our view, by the 16% FY14-17E three-year EPS CAGR. With close to 40% upside potential to our TP, we maintain Buy. Key company-specific downside risks for BAIC Motor include a weak reception for its new models, failure to contain cost increases, as well as an inability to achieve positive free cash flow and the subsequent funding pressure.

______Deutsche Bank AG/Hong Kong The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=1958.HK MCI (P) 124/04/2015.