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Buy BAIC Motor Alert Deutsche Bank Markets Research Rating Company Date 26 August 2016 Buy BAIC Motor Alert Company Update Asia China Reuters Bloomberg Exchange Ticker Price at 26 Aug 2016 (HKD) 7.72 Automobiles & 1958.HK 1958 HK HSI 1958 Price target - 12mth (HKD) 8.60 Components 52-week range (HKD) 8.14 - 4.75 HANG SENG INDEX 22,815 Hong Kong NDR takeaways Vincent Ha, CFA Fei Sun, CFA Research Analyst Research Analyst We hosted BAIC Motor's post-1H16-results NDR in Hong Kong on 26 August. (+852 ) 2203 6247 (+852 ) 2203 6130 The following are the key topics for discussion: [email protected] [email protected] - Beijing Benz: Management attributes the margin improvement at the JV mainly on strong product demand, pricing resilience, and high component Stock data localization for new models, partly offset by FX loss due to RMB depreciation Market cap (HKDm) 58,636 in 1H16. Going forward, BAIC envisions less FX impact given increasing Market cap (USDm) 7,562 localization and some currency hedging. Besides, the company also expects further sales strength on the ramp-up of new model sales (e.g. GLC Class SUV Shares outstanding (m) 7,595.3 after the relief of auto transmission supply shortage, and new E Class long- Major shareholders BAIC Group wheelbase sedan). BAIC comments that the new E Class has accumulated (45%) about 10k orders at dealers since launch on 22 August. While the new E Class Free float (%) 28 shares the same gearbox as GLC Class, management believes the supply Avg daily value traded 2.0 bottleneck at Daimler is gradually improving. In addition, the JV will launch (USDm) new standard wheelbase E Class in 1H17. Source: Deutsche Bank - Beijing Motor (local brands): Despite still booking a loss in 1H16, BAIC's local brand achieved favorable mix improvement with SUVs and new energy Key data vehicles (NEVs) contributing 56% to total sales volume vs. 16% in FY15. FYE 12/31 2015A 2016E 2017E Management expects local brand’s FY16-18E loss to narrow sequentially, Sales (CNYm) 84,112 103,349 126,613 mainly as a result of increasing contributions from the higher-margin SUV Net Profit 3,318.6 4,837.0 6,004.0 segment (with management’s high hope on new models like X25, X35 and (CNYm) BJ20) and EV sales. Current inventory level at local brand is about 2.5-month. DB EPS (CNY) 0.44 0.64 0.79 - Beijing Hyundai: Management attributes the weak 1H16 wholesale and the PER (x) 15.5 10.4 8.4 earnings decline mainly to intensive competition from other JVs and local Yield (net) (%) 2.2 3.4 4.2 brands. With the solid performance of new Elantra Lingdong, as well as new Source: Deutsche Bank generation Verna and New Santa-Fe SUV facelift to be launched in 2H16E, the JV still targets to grow its FY16E sales and net profit. The new Cangzhou plant will come into operation in September (for the production of new Verna) and Chongqing plant in 2Q17 (for the production of a new compact SUV model). Deutsche Bank's view - New E-Class to bring Benz JV to new heights; dragging factors abating We remain upbeat on the Benz JV’s FY16E sales and profit outlook with the favorable new model cycle. We are optimistic that the just-launched long wheelbase E-Class sedan will allow the group to sustain strong growth in 2H16E/FY17E and challenge rivals’ market leadership. Meanwhile, we expect the sales momentum of Beijing Hyundai’s new Tucson SUV and Elantra Lingdong sedan, together with the upcoming new Verna sedan, to secure a stable sales/earnings outlook for the JV. Last but not least, we think the significantly improved sales mix of Beijing Motor will help the local brand business to narrow losses, thus easing the market’s key concern. Key downside risks include weak new model sales and margin compression. ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Distributed on: 08/26/2016 14:57:56GMT 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) 057/04/2016. .
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