Contemporary Amperex Technology

China Consumer Discretionary 30 August 2018

China New Energy Vehicles

Battery study: emerging giants ahead of the curve

 We forecast China’s battery shipments to show a CAGR of 41% over 2017-20E on an NEV sales CAGR of 39%  Likely near-term pain from high pricing pressure, but could be positive Kelvin Lau for market leaders as they gain market share (852) 2848 4467  Initiating on CATL with a Buy (1); reiterating Buy (1) calls on Guoxuan [email protected] and BYD; pecking order: CATL, Guoxuan and BYD Jay Lu

(852) 2848 4970 [email protected]

See important disclosures, including any required research certifications, beginning on page 52

China Consumer Discretionary 30 August 2018

China New Energy Vehicles

Battery study: emerging giants ahead of the curve

(852) 2848 4970 [email protected]

What's new: In this report, we analyse the growth prospects of China’s Key stock calls new energy vehicle (NEV) market, EV battery supply and demand, and New Prev. industry development from now until 2020. Taking into account likely strong Contemporary Amperex Technology (300750 CH) Rating Buy market growth as well as cuts to NEV subsidies, we are positive on the Target 86.00 outlook for market leaders, especially those with cutting-edge technology. Upside p 22.9% Industry consolidation looks set to continue, with many small players likely Guoxuan High-Tech (002074 CH) to be squeezed out before they can reach the finish line. Also, we initiate on Rating Buy Buy Contemporary Amperex Technology (CATL) with a Buy (1) rating. Target 17.80 22.00 Upside p 34.6% What's the impact: NEV battery demand likely to rise in 2018-20E, with BYD (1211 HK) Rating Buy Buy NCM becoming the major battery type. We expect China’s EV battery Target 67.00 75.00 shipments to reach 105GWh by 2020E, representing a CAGR of 41%, Upside p 39.1% backed by a robust NEV CAGR of 39% and increasing average energy Source: Daiwa forecasts capacity per vehicle. We believe NCM will be the major battery type for PV batteries by 2020, accounting for c.90% of the market, while NCA is likely to gain a c.5% market share in PVs as Tesla production begins in China. Although we expect LFP to remain the major LiB type in e-buses for safety reasons, it is likely to continue losing market share to NCM in 2018-20E.

Pricing pressure set to continue, but positive for leading players in paving way for market-share gains. We forecast the industrial battery ASP to continue to decline significantly over 2017-20E, due to increasing market competition from a likely supply-demand imbalance going forward and ongoing NEV subsidy cuts. Therefore, gross margins are likely to be squeezed further, with economies of scale and advanced technology becoming the keys to survival. We believe the decline in profitability after the subsidy cut will force weaker players to leave the market.

Competition with global players to come. We believe China’s leading LiB makers’ technology is not too far behind that of the global players, especially CATL, which looks set to compete with LG Chem and Samsung SDI globally. In China, competition with international makers may arise after 2020E, by which time the NEV subsidy scheme will be phased out.

What we recommend: We are positive on the NEV battery sector, with Buy (1) ratings on CATL (300750 CH, CNY69.99), Guoxuan (002074 CH, CNY13.22) and BYD (1211 HK, HKD48.15). CATL is our top sector pick, backed by its edge in technology and earnings outlook, followed in order by Guoxuan and BYD. The key downside to our sector view: lower-than- expected NEV new-car sales and higher-than-expected pricing pressure.

How we differ: Unlike some in the market, we use bottom-up analysis to assess the prospects of China’s EV battery industry over 2018-20E.

See important disclosures, including any required research certifications, beginning on page 52

China New Energy Vehicles: 30 August 2018

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg BYD 1211 HK 48.15 Buy Buy 67.00 75.00 (10.7%) 1.224 2.061 (40.6%) 1.549 3.054 (49.3%) Contemporary Amperex Technology 300750 CH 69.99 Buy 86.00 1.529 2.050 Guoxuan High-Tech 002074 CH 13.22 Buy Buy 17.80 22.00 (19.1%) 0.753 0.756 (0.4%) 0.841 0.896 (6.1%) Source: Bloomberg, Daiwa forecasts

China: NEV production and forecasts by segment Production volume 2015 2016 2017 2018E 2019E 2020E China NEV production 374,357 518,581 810,624 1,107,312 1,545,808 2,157,948 PV 214,283 322,679 551,617 796,535 1,178,872 1,735,771 BEV 150,528 248,450 449,544 665,325 997,988 1,496,982 PHEV 63,755 74,229 102,073 131,210 180,884 238,789 CV 112,296 135,240 104,934 107,401 110,682 114,672 BEV 88,248 115,664 88,556 94,299 100,200 106,287 PHEV 24,048 19,576 16,378 13,102 10,482 8,386 Special Vehicle 47,778 60,662 154,073 203,376 256,254 307,505 BEV 47,778 60,662 154,073 203,376 256,254 307,505 YoY growth (%) China NEV production 301% 39% 56% 37% 40% 40% PV 238% 51% 71% 44% 48% 47% BEV 222% 65% 81% 48% 50% 50% PHEV 284% 16% 38% 29% 38% 32% CV 332% 20% -22% 2% 3% 4% BEV 589% 31% -23% 6% 6% 6% PHEV 82% -19% -16% -20% -20% -20% Special Vehicle 1074% 27% 154% 32% 26% 20% BEV 1074% 27% 154% 32% 26% 20%

Source: Chinaev, Daiwa forecasts

China: average battery energy capacity per vehicle and forecast kWh per vehicle 2015 2016 2017 2018E 2019E 2020E PV

BEV 22.3 32.3 27.0 33.0 37.0 40.0 PHEV 14.0 13.9 14.8 15.0 16.0 16.0 CV

BEV 101.9 131.9 153.5 155.0 155.0 155.0 PHEV 25.0 30.6 34.8 35.0 36.0 36.0 Special Vehicle

BEV 37.7 51.1 53.2 55.0 60.0 65.0

Source: Chinaev, atk, Daiwa forecasts

China: power battery shipment and forecasts by segment GWh 2015 2016 2017 2018E 2019E 2020E PV 4.3 9.1 13.7 23.9 39.8 63.7 BEV 3.4 8.0 12.2 22.0 36.9 59.9 PHEV 0.9 1.0 1.5 2.0 2.9 3.8 CV 9.6 15.9 14.2 15.1 15.9 16.8 BEV 9.0 15.3 13.6 14.6 15.5 16.5 PHEV 0.6 0.6 0.6 0.5 0.4 0.3 Special Vehicle 1.8 3.1 8.2 11.2 15.4 20.0 BEV 1.8 3.1 8.2 11.2 15.4 20.0 Replacement demand 0.2 0.5 1.4 2.1 3.5 4.9 Total 15.8 28.5 37.4 52.3 74.6 105.4

Source: atk, Daiwa forecasts

China New Energy Vehicles: 30 August 2018

Table of contents

China LiB market outlook ...... 4 LiB battery sales set to increase in 2018-20E ...... 4 Major LiB makers in China ...... 12 ASP pressure and gross margin decline likely to continue; net margin to bottom out over 2018-20E ...... 16 A look at competition with global players...... 20 Stock recommendations ...... 22 Risks to our sector view ...... 25

Company Section Contemporary Amperex Technology ...... 26 Guoxuan High-Tech ...... 41 BYD ...... 45

China New Energy Vehicles: 30 August 2018

China LiB market outlook LiB battery sales set to increase in 2018-20E Why is NEV development so important to China? NEVs: China’s way of It seems inevitable that the world’s automobile industry will transition from internal catching up in the combustion engines (ICEs) to NEVs in the next few decades, given the increasing need for world’s automobile environmental protection and the potential expiration of non-renewable energy resources. industry By 2017, some 7 countries had announced timelines to prohibit sales of traditional ICE vehicles, potentially by as early as 2025. For its part, the Chinese government is studying the timeline for such a transition, according to a speech made by Mr. Xin Guobin, Vice Minister of the Ministry of Industry and Information, on 9 September 2017. We believe China is likely to set a more aggressive deadline than those of some developed countries, as the government is keen for the country to become a top-tier player in the automobile industry.

Timeline for phasing out ICE sales by country Country/state Target phase-out year Type of vehicle phased out Netherlands 2025 ICE US (California) 2025 ICE Norway 2030 non-EV German 2030 ICE India 2030 ICE France 2040 ICE UK 2040 ICE, HEV China* 2030-35

Source: news, *Daiwa estimates

Global EV market share by country (2017) Other 4% USA 16%

China 49%

Europe 25%

Japan 5% Source: EV Volume

Although China’s automobile industry dates back over 60 years, and its annual production volume reached nearly 30m units in 2017, China’s ICE vehicle/component manufacturing technology still lags far behind that of global OEMs. This is particularly the case for some key components like ICE engines and transmissions. However, we believe the world’s intended transition from ICEs to NEVs presents China with an opportunity to catch up with and eventually overtake more established players. A key factor, in our view, is that EVs do not require engines or traditional transmissions, while EVs’ mechanical structure is much less complex (several tens of removable components) than that of ICEs’ (over 3,000 parts). As such, the Chinese government in 2012 launched guidelines for policies designed to promote NEV development.

Many companies have entered the industry in China in recent years, and some have ended up producing low-quality EVs or been found to have cheated on their subsidy claims. We believe that as time passes and subsidies are cut, the weaker players will leave the market, which would be positive for the leading players. Overall we still see China’s NEV policy stance being successful. In 2017, the country’s NEV sales accounted for nearly a half of the world’s total sales. Besides, China is also a leading player in the LiB/LiB- components industry, a key component in NEVs, together with Japan and South Korea.

China New Energy Vehicles: 30 August 2018

CATL’s success and Guoxuan’s potential opportunity to enter the global OEMs’ supply chains also indicate China is playing a more important role in the world’s automobile industry. We believe that China’s rapid development of Internet technology will further support the country’s automobile industry aspirations of competing with global giants in the future.

Changes to China’s NEV subsidy policy We expect the NEV Overall, we view China’s NEV subsidy policy as favourable to vehicles with relatively long subsidy to be cut by a driving ranges, high energy density battery systems, and good energy consumption, given further 33% in 2019 the government’s goal of pushing technological development within the industry. Meanwhile, the government has a preference for battery electrical vehicles (BEVs) over plug-in hybrid electric vehicles (PHEVs), which we believe can be explained by the following factors: 1) PHEVs are akin to short-term transitional products from ICEs to EVs, and 2) China’s key challenges or technology bottlenecks on ICEs, as we discussed above, still exist in PHEVs, as PHEVs and ICEs share similar mechanical structures.

We expect China’s NEV subsidies to be cut step by step in 2019 and 2020, as happened in 2017 and 2018. In our view, the government aims to exit the subsidy scheme in a gradual manner and avoid a sudden subsidy cut in 2020 in order to minimise the negative impact on the industry. We look for a 33% cut in the NEV subsidy for 2019, as well as higher requirements for the energy density of battery systems. Besides, the minimum requirement for NEV mileage is likely to rise to 200km from 150km in 2018, in our view.

China: central subsidies for NEV PVs Driving range, R (Km) 2017 central subsidies (CNY/vehicle) 2018 central subsidies (CNY/vehicle) 100 <= R < 150 20,000 0 150 <= R < 200 36,000 15,000 200 <= R < 250 36,000 24,000 EV 250 <= R < 300 44,000 34,000 300 <= R < 400 44,000 45,000 R >= 400 44,000 50,000 PHEV R>=50 24,000 22,000

Energy density of battery system (Wh/kg) 2017 subsidies multiples (x) Energy density of battery system (Wh/kg) 2018 subsidies multiples (x) 105-120 0.6 90-120 1 120-140 1 140-160 1.1 >120 1.1 >160 1.2

Energy consumption optimisation ratio * per 100km 2018 subsidies multiples (x) 0<=Energy consumption optimisation ratio < 5% 0.5 5 %<= Energy consumption optimisation ratio < 25% 1 Energy consumption optimisation ratio >= 25% 1.1

Source: Government, Daiwa Note: total NEV subsidies equal to the amount in the first table times multiples of energy density and energy consumption

China: central subsidies for NEV buses Maximum subsidy per unit from central government Subsidy by central Types of NEV bus Central government subsidy adjusted factor (CNY) government (CNY/kWh) 610m Energy density of battery system (Wh/kg) Non fast-charging pure EV 1,200 115-135 above 135 55,000 120,000 180,000 bus 1 1.1 Charging rate Fast-charging pure EV bus 2,100 3C-5C 5C-15C above 15C 40,000 80,000 130,000 0.8 1 1.1 Level of saving fuels PHEV bus 1,500 60%-65% 65%-70% above 70% 22,000 45,000 75,000 0.8 1 1.1

Energy consumption for bus (Ekg Wh/km*kg) 2018 subsidies multiples (x) 0.15-0.21 1 <=0.15 1.1

Source: Government, Daiwa Note: total NEV subsidies equal to the amount in the first table times multiples of energy consumption

China New Energy Vehicles: 30 August 2018

Central subsidies for NEV trucks and special vehicles Subsidy standard (CNY/kWh) for various portions Maximum subsidy per unit from central Below 30kWh 30-50 kWh Above 50kWh government 850 750 650 100,000

Energy consumption for trucks and special vehicles (Ekg Wh/km*kg) 2018 subsidies multiples (x) 0.35-0.4 0.2 <=0.35 1

Source: Government, Daiwa Note: total NEV subsidies equal to the amount in the first table times multiples of energy consumption

EV sales growth the key driver for LiB shipments We forecast China’s NEV In 2017, China’s total NEV sales expanded by 53% YoY to 777k units, and we expect sales sales to reach 2.1m by to reach 2.1m units by 2020E, representing a CAGR of 39% YoY. However, the NEV sales 2020E, a CAGR of 39% volume targets set by each Chinese OEM seem much more aggressive than our for 2017-20E estimates, with the sum of the major OEMs (including MHEVs for Geely) reaching almost 5m units for 2020. Our conservative view factors in the expected NEV subsidy cuts through to 2020, and we look for stronger growth thereafter, probably 5 years later, once NEV technology achieves upfront cost parity with ICEs. By that time, real market demand for NEVs could boost sales without the need for supportive government policies.

The BEV PV segment is By segment, we expect NEV PVs to see the strongest production volume growth in the likely to see strongest sector, rising at a CAGR of 47% YoY to 1.7m (from 0.6m in 2017) by 2020E, as OEMs tend growth in the sector to push new NEV models to meet the NEV credit policy (ie, minimum NEV credit equal to 10-12% of each OEM’s total ICE sales volumes over 2019-20E; NEV credits can be earned by producing NEV models or through purchase from other OEMs which own extra credits [likewise NEV credits can be sold to other OEM peers]) imposed by the central government in 2017. NEV commercial vehicles (CVs) (including special vehicles) are likely to see slower but steady growth (18% CAGR, on our estimates) in the next 3 years, driven mainly by BEV special vehicles.

By NEV type, we are more upbeat on the outlook for BEVs, for which government policy is more supportive, over PHEVs, and look for a CAGR of 49% from 2017-20E for BEV PVs. We forecast PHEV PV sales to underperform the NEV market in China, increasing at a CAGR of 33% from 2017-20E — still decent growth as we believe OEMs may choose to simply upgrade their ICE platforms to PHEV versions and launch PHEV models first, in order to meet the government requirement. However, PHEV CVs will likely be phased out over time, with their sales volume declining at a CAGR of -20% over 2017-20E.

China: NEV sales and forecasts (units) (YoY %) 2,500,000 343% 400% 2,108,545 350% 2,000,000 300% 1,500,851 1,500,000 250% 1,068,297 200% 1,000,000 777,000 150% 507,000 53% 53% 100% 500,000 331,092 37% 40% 50% 40% 0 0% 2015 2016 2017 2018E 2019E 2020E NEV sales (LHS) YoY growth (RHS)

Source: CEIC, Daiwa forecasts

China New Energy Vehicles: 30 August 2018

China: NEV production and forecasts by segment Production volume* 2015 2016 2017 2018E 2019E 2020E China NEV production 374,357 518,581 810,624 1,107,312 1,545,808 2,157,948 PV 214,283 322,679 551,617 796,535 1,178,872 1,735,771 BEV 150,528 248,450 449,544 665,325 997,988 1,496,982 PHEV 63,755 74,229 102,073 131,210 180,884 238,789 CV 112,296 135,240 104,934 107,401 110,682 114,672 BEV 88,248 115,664 88,556 94,299 100,200 106,287 PHEV 24,048 19,576 16,378 13,102 10,482 8,386 Special Vehicle 47,778 60,662 154,073 203,376 256,254 307,505 BEV 47,778 60,662 154,073 203,376 256,254 307,505 YoY growth (%) China NEV production 301% 39% 56% 37% 40% 40% PV 238% 51% 71% 44% 48% 47% BEV 222% 65% 81% 48% 50% 50% PHEV 284% 16% 38% 29% 38% 32% CV 332% 20% -22% 2% 3% 4% BEV 589% 31% -23% 6% 6% 6% PHEV 82% -19% -16% -20% -20% -20% Special Vehicle 1074% 27% 154% 32% 26% 20% BEV 1074% 27% 154% 32% 26% 20%

Source: Chinaev, Daiwa forecasts Note: Production volume slightly differs from sales volume

China: 2020 NEV sales volume target by OEM OEMs Type Sales volume target by 2020 (k units) Geely BEV 630 PHEV&MHEV 1170 BAIC NEV 650 SAIC NEV 600 Changan NEV 400 Dongfeng NEV 300 GAC NEV 200 Chery NEV 200 JAC NEV 200 BYD NEV In line with market growth

Source: various news sources (ie, d1ev), Company

Robust battery shipment growth over 2018-20E We expect China’s LiB We forecast China’s LiB sales growth to see robust growth, rising by a CAGR of 41% from shipments to reach 2017-20 to 105GWh — higher than NEV sales growth — backed by the increasing 105GWh in 2020, a average energy capacity (AEC) per vehicle. For BEV PVs, we expect the AEC to reach 40 CAGR of 41% kWh by 2020E (a CAGR of 14%) and increase further thererafter, as the average 300km driving range of NEVs today is far behind that of ICEs of 800km. However, other segments are likely to see milder growth as the current driving range is already enough or nearly enough in their normal operation scenarios, eg, urban public buses drive only 200-300km per day according to our checks with some urban public bus operators in China. As such, we forecast CVs’ AEC growth to be flat, while special vehicles’ AEC increases to 65GWh by 2020E, representing a CAGR of 7%. As such, according to our estimates, battery demand for new-car sales of PVs, CVs and special vehicles will rise at CAGRs of 67%, 6% and 35%, respectively, over 2017-20E.

In addition, we expect LiB replacement demand to rise during 2018-20E as China’s NEV sales have surged since 2012, when the government launched its NEV policy guidelines, and given that an EV battery’s life cycle tends to be 6-8 years. We estimate replacement demand to make a meaningful contribution by 2020E (4.9GWh, accounting for 5% of total battery demand).

China New Energy Vehicles: 30 August 2018

China: LiB shipments and forecasts (units) (YoY %) 120 80% 90% 105.4 80% 100 70% 74.6 80 60% 40% 50% 60 52.3 31% 40% 37.4 43% 41% 40 28.5 30% 15.8 20% 20 10% 0 0% 2015 2016 2017 2018E 2019E 2020E Battery shipment (LHB) YoY growth (RHS)

Source: Daiwa estimates and forecasts

China: average battery energy capacity per vehicle and forecasts kWh per vehicle 2015 2016 2017 2018E 2019E 2020E PV

BEV 22.3 32.3 27.0 33.0 37.0 40.0 PHEV 14.0 13.9 14.8 15.0 16.0 16.0 CV

BEV 101.9 131.9 153.5 155.0 155.0 155.0 PHEV 25.0 30.6 34.8 35.0 36.0 36.0 Special Vehicle

BEV 37.7 51.1 53.2 55.0 60.0 65.0

Source: Chinaev, atk, Daiwa forecasts

Source: atk, Daiwa forecasts

NCM likely to gain market share against LFP in China Reflecting the rapid development of LiB technology in recent years, LiBs are now the mainstream solution for EV power batteries globally. By type of cathode material, EV batteries can be classified as NCM, NCA, LFP, LMO, and LTO, among others. In China, most EVs are equipped with NCM and LFP batteries, which together had a 93% market share in 2017. We expect NCM and LFP to remain the major battery types in 2018-20E, while NCM is likely to take market share from LFP in the PV and CV segments.

Battery instalment by type in 2016 Battery instalment by type in 2017

LTO LTO Others LMO Others 2% 1% LMO 1% 3% 1% 4%

NCM 23%

LFP 49% NCM 44%

LFP 72%

Source: GGII Source: GGII

China New Energy Vehicles: 30 August 2018

Comparisons among LFP, NCM and NCA (3= best, 1= worst) LFP NCA NCM Description

Energy density 1 3 3 Energy per unit weight Cost 3 1 2 Expense per unit energy Life Span 3 2 2 Numbers of cycles can be charged Safety 3 1 2 Concerns if the battery is misused Performance 2 2 2 Performance over extreme temperatures Power density 3 2 2 Power per unit weight

Source: Battery University, Daiwa

NCM set to be the major NCM batteries to gain market share in 2018-20E. In 2017, NCMs’ market share in China battery type, with LFP rose to 55%, from 23% in 2016. We believe NCM batteries will continue to gain market seen losing market share in 2018-20E, supported by the robust growth of NEV PVs and NCM penetration in share both PVs and CVs. Due to the new NEV subsidy policies in 2017 and 2018, which introduced energy density multiples into the subsidy calculation, EV OEMs are required to use high-end batteries with a certain level of energy density. For example, if the batteries’ energy density falls into the range of ~105-120 Wh/kg in 2018, the total NEV subsidy received by OEMs would be cut by 40% (compared to the standard subsidy category of 120~140 Wh/kg). As such, NCMs, which generally have significant advantages over LFPs in terms of energy density, have since 2016 become the key development focus at the battery makers, given potentially stricter requirements on energy density going forward.

LFP batteries to lose market share but likely to remain a major battery type in the near term. In 2017, LFPs’ market share in China declined to 49%, from 72% in 2016, due mainly to rising competition from NCM batteries in the NEV PV segment. We expect LFPs’ market share to further decline and be gradually replaced by NCMs in NEV PVs in 2018- 20E. However, we believe LFPs will remain a major battery type for NEV buses in the near term, as they are more stable than NCM batteries and NCMs were prohibited from use in buses in 2016 for safety reasons. Although this restriction was lifted in 2017, the safety concerns remain, and no bus makers in China currently use NCM in their products. Therefore, we believe LFP, LMO and LTO are still the main battery types for EV buses, with LFP seen taking the majority share in the near term; hence, we expect NCM to pose a limited threat for now.

NCA penetration largely NCA probably not the direction for China, but likely to gain market share due to dependent on Tesla’s Tesla’s local production. Tesla is the world’s major user of NCA batteries, while pace of production in Panasonic is the major producer. Although NCA batteries generally have a higher energy China density compared with LFP and NCM batteries, instability is a major concern. An NCA battery generally consists of thousands of small-sized cylindrical cells with limited energy capacity per unit. For example, a Tesla Model S is equipped with 7,104 units of NCA18650 cells, which requires a complex battery management system (BMS). Tesla self-developed its BMS, which is now one of the company’s key technology advantages over other global OEMs, in our view. Interestingly, in the early years, Tesla tried to outsource its BMS but failed to find a company that could meet its high requirements, according to our discussion with a leading Chinese BMS provider.

As such, we do not expect Chinese OEMs to use NCA batteries due to: 1) the technology limitations associated with BMS in the near term, and 2) the limited energy density improvements from NCM to NCA but large amount of capital required for NCA development. However, we still expect NCA’s market share to grow from 2020 onwards in China as a result of Tesla’s planned entrance into the China market. Tesla plans to build a new EV factory in Shanghai with a total capacity of 250k units pa, and has received government approval to do so, and Panasonic is likely to follow suit by building a “super” battery factory near Shanghai. However, we view Tesla’s capacity plan as aggressive and believe it could experience lower-than-expected sales in the near term given an increasingly competitive market. As such, we believe our estimate for NCA’s market share of 5% by 2020E is not conservative.

China New Energy Vehicles: 30 August 2018

China: penetration in NEV PV power battery by battery type Theoritical maximum energy density (Wh/kg) 2017 2018E 2019E 2020E LFP 190 20% 7% 5% 5% NCM333 200 25% 15% 0% 0% NCM532 220 35% 30% 15% 5% NCM622 250 20% 42% 63% 45% NCM811 300 0% 5% 15% 40% NCA 320 0% 1% 2% 5%

Source: Daiwa estimates and forecasts

China: penetration in NEV CV power battery by battery type 2017 2018E 2019E 2020E LFP 88% 85% 81% 77% NCM 0% 0% 5% 10% Others 12% 15% 14% 13%

Source: Daiwa estimates and forecasts

China: penetration in NEV special vehicle power battery by battery type 2017 2018E 2019E 2020E LFP 26% 20% 18% 16% NCM 69% 75% 78% 80% Others 5% 5% 4% 4%

Source: Daiwa estimates and forecasts

China: battery shipment estimates by battery type GWh 2017 2018E 2019E 2020E LFP 17.3 16.5 17.6 19.3 NCM 16.6 30.6 49.8 75.0 NCA 0.0 0.2 0.8 3.2 Others 2.1 2.8 2.8 3.0 Total* 36.0 50.2 71.1 100.5

Source: Daiwa estimates and forecasts Note: *excludes replacement demand

NCA battery/pack used in Model S, Tesla

Source: Company website, various media

Pouch batteries have the China likely to shift from prismatic batteries to pouch batteries highest energy density, By shape, battery cells can also be classified as cylindrical batteries, prismatic batteries followed by prismatic and pouch batteries. Currently, most EVs in China use prismatic batteries, while some key and cylindrical batteries battery makers, like CATL and Guoxuan, are also developing pouch batteries and aiming given a certain battery to catch up with the Korean players. type Historically, cylindrical batteries have been the most popular in EVs, due mainly to their low production costs, stable physical structure and ease of thermal management. However, the cylindrical shape is not efficient in energy density at the pack level as more space is wasted between each cell compared to prismatic and pouch batteries. Moreover, as the unit size of cylindrical cells for EVs is small, a large number of cells are required for the battery pack, indicating a complicated battery management system (BMS). As mentioned before, Tesla uses this technology with 7,104 units of Panasonic’s 18650 NCA battery (18mm diameter x 65mm length) installed in its vehicle chassis.

The prismatic battery has a thin and flat structure, which allows greater reduction of space between cells than a cylindrical battery, resulting in higher utilisation of space and greater

China New Energy Vehicles: 30 August 2018

energy density at the pack level. However, heat management also becomes more of an issue, thus requiring a higher standard thermal management system. Prismatic batteries are now gaining wider recognition in China, and currently, most major Chinese battery makers, such as CATL and Guoxuan, mainly produce prismatic batteries.

China is catching up in Pouch batteries, the third type of LiB cell, are more flexible as they are constructed by pouch batteries pouches made from li-polymer. This technology enables the battery to be light and cost- effective, but it usually swells over hundreds of cycles, which needs to be taken into consideration when designing the battery cells. Generally, pouch batteries have the highest energy density, but the strictest requirement on cell qualities among these 3 shapes. The Korean players lead in the pouch battery space, while China’s CATL and Guoxuan are catching up. We estimate CATL is likely 2-3 years behind LG Chem (051910 KS, KRW363,500, Buy [1]) in the development of NCM pouch batteries.

Cylindrical battery Prismatic battery

Source: Battery University Source: Battery University

Pouch battery Swollen pouch battery

Source: Battery University Source: Battery University

China: energy density of battery and pack by shape kWh Cylindrical battery Pack Prismatic battery Pack Pouch battery Pack 2016 180 130 170-200 125-145 200-220 130-150 2017 215 140 190-210 135-155 210-240 140-170

Source: GGII

China New Energy Vehicles: 30 August 2018

Major LiB makers in China Weak ones likely to exit the market, while survivors thrive We expect market In China, the automobile LiB industry is quite fragmented with hundreds of manufacturers; consolidation to most of them produce low-end batteries, eg, low-energy-density/quality LFP batteries. continue until 2020E According to qd-lib.com, by 2020, China’s total LiB capacity will reach 300GWh, much higher than demand of 105GWh, based on our forecasts. As such, we expect market consolidation to continue until 2020 and small players with obsolete technology to leave the market amid an ongoing NEV subsidy cut toward 2020. In fact, even the No.3 LiB player in China in terms of sales volume in 2017, Optimum, which focuses on LFP batteries, has been incurring huge losses since 2017 and has halted production for 6 months starting 1 July 2018. Despite the near-term ASP and profitability pressures faced by the entire industry due to the subsidy cut, we view market consolidation as positive for market leaders like CATL, BYD and Guoxuan, which own relatively high-end technologies and can compete with global players such as Samsung SDI (006400 KS, KRW235,500, Buy [1]) and LG Chem.

China LiB market share by battery maker in 2017 Others 20% CATL Eve 27% 2% Zhihang 2% Lishen 3% Farasis 3% Bak 4% BYD 16% National Battery 4% Guoxuan Optimum 7% 12%

Source: GGII

China: major battery makers’ capacity expansion plan by 2020 Capacity (GWh) 2015 2016 2017 2020E CATL 2.5 7.5 17 54 BYD 3.5 10 13 40 Guoxuan 1.5 3.5 7.5 22 Optimum 0.9 7 10 BAK 0.7 6 8 15 Lishen 1.3 4.5 7.2 30 Industry total* 300

Source: Companies, GGll Note: Daiwa estimates

Tesla Gigafactory BYD’s super battery factory in Qinghai

Source: Sina Source: Sina

China New Energy Vehicles: 30 August 2018

CATL’s planned battery factory in Germany Guoxuan’s battery factory in China

Source: Offweek Source: IITDCM

CATL is one of the global leaders. CATL is China’s No.1 LiB maker and also a tier-1 LiB maker globally in terms of market share, capacity expansion and technologies. In 2017, CATL’s market share was 27% in China, and we expect it to grow to 45% by 2020E, backed by its capacity expansion initiatives and strong order book. CATL targets to expand its capacity to 54GWh by 2020 from 14GWh in 2017, with NCM accounting for c.75% of this capacity and to be supplied to most of the current/potential EV giants in China, including SAIC, Geely and BJEV. Meanwhile, CATL is also exploring overseas opportunities. After joining BMW’s supply chain in 2012, CATL became one of the global suppliers to VW Group in March 2018 and Daimler Group in May 2018. CATL plans to build a new plant in Germany with 14GWh capacity and expects to start production by 2021.

CATL is likely 2-3 years In terms of technology, we believe CATL is the leading LiB maker in China and quite close behind the Korean to the South Korean players, especially in prismatic cell products; but for pouch cells, players in pouch which normally have higher energy density and require higher quality/stability, we believe batteries CATL is still 2-3 years behind the Korean players. CATL’s production schedule of the high- end NCM811 battery is ahead of the industry in China and it aims to start production by the end of 2018.

Guoxuan likely the next global player after CATL in China. In 2017, Guoxuan had a market share of 7% in China, after CATL, BYD and Optimum. However, as mentioned, Optimum has currently halted production for 6 months after raking up huge losses, which we attribute to its low-end technologies (focusing on LFP batteries only), limited profitability and weak operations. We do not think Guoxuan will follow in Optimum’s footsteps, backed by its leading technology development, capacity expansion plans and much stronger client base. Guoxuan used to focus on LFP batteries in its early years, but started producing NCM batteries in 2016. By the end of 2017, Guoxuan’s total battery capacity was 7.5GWh (5.5GWh for LFP and 2GWh for NCM). It plans to expand capacity rapidly over 2018-20, targeting total capacity of 22GWh by 2020E, with NCM accounting for c.60%. Guoxuan’s major clients include BJEV, JAC and Geely in China, as well as potentially some global players. We expect Guoxuan’s market share to reach 11% by 2020.

We estimate Guoxuan is No.2 in China after CATL in terms of battery technology, and likely at the same level as BYD in NCM development. According to management, by 3Q18, all NCM production lines will have been upgraded to NCM622 and the company targets to produce NCM811 by late 2019. In addition, Guoxuan is developing pouch NCM batteries, aided by the Ministry of Science and Technology (MOST). It plans to commence trial production of the NCM622 pouch in 2019 and NCM811 pouch in 2020.

BYD on the way to becoming an EV battery supplier. BYD used to be China’s largest battery maker due to strong EV sales of its own brand, but was replaced by CATL with a 16% market share in 2017, as CATL kept winning orders from various OEMs. Previously, BYD’s batteries were only for internal supply to its own NEVs, but now BYD plans to

China New Energy Vehicles: 30 August 2018

explore outside clients after it launched an aggressive capacity expansion plan, which we expect will contribute to earnings in 2019. In 2017, BYD’s total capacity was 13GWh; it targets to reach 40GWh by 2020. However, we are still cautious on BYD’s abilities to acquire clients due to: 1) the competition between its own NEV business and its potential clients, 2) its relative lagging development in NCM batteries, and 3) our conservative view about its advanced battery segment, LFP. Thus far, BYD has not made any announcement about its potential battery clients, but we believe Great Wall Motor (GWM) is now a client, based on our research in the market.

BYD face challenges in In the past few years, BYD has invested heavily in the development of the LFP segment, terms of client which BYD used to believe is more suitable for PVs for safety reasons, especially for acquisition buses. As such, LFP was widely used in BYD’s PVs/CVs in the early years. However, thereafter, the NEV subsidy cut and higher government requirement on batteries’ energy density pushed BYD to play catch-up in the NCM segment, and now most of BYD’s NEVs use NCM batteries. According to management, BYD currently primarily manufactures NCM333 and NCM532, and plans to launch its first production line for NCM811 in 2019.

China LiB makers: battery capacity expansion plan by battery type Capacity (GWh) 2016 2017 2018E 2019E 2020E CATL LFP 5.1 8.5 11.6 13.4 13.4 NCM 2.5 8.5 19.5 32.5 40.5 Total 7.6 17 31.1 45.9 53.9

Guoxuan LFP 3.5 5.5 7.5 7.5 8.5 NCM 2.0 2.0 7.0 11.5 13.5 Total 3.5 7.5 14.5 19.0 22.0

BYD LFP 8.0 8.0 10.0 10.0* 13.0* NCM 2.0 5.0 9.0 17.0* 27.0* Total 10.0 13.0 19.0 27.0* 40.0

Sum of CATL, Guoxuan and BYD LFP 16.6 22.0 29.1 30.9 34.9 NCM 6.5 15.5 35.5 61.0 81.0 Total 21.1 37.5 64.6 91.9 115.9

Source: Companies, Daiwa estimates

China: battery shipment estimates by battery type GWh 2017 2018E 2019E 2020E LFP 17.3 16.5 17.6 19.3 NCM 16.6 30.6 49.8 75.0 NCA 0.0 0.2 0.8 3.2 Others 2.1 2.8 2.8 3.0 Total* 36.0 50.2 71.1 100.5

Source: Daiwa estimates Note: *excludes replacement demand

Client base likely to be more crucial for battery makers over 2018-20E In 2016-17, key battery makers’ sales largely depended on their pace of capacity expansion, especially in the high-end battery segment; however, from 2018, when capacity is no longer a key driver, their client base has become crucial to battery makers’ sales outlook. Although China battery makers’ technology and scale have advanced substantially in the past decade, very few makers have entered global OEMs’ supply chain, ie, CATL by now and Guoxuan likely to be soon. In 2017, all battery makers’ revenue still solely came from the China market, with each battery makers/OEMs highly relying on certain clients/ suppliers. For example, in 2017, nearly 100% of Geely’s batteries were supplied by CATL, while Guoxuan’s battery sales mainly depended on JAC and BJEV’s EV pipeline and volume sales.

China New Energy Vehicles: 30 August 2018

However, in 2018, the situation is changing and we note that some leading players are exploring more cooperation opportunities with new clients. For instance, according to catarc, CATL has gained significant market share from smaller players in 1H18 (market share rose to 42% in 1H18, from 27% in 2017), and Guoxuan signed supply contracts with Geely in 1H18. We believe the move to diversify their client bases was mainly led by: 1) small players exiting the market due to limited profitability after the NEV subsidy cut, and 2) demand from OEMs to diversify their supply chain; both these factors are positive for the industry’s long-term development, in our view.

We note that CATL’s market share of 42% in 1H18 is also partially due to its faster-than- peer capacity expansion in 1H18; however, we expect its market share in 2H18 to be squeezed compared to 1H18 as a large amount of new capacity from peers, eg. Guoxuan, is slated to come online in 2H18. Overall, we still look for continued market share gains for CATL towards 2020E.

China LiB makers: supply share by NEV OEM in 2017 CATL BYD Optimum Guoxuan Bak Farasis Lishen Eve Wanxiang A123 Tianneng Chaowei BYD 100% BJEV 50% 10% 40% SAIC SAIC CATL** * ATBS ** Zoyte 60% 8% 2% Zhidou 10% Chery 15% 0.1% 30% 55% Geely 100% ** Jiangling 75% 0.3% JAC 95% 5% GAC 65% 35% Source: Companies, GGII, Daiwa Note: Guoxuan now supplies batteries to CVs under SAIC; **Guoxuan and Geely signed supply contracts in 1H18; ** battery supply through JVs

Geely and SAIC are In the downstream segment, China’s NEV market is highly fragmented like the battery likely to catch up in the industry, mainly consisting of: 1) new joiners that only produce A/A0 vehicles with their NEV industry in 2018- profitability depending on the NEV subsidies in early years and sales volume relying on the 20E major cities’ favourable policy to NEV’s driving license, eg, Zhidou, 2) some Internet concept-based new EV manufacturers, normally benchmarked to Tesla and targeting the premium segment, eg NIO and Xiaopeng, and 3) traditional OEMs’ EV segment, with diverging performance.

As the NEV subsidy is likely to be cut further in 2019, and completely phased out by 2020 according to the government’s plan, we are cautious on the outlook for small-sized EV-only producers in 2018-20, given their lagging technologies, fragile supply chains and limited brand value. Also, we are highly uncertain about the near-term outlook for each Internet- concept OEM; we do not expect them to gain a large much market share from traditional premium vehicles in the near term.

As for traditional OEMs, which we believe will still be the major players in China’s NEV industry in the future, the leading players could change over time, in our view. We are positive on Geely and SAIC’s EV outlook, driven by their advanced EV platforms, and expect their market shares to continuously increase. We see BYD losing market share over 2018-20E given strong market growth during the period, but expect it to maintain its leading position on a decent product pipeline. However, we expect the operations of other current top players like BJEV, Zoyte and Chery (which used to mainly produce low-end NEVs), to be under pressure in a more competitive environment going forward. As such, based on the battery makers’ current and potential client base, we prefer CATL, followed by Guoxuan and BYD, while most other battery makers are likely to face numerous challenges, in our opinion.

China New Energy Vehicles: 30 August 2018

China: NEV market share by OEM in 2017

Others BYD 16% 20%

Changan 5% JAC 5% Jiangling BJEV 5% 18% Geely 5% Chery SAIC 6% Zhidou Zoyte 8% 6% 6% Source: GGII

ASP pressure and gross margin decline likely to continue; net margin to bottom out over 2018-20E LiB ASPs expected to decline significantly over 2018-20E Lower battery prices to Over the past few years, China’s NEV sales have been driven mainly by the NEV subsidy trigger real demand for and favourable policies on NEVs; however, from now on, we expect a gradual rise in the NEVs real demand for NEVs due to the price parity between ICEs and NEVs. In fact, by now, the whole-life cost of some certain types of NEVs (eg, urban logistic vehicles) is already close to the ICE versions, and we also expect upfront cost parity between ICE PVs and NEV PVs in the next 5 years. Our view is mainly backed by the trend of lower battery prices, which account for 30-40% of the current production cost of an EV.

NEV cost breakdown Others, 7%

Electronics, 9%

Battery, 38% Interiors, 15% Powertrain, 50%

Motor, 7% Body, 5% Chassis, 14% Control system, 6%

Source: Daiwa estimates

Currently, the cost of producing an EV is higher than that of an ICE car due to the high battery price, which we expect to decline significantly by 2020E due to: 1) continuous pricing pressure from OEMs, likely due to the NEV subsidy cut, and 2) technology improvements and greater business scale, which will lower the production costs of LiB. Moreover, the Chinese government has set an aggressive battery price target, aiming to reach CNY1/Wh at the pack level by 2020, indicating an average price decline of 15% YoY over 2018-20E.

China New Energy Vehicles: 30 August 2018

China: average EV battery pack price trend (CNY/Wh) 2.5

2.0 CAGR: -15% 1.5

1.0

0.5

0.0 2016 2017 2020E Source: CAAM, Daiwa estimates

BEV battery: technology development roadmap for China

2015 2020 2025 2030

Fulfil the EV requirement for driv ing at pure electric distance of Fulfil the EV requirement for driv ing at pure electric distance of Fulfil the EV requirement for driv ing at pure electric distance of 300km 400km 500km

Energy /Weight: LiB cell 350Wh/kg, LiB pack 250Wh/kg Energy /Weight: LiB cell 400Wh/kg, LiB pack 280Wh/kg Energy /Weight: LiB cell 500Wh/kg, LiB pack 350Wh/kg Energy /Volume: LiB cell 650Wh/L, LiB pack 320Wh/L Energy /Volume: LiB cell 800Wh/L, LiB pack 500Wh/L Energy /Volume: LiB cell 1,000Wh/L, LiB pack 700Wh/L Charging pow er/Weight: LiB cell 1,000W/kg, LiB pack Charging pow er/Weight: LiB cell 1,000W/kg, LiB pack Charging pow er/Weight: LiB cell 1,000W/kg, LiB pack 700W/kg 700W/kg 700W/kg Longev ity: LiB cell 4,000 charging times/10 year, LiB pack Longev ity: LiB cell 4,500 charging times/10 year, LiB pack Longev ity: LiB cell 5,000 charging times/10 year, LiB pack 3,000 charging times/10 year 3,500 charging times/10 year 4,000 charging times/10 year Cost: LiB cell CNY0.6/Wh, LiB pack CNY1.0/Wh Cost: LiB cell CNY0.5/Wh, LiB pack CNY0.9/Wh Cost: LiB cell CNY0.4/Wh, LiB pack CNY0.8/Wh

Improved energy density (Energy/Weight):

Based on ex isting materials with high energy, improve the Apply new material system, enhance the running voltage of Optimise new material system, utilise new battery structure electrode structure and load capacity of active materials LiB

Improved longevity: Dev elop cathode/anode materials with better longevity;, Apply new materials such as barium salt, improve enhance the purity of electroly tes; develop new additives, Apply solid electrolyte materials manufacturing process and environment control optimise electrode design, etc

Improved safety:

New separator, new electrolyte, electrode safety coating, New separator, new electrolyte, electrode safety coating, Combination technology for solid and liquid electrolyte, new optimise battery design optimize battery design material sy stem

Cost control:

Apply new materials, new manufacturing process and Optimise design, improve manufacturing level New material system, new manufacturing process roadmap equipment

Source: Society of Automotive Engineers of China, Energy-saving and New Energy Vehicle Technology Roadmap

China New Energy Vehicles: 30 August 2018

PHEV battery: technology development roadmap for China

2020 2025 2030

Energy /Weight: LiB cell 200Wh/kg, LiB pack 120Wh/kg Energy /Weight: LiB cell 250Wh/kg, LiB pack 150Wh/kg Energy /Weight: LiB cell 300Wh/kg, LiB pack 180Wh/kg Energy /Volume: LiB cell 400Wh/L, LiB pack 240Wh/L Energy /Volume: LiB cell 500Wh/L, LiB pack 300Wh/L Energy /Volume: LiB cell 600Wh/L, LiB pack 350Wh/L Charging pow er/Weight: LiB cell 1,500W/kg, LiB pack Charging pow er/Weight: LiB pack 1500W/kg Charging pow er/Weight: LiB pack 1500W/kg 900W/kg Longev ity: LiB pack 4,000 charging times/12 year Longev ity: LiB pack 5,000 charging times/15 year Longev ity: LiB pack 3,000 charging times/10 year Cost: LiB cell CNY0.9/Wh, LiB pack CNY1.3/Wh Cost: LiB cell CNY0.8/Wh, LiB pack CNY1.1/Wh Cost: LiB cell CNY1.0/Wh, LiB pack CNY1.5/Wh

Improved energy density (Energy/Weight):

Based on ex isting materials with high energy, improve the electrode structure and load capacity of active materials Optimise new material system, utilise new battery structure

Improved longevity:

Dev elop cathode/anode materials with better longevity; enhance the purity of electrolyte; develop new additives, optimise electrode Apply solid electrolyte materials design, etc

Improved safety:

Combination technology for solid and liquid electrolyte, new New separator, new electrolyte, electrode safety coating, optimise battery design material sy stem

Cost control:

Optimise design, improve manufacturing level New material system, new manufacturing process roadmap

Source: Society of Automotive Engineers of China, Energy-saving and New Energy Vehicle Technology Roadmap

Gross margin decline likely to moderate over 2018-20E on cost reduction Gross margin decline is In 2017, the China LiB industry’s gross margin suffered due to heavy pricing pressure from likely to continue in OEMs as the OEMs were trying to offset the cut in NEV subsidy. CATL and Guoxuan’s 2018-20E gross margin declined to 35% and 40% in 2017 from 45% and 49% in 2016, respectively. We look for the industry’s average gross margin to continue to be squeezed in 2018-20E on the back of the ongoing NEV subsidy cut, although we expect the cost of LiBs to decline at a CAGR of 10% over 2018-20E due to lower prices of battery components on technology improvements and greater business scale, and LiB makers’ efforts to control costs.

Key battery components By component, we expect the cost of cathodes, which account for c.30% of the LiB cost or to see meaningful cost 40% of the raw-material cost and are the key element in determining a battery’s energy reduction in 2018-20E density, to be relatively stable over 2018-20E as we think the raw-material hikes can be offset by a lower composition ratio of cobalt and greater business scale. As for anodes, separators and electrolytes (which account for 6%, 9% and 7% of batteries’ total costs, respectively), we expect all to see meaningful cost reductions over 2018-20E for various reasons. The technology improvement and greater business scale for anodes and separators, and electrolytes’ upstream material price decline will lead to a 13-19% reduction in their prices per year over 2018-20E, on our estimates.

China New Energy Vehicles: 30 August 2018

LiB battery cost breakdown

Others, 16% Battery components, 70% Cathode, 30%

Anode, 6% Separator, 9% Manufacturing cost, 9% Electrolyte, 7% Other material, 17%

Labor cost, 5%

Source: GGII, Daiwa

Average EV battery cost trend (CNY/Wh) 1.5

1.3

CARG: -10% 1.1

0.9

0.7

0.5 2016 2017 2020E Source: GGII, Daiwa estimates

Cathode price (CNY ’000/t) Anode price (CNY ’000/t) 25 8

20 6

4 15 2 10 0

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18

Mar-16 Mar-17 Mar-18

Sep-16 Nov-16 Sep-17 Nov-17

May-16 May-17 May-18

Jul-17 Jul-18

Jul-16 Artificial graphite (310-320mAh/g) Artificial graphite (330-340mAh/g)

Jan-16 Jan-17 Jan-18

Mar-16 Mar-17 Mar-18

Nov-16 Nov-17

Sep-16 Sep-17

May-17 May-18 May-16 Artificial graphite (340-360mAh/g) Natrual graphite (low-end) NCM532 LFP Natrual graphite (mid-end) Natrual graphite (high-end) Source: Wind Source: Wind

Electrolyte price (CNY ’000/t) Separator price (CNY/sq m) 10 45 8 9 40 7 8 35 6 30 7 25 5 6 20 5 4 15 4 10 3 3 5 2

2 0

Jul-17 Jul-18

Oct-16 Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18 Jun-18

Feb-17 Feb-18 Mar-17 Mar-18

Dec-16 Dec-17 Nov-16 Aug-17 Sep-17 Nov-17

May-17 May-18

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18

Mar-16 Mar-17 Mar-18

Nov-16 Nov-17 Sep-16 Sep-17

May-17 May-18 May-16 Dry (low-end) Wet (mid-end) Dry (high-end) Ternary electrolyte LFP electrolyte LiPF6 (RHS) Dry (imported) Wet (imported) Source: Wind Source: Wind

China New Energy Vehicles: 30 August 2018

Key battery component cost trend Key components Estimated price movement per year over 2018-20E Note Cathode Stable Raw material hikes offset by lower composition ratio of cobalt and greater business scale Anode low-teens percentage decline Technology improvements and greater business scale Separator Mid-teens percentage decline Technology improvements and greater business scale Electrolyte High-teens percentage decline Raw material price decline Source: Daiwa

A look at competition with global players We view CATL as a Helped by the strong government backing of recent years, China is now the world’s No.1 global top-tier player, EV market by sales volume and accounted for 49% of the global market in 2017. At the along with Panasonic, OEM level, China’s BYD and BJEV led Tesla were the top-2 players in the world by sales LG Chem, and Samsung volume in 2017. The robust EV sales growth in China, driven by the NEV subsidy scheme, SDI has given rise to a number of EV battery makers in the country; but with the scheme set to be phased out by 2020E, China’s battery makers are set to face increased competition from global players.

Global EV market share by EV maker (2017) Global EV market share by country (2017) BYD Other 9% 4% USA BJEV 16% 9%

Others 41% Tesla 8% China 49% BMW 8% Europe GM 25% 5% Chevrolet VWSAIC Toyota Nissan Japan 4% 4% 4% 4% 4% 5% Source: Chinaev Source: EV Volume

The global EV battery supply is concentrated in Japan, South Korea and China. At the company level, CATL, Panasonic, BYD, Optimum, LG Chem, Guoxuan and Samsung SDI are the leading players. Overall, we view CATL, Panasonic, LG Chem and Samsung SDI as top-tier suppliers in terms of technology, scale and client base. In our view, BYD and Guoxuan still underperform their global peers on these measures, and hence are likely to focus on the China market in the near term.

Global battery makers ranking by sales (2017) Global players Country Sales (GWh) CATL China 12 Panasonic Japan 10 BYD China 7.2 Optimum China 5.5 LG Chem Korea 4.5 Guoxuan China 3.2 Samsung SDI Korea 2.8 National Battery China 1.9 Bak China 1.6 Farasis China 1.3

Source: GGII

Panasonic, the world’s leading producer of NCA batteries, mainly supplies related products to Tesla. In 2016, Panasonic and Tesla jointly invested USD5bn to build a super battery factory in the US (“Gigafactory”) with a capacity of 35GWh; construction is targeted to be fully completed in 2020. Panasonic also owns a factory in Dalian, China, with an annual capacity to supply 200k EVs, but the production line is not capable of manufacturing NCA batteries for Tesla. With Tesla preparing to produce vehicles in the China market, we believe that Panasonic is likely to build another super LiB factory near Shanghai (likely in Suzhou, Jiangsu Province) in the near future. Since the Chinese battery makers’ technology focuses more on NCM than NCA, and we do not expect the country’s OEMs to

China New Energy Vehicles: 30 August 2018

widely adopt NCA batteries in the near term, competition between Chinese battery makers and Panasonic seems likely to remain limited for now.

Competition with Korean In contrast, the Korean battery makers — LG Chem, Samsung SDI, and SK Innovation — players likely to intensify are more comparable with the Chinese players, as both groups are focusing on the in China and globally development of NCM technology. As the Chinese government plans to phase out NEV subsidies by 2020 (note: Korean EV batteries are not eligible for NEV subsidies in China), we expect competition in the China market between the Chinese and Korean makers to intensify thereafter. Indeed, LG Chem has already negotiated EV supply contracts commencing from 2020E with a number of Chinese OEMs, according to Daiwa analyst Josh Rhee. At the same, the company has launched an aggressive plan to expand capacity in China.

In the global market, Samsung SDI is likely to be CATL’s major competitor in Europe, as both companies have similar product types and client bases (including the 3 German OEM giants). Samsung SDI has a plant in Hungary, which entered production in 2Q18, that is capable of producing batteries for 50k EVs per annum. Samsung SDI’s EV battery capacity at end-2017 stood at 7GWh, which Daiwa analyst SK Kim expects to expand to 15GWh by end-2018. Meanwhile, LG Chem has the most diverse client base globally and could potentially gain order share from CATL’s customers in the future. LG Chem is now building a battery factory in Poland, which it expects to begin production by 2020. At end-2017, LG Chem had an EV battery capacity of 18GWh, which we expect to double by end-2018E.

CATL: capacity expansion comparison with Korean battery makers Battery maker Capacity plan in China Global capacity plan by 2021E LG Chem 32 GWh by 2021E 90 GWh Samsung SDI 5-10 GWh by 2020E* 30 GWh SK innovation 7 GWh by 2020E or 2021E* 15-17 GWh* CATL 54 GWh by 2020E 70 GWh*

Source: Companies, *Daiwa estimates

Global battery suppliers and customers CATL BYD Guoxuan Panasonic LG Chem Samsung SDI SKI AESC US Tesla √ GM √ Ford √ √ Chevrolet Chrysler √ Europe BMW √ √ VW √ √ √ Daimler √ √ √ Volvo √ Renault √ √ PSA √ √ Korea and Japan Nissan √ √ Toyota √ Honda √ Hyundai √ China BYD √ BJEV √ √ SAIC √ Geely √ √

Source: GGII, Daiwa

China New Energy Vehicles: 30 August 2018

Stock recommendations CATL: a leading LiB maker globally; initiating with Buy (1) rating We initiate on CATL with Given our outlook for strong growth in NEV battery sales in China, we believe related a Buy rating suppliers, including battery makers, stand to benefit in the long run. The new NEV credit scheme and the long-term plan for China to ban ICE cars will likely force many auto makers to speed up their NEV development, increasing the demand for EV batteries. As the leading EV battery maker in China, CATL stands to be a major beneficiary, in our view. CATL’s technology is also advanced globally, and has entered the supply chains of most of the leading global OEMs. As such, we initiate coverage of CATL with a Buy (1) rating.

CATL: share price performance (CNY) 100 90 80 70 60 50 40 30 20 10 0 Jun-18 Jun-18 Jun-18 Jun-18 Jul-18 Jul-18 Jul-18 Jul-18 Aug-18 Aug-18 Aug-18 Aug-18

Source: Bloomberg

Guoxuan: another Guoxuan: a leading LiB maker in China with the potential to be a global leading LiB player in player China Similar to CATL, as a leading LiB maker in China, Guoxuan looks well placed to benefit from the robust market growth. In our view, Guoxuan is the No.2 player in China in NCM technology (behind CATL) and has a strong client base domestically. We expect the company to win more orders from new clients over 2018-20E as OEMs look to diversify their battery supply chains. Meanwhile, we see a possibility of Guoxuan becoming a global player in the future, with management stating that the company has signed confidential agreements with some top-tier global clients (names not disclosed). As such, we have a Buy (1) rating on Guoxuan.

Guoxuan: 12-month forward PER (PER) 73 63 +1 SD 53 43 33 Avg PER 23 -1 SD 13

Jul-16 Jul-17 Jul-18

Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18

Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18

Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18

Dec-17 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17

May-16 May-17 May-18 Trading PE +1 SD Average PER -1 SD

Source: Bloomberg, Daiwa forecasts

BYD: a strong NEV maker globally and leading LiB maker in China BYD: on the way to Another name that we recommend is BYD, which we believe has the credentials to remain becoming a leading LiB a leader in China’s NEV segment. We are positive on the development of the NEV market supplier in the long run and believe BYD stands to capture some of this potential market growth. BYD is not only a dominant player in China, but has also successfully captured several overseas orders — not only in developing countries, such as Indonesia, but also the US and the Europe. We view the company’s self-owned battery technology as offering a

China New Energy Vehicles: 30 August 2018

particular advantage over other NEV players’ in the long run. However, we do not expect the company’s battery business to see a meaningful revenue/earnings contribution from outside clients in the near term, given capacity limitations, high pricing pressure, and hurdles to new client acquisition. We have a Buy (1) rating on BYD.

BYD: 12-month forward PER (PER) 60

Jul-17 Jul-16 Jul-18

Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18

Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18

Feb-17 Feb-16 Mar-16 Mar-17 Feb-18 Mar-18

Dec-15 Dec-17 Aug-15 Sep-15 Nov-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17

May-16 May-17 May-18 Trading PER + 1SD Average -1 SD

Source: Bloomberg, Daiwa forecasts

Global auto OEMs: valuations Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA (x) Div yield (%) ROE (%) code currency 30-Aug-18 18E 19E 18E 19E 18E 18E 19E 18E 19E 18E China H-share listed Geely Automobile Holdings Lt 175 HK HKD 17.00 Buy (1) 8.8 6.6 2.8 2.1 5.0 3.3 3.4 4.6 37.5 37.0 BYD Co Ltd-H 1211 HK HKD 48.15 Buy (1) 34.2 27.0 2.0 1.8 9.6 8.3 n.a. n.a. 5.9 7.0 Brilliance China Automotive 1114 HK HKD 12.10 Buy (1) 7.3 5.9 1.6 1.3 n.a n.a 1.4 1.8 24.3 24.4 Dongfeng Motor Grp Co Ltd-H 489 HK HKD 8.42 Outperform (2) 5.2 5.1 0.5 0.5 10.2 2.2 2.9 3.0 10.7 10.1 Great Wall Motor Company-H 2333 HK HKD 4.94 Outperform (2) 4.5 3.7 0.7 0.6 2.9 2.0 6.9 8.4 16.6 17.6 Guangzhou Automobile Group-H 2238 HK HKD 8.36 Buy (1) 5.7 5.2 0.9 0.8 1.7 0.1 6.0 6.6 16.3 16.0 BAIC Motor Corp Ltd-H 1958 HK HKD 6.49 Hold (3) 6.1 4.9 0.9 0.8 1.1 0.7 5.7 7.0 16.3 17.7 China A-share listed BYD Co Ltd -A 002594 CH CNY 45.00 NR 30.0 22.5 2.1 2.0 n.a. n.a. 0.7 0.4 8.5 7.3 Guangzhou Automobile Group-A 601238 CH CNY 10.57 NR 8.6 7.5 1.3 1.2 11.9 7.0 2.9 3.7 20.7 17.2 Great Wall Motor Co Ltd-A 601633 CH CNY 7.07 NR 9.0 8.0 1.2 1.1 n.a. n.a. 2.9 3.4 11.5 13.5 Saic Motor Corp Ltd-A 600104 CH CNY 28.62 NR 8.8 8.1 1.4 1.2 n.a. n.a. 6.1 6.9 16.8 15.9 Chongqing Changan Automobi-B 200625 CH HKD 6.73 NR 5.0 4.3 0.5 0.5 n.a. n.a. 9.8 7.9 17.9 12.7 Faw Car Company Limited-A 000800 CH CNY 6.86 NR n.a. n.a. 1.4 1.3 n.a. n.a. n.a. n.a. 5.1 5.6 Anhui Jianghuai Auto Co-A 600418 CH CNY 5.02 NR 18.3 14.2 0.7 0.7 11.4 8.6 1.6 1.5 3.7 3.4 Jiangsu Yueda Investment C-A 600805 CH CNY 5.22 NR 26.8 26.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2.1 Tianjin Faw Xiali Automobi-A 000927 CH CNY 3.39 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Lifan Industry Group Co Lt-A 601777 CH CNY 4.69 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 2.78 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. US Tesla Motors Inc TSLA US USD 305.01 NR n.a. 95.9 9.2 8.7 126.5 39.5 n.a. n.a. n.a n.a Ford Motor Co F US USD 9.97 Hold (3) 7.4 7.2 1.1 1.0 2.1 2.7 6.2 6.4 23.7 16.5 General Motors Co GM US USD 37.12 Outperform (2) 6.2 6.2 1.4 1.2 2.8 3.1 4.1 4.1 18.9 22.6 Europe Daimler AG-Registered Shares DAI GR EUR 56.77 NR 6.5 6.2 0.9 0.8 2.1 2.3 6.1 6.2 16.6 15.4 Bayerische Motoren Werke AG BMW GR EUR 84.28 NR 7.5 7.2 0.9 0.9 6.6 6.7 4.5 4.7 15.5 13.1 Volkswagen AG VoW GR EUR 140.30 NR 5.7 4.9 0.6 0.6 2.1 2.1 2.5 3.8 12.6 11.4 Fiat Chrysler Automobiles NV FCA IM EUR 14.96 NR 4.8 4.5 0.9 0.7 1.8 1.9 0.1 1.6 16.6 19.9 Peugeot SA UG FP EUR 24.24 NR 7.2 6.4 1.3 1.1 2.5 2.0 2.3 3.3 14.5 18.8 Renault SA RNO FP EUR 74.64 NR 4.9 4.7 0.6 0.6 3.0 2.9 4.7 5.0 13.6 12.8 Japan Honda Motor Co Ltd 7267 JP JPY 3,356 Hold (3) 5.9 8.3 0.7 0.7 9.0 8.1 2.7 3.0 8.2 13.1 Nissan Motor Co Ltd 7201 JP JPY 1,048 Hold (3) 5.7 7.7 0.8 0.7 2.4 3.4 4.6 5.1 12.5 13.5 Toyota Motor Corp 7203 JP JPY 7,003 Outperform (2) 8.4 8.8 1.1 1.0 12.9 12.1 3.0 3.1 10.4 12.9 Korea Hyundai Motor Co 005380 KS KRW 123,500 Buy (1) 8.8 7.4 0.5 0.4 5.3 4.5 4.0 4.8 5.3 6.1 Kia Motors Corp 000270 KS KRW 32,150 Outperform (2) 6.5 5.1 0.5 0.4 3.0 2.6 3.7 4.0 7.2 8.5 India Tata Motors Ltd TTMT IN INR 259.35 NR 10.4 10.6 1.2 0.9 n.a. n.a. 0.4 0.5 8.8 11.9 Mahindra & Mahindra Ltd MM IN INR 982.95 NR 26.2 19.8 4.4 3.1 14.9 26.4 0.7 1.0 13.1 22.0 Total Weighted average 7.9 12.5 1.5 1.4 12.1 7.4 3.4 3.8 13.0 13.7 High 34.2 95.9 9.2 8.7 126.5 39.5 9.8 8.4 37.5 37.0 Low 4.5 3.7 0.5 0.4 1.7 0.1 0.1 0.4 3.7 2.1 Median 7.4 7.2 1.1 0.9 4.0 3.2 3.2 3.9 13.4 13.1 Source: Bloomberg, Daiwa forecasts for rated stocks

China New Energy Vehicles: 30 August 2018

Global battery stocks: valuations Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 30-Aug-18 FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E China A share - listed GUOXUAN HIGH-TECH CO LTD-A * 002074 CH CNY 13.22 Buy (1) 17.6 15.7 1.7 1.5 12.1 10.7 0.8 0.9 9.9 10.2 CONTEMPORARY AMPEREX TECHN-A * 300750 CH CNY 69.99 Buy (1) 45.8 34.1 4.5 4.0 25.4 17.9 0.0 0.0 11.4 12.5 SHAANXI J&R OPTIMUM ENERGY-A 300116 CH CNY 2.06 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. EVE ENERGY CO LTD-A 300014 CH CNY 13.54 NR 22.6 17.4 3.4 2.9 16.9 13.1 1.0 1.3 14.7 16.6 NINGBO SHANSHAN CO LTD-A 600884 CH CNY 17.10 NR 19.2 16.0 1.8 1.6 15.8 12.5 0.4 0.6 9.6 10.3 BEIJING EASPRING MATERIAL-A 300073 CH CNY 24.26 NR 35.1 26.4 4.0 3.6 n.a. n.a. 0.6 0.8 12.3 15.0 ZHEJIANG NARADA POWER SOUR-A 300068 CH CNY 12.56 NR 17.4 13.3 1.7 1.5 15.7 12.1 1.7 2.1 9.7 11.3 SICHUAN CHENGFEI INTEGRAT -A 002190 CH CNY 17.51 NR n.a. n.a. 4.0 4.4 82.0 n.a. n.a. n.a. n.a n.a SHENZHEN DESAY BATTERY TEC-A 000049 CH CNY 26.60 NR 15.7 12.6 3.1 2.6 10.2 8.9 1.2 1.2 22.2 21.2 Weighted average 36.0 27.2 3.8 3.4 22.4 14.7 0.3 0.3 11.0 12.0 High 45.8 34.1 4.5 4.4 82.0 17.9 1.7 2.1 22.2 21.2 Low 15.7 12.6 1.7 1.5 10.2 8.9 0.4 0.6 9.6 10.2 Median 19.2 16.0 3.2 2.7 15.8 12.3 0.9 1.0 11.4 12.5

Hong Kong-listed COSLIGHT TECHNOLOGY INTL GP 1043 HK HKD 2.67 NR 12.9 4.6 0.4 0.4 5.1 3.2 n.a. n.a. 3.1 8.1 TIANNENG POWER INTL LTD 819 HK HKD 9.85 NR 6.9 5.8 1.6 1.3 3.6 3.2 4.3 5.2 25.5 26.1 CHAOWEI POWER HOLDINGS LTD 951 HK HKD 3.81 NR 10.5 9.8 0.9 0.8 n.a. n.a. 1.8 2.1 9.1 8.8 LEOCH INTERNATIONAL TECH 842 HK HKD 0.77 NR 4.2 2.9 0.4 0.3 n.a. n.a. n.a. n.a. 6.9 9.1 FDG KINETIC LTD 378 HK HKD 0.14 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. HONBRIDGE HOLDINGS LIMITED 8137 HK HKD 1.10 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Foreign players PANASONIC CORP 6752 JT JPY 1,346.50 Hold (3) 15.4 12.2 1.9 1.7 5.9 4.9 2.2 2.5 12.7 14.2 SAMSUNG SDI CO LTD * 006400 KS KRW 235,500 Buy (1) 18.0 13.0 1.2 1.1 9.0 5.9 0.4 0.4 7.2 9.0 LG CHEM LTD * 051910 KS KRW 363,500 Buy (1) 11.7 9.6 1.4 1.3 5.7 4.8 1.9 2.5 12.9 14.2 Weighted average 18.1 13.8 2.1 1.9 17.3 8.8 1.5 1.8 11.9 13.3 High 45.8 34.1 4.5 4.4 82.0 17.9 4.3 5.2 25.5 26.1 Low 4.2 2.9 0.4 0.3 3.6 3.2 0.4 0.4 3.1 8.1 Median 16.6 12.8 1.7 1.5 11.1 8.9 1.2 1.3 10.7 11.9 Source: Bloomberg, *Daiwa forecasts

China New Energy Vehicles: 30 August 2018

Risks to our sector view The key downside risk to Greater-than-expected pricing pressure from OEMs our sector stance would The key downside risk to our call would be pricing pressure from NEV OEMs, which will be higher-than-expected likely seek to reduce overall costs to offset subsidy cuts in 2017 and 2018, and likely 2019 ASP pressure too. Hence, we believe OEMs will still push for discounts in order to realise better profitability. If OEMs request bigger-than-expected discounts in 2018-20, industry profitability as a whole is likely to be affected. There is also a risk that intensified competition among LiB makers will result in pricing cuts as companies jostle for market share.

Lower-than-expected NEV demand, especially for NEV buses Although we are positive on the NEV PV sales outlook in China, the battery industry also relies on NEV bus clients. In the short term, any shortfall in the NEV bus segment could eat into the industry’s top-line growth.

Failure to reduce LiB costs We expect the industry as a whole to deliver unit cost reductions for LiBs at a rate of 10% pa over 2018-20E, backed by technology improvements and an expanded business scale. If the industry fails to realise such cost reductions, it may not be able to offset unit selling price declines and profitability will be negatively impacted.

Market disruption due to new LiB technology or new entrants LiB technology has advanced rapidly over the past 10 years, and OEMs have taken advantage of the lower cost of developing EV models. There is a risk that new technologies will emerge that lead to disruption within the space or are adopted by new entrants, allowing them to quickly gain market share or supersede existing players like Guoxuan.

China Industrials 30 August 2018

Contemporary Amperex Technology (300750 CH)

Contempor ar y Amperex T echnolog y

Target price: CNY86.00 Share price (30 Aug): CNY69.99 | Up/downside: +22.9%

Initiation: charging up its global ambitions Jay Lu (852) 2848 4970  Robust volume growth on strong domestic demand in 2018-20E [email protected]  Wide client base and aggressive capacity expansion plan Kelvin Lau (852) 2848 4467  Initiating with a Buy (1) call and 12-month TP of CNY86.0 [email protected]

Investment case: We initiate coverage of Contemporary Amperex Share price performance

Technology (CATL), China’s No.1 automotive lithium-ion battery (LiB) (CNY) (%) maker by market share and technology, with a Buy (1) call. We forecast the 95 275 company’s 2018-20E core profit to surge by 34-43% YoY backed by strong 79 226 sales volume growth, leading to a domestic market share of 45% by 2020E. 63 178 46 129

30 80 Sales volume poised to increase in 2018-20E. We forecast CATL’s LiB Jun-18 sales volume to rise rapidly at a CAGR of 60% over 2018-20E, CAT (LHS) Relative to SZASHR Index (RHS) outperforming market growth of 41%, mainly backed by its wide client base and aggressive capacity expansion. CATL’s customers range from leading 12-month range 36.20-91.77 Chinese NEV OEMs, such as BJEV, SAIC and Geely, to global automobile Market cap (USDbn) 22.29 players, such as BMW, Daimler and VW. CATL plans to expand its LiB 3m avg daily turnover (USDm) 275.70 Shares outstanding (m) 2,172 capacity in China to 54GWh by 2020E, from 14GWh in 2017. We see Major shareholder Mr. Zheng Yuqun (26.3%) further upside potential in overseas markets with its first overseas plant, a 14GWh facility in Germany, scheduled to commence operations in 2021. Financial summary (CNY) Year to 31 Dec 18E 19E 20E Large scale of business offsets pricing pressure. We expect the whole Revenue (m) 29,226 42,326 59,977 industry to remain under intense pricing pressure in 2018-20E due to the Operating profit (m) 3,634 4,900 7,146 Net profit (m) 3,321 4,454 6,348 ongoing NEV subsidy cuts. However, CATL’s gross-margin decline is likely Core EPS (fully-diluted) 1.529 2.050 2.922 to moderate and stabilise by 2020, thanks to its large business scale. We EPS change (%) 34.5 34.1 42.5 estimate the company’s LiB ASP will reach CNY0.92/Wh in 2020E, well Daiwa vs Cons. EPS (%) 65.1 89.3 116.5 PER (x) 45.8 34.1 24.0 below the government’s 2020 target of CNY1/Wh, and close to its 2025 Dividend yield (%) 0.0 0.0 0.0 target of CNY0.9/Wh. Meanwhile, the net margin should bottom in 2019E, DPS 0.000 0.000 0.000 led by lower selling and administrative expenses (as a % of revenue). PBR (x) 4.5 4.0 3.4 EV/EBITDA (x) 25.4 17.9 12.9 ROE (%) 11.4 12.5 15.4 Earnings forecasts. We look for CATL’s revenue to increase by 42-46% Source: FactSet, Daiwa forecasts YoY, and its core earnings by 34-43% YoY over 2018-20E, on the back of our assumptions for 50-65% growth in LiB sales volume, 8-18% declines in LiB ASPs and a 8-14% reduction in LiB costs.

Valuation: CATL has traded at a 2018-19E average PER of 37-52x since 22 June 2018 when its share price stabilised after having traded limit-up for 11 straight days since listing on 11 June 2018. We initiate coverage with a Buy (1) rating and 12-month TP of CNY86, based on a 2018-19E average PER of 48x, representing a 2018-20E PEG of 1.3x, which is at a 20% premium to its A-share LiB peers. We believe the premium is justified by CATL’s leading market position (2017 market share of 27%), cutting-edge technology development (NCM811 batteries by end-2018E), strong earnings growth in 2018-20E (38% CAGR), large market cap (USD22bn) and good liquidity (daily turnover of c.USD280m).

Risks: The main risks to our call are higher-than-expected pricing pressure from OEM clients, and lower-than-expected NEV sales in China.

See important disclosures, including any required research certifications, beginning on page 52

Contemporary Amperex Technology (300750 CH): 30 August 2018

How do we justify our view? Growth outlook Valuation Earnings revisions

CATL: revenue breakdown and forecasts Growth outlook

We forecast CATL’s revenue to rise at a CAGR of 44% over 2018-20E, driven mainly by a robust EV battery sales 70,000 CAGR of 60% over the same period. This strong volume 60,000 growth is backed by our forecast for China’s NEV sales to 50,000 rise at a 40% CAGR and CATL to see continuous market- 40,000 share gains. However, we expect the industry to remain (CNYm) 30,000 under fierce pricing pressure in 2018-20E due to the 20,000 ongoing NEV subsidy cut, and look for an ASP CAGR of - 13% for CATL over 2018-20E. For its energy storage 10,000 systems and LiB material segments, we forecast revenue 0 2015 2016 2017 2018E 2019E 2020E CAGRs of 222% and 63%, respectively, over 2018-20E. Automotive LiB Energy storage system LiB material Others

Source: Company, Daiwa forecasts

Valuation A-share LiB companies: valuation comparison The stock is trading currently at a PER of 39x, based on Name PER (x) Earnings CAGR (%) PEG our average 2018-19E EPS. We assign a target price of FY18E FY19E FY17-20E FY17-20E

CNY86.0, implying 23% upside potential. Our TP is based China A share - listed Guoxuan 17.6 15.7 19.6 0.9 on an average 2018-19E PER of 48x, representing a PEG CATL 45.8 34.1 37.0 1.1 of 1.3x. We note CATL’s A-share peers are trading Shanshan 19.2 16.0 16.4 1.1 currently at a weighted average PEG of 1.0x. We see Easpring 35.1 26.4 23.8 1.3 EVE 22.6 17.4 28.3 0.7 CATL’s high product quality, wide customer base and Weighted average 39.5 29.8 32.7 1.0 superior cost-control capability offering it with a competitive High 45.8 34.1 37.0 1.3 advantage over peers, and hence, making the company Low 17.6 15.7 16.4 0.7 Median 22.6 17.4 23.8 1.1 deserving of a 30% premium in its PEG vs. its peers. Source: Bloomberg, Wind, Daiwa forecasts; note: prices as of close on 30 August 2018

Earnings revisions CATL: net profit and net-profit growth

As the stock was only listed earlier in June there are no (YoY Growth) 7,000 250% earnings revisions so far. CATL’s gross margin declined in 236% 2017, as a result of increasing pricing pressure from OEMs 6,000 200% due to the NEV subsidy cuts. While we forecast it to fall 5,000 150% further, we expect the margin decline to moderate thanks 4,000 (CNYm) 100% to CATL’s large business scale and effective cost controls, 3,000 until the margin stabilises in 2020E. 50% 2,000 34% 34% 43%

1,000 0% We look for robust net-profit growth of 34% YoY for 2018E, -16% driven by top-line growth of 46% YoY (LiB shipments 0 (50%) 2015 2016 2017 2018E 2019E 2020E picking up by 65% YoY while ASPs decline by 18% YoY) Net income YoY Growth with the blended gross margin falling by 6.1pp to 30.2%. Source: Company, Daiwa forecasts Looking ahead, we expect 2019 to be another strong year with net profit growth of 34% YoY.

Contemporary Amperex Technology (300750 CH): 30 August 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automotive LiB - sales volume (GWh) n.a. n.a. 2.2 6.8 11.8 19.5 31.3 46.9 Automotive LiB - sales volume YoY n.a. n.a. 0 211 74 65 60 50 Growth (%) Automotive LiB - ASP (CNY/Wh) n.a. n.a. 2.28 2.06 1.41 1.15 1.00 0.92 Automotive LiB - ASP YoY Growth (%) n.a. n.a. 0 (10) (32) (18) (13) (8) Automotive LiB - capacity year end n.a. n.a. 0.0 7.6 17.0 31.1 45.9 53.9 (GWh)

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automotive LiB n.a. n.a. 4,981 13,976 16,657 22,537 31,371 43,292 Transmission and distribution n.a. n.a. 722 903 3,340 6,689 10,955 16,685 equipment Other Revenue n.a. n.a. 0 0 0 0 0 0 Total Revenue n.a. n.a. 5,703 14,879 19,997 29,226 42,326 59,977 Other income n.a. n.a. (98) (343) 104 29 42 60 COGS n.a. n.a. (3,499) (8,377) (12,740) (20,390) (30,231) (43,175) SG&A n.a. n.a. (951) (2,614) (3,658) (5,231) (7,238) (9,716) Other op.expenses n.a. n.a. 0 0 0 0 0 0 Operating profit n.a. n.a. 1,154 3,545 3,702 3,634 4,900 7,146 Net-interest inc./(exp.) n.a. n.a. (109) (80) (42) 63 52 (76) Assoc/forex/extraord./others n.a. n.a. 55 106 1,282 174 239 329 Pre-tax profit n.a. n.a. 1,100 3,570 4,942 3,871 5,192 7,399 Tax n.a. n.a. (149) (482) (654) (484) (649) (925) Min. int./pref. div./others n.a. n.a. (20) (67) (316) (66) (88) (126) Net profit (reported) n.a. n.a. 931 3,022 3,972 3,321 4,454 6,348 Net profit (adjusted) n.a. n.a. 880 2,957 2,470 3,321 4,454 6,348 EPS (reported)(CNY) n.a. n.a. n.a. n.a. 1.828 1.529 2.050 2.922 EPS (adjusted)(CNY) n.a. n.a. n.a. n.a. 1.137 1.529 2.050 2.922 EPS (adjusted fully-diluted)(CNY) n.a. n.a. n.a. n.a. 1.137 1.529 2.050 2.922 DPS (CNY) n.a. n.a. n.a. n.a. 0.000 0.000 0.000 0.000 EBIT n.a. n.a. 1,154 3,545 3,702 3,634 4,900 7,146 EBITDA n.a. n.a. 1,343 4,324 5,057 6,410 9,698 14,303

Cash flow (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax n.a. n.a. 1,100 3,570 4,942 3,871 5,192 7,399 Depreciation and amortisation n.a. n.a. 189 779 1,355 2,776 4,798 7,157 Tax paid n.a. n.a. (475) (1,560) (1,493) (484) (649) (925) Change in working capital n.a. n.a. (1,103) (317) (573) (114) (1,240) (1,211) Other operational CF items n.a. n.a. 953 (364) (1,890) (213) (262) (218) Cash flow from operations n.a. n.a. 665 2,109 2,341 5,837 7,839 12,202 Capex n.a. n.a. (1,554) (2,801) (7,180) (11,000) (13,000) (15,000) Net (acquisitions)/disposals n.a. n.a. 0 (258) (1,665) 0 0 0 Other investing CF items n.a. n.a. 912 (9,370) 1,209 0 0 0 Cash flow from investing n.a. n.a. (641) (12,428) (7,636) (11,000) (13,000) (15,000) Change in debt n.a. n.a. 202 993 3,055 2,010 2,211 2,432 Net share issues/(repurchases) n.a. n.a. 151 11,132 6,179 5,506 0 0 Dividends paid n.a. n.a. (69) (54) (82) 0 0 0 Other financing CF items n.a. n.a. 157 (1,100) (219) 63 52 (76) Cash flow from financing n.a. n.a. 440 10,971 8,933 7,579 2,263 2,356 Forex effect/others n.a. n.a. 0 0 0 0 0 0 Change in cash n.a. n.a. 463 652 3,638 2,416 (2,898) (442) Free cash flow n.a. n.a. (889) (692) (4,840) (5,163) (5,161) (2,798) Source: FactSet, Daiwa forecasts

Contemporary Amperex Technology (300750 CH): 30 August 2018

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment n.a. n.a. 516 1,166 4,790 7,205 4,307 3,865 Inventory n.a. n.a. 1,042 1,360 3,418 5,997 9,447 13,492 Accounts receivable n.a. n.a. 2,816 7,886 12,377 18,997 28,359 40,784 Other current assets n.a. n.a. 1,130 11,349 12,449 12,873 13,413 14,542 Total current assets n.a. n.a. 5,504 21,761 33,033 45,073 55,526 72,684 Fixed assets n.a. n.a. 1,788 4,954 11,194 19,521 27,827 35,774 Goodwill & intangibles n.a. n.a. 603 722 1,509 1,405 1,301 1,198 Other non-current assets n.a. n.a. 777 1,151 3,927 4,077 4,287 4,581 Total assets n.a. n.a. 8,673 28,588 49,663 70,076 88,941 114,236 Short-term debt n.a. n.a. 1,041 4,394 8,813 13,253 19,045 27,200 Accounts payable n.a. n.a. 1,472 3,173 4,978 8,156 11,790 16,406 Other current liabilities n.a. n.a. 2,836 2,615 4,099 5,991 8,676 12,294 Total current liabilities n.a. n.a. 5,349 10,183 17,890 27,400 39,512 55,901 Long-term debt n.a. n.a. 0 302 2,129 4,139 6,350 8,782 Other non-current liabilities n.a. n.a. 1,825 2,312 3,173 3,173 3,173 3,173 Total liabilities n.a. n.a. 7,175 12,797 23,192 34,712 49,034 67,855 Share capital n.a. n.a. 471 613 1,955 2,172 2,172 2,172 Reserves/R.E./others n.a. n.a. 783 14,875 22,746 31,357 35,811 42,159 Shareholders' equity n.a. n.a. 1,254 15,489 24,701 33,529 37,983 44,332 Minority interests n.a. n.a. 245 302 1,770 1,836 1,924 2,050 Total equity & liabilities n.a. n.a. 8,673 28,588 49,663 70,076 88,941 114,236 EV n.a. n.a. 152,818 155,712 159,180 163,130 173,909 184,770 Net debt/(cash) n.a. n.a. 525 3,530 6,152 10,187 21,088 32,116 BVPS (CNY) n.a. n.a. n.a. n.a. 11.370 15.434 17.484 20.406

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) n.a. n.a. n.a. 160.9 34.4 46.2 44.8 41.7 EBITDA (YoY) n.a. n.a. n.a. 222.0 16.9 26.8 51.3 47.5 Operating profit (YoY) n.a. n.a. n.a. 207.2 4.4 (1.8) 34.8 45.8 Net profit (YoY) n.a. n.a. n.a. 235.9 (16.5) 34.5 34.1 42.5 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. 34.5 34.1 42.5 Gross-profit margin n.a. n.a. 38.6 43.7 36.3 30.2 28.6 28.0 EBITDA margin n.a. n.a. 23.5 29.1 25.3 21.9 22.9 23.8 Operating-profit margin n.a. n.a. 20.2 23.8 18.5 12.4 11.6 11.9 Net profit margin n.a. n.a. 15.4 19.9 12.4 11.4 10.5 10.6 ROAE n.a. n.a. n.a. 35.3 12.3 11.4 12.5 15.4 ROAA n.a. n.a. n.a. 15.9 6.3 5.5 5.6 6.2 ROCE n.a. n.a. n.a. 30.8 12.8 8.1 8.3 9.7 ROIC n.a. n.a. 49.3 28.7 12.4 8.1 8.0 9.0 Net debt to equity n.a. n.a. 41.9 22.8 24.9 30.4 55.5 72.4 Effective tax rate n.a. n.a. 13.6 13.5 13.2 12.5 12.5 12.5 Accounts receivable (days) n.a. n.a. n.a. 131.3 184.9 195.9 204.2 210.4 Current ratio (x) n.a. n.a. 1.0 2.1 1.8 1.6 1.4 1.3 Net interest cover (x) n.a. n.a. 10.6 44.1 87.8 n.a. n.a. 94.5 Net dividend payout n.a. n.a. 0.0 n.a. 0.0 0.0 0.0 0.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

CATL is engaged mainly in the R&D, manufacture and sale of LiBs for EVs. The company is currently the No.1 LiB maker in China by both market share and technology and is set to compete with Korean players globally, with clients including SAIC, BJEV, Geely, Yutong, BMW, VW and Daimler.

Contemporary Amperex Technology (300750 CH): 30 August 2018

No.1 in China and a global player LiB business the key revenue and earnings driver Sales volume to increase on strong domestic demand in 2018-20E China’s No.1 LiB maker, CATL generated 95% of its total revenue from the LiB business in 2017 (83% for with a market share of automotive LiBs and 12% for LiB materials), which was mainly driven by robust sales 27% for 2017 volume growth of NEVs in China. In 2017, China’s total NEV production volume grew by 56% YoY to 811k units, and we expect it to reach 2.2m units by 2020E, with a CAGR of 39% from 2018-20E. Such robust NEV sales indicate strong LiB demand of 105GWh by 2020E, on our forecasts, versus 37GWh in 2017, amid an increasing average battery capacity per vehicle. Given CATL’s leading position, with a market share of 27% in China for 2017, we believe CATL stands to be the biggest beneficiary of China’s LiB market growth. We forecast CATL’s sales volume to expand at a CAGR of 60% over 2018-20E, on its wide client base and ongoing capacity expansion.

China: market NEV production forecasts CATL and market LiB sales volume forecasts GWh 2,500,000 350% 120 50% 300% 2,000,000 100 40% 250% 80 1,500,000 200% 30% 60 1,000,000 150% 20% 40 100% 500,000 20 10% 50% 0 0% 0 0% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E CATL Market CATL Market share China NEV production YoY growth (%)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

CATL: revenue breakdown and forecasts CATL: gross profit breakdown and forecasts

70,000 18,000 16,000 60,000 14,000 50,000 12,000 40,000 10,000 CNYm CNYm8,000 30,000 6,000 20,000 4,000 2,000 10,000 0 0 (2,000) 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E Automotive LiB Energy storage system LiB material Others Automotive LiB Energy storage system LiB material Others

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Client base: rooted in China, reaching the world Client base includes In China, CATL’s NEV OEM customers include both leading commercial vehicle (CV) and major Chinese OEMs passenger vehicle (PV) manufacturers, with its sales of lithium iron phosphate (LFP) and global players batteries mainly to CV makers and nickel cobalt manganese (NCM) batteries mainly to PV makers. For the CV segment, CATL’s past key customers include Yutong Bus (the largest NEV bus player in China), Nanjing Kinglong, Dongfeng and CRRC, while for the PV segment, CATL has supplied batteries to BAIC, Changan and Geely. Going forward, CATL is poised to become a major supplier for SAIC and GAC, through its various JVs with these 2 companies. CATL formed 2 JVs (CATL SAIC and SAIC CATL) with SAIC in May 2017 and 2 JVs (CATL GAC and GAC CATL) with GAC in July 2018, to secure future orders from these 2 giant Chinese automakers.

Contemporary Amperex Technology (300750 CH): 30 August 2018

In addition, CATL is rapidly entering overseas markets as its products gain global recognition. After joining BMW’s supply chain in 2012, CATL became one of the global suppliers for VW Group in March 2018 and Daimler Group in May 2018. CATL has received battery orders from VW for 11 EVs produced under VW’s MEB EV platform, whereby from 2020-22, VW will import 3 of the EV models to China, while 8 will be produced in China. Meanwhile CATL will supply battery cells to Daimler’s global factories to help Daimler reach its target NEV penetration of 15-25% by 2025E. Moreover, CATL plans to build its first overseas plant in Germany and targets to commence operations by 2021E.

CATL: share of sales to top clients Client Listing code 2015 2016 2017 Yutong Bus 600066 CH 46.10% 34.05% 18.54% Pride Power Not listed 12.42% 18.61% 11.51% Geely 175 HK n.a 9.80% 9.45% Kinglong Bus 600686 CH 15.61% 9.27% 6.55% Dongfeng 489 HK n.a. n.a 5.85% Shanshan 600884 CH 4.30% n.a n.a CRRC 1766 HK 4.19% 7.77% n.a

Source: Company, Daiwa

CATL: NEV plans of major clients Customer NEV Plan China customers Geely NEV (including MHEV) sales volume share to reach 90% of total sales by 2020E (65% for PHEVs and MEVs, 25% for BEVs), indicating 1.8m units in total SAIC SAIC plans to invest CNY20bn to develop EV products and aims to launch 30 NEV products (17 models for HEV, 13 models for BEV); NEV sales volume target of 600k units by 2020 BJEV NEV sales volume target of 650k units by 2020 GAC NEV sales volume target of 200k units by 2020

Global customers BMW 25 NEV models by 2025E, including 12 BEV models; sales volume of NEVs of 500k units by 2020E; a sales volume share of NEVs of 15-25% by 2025E VW Has established a JV with JAC for NEV production in China; 13 NEV models by 2020; target for NEV sales volumes of 3m units by 2025 Daimler 50 NEV models by 2022, including 10 BEV models; Sales volume share of BEVs to 15-25% by 2025 Renault-Nissan Alliance Has established a JV with Dongfeng Nissan Nissan plans to launch 20 EV models in China in the next 5 years PSA PSA plans to release one BEV model by 2020 and develop 11 EV models by 2023

Source: Company, Daiwa

Aggressive capacity expansion going forward CATL’s LiB capacity to Backed by a strong order book, CATL has launched an aggressive capacity expansion reach 54GWh by 2020E plan, which targets battery capacity of 54GWh by 2020E, up from 14GWh in 2017, with NCM and LFP batteries accounting for 75% and 25% of capacity, respectively. Within the NCM segment, CATL mainly produces prismatic NCM622 batteries for domestic clients, and it plans to start producing NCM811 batteries by the end of 2018, ahead of global players. For pouch NCM batteries, 2GWh of capacity is scheduled to come online at CATL’s Ningde factory in 2019. In addition, the company expects its overseas plant in Germany to commence operations in 2021 with an annual capacity of 14GWh. In our view, this ongoing capacity expansion will support robust sales growth for CATL over 2018-20E.

Contemporary Amperex Technology (300750 CH): 30 August 2018

CATL: capacity expansion by battery type CATL: China capacity expansion by plant MWh Capacity (MWh) 2016 2017 2018E 2019E 2020E 60,000 Ningde factory

LFP 6,500 7,100 7,100 7,100

50,000 NCM 8,500 14,500 22,500 30,500

Nieyang factory 40,000 NCM 5,000 10,000 10,000

Qinghai factory 30,000 LFP 2,000 4,500 6,300 6,300

20,000 Total 7,600 17,000 31,100 45,900 53,900

10,000

0 2016 2017 2018E 2019E 2020E LFP NCM

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Greater business scale to offset pricing pressure LiB gross margin decline likely to moderate and stabilise by 2020E We forecast CATL’s LiB In 2017, CATL’s LiB ASP fell by 32% to CNY1.41/Wh as OEMs pushed their suppliers, like sales gross margin to CATL, for heavy discounts in order to improve their profitability and offset the negatives reach 28% in 2020E, from the NEV subsidy cut. As we expect the NEV subsidy to be further cut in both 2019 down from 36% in 2017 and 2020, CATL’s gross margin looks likely to remain under pressure. However, we see the company’s gross-margin decline moderating over 2018-20E, due to: 1) a lower subsidy cut in dollar terms in 2019-20E, 2) a decline in battery component prices, and 3) its considerable business scale. We forecast CATL’s LiB sales gross margin to reach 28% in 2020E, versus 35% in 2017. According to our estimates, CATL’s LiB ASP will reach CNY0.92/Wh by 2020, well below the Chinese government’s 2020 target of CNY1/Wh, and close to the 2025 target of CNY0.9/Wh. We expect the intense pricing pressure to be lifted from 2020, and the company to see continuous cost savings thereafter, leading to a stabilisation of its gross margin in 2020.

CATL: unit selling price and unit cost CATL: margins and forecasts

YoY Growth 50% 25% 2.5 0% 45% (5%) 2.0 40% 20% (10%) 35% 1.5 (15%) 30% 15% CNY/Wh 1.0 (20%) 25% (25%) 20% 10% 0.5 (30%) 15% 10% 5% 0.0 (35%) 2015 2016 2017 2018E 2019E 2020E 5% 0% 0% Selling price per Wh Cost per Wh 2015 2016 2017 2018E 2019E 2020E Selling price YoY Cost YoY Gross margin Groos margin of automotive LiB

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Net margin set to bottom in 2019E Nevertheless, we forecast CATL’s net margin to reach a trough of 10.5% in 2019E, versus 12.4% in 2017, and gradually recover thereafter, mainly thanks to the company’s considerable business scale. We assume CATL’s selling expenses and administrative expenses (as a percentage of revenue) to decline to 3.8% and 12.4% by 2020E, from 4% and 14.3% in 2017, respectively, which we view as achievable, assuming its LiB sales volume increases from 12GWh in 2017 to 47GWh in 2020E.

Contemporary Amperex Technology (300750 CH): 30 August 2018

CATL: earnings and forecasts CNYm 2015 2016 2017 2018E 2019E 2020E Revenue 5,703 14,879 19,997 29,226 42,326 59,977 Gross profit 2,204 6,502 7,257 8,836 12,096 16,802 Gross margin 38.6% 43.7% 36.3% 30.2% 28.6% 28.0% Selling expenses -331 -628 -794 -1,315 -1,778 -2,279 as % of revenue 5.8% 4.2% 4.0% 4.5% 4.2% 3.8% R&D -281 -1,081 -1,603 -2,192 -3,090 -4,198 as % of revenue 4.9% 7.3% 8.0% 7.5% 7.3% 7.0% Administration expense -340 -905 -1,261 -1,724 -2,370 -3,239 as % of revenue 6.0% 6.1% 6.3% 5.9% 5.6% 5.4% Core net income 880 2,957 2,470 3,321 4,454 6,348 Core net margin 15.4% 19.9% 12.4% 11.4% 10.5% 10.6%

LiB sales volume (MWh) 2,187 6,798 11,844 19,543 31,269 46,904 LiB ASP (CNY/Wh) 2.28 2.06 1.41 1.15 1.00 0.92 LiB unit cost (CNY/Wh) 1.33 1.13 0.91 0.79 0.70 0.65

Source: Company, Daiwa forecasts

Contemporary Amperex Technology (300750 CH): 30 August 2018

Financial review Strong earnings growth outlook for 2018-20E We forecast net profit to We forecast CATL’s core net profit to see strong growth of 34% YoY to CNY3.3bn in 2018E rise at a CAGR of 38% in (and at a CAGR of 38% over 2018-20E) compared to a 16% YoY decline in 2017 which 2018-20E, driven by was due mainly to selling price cuts by OEM clients. Although CATL is likely to remain robust volume growth under pricing pressure in 2018-20E, we expect the negatives to be offset by strong volume growth and its large business scale. We forecast its net profit to rise by a solid 34% YoY for 2018E, backed by 46% YoY revenue growth, with LiB shipments up 65% YoY and its ASP down 18% YoY.

We forecast a blended gross margin of 30.2% for 2018E, versus 36.3% for 2017 and 43.7% for 2016. Our forecasts call for a moderating margin decline going forward, as we estimate the company can attain a unit cost reduction of 11% every year through better economies of scale and lower component costs, which would partially also offset the ASP decline. We look for a net margin of 11.4% for 2018E, down from 12.4% for 2017, but see it bottoming in 2019 and stabilising in 2020E and thereafter due to a reduction in selling expenses and administration expenses (as a percentage of revenue).

CATL: net profit growth forecasts CATL: revenue growth forecasts YoY Growth YoY Growth 7,000 250% 70,000 180% 236% 161% 160% 6,000 200% 60,000 140% 5,000 50,000 150% 120% 4,000 40,000 100% CNYm 100% CNYm 3,000 30,000 80% 50% 60% 2,000 34% 34% 43% 20,000 46% 45% 42% 40% 0% 34% 1,000 -16% 10,000 20% 0 (50%) 0 0% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E Net income YoY Growth Revenue YoY Growth

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Financial summary CATL had net cash of CNY4.8bn as at the end of 2017, with its total debt ratio decreasing from an average of 32% in 2015-16 to 25% at end-2017. The company had accounts receivable days of around 130-190 days per year during 2015-17 (slightly lower than peers Guoxuan, Optimum and Sichuan Chengfei), as payments from OEMs are typically spread over an average of 2 years (60% of payments are paid within 1 month of delivery, while the remainder may depend on when OEMs receive the subsidy from the government). We forecast CATL’s accounts receivable days to gradually decrease over 2018-20E as the NEV subsidy cuts continue.

The company generated positive operating cash flow during 2015-17, and we expect operating cash flow to grow rapidly in 2018-20, on the back of a strong net-profit CAGR of 38%. However, due to CATL’s considerable capex plans, the company is likely to seek new funding through financing activities over 2018-21E to meet future demand, even though it just raised CNY5.5bn from an A-share listing on 11 June 2018.

Contemporary Amperex Technology (300750 CH): 30 August 2018

CATL: turnover days and cash conversion cycle CATL: liquidity analysis Days (x) 200 2.5 Current Ratio (X) 180 160 2.0 140 120 1.5 100 80 1.0 60 40 0.5 20 0 0.0 2016 2017 2015 2016 2017 Inventory days A/R days A/P days Operating cycle days Current Ratio (X)

Source: Company, Daiwa Source: Company, Daiwa

CATL: cash flow and capex analysis CATL: debt ratio analysis CNY m 45% 4,000 40%

2,000 35% 30% 0 25% (2,000) 20% (4,000) 15% 10% (6,000) 5% (8,000) 0% 2015 2016 2017 2015 2016 2017 Cash flow from operation activities Capital expenditure Debt ratio

Source: Company, Daiwa Source: Company, Daiwa

Contemporary Amperex Technology (300750 CH): 30 August 2018

Valuation and recommendation Valuation methodology We initiate coverage of We initiate coverage of CATL with a Buy (1) rating and 12-month target price of CNY86.0, CATL with a Buy (1) based on a 2018-19E average PER of 48x, implying 23% upside potential. rating, based on a 48x 2018-19E average PER, A-share listed battery companies, most of which have high exposure to the LiB business, representing a 1.3x PEG are trading currently at an average PEG of 1.0x. We are comfortable with our target multiple of 48x, which indicates a PEG of 1.3x, given: our earnings CAGR forecast of 38% over 2018-20E; the company’s top ranking in terms of LiB battery shipments among Chinese or even global battery players; and its superior profitability thanks to its high operational efficiency and ability to self-source components across the LiB value chain.

With our outlook for strong growth in NEV battery sales in China, we believe CATL stands to benefit in the long run. The new NEV credit scheme and the long-term plan for China to ban internal combustion engine (ICE) cars will likely force many auto makers to speed up their NEV development, increasing the demand for EV batteries. As the leading EV battery maker in China, CATL stands to be a major beneficiary, in our view. CATL’s technology is also advanced globally, and it has entered the supply chains of most of the leading global OEMs. As such, we initiate coverage with a Buy (1) rating.

CATL: share-price performance updated (CNY) 100 90 80 70 60 50 40 30 20 10 0 Jun-18 Jun-18 Jun-18 Jun-18 Jul-18 Jul-18 Jul-18 Jul-18 Aug-18 Aug-18 Aug-18 Aug-18

Source: Bloomberg

CATL: A-share/global peers PEG chart Name Market Cap 90 Day Average Turnover PER (x) Earnings CAGR (%) PEG (x) USDm USDm FY18E FY19E FY17-FY20E FY17-FY20E China A share - listed Guoxuan* 2,199 25.3 17.6 15.7 19.6 0.9 CATL* 22,294 277.8 45.8 34.1 37.0 1.1 Shanshan 2,810 93.8 19.2 16.0 16.4 1.1 Easpring 1,551 n.a. 35.1 26.4 23.8 1.3 EVE 1,695 36.0 22.6 17.4 28.3 0.7 Weighted average 39.5 29.8 32.7 1.0 High 45.8 34.1 37.0 1.3 Low 17.6 15.7 16.4 0.7 Median 22.6 17.4 23.8 1.1

Foreign players Panasonic 29,645 95.8 15.4 12.2 22.3 0.6 Samsung SDI* 14,589 68.3 18.0 13.0 33.0 0.5 LG Chem* 23,117 88.8 11.7 9.6 17.3 0.6 Weighted average 15.0 11.6 24.2 0.6 High 18.0 13.0 33.0 0.6 Low 11.7 9.6 17.3 0.5 Median 15.4 12.2 22.3 0.6 Source: Bloomberg, Wind, *Daiwa forecasts; note: based on prices as of close on 30 August 2018

Contemporary Amperex Technology (300750 CH): 30 August 2018

Global battery stocks: valuations Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 30-Aug-18 FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E China A share - listed GUOXUAN HIGH-TECH CO LTD-A * 002074 CH CNY 13.22 Buy 17.6 15.7 1.7 1.5 12.1 10.7 0.8 0.9 9.9 10.2 CONTEMPORARY AMPEREX TECHN-A * 300750 CH CNY 69.99 Buy 45.8 34.1 4.5 4.0 25.4 17.9 n.a. n.a. 11.4 12.5 SHAANXI J&R OPTIMUM ENERGY-A 300116 CH CNY 2.06 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. EVE ENERGY CO LTD-A 300014 CH CNY 13.54 NR 22.6 17.4 3.4 2.9 16.9 13.1 1.0 1.3 14.7 16.6 NINGBO SHANSHAN CO LTD-A 600884 CH CNY 17.10 NR 19.2 16.0 1.8 1.6 15.8 12.5 0.4 0.6 9.6 10.3 BEIJING EASPRING MATERIAL-A 300073 CH CNY 24.26 NR 35.1 26.4 4.0 3.6 n.a. n.a. 0.6 0.8 12.3 15.0 ZHEJIANG NARADA POWER SOUR-A 300068 CH CNY 12.56 NR 17.4 13.3 1.7 1.5 15.7 12.1 1.7 2.1 9.7 11.3 SICHUAN CHENGFEI INTEGRAT -A 002190 CH CNY 17.51 NR n.a. n.a. 4.0 4.4 82.0 n.a. n.a. n.a. n.a n.a SHENZHEN DESAY BATTERY TEC-A 000049 CH CNY 26.60 NR 15.7 12.6 3.1 2.6 10.2 8.9 1.2 1.2 22.2 21.2 Weighted average 36.0 27.2 3.8 3.4 22.4 14.7 0.3 0.3 11.0 12.0 High 45.8 34.1 4.5 4.4 82.0 17.9 1.7 2.1 22.2 21.2 Low 15.7 12.6 1.7 1.5 10.2 8.9 0.4 0.6 9.6 10.2 Median 19.2 16.0 3.2 2.7 15.8 12.3 0.9 1.0 11.4 12.5

Foreign players PANASONIC CORP 6752 JP JPY 1,346.50 Hold 15.4 12.2 1.9 1.7 5.9 4.9 2.2 2.5 12.7 14.2 SAMSUNG SDI CO LTD * 006400 KS KRW 235,500 Buy 18.0 13.0 1.2 1.1 9.0 5.9 0.4 0.4 7.2 9.0 LG CHEM LTD * 051910 KS KRW 363,500 Buy 11.7 9.6 1.4 1.3 5.7 4.8 1.9 2.5 12.9 14.2 Weighted average 18.1 13.8 2.1 1.9 17.3 8.8 1.5 1.8 11.9 13.3 High 45.8 34.1 4.5 4.4 82.0 17.9 4.3 5.2 25.5 26.1 Low 4.2 2.9 0.4 0.3 3.6 3.2 0.4 0.4 3.1 8.1 Median 16.6 12.8 1.7 1.5 11.1 8.9 1.2 1.3 10.7 11.9 Source: Bloomberg, *Daiwa forecasts

Contemporary Amperex Technology (300750 CH): 30 August 2018

Risks Main risks The main risk to our Greater-than-expected pricing pressure from OEMs stance is higher-than- The key downside risk to our call would be pricing pressure from NEV OEMs, which are expected ASP pressure seeking to reduce overall costs to offset subsidy cuts in 2017 and 2018, and likely 2019 and 2020 too. Hence, we believe OEMs will still push for discounts in order to realise better profitability. If OEMs request bigger-than-expected discounts in 2019-20E, industry profitability as a whole is likely to be affected. There is also a risk that intensified competition among LiB makers will result in pricing cuts as companies jostle for market share.

Lower-than-expected NEV demand, especially for NEV buses In our view, CATL stands to benefit from the secular growth of NEV model sales in China over 2018-20, which benefits from supportive government policies. However, at present, the company is still highly reliant on NEV bus clients and is transitioning to providing more products to NEV PV clients. In the short term, NEV bus demand will remain the key driver of revenue and any shortfall in this segment will detract from top-line growth.

Secondary risks Failure to reduce LiB costs CATL can reduce its unit We expect CATL to deliver unit cost reduction for LiBs at a rate of 11% annually over 2018- cost by leveraging 20E, benefiting from its efforts in building capacity of core components and raw materials ongoing technology sourced internally, as well as via improving the energy density of LiBs. Nevertheless, if advancement and CATL fails to attain satisfactory cost reductions, it will be unable to offset unit selling price improving operating declines and profitability will be negatively impacted. efficiency Aggressive capacity expansion resulting in a more competitive landscape Currently, the lithium-ion battery space for NEVs is dominated by a handful of players, accounting for c.70% of the market in China. While there are many small LiB manufacturers, most cannot get into the supply chain of major NEV clients given the poor quality of their products. We expect these small players to be increasingly consolidated by the major players over the next 1-2 years and larger LiB makers, such as CATL and Guoxuan, to benefit from market-share gains. However, there is a risk the large LiB makers expand capacity aggressively, leading to a harsher competitive environment and further pricing pressure, which is bad for all players in the LiB segment.

Market disruption due to new LiB technology or new entrants LiB technology has advanced rapidly over the past 10 years, and OEMs have taken advantage of the lower cost of developing EV models. There is a risk that new technologies are developed and cause disruption within the space, or are adopted by new entrants allowing them to quickly gain market share or supersede existing players like CATL.

Contemporary Amperex Technology (300750 CH): 30 August 2018

Company background Company milestones CATL focuses on R&D, CATL was established in 2011 and is headquartered in Ningde, Fujian, China. Rooted in production, and sales of China, CATL boasts a global deployment and is devoted to driving new energy innovation EV battery and energy throughout the world. It currently develops R&D and has manufacturing capabilities of full storage battery systems industry chains in vehicle and energy storage batteries fields, including upstream materials, battery cells, battery management systems, battery recycling and reuse.

CATL: company milestones Year Event 2011 Established Contemporary Amperex Technology Limited from a department of ATL (a consumer electronic battery maker) 2012 Established Contemporary Amperex Technology Limited (Qinghai) 2014 Established Contemporary Amperex Technology GmbH (Munich) Established Beijing Li Contemporary Amperex Technology Limited Established Contemporary Amperex Technology Limited (Shanghai) 2015 Modified to a joint stock limited company Purchased Guangdong Brunp Recycling Technology Limited 2016 Established CATL Academicians and Specialists Workstation Established Contemporary Amperex Technology Limited (Jiangsu) 2017 Founded branches in France, USA, Canada and Japan. Cooperated with SAIC to found United Auto Battery Co.

Source: Company website, Daiwa

CATL: achievements Year Event 2013 CATL contracted the government's New Energy Vehicle Technology Innovation, a project in China's 12th Five-Year Plan 2014 Launched Brilliance BMW Zinoro 1E - the first model cooperated with BMW 2015 Selected in the catalogue of “Vehicle Power Battery Industry Standard” by the China Ministry of Industry and Information 2016 The “Academician and Specialists Workstation” approved by government was established Successfully applied China’s 13th Five-Year-Plan important project: New Energy Automobile Specific Project and Intelligent Electric Gird Specific Project BMW X1 delivered from the assembly line under the witness of Chancellor Merkel NEV model EU260 containing CATL’s Li-ion battery and manufactured by BAIC Group won “Best Performance in Power Endurance” in the Tour of Qinghai Lake Race 2017 CATL was one of the first companies compliant with Standard Conditions for Li-ion Battery Industry by the China Ministry of Industry and Information CATL after-sales service system was certificated by China's national 5-star standard

Source: Company website, Daiwa

CATL: products performance Nominal Voltage Operating Voltage Range Operating Temperature Maximum Continuous Maximum Continuous Segment Capacity Chemistry (V) (V) Range (℃) Charge Rate Discharge Rate PV 10Ah NCM 3.6 2.7-4 -30-55 37Ah NCM 3.65 2.8-4.2 -30-55 1C 3C 72Ah NCM 3.65 2.8-4.2 -30-55 1.5C 2C 43Ah Fast-charging NCM 3.66 2.8-4.25 -30-55 4C 4C Bus 50Ah LFP 3.2 2.5-3.65 -30-60 5.2C 3C 60Ah LFP 3.2 2.5-3.65 -30-60 5.2C 3C 240Ah LFP 3.2 2.5-3.65 -30-60 1C 1.5C 92Ah Fast-Charging LFP 3.2 2.5-3.65 -30-60 3.2C 1.5C 92Ah PHEV LFP 3.2 2.5-3.65 -30-60 1C 2C Truck 100Ah LFP 3.2 2.8-3.65 -30-60 1C 1C 120Ah LFP 3.2 2.8-3.65 -30-60 1C 1C 140Ah LFP 3.2 2.8-3.65 -30-60 1C 1C Source: Company website, Daiwa

Contemporary Amperex Technology (300750 CH): 30 August 2018

Shareholder structure and management profile The controlling shareholders are Zheng Yuqun and Li Ping, who in total own around 31.46% of the shares. Born in 1968, Zheng Yuqun is also the chairman and CEO of CATL. Born in 1968, Li Ping is the vice chairman.

CATL: shareholder structure

Ruiting Ningbo Other A share Investment Li Ping Huang Shilin Lianchuang CMB No.3 CMB Power CMBI holders (Zheng Yuqun) 26.31% 5.15% 12.01% 7.65% 3.32% 3.08% 0.18% 42.3%

CATL

60.42% 100% 51% 54.55% 100% 100% 100% 95% 100% 51% 100% 100% 100% 100% United Shidai Shidai Beijing Hong Qingha Jiangsu Pingnan Ningde Dongguan Ningde Wending Ningde CATL Auto Lithium Supply Lithium Kong i Shidai Shidai Shidai Runyuan Runyuan Hesheng Investment Runfeng GmbH Battery Power Chain Shidai Branch

100% 100% 100% 100% 100%

Guangdong France US Canada Japan Brunp Branch Branch Branch Branch

100% 100% 100%

France US Canada Branch Branch Branch h 100% Brunp Auto

Source: Daiwa, Company

CATL: global footprint

Source: Daiwa, Company website

China Industrials 30 August 2018

(002074 CH) Guoxuan High-Tech Guoxuan High-T ech

Target price: CNY17.80 (from CNY22.00) Share price (30 Aug): CNY13.22 | Up/downside: +34.6%

Likely to gain market share ahead Jay Lu (852) 2848 4970  We expect gross margins to decline but sales volumes to grow in [email protected] 2H18 Market share likely to reach 11% by 2020E Kelvin Lau (852) 2848 4467  Reiterating our Buy (1) rating; cutting TP to HKD17.8 [email protected]

What's new: Guoxuan released its 1H18 results on 29 August 2018; its Forecast revisions (%) core earnings growth of 1% YoY was below our estimate, mainly due to Year to 31 Dec 18E 19E 20E lower-than-expected sales volume. As such, we cut our TP to HKD17.8 Revenue change (18.7) (15.3) (16.5) Net profit change (0.4) (6.1) 9.3 from HKD22.0 after applying a new target PER multiple of 22x (from 26x). Core EPS (FD) change (0.4) (6.1) 9.3 Source: Daiwa forecasts What's the impact: gross margin likely to be under pressure, but sales volume should grow in 2H18E. In 1H18, Guoxuan reported weak Share price performance revenue growth of 9% YoY, likely due to high pricing pressure and lower- (CNY) (%) than-expected sales volume. Its 1H18 gross margin came in at 33.7%, 27 115 down from 36.8% in 1H17 on a 20% YoY ASP decline, based on our 23 103 20 90 estimate, despite an average cost reduction of 9% YoY. For 2H18E, we see 16 78 sales volume growth being led by capacity expansion. Management targets 12 65 a gross margin of 33% and sales volume of 5GWh in 2018. Aug-17 Nov-17 Feb-18 May-18 Guoxuan (LHS) Relative to SZASHR Index (RHS) 2018-20E: ongoing market consolidation positive for Guoxuan. We believe most of the LiB makers in China are likely to exit the market in the 12-month range 12.40-26.62 next 3 years due to lower profitability or even losses in a high pricing Market cap (USDbn) 2.20 pressure environment. However, we expect Guoxuan to be one of the few 3m avg daily turnover (USDm) 22.06 Shares outstanding (m) 1,137 survivors, backed by its relatively advanced technology development, and Major shareholder Mr. Li Zhen (34.2%) eventually benefit by gaining market share from weaker rivals. We also expect Guoxuan to enter into the supply chains of more leading Chinese Financial summary (CNY) NEV makers or even JVs in China and capture market share from CATL, Year to 31 Dec 18E 19E 20E as we see OEMs diversifying their LiB suppliers. As such, we look for Revenue (m) 6,243 8,869 12,014 Guoxuan’s market share in China to reach 11% by 2020E from 7% in 2017. Operating profit (m) 875 1,040 1,289 Net profit (m) 856 956 1,139 Core EPS (fully-diluted) 0.753 0.841 1.002 Earnings forecast revisions. We lower our 2018-19E EPS by 0.4-6% EPS change (%) 28.4 11.8 19.1 after assuming lower sales volumes, offset slightly by our lower selling Daiwa vs Cons. EPS (%) (6.6) (8.8) 1.1 PER (x) 17.6 15.7 13.2 expenses and tax rate of 12-13% (from 15%) which have a greater impact Dividend yield (%) 0.8 0.9 1.0 on 2020E . We cut our 2018-20E sales volume to 4.1-11.1GWh from 5.1- DPS 0.102 0.114 0.136 13GWh to factor in a slower-than-expected capacity expansion in 1H18. PBR (x) 1.7 1.5 1.4 EV/EBITDA (x) 12.1 10.7 9.3 ROE (%) 9.9 10.2 11.0 What we recommend: We reiterate our Buy (1) rating, but cut our 12- Source: FactSet, Daiwa forecasts month TP to CNY17.80 (from CNY22.00). We now apply a new target PER of 22x, from 26x (in line with its rolling past 3-year average PER), to our average 2018-19E EPS (unchanged), as we now see a slower earnings growth profile over the next 2 years. Our new target PER implies a PEG of 1.1x (based on 2017-20E EPS CAGR), which we view as fair vs. with its peers’ average of 1.0x, given Guoxuan’s advanced technology development and better client base. Risks: worse-than-expected sales volume and margins.

How we differ: Our 2018-19E EPS are 7-9% below the consensus, which we attribute to the slower-than-expected capacity expansion over 1H18.

See important disclosures, including any required research certifications, beginning on page 52

Guoxuan High-Tech (002074 CH): 30 August 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automotive LiB - sales volume (GWh) 0.3 0.4 1.0 2.0 2.4 4.1 7.0 11.1 Automotive LiB - sales volume YoY 33 67 136 99 20 68 72 57 Growth (%) Automotive LiB - ASP (CNY/Wh) 2.87 2.28 2.08 1.99 1.66 1.32 1.13 0.99 Automotive LiB - ASP YoY Growth (%) n.a. (21) (9) (4) (17) (20) (15) (12) Automotive LiB - capacity year end 1.0 1.0 2.5 3.5 7.5 14.5 19.0 22.0 (GWh)

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automotive LiB 749 994 2,135 4,075 4,061 5,427 7,962 10,984 Transmission and distribution 771 906 610 683 777 816 907 1,030 equipment Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 1,520 1,900 2,745 4,758 4,838 6,243 8,869 12,014 Other income (60) (85) (104) (124) (233) (37) (53) (72) COGS (882) (1,142) (1,499) (2,525) (2,945) (4,176) (6,224) (8,610) SG&A (278) (322) (482) (960) (981) (1,155) (1,552) (2,042) Other op.expenses 0 (45) (37) (77) (309) 0 0 0 Operating profit 301 306 623 1,071 371 875 1,040 1,289 Net-interest inc./(exp.) (43) (41) (21) (41) (38) (51) (89) (129) Assoc/forex/extraord./others 52 79 79 167 661 150 150 150 Pre-tax profit 310 344 680 1,197 994 973 1,100 1,310 Tax (48) (51) (93) (165) (154) (117) (143) (170) Min. int./pref. div./others (14) (11) (3) (2) (2) (1) (1) (1) Net profit (reported) 248 282 585 1,031 838 856 956 1,139 Net profit (adjusted) 248 237 548 954 529 856 956 1,139 EPS (reported)(CNY) 0.283 0.321 0.667 1.177 0.946 0.753 0.841 1.002 EPS (adjusted)(CNY) 0.283 0.270 0.625 1.089 0.598 0.753 0.841 1.002 EPS (adjusted fully-diluted)(CNY) 0.283 0.270 0.625 1.089 0.586 0.753 0.841 1.002 DPS (CNY) 0.000 0.009 0.150 0.150 0.100 0.102 0.114 0.136 EBIT 301 306 623 1,071 371 875 1,040 1,289 EBITDA 340 356 691 1,199 630 1,176 1,470 1,873

Cash flow (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 310 344 680 1,197 994 973 1,100 1,310 Depreciation and amortisation 39 50 67 128 258 302 431 584 Tax paid 0 0 0 0 0 (117) (143) (170) Change in working capital (371) (242) 85 234 (1,045) 294 391 426 Other operational CF items 188 118 (312) (285) (307) 115 147 181 Cash flow from operations 166 270 520 1,275 (100) 1,568 1,926 2,331 Capex (200) (234) (558) (1,307) (1,307) (2,270) (2,635) (3,073) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items (49) 4 58 (532) (388) 0 0 0 Cash flow from investing (249) (230) (500) (1,840) (1,696) (2,270) (2,635) (3,073) Change in debt 0 0 (396) 743 743 505 530 557 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid 0 0 (37) (195) (195) (114) (116) (130) Other financing CF items 34 116 1,543 355 3,725 (115) (147) (181) Cash flow from financing 34 116 1,110 903 4,274 276 267 246 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (50) 156 1,131 338 2,478 (426) (442) (496) Free cash flow (34) 36 (38) (33) (1,407) (702) (709) (743) Source: FactSet, Daiwa forecasts

Guoxuan High-Tech (002074 CH): 30 August 2018

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 500 592 1,723 2,062 4,533 4,107 3,665 3,169 Inventory 284 267 489 630 1,515 2,148 3,201 4,429 Accounts receivable 818 1,317 1,836 2,716 4,397 5,674 8,061 10,919 Other current assets 353 377 508 499 742 773 830 899 Total current assets 1,955 2,553 4,556 5,908 11,187 12,702 15,758 19,415 Fixed assets 677 887 1,358 2,722 3,637 5,223 7,056 9,185 Goodwill & intangibles 269 322 307 529 562 944 1,316 1,677 Other non-current assets 339 307 492 1,056 1,710 1,710 1,710 1,710 Total assets 3,240 4,069 6,713 10,215 17,097 20,579 25,840 31,987 Short-term debt 294 328 540 754 821 1,164 1,735 2,400 Accounts payable 353 528 923 1,710 2,543 3,606 5,375 7,435 Other current liabilities 784 1,061 1,282 1,849 2,854 3,682 5,231 7,086 Total current liabilities 1,432 1,917 2,745 4,314 6,217 8,452 12,341 16,921 Long-term debt 200 275 648 1,133 1,614 2,119 2,649 3,206 Other non-current liabilities 56 87 279 809 1,011 1,011 1,011 1,011 Total liabilities 1,688 2,280 3,671 6,255 8,842 11,582 16,001 21,138 Share capital 1,268 1,268 1,268 876 1,137 1,137 1,137 1,137 Reserves/R.E./others 196 473 1,748 3,060 7,094 7,836 8,676 9,684 Shareholders' equity 1,464 1,741 3,016 3,936 8,230 8,972 9,812 10,821 Minority interests 88 48 26 24 25 26 27 28 Total equity & liabilities 3,240 4,069 6,713 10,215 17,097 20,579 25,840 31,987 EV 15,108 15,086 14,517 14,875 12,953 14,228 15,772 17,492 Net debt/(cash) (6) 11 (535) (175) (2,099) (824) 719 2,437 BVPS (CNY) 1.670 1.986 3.442 4.492 7.241 7.894 8.633 9.520

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) n.a. 25.0 44.5 73.3 1.7 29.0 42.1 35.5 EBITDA (YoY) n.a. 4.6 94.1 73.7 (47.5) 86.8 25.0 27.4 Operating profit (YoY) n.a. 1.6 103.8 71.9 (65.3) 135.6 18.8 24.0 Net profit (YoY) n.a. (4.5) 131.2 74.2 (44.5) 61.6 11.8 19.1 Core EPS (fully-diluted) (YoY) n.a. (4.5) 131.2 74.2 (46.2) 28.4 11.8 19.1 Gross-profit margin 42.0 39.9 45.4 46.9 39.1 33.1 29.8 28.3 EBITDA margin 22.4 18.7 25.2 25.2 13.0 18.8 16.6 15.6 Operating-profit margin 19.8 16.1 22.7 22.5 7.7 14.0 11.7 10.7 Net profit margin 16.3 12.5 20.0 20.1 10.9 13.7 10.8 9.5 ROAE 33.9 14.8 23.0 27.5 8.7 9.9 10.2 11.0 ROAA 15.3 6.5 10.2 11.3 3.9 4.5 4.1 3.9 ROCE 29.4 13.8 18.8 21.3 4.5 7.6 7.8 8.4 ROIC 16.4 15.6 25.0 29.4 6.3 10.7 9.7 9.4 Net debt to equity net cash 0.7 net cash net cash net cash net cash 7.3 22.5 Effective tax rate 15.6 14.9 13.7 13.7 15.5 12.0 13.0 13.0 Accounts receivable (days) n.a. 205.1 209.6 174.6 268.3 294.4 282.6 288.3 Current ratio (x) 1.4 1.3 1.7 1.4 1.8 1.5 1.3 1.1 Net interest cover (x) 7.0 7.5 29.0 26.1 9.7 17.0 11.6 10.0 Net dividend payout 0.0 2.7 22.5 12.8 10.6 13.6 13.6 13.6 Free cash flow yield n.a. 0.2 n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Guoxuan Hi-Tech is mainly engaged in the R&D, manufacture and sale of LiBs. The company is currently poised as a top-5 LiB maker in China, with clients including Zhongtong Bus, Nanjing Kinglong, BAIC EV and Jianghuai EV.

Guoxuan High-Tech (002074 CH): 30 August 2018

Guoxuan: 1H18 results summary 1H17 1H18 YoY %

Gross sales 2,397 2,607 8.8% Gross profit 882 879 -0.4% Selling and distribution costs (177) (160) -9.6% Administrative expenses (264) (297) 12.2% Net income 406 408 0.5% ppts

Gross margin 36.8% 33.7% -3.1 Net margin 16.9% 15.7% -1.3

Source: Company

China Consumer Discretionary 30 August 2018

(1211 HK) BYD BYD

Target price: HKD67.00 (from HKD75.00)

Share price (30 Aug): HKD48.15 | Up/downside: +39.1%

Likely to continue to lead the NEV market in 2018-20E Kelvin Lau (852) 2848 4467  2H18 likely to see earnings recovery on higher NEV PV subsidies [email protected]  Self-made LiB likely to underpin better profitability in 2018-20E Jay Lu (852) 2848 4970  Reiterating our Buy (1) rating; cutting our TP to HKD67 [email protected]

What's new: BYD held an analyst briefing about its 2Q18 results on 30 Forecast revisions (%) August. Its net profit for the quarter declined by 66% YoY, mainly due to the Year to 31 Dec 18E 19E 20E NEV subsidy cut. As such, we cut our TP to HKD67 (from HKD75) to reflect Revenue change - (3.5) (5.1) Net profit change (40.6) (49.3) (46.3) BYD’s lower-than-expected gross margin in 2Q18, but we reiterate our Buy Core EPS (FD) change (40.6) (49.3) (46.3) (1) rating as we look for an earnings recovery in 2H18. Source: Daiwa forecasts

What's the impact: 2H18 likely to bring earnings recovery. In 2Q18, Share price performance

BYD’s net income came in at CNY377m, down by 66% YoY and below our (HKD) (%) prior estimate. The gross margin was squeezed to 13.7% in 2Q18 (vs. 85 170 18.9% in 2Q17), mainly due to the NEV subsidy cut during the transition 74 148 63 125 period. However, we expect BYD’s NEV business to recover in 2H18, on: 51 103

1) a higher NEV subsidy for certain EV models (eg, BYD’s e6 is likely to 40 80 receive CNY99k/vehicle in 2H18, vs. CNY46k/vehicle before 11 June Aug-17 Nov-17 Feb-18 May-18 2018), and 2) stronger volume contributions from new NEV models. BYD BYD (LHS) Relative to HSI (RHS) expects the Yuan EV to record sales of 10k units/month when the limitation on LiB supply is removed, vs. the current level of 4-5k units/month. 12-month range 40.90-80.45 Management guided for net profit of CNY800-1,200m in 3Q18E, vs. Market cap (USDbn) 16.74 CNY1,069m in 3Q17 and CNY480m in 1H18. 3m avg daily turnover (USDm) 32.52 Shares outstanding (m) 2,728

Major shareholder Mr. Wang Chuan-fu (23.1%) 2018-20E: BYD likely to maintain lead in the NEV market. Unlike other OEMs, BYD owns a complete industry chain within its NEV system, Financial summary (CNY) including the design and manufacture of LiB, motors, and electronic control Year to 31 Dec 18E 19E 20E system, which we believe provides a unique umbrella to protect its leading Revenue (m) 124,857 149,805 176,186 position in China. This is also why BYD is still making profits during the Operating profit (m) 7,727 9,412 11,831 nd Net profit (m) 3,338 4,226 5,727 ongoing NEV subsidy cuts, while other players, even the 2 player, BJEV Core EPS (fully-diluted) 1.224 1.549 2.099 (not listed), are loss-making. In 1H18, BYD’s EV sales were capped by the EPS change (%) (17.9) 26.6 35.5 shortage of high-quality LiB supply. By 2020E, BYD’s new LiB factory Daiwa vs Cons. EPS (%) (18.3) (19.6) (2.4) PER (x) 34.2 27.0 19.9 should not only fulfil its own demand, but also contribute external revenues Dividend yield (%) 0.0 0.0 0.0 to the company, according to management. DPS 0.000 0.000 0.000 PBR (x) 2.0 1.8 1.7 What we recommend: We cut our 2018E EPS by 41% after the lower- EV/EBITDA (x) 9.6 8.3 7.3 ROE (%) 5.9 7.0 8.8 than-expected 1H18 results and soft 3Q18 guidance, which could extend to Source: FactSet, Daiwa forecasts 4Q18, while we cut our 2019-20E EPS by 46-49% as we now expect further NEV subsidy cuts in both 2019 and 2020. As such, we cut our SOTP-based 12-month TP to HKD67 (from HKD75). Nevertheless, we reiterate our Buy (1) rating on BYD, as we expect the company to still deliver a decent earnings recovery in 2H18-20E. Key downside risk: lower- than-expected NEV sales.

How we differ: Our revised 2018-20E EPS are 2-20% below the Bloomberg consensus, which we attribute to us factoring in the softer-than- expected guidance for 3Q18.

See important disclosures, including any required research certifications, beginning on page 52

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E BYD NEV volume (units) 2,120 20,972 67,016 115,738 126,977 180,024 274,879 375,089 Volume growth - NEV (%) 25.4 889.2 219.5 72.7 9.7 41.8 52.7 36.5 BYD ICE volume (units) 504,503 419,418 393,760 394,188 296,014 388,260 415,294 373,600 Volume growth - ICE (%) 11.0 (16.9) (6.1) 0.1 (24.9) 31.2 7.0 (10.0) Battery shipment (%) 7.4 (0.8) 15.5 23.5 18.9 18.9 20.0 15.0 Handset shipment (%) 13.4 23.9 36.5 15.7 4.3 4.3 10.0 7.0

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automobile 25,291 26,270 38,934 55,022 53,501 68,421 82,222 88,609 Mobile handset 19,459 24,116 32,928 38,083 39,708 41,403 45,543 48,731 Other Revenue 5,018 4,980 5,750 7,103 9,442 15,034 22,040 38,846 Total Revenue 49,768 55,366 77,612 100,208 102,651 124,857 149,805 176,186 Other income 651 950 499 1,012 1,867 1,904 2,232 2,564 COGS (43,252) (47,743) (65,753) (81,189) (84,716) (105,300) (126,447) (148,242) SG&A (5,364) (6,694) (8,295) (11,058) (11,713) (13,734) (16,179) (18,676) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 1,803 1,879 4,063 8,972 8,089 7,727 9,412 11,831 Net-interest inc./(exp.) (947) (1,292) (1,464) (1,647) (2,247) (2,830) (3,315) (3,859) Assoc/forex/extraord./others (24) 287 1,196 (757) (221) (225) (225) (225) Pre-tax profit 832 874 3,795 6,568 5,621 4,673 5,873 7,748 Tax (56) (134) (657) (1,088) (704) (631) (793) (1,046) Min. int./pref. div./others (223) (306) (315) (428) (850) (704) (854) (975) Net profit (reported) 553 434 2,823 5,052 4,066 3,338 4,226 5,727 Net profit (adjusted) 553 87 1,634 5,052 4,066 3,338 4,226 5,727 EPS (reported)(CNY) 0.235 0.179 1.140 1.957 1.491 1.224 1.549 2.099 EPS (adjusted)(CNY) 0.235 0.036 0.660 1.957 1.491 1.224 1.549 2.099 EPS (adjusted fully-diluted)(CNY) 0.235 0.036 0.660 1.957 1.491 1.224 1.549 2.099 DPS (CNY) 0.050 0.000 0.000 0.178 0.141 0.000 0.000 0.000 EBIT 1,803 1,879 4,063 8,972 8,089 7,727 9,412 11,831 EBITDA 5,336 6,092 9,376 15,889 15,052 18,076 22,393 27,854

Cash flow (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 832 874 3,795 6,568 5,621 4,673 5,873 7,748 Depreciation and amortisation 3,533 4,212 5,314 6,917 6,963 10,349 12,982 16,024 Tax paid (246) (192) (399) (1,152) (1,208) (631) (793) (1,046) Change in working capital (2,913) (6,106) (5,977) (16,811) (7,113) (3,805) (4,734) (5,137) Other operational CF items 1,230 1,251 1,110 2,633 2,105 3,150 3,640 4,168 Cash flow from operations 2,436 38 3,842 (1,846) 6,368 13,735 16,967 21,757 Capex (5,764) (8,578) (12,290) (13,053) (14,793) (19,369) (25,579) (33,889) Net (acquisitions)/disposals 80 480 1,562 (694) (796) 0 0 0 Other investing CF items (168) 197 (8) 326 (127) 0 0 0 Cash flow from investing (5,851) (7,901) (10,736) (13,421) (15,717) (19,369) (25,579) (33,889) Change in debt 3,232 5,314 5,774 4,532 9,783 9,500 10,500 11,000 Net share issues/(repurchases) 0 3,342 3,200 596 100 0 1 1 Dividends paid 0 (124) (37) (1,238) (782) (385) 0 0 Other financing CF items 1,276 (1,262) (187) 12,380 2,066 (2,926) (3,418) (3,945) Cash flow from financing 4,508 7,271 8,750 16,270 11,168 6,190 7,083 7,056 Forex effect/others 0 0 0 0 0 0 1 1 Change in cash 1,093 (592) 1,856 1,003 1,819 556 (1,527) (5,076) Free cash flow (3,328) (8,540) (8,448) (14,899) (8,425) (5,634) (8,611) (12,133) Source: FactSet, Daiwa forecasts

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 4,511 3,950 6,011 7,111 8,936 9,492 7,964 2,887 Inventory 8,221 9,978 15,751 17,378 19,873 24,702 29,662 34,775 Accounts receivable 13,135 22,435 26,679 45,733 53,277 64,802 77,751 91,442 Other current assets 4,099 4,471 6,079 8,132 20,736 22,079 23,589 25,185 Total current assets 29,966 40,834 54,519 78,354 102,821 121,074 138,966 154,290 Fixed assets 34,147 36,379 38,126 42,049 47,831 55,593 67,181 84,147 Goodwill & intangibles 9,623 10,821 11,824 12,008 14,128 15,387 16,398 17,298 Other non-current assets 4,279 5,974 11,016 12,661 13,319 13,095 12,871 12,647 Total assets 78,015 94,009 115,486 145,071 178,099 205,149 235,416 268,381 Short-term debt 16,172 19,173 26,413 32,928 45,649 51,649 57,649 63,649 Accounts payable 22,293 25,851 30,656 34,663 39,527 49,132 58,999 69,168 Other current liabilities 4,879 7,998 9,041 10,726 19,821 24,109 28,926 34,020 Total current liabilities 43,344 53,022 66,110 78,318 104,997 124,889 145,573 166,837 Long-term debt 8,652 10,979 11,230 9,339 10,862 14,362 18,862 23,862 Other non-current liabilities 1,162 1,113 2,116 2,005 2,283 2,283 2,283 2,283 Total liabilities 53,158 65,114 79,457 89,661 118,142 141,534 166,718 192,982 Share capital 2,354 2,476 2,476 2,728 2,728 2,728 2,729 2,729 Reserves/R.E./others 19,356 22,890 29,818 48,528 52,276 55,229 59,457 65,185 Shareholders' equity 21,710 25,366 32,294 51,256 55,004 57,958 62,186 67,914 Minority interests 3,147 3,529 3,735 4,153 4,953 5,657 6,511 7,486 Total equity & liabilities 78,015 94,009 115,486 145,071 178,099 205,149 235,416 268,381 EV 136,544 142,484 147,645 151,232 163,631 173,504 186,609 203,886 Net debt/(cash) 20,313 26,202 31,632 35,156 47,575 56,519 68,547 84,624 BVPS (CNY) 9.222 10.245 13.043 18.788 20.162 21.244 22.794 24.893

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 12.1 11.2 40.2 29.1 2.4 21.6 20.0 17.6 EBITDA (YoY) 21.7 14.2 53.9 69.5 (5.3) 20.1 23.9 24.4 Operating profit (YoY) 60.0 4.2 116.2 120.8 (9.8) (4.5) 21.8 25.7 Net profit (YoY) 579.6 (84.2) 1,772.9 209.2 (19.5) (17.9) 26.6 35.5 Core EPS (fully-diluted) (YoY) 579.6 (84.7) 1,734.4 196.7 (23.8) (17.9) 26.6 35.5 Gross-profit margin 13.1 13.8 15.3 19.0 17.5 15.7 15.6 15.9 EBITDA margin 10.7 11.0 12.1 15.9 14.7 14.5 14.9 15.8 Operating-profit margin 3.6 3.4 5.2 9.0 7.9 6.2 6.3 6.7 Net profit margin 1.1 0.2 2.1 5.0 4.0 2.7 2.8 3.3 ROAE 2.6 0.4 5.7 12.1 7.7 5.9 7.0 8.8 ROAA 0.7 0.1 1.6 3.9 2.5 1.7 1.9 2.3 ROCE 3.9 3.5 6.1 10.5 7.6 6.3 6.8 7.7 ROIC 4.0 3.2 5.5 9.5 7.1 5.9 6.3 6.9 Net debt to equity 93.6 103.3 97.9 68.6 86.5 97.5 110.2 124.6 Effective tax rate 6.8 15.3 17.3 16.6 12.5 13.5 13.5 13.5 Accounts receivable (days) 84.6 117.2 115.5 131.9 176.0 172.6 173.7 175.3 Current ratio (x) 0.7 0.8 0.8 1.0 1.0 1.0 1.0 0.9 Net interest cover (x) 1.9 1.5 2.8 5.4 3.6 2.7 2.8 3.1 Net dividend payout 21.3 0.0 0.0 9.1 9.5 0.0 0.0 0.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Listed in Hong Kong in 2002, BYD is engaged in the R&D, manufacture and distribution of automobiles, rechargeable batteries and mobile phone components. It owns 65% of BYD Electronics (285 HK, Not rated). BYD focuses on autos (especially NEVs), rechargeable batteries (lithium-ion and nickel batteries used in mobile phones and other portable electronic devices), as well as mobile-phone components and its assembly mobile phones business (casings, keypads, mobile-phone designs, etc.).

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

BYD: 2Q18 results summary (in CNYm) YoY growth PRC GAAP 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Gross revenue 21,046 23,993 28,895 31,980 24,738 29,413 4% -3% 4% 4% 18% 23% Net revenue 20,726 23,751 28,604 31,503 24,284 29,019 4% -2% 4% 5% 17% 22% Gross profit 4,100 4,492 5,239 4,979 3,787 3,988 6% -18% -12% 18% -8% -11% Net income 606 1,117 1,069 1,275 102 377 -29% -21% -24% -8% -83% -66% Margin Gross margin* 19.8% 18.9% 18.3% 15.8% 15.6% 13.7% 0.4pp -3.7pp -3.4pp 1.8pp -4.2pp -5.2pp Net margin 2.9% 4.7% 3.7% 4.0% 0.4% 1.3% -1.3pp -1.1pp -1.4pp -0.6pp -2.5pp -3.4pp

Source: Company

BYD: SOTP valuation Valuation Multiple (x) NAV 18E NAV/share (CNY m) (CNY) Rechargeable Battery EV/EBITDA 10.0 x 32,215 11.8 Mobile handset EV/EBITDA 6.0 x 37,326 13.7 Auto - Conventional EV/EBITDA 6.0 x 11,408 4.2 Auto - NEV EV/EBITDA 22.0 x 177,507 65.1 Monorail EV/EBITDA 7.0 x 5,250 1.9 Sub-total 263,707 96.7 - Net debt/cash (end-2018E) (56,519) (20.7) - Minority interest (5,657) (2.1) Equity value (CNYm) 201,530 73.9 Exchange rate, 1HKD = x CNY 0.87 Equity value (HKDm) 231,644 Conglomerate discount 20% Equity value/share (HKD) 67.00 Current price (HKD) 48.15 Potential share price upside (%)* 39% Source: Bloomberg, Daiwa estimates and forecasts; *note: based on price as of close on 30 August 2018

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail Chief Strategist for Asia Pacific; Strategy (Regional) SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Henny JUNG (82) 2 787 9182 henny.jung @kr.daiwacm.com Olivia XIA (852) 2773 8736 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Macro Economics (Regional/China) Thomas Y KWON (82) 2 787 9181 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Head of Automobiles; Transportation and Industrial (Hong Kong/China) Fiona LIANG (852) 2532 4341 [email protected] TAIWAN Industrial (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Jay LU (852) 2848 4970 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Automobiles and Components (Hong Kong/China) (Regional) Leon QI (852) 2532 4381 [email protected] Nora HOU (886) 2 8758 6249 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation & PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] John CHOI (852) 2773 8730 [email protected] Small/Mid Cap Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Carlton LAI (852) 2532 4349 [email protected] INDIA Small/Mid Cap (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of India Research; Strategy; Banking/Finance Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE Saurabh MEHTA (91) 22 6622 1009 [email protected] (Hong Kong/China) Capital Goods; Utilities Don LAU (852) 2848 4469 [email protected]

Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) SINGAPORE Anna LU (852) 2848 4465 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Power, Utilities, Renewable and Environment (PURE) – Nuclear (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jonas KAN (852) 2848 4439 [email protected] David LUM (65) 6228 6740 [email protected] Head of Hong Kong and China Property Banking; Property and REITs Cynthia CHAN (852) 2773 8243 [email protected] Royston TAN (65) 6228 6745 [email protected] Property (China) Oil and Gas; Capital Goods Bryan CHIK (852) 2773 8741 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Custom Products Group Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Selwyn CHENG (852) 2773 8716 [email protected]

Custom Products Group JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected] PHILIPPINES Strategy (Regional) Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

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China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

LG Chem: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating

11/05/18 470,000 Buy 24/07/18 450,000 Buy 500,000 470,000 450,000 450,000

400,000

350,000

300,000 300,000

250,000

200,000

Jul-16 Jul-17 Jul-18

Oct-17 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18

Jun-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18

Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18

Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17

May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Samsung SDI: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 19/02/16 110,000 Outperform 13/04/17 152,000 Outperform 17/04/18 252,000 Buy 03/05/16 127,000 Outperform 06/06/17 176,000 Outperform 20/06/18 273,000 Buy 29/07/16 120,000 Outperform 18/07/17 200,000 Outperform 30/07/18 281,000 Buy 28/10/16 105,000 Outperform 25/10/17 219,000 Outperform

18/01/17 125,000 Outperform 18/01/18 260,000 Buy 300,000 280,000 281,000 273,000 260,000 260,000 252,000 240,000 220,000 219,000 200,000 200,000

180,000 176,000 160,000 150,000 152,000 140,000 127,000 120,000 120,000 125,000 110,000 100,000 105,000

80,000

Jul-16 Jul-17 Jul-18

Oct-17 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18

Jun-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18

Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18

Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17

May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

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China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

China New Energy Vehicles: 30 August 2018 BYD (1211 HK): 30 August 2018

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 70.4% Hold** 21.1% Sell*** 8.5% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

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