Company report Industrials Autos Equity – China BAIC Motor (1958 HK) Hold Downgrade to Hold: The good, mixed, and bad Target price (HKD) 8.10 We cut our earnings forecasts driven by weak sales volume of Share price (HKD) 7.60 Upside/Downside (%) +6.6% domestic brands and BJ Hyundai Dec 2014 a 2015 e 2016 e HSBC EPS (CNY) 0.70 0.62 0.73 Uncertainties on BJ Hyundai/domestic brands would hinder a HSBC PE 8.9 10.0 8.6 re-rating of the stock Performance 1M 3M 12M Absolute (%) 6.9 -4.0 Downgrade to Hold from Buy with target price cut from Relative^ (%) 0.8 6.9 HKD10.4 to HKD8.1 based on 10.8x 2015e PE BJ Benz: Still in the fast lane; don’t just focus on negative forex in 2H15e. BJ Benz’s product cycle may remain stronger than its competitors in 2H15e and 2016e. As the upcoming GLC and E- class would sit on the same platform as the C-class, we expect to see some scale effects in 2016e. We think investors should not just focus on the potential FX loss of cRMB215m in 2H15e arising from EUR borrowings. As the company gradually raises its hedging for 2016 exposure, we believe the impact from forex fluctuation would be reduced. We expect BJ Benz’s earnings contribution to 19 October 2015 rise 118%YoY to RMB2,916m in 2015e. Carson Ng* BJ Hyundai: Weak sales volume in 3Q15; the silver lining comes with new models. Sales Analyst The Hongkong and Shanghai Banking volume of BJ Hyundai declined 17%YoY in 3Q15, which was weaker than our expectation and Corporation Limited put profitability under pressure in 2H15e. We cut our forecasts for earnings contributions by +852 2996 6625 15%/16% in 2015e/16e to RMB4,013m/3,954m (-29%/-1%YoY) to reflect the volume and pricing [email protected] pressure. We believe the upcoming new model launches (SUV Tucson in September 2015 and Mike Yip* Analyst three sedan models in 2016) would alleviate the sales volume pressure but the new capacity from The Hongkong and Shanghai Banking 4Q16 remains a concern. Corporation Limited +852 2996 6942 Domestic brand: Ample new models but uncertain on execution. The reception of new models [email protected] launches (e.g. CC/X65) remains lacklustre so far, which cast doubt on the upcoming new model (X25/X55 in 4Q15). We lower our volume forecast for the new models and raised our domestic View HSBC Global Research at: brand net loss forecast from RMB1.8bn/1.6bn to RMB2.3bn/2.2bn in 2015e/16e. Our key concern http://www.research.hsbc.com is the company’s ability to translate the new model launches into volume. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA Downgrade to Hold from Buy with our target price cut from HKD10.4 to HKD8.10. We cut regulations our earnings forecasts by 17%/13%/9% in 2015e-17e and we are 8%/13% below consensus Issuer of report: The Hongkong and Shanghai Banking earnings in 2015e/16e. Our target multiple derived from ROE-based PE method is changed to Corporation Limited 10.8x from 11.3x. Although the stock offers 5% yield based on our estimates, we think the Disclaimer & concerns on BJ Hyundai and domestic brand would hinder any re-rating on the stock in 2H15e. Disclosures Next catalysts are 3Q15 results on 20 October and monthly sales volume especially on the new This report must be read SUVs. Upside risks include better-than-expected recovery of Hyundai in 2016e and downside with the disclosures and risks include domestic brands’ failure to narrow the loss. the analyst certifications in the Disclosure appendix, ^Index HSCEI Free float (%) 18 Index level 10,637 Market cap (USDm) 7,448 and with the Disclaimer, RIC 1958.HK Market cap (HKDm) 57,725 which forms part of it Bloomberg 1958 HK Source: HSBC Source: HSBC BAIC Motor (1958 HK) Autos abc 19 October 2015 Financials & valuation Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (CNYm) PE* 8.9 10.0 8.6 8.1 PB 1.4 1.3 1.3 1.2 Revenue 56,370 87,133 99,716 105,414 Dividend yield (%) 4.9 5.0 5.8 6.2 EBITDA 3,786 10,358 12,846 13,421 * Based on HSBC EPS (diluted) Depreciation & amortisation -2,364 -4,263 -4,817 -4,800 Operating profit/EBIT 1,422 6,095 8,028 8,622 Net interest -533 -755 -823 -862 Price relative PBT 6,698 9,491 11,316 11,973 13 13 HSBC PBT 6,698 9,491 11,316 11,973 Taxation -857 -1,860 -2,291 -2,433 12 12 Net profit 4,511 4,747 5,514 5,819 11 11 HSBC net profit 4,511 4,747 5,514 5,819 10 10 9 9 Cash flow summary (CNYm) 8 8 Cash flow from operations 1,742 9,980 8,493 8,054 7 7 Capex -11,785 -11,870 -6,796 -7,157 6 6 Cash flow from investment -9,941 -9,409 -4,256 -4,559 5 5 Dividends -2,273 -2,279 -2,373 -2,757 4 4 Change in net debt 1,711 -1,648 -1,864 -738 2013 2014 2015 2016 FCF equity -8,767 -1,441 2,887 2,107 BAIC Motor Rel to HSCEI Source: HSBC Balance sheet summary (CNYm) Intangible fixed assets 8,251 9,466 10,838 12,466 Note: Priced at close of 19 Oct 2015 Tangible fixed assets 43,222 49,131 49,738 50,467 Current assets 44,319 51,905 58,056 61,291 Cash & others 22,967 24,935 26,799 27,538 Total assets 109,859 123,503 133,202 140,410 Operating liabilities 36,189 44,494 48,732 50,366 Gross debt 29,918 30,238 30,238 30,238 Net debt 6,951 5,303 3,439 2,701 Shareholders' funds 33,355 35,491 37,441 39,293 Invested capital 36,636 41,073 43,101 46,321 Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 341.0 54.6 14.4 5.7 EBITDA 173.6 24.0 4.5 Operating profit 328.7 31.7 7.4 PBT 114.2 41.7 19.2 5.8 HSBC EPS 42.1 -11.1 16.2 5.5 Ratios (%) Revenue/IC (x) 1.8 2.2 2.4 2.4 ROIC 5.5 14.4 17.2 17.5 ROE 16.0 13.8 15.1 15.2 ROA 6.8 7.3 7.7 7.6 EBITDA margin 6.7 11.9 12.9 12.7 Operating profit margin 2.5 7.0 8.1 8.2 EBITDA/net interest (x) 7.1 13.7 15.6 15.6 Net debt/equity 16.6 11.3 6.6 4.7 Net debt/EBITDA (x) 1.8 0.5 0.3 0.2 CF from operations/net debt 25.1 188.2 247.0 298.2 Per share data (CNY) EPS reported (diluted) 0.70 0.62 0.73 0.77 HSBC EPS (diluted) 0.70 0.62 0.73 0.77 DPS 0.30 0.31 0.36 0.38 Book value 4.44 4.67 4.93 5.17 2 BAIC Motor (1958 HK) Autos abc 19 October 2015 Analysis We cut our earnings forecasts driven by weak sales volume of domestic brands and BJ Uncertainties on BJ Hyundai/domestic brands would hinder re-rating of the stock Downgrade to Hold from Buy with target price cut from HKD10.4 to HKD8.1 based on 10.8x 2015e PE Beijing Hyundai Weak 3Q15 sales volume of Beijing Hyundai Sales volume of Beijing Hyundai declined 17.3%YoY to 214,429 units in 3Q15. In August, the JV has officially reduced the MSRP of ix35 and Sante Fe ahead of the launch of new Tucson in September 2015. As the net profit margin of BJ Hyundai declined from 10.2% in 1H14 to 8.1% in 1H15, we believe the weak volume in 3Q15 would continue to put the profitability under pressure in 2H15. New product launches of BJ Hyundai Recently, Hyundai made a couple of executive changes for its China business. Mr Lee Byung-ho, former vice president of Hyundai WIA, was made Head of Beijing Hyundai. Mr Lee was the head of Hyundai US sales company from 2009 to 2014. Mr Noh Jae-man, the head of Beijing Hyundai until 2011, will return to Hyundai Motor, holding an advisory role to the China business. Beijing Hyundai just launched the New Tucson in September 2015 and the pace of ramp-up and reception was solid in the first month of sales in September 2015. The company also schedules to launch three sedan models in 2016. Given that consumers become much more sensitive to products’ model age, we think new model launches become more important for the turnaround of the business. The new generation of Elantra would be a focus in 2016e. 3 BAIC Motor (1958 HK) Autos abc 19 October 2015 Monthly sales volume of Beijing Hyundai Market share Beijing Hyundai in total PV sales 140,000 7.0% Units 120,000 6.5% 6.0% 100,000 5.5% 80,000 5.0% 60,000 4.5% 40,000 4.0% 20,000 3.5% - 3.0% Jul-12 Jul-13 Jul-14 Jul-15 Jul-12 Jul-13 Jul-14 Jul-15 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Jan-12 Jan-13 Jan-14 Jan-15 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Jan-12 Jan-13 Jan-14 Jan-15 Monthly sales volume of BJ Hyundai Market share of BJ Hyundai Source: CAAM Source: CAAM Earnings forecasts for Beijing Hyundai Sales volume assumptions of Beijing Hyundai Revised Previous Chg% (Units) 2015e 2016e 2017e2015e 2016e 2017e 2015e 2016e 2017e Sedan Sonata 8th generation 13,737 6,868 6,525 13,737 6,868 6,868 0.0% 0.0% -5.0% Sonata 9th generation 59,000 70,800 70,800 40,000 44,000 44,000 47.5% 60.9% 60.9% Sonata Monica 6,500 - - 4,593 - - 41.5% N.A.