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. N.A. Mistra 151,197 143,637 143,637 148,497 150,724 150,724 1.8% -4.7% -4.7% Elantra new generation 155,000 210,000 180,000 252,000 N.A. -13.9% -16.7% Elantra Langdong 239,721 119,861 65,923 263,693 105,477 52,739 -9.1% 13.6% 25.0% Elantra Yuedong 46,327 32,429 12,972 72,800 50,960 20,384 -36.4% -36.4% -36.4% Elantra 14,506 2,901 - 14,506 - - 0.0% N.A. N.A. Verna 192,360 182,742 182,742 224,223 213,012 213,012 -14.2% -14.2% -14.2% i20 - 2,000 50,000 - - SUV New Santa Fe 32,141 32,141 32,141 21,427 21,427 21,427 50.0% 50.0% 50.0% New ix35 103,166 41,266 41,266 103,166 36,108 36,108 0.0% 14.3% 14.3% Tucson/New Tucson 53,031 121,900 126,776 30,221 115,000 120,750 75.5% 6.0% 5.0% ix25 100,120 110,132 110,132 96,412 106,053 106,053 3.8% 3.8% 3.8% Beijing Hyundai 1,011,805 1,021,677 1,052,913 1,033,275 1,029,630 1,024,065 -2.1% -0.8% 2.8% YoY% -9.7% 1.0% 3.1% -7.7% -0.4% -0.5%

Source: HSBC estimates

4 BAIC Motor (1958 HK) Autos abc 19 October 2015

Earnings revision for Beijing Hyundai 2015e 2016e 2017e (RMB m) Revised Old Chg% Revised Old Chg% Revised Old Chg% Revenue 98,997 99,157 -0.2% 103,348 101,010 2.3% 105,071 101,350 3.7% COGS (79,072) (77,927) 1.5% (82,983) (79,831) 3.9% (84,562) (80,368) 5.2% Gross profit 19,925 21,230 -6.1% 20,365 21,178 -3.8% 20,509 20,981 -2.3% GP margin % 20.1% 21.4% 19.7% 21.0% 19.5% 20.7%

Operating expenses (9,068) (8,485) 6.9% (9,580) (8,578) 11.7% (9,881) (8,807) 12.2% Operating profit 10,857 12,745 -14.8% 10,785 12,600 -14.4% 10,628 12,175 -12.7% EBIT margin % 11.0% 12.9% 10.4% 12.5% 10.1% 12.0%

Net finance cost (155) (152) 1.9% (241) (123) 95.2% (267) (130) 104.8%

Profit before tax 10,702 12,593 -15.0% 10,544 12,477 -15.5% 10,361 12,044 -14.0% Taxation (2,676) (3,148) -15.0% (2,636) (3,119) -15.5% (2,279) (2,650) -14.0% Net profit 8,027 9,445 -15.0% 7,908 9,358 -15.5% 8,082 9,395 -14.0% Net profit margin % 8.1% 9.5% 7.7% 9.3% 7.7% 9.3%

Attributable to: Shareholders of BAIC Motor 4,013 4,722 -15.0% 3,954 4,679 -15.5% 4,041 4,697 -14.0%

Source: HSBC estimates

Beijing Motor (domestic brands) Lacklustre reception for new models BJ Senova has launched a couple of new models since late-2014 but the reception has been lacklustre so far.

The BJ Senova CC was launched in May 2015 but only achieved about c200 units monthly sales since launch.

BJ Senova X65, the company’s first compact SUV, was launched in March 2015. The initial reception was disappointing, with only c1,600 unit sales in April to August. In August, the company decided to cut the pricing by all variants by RMB15,000 (10-15% of original MSRP) and sales volume improved to 3,533 units in September.

We think the lacklustre reception of these new models cast doubt on the company’s new model launches. The company is scheduled to launch X25 and X55 in 2015, as well as X35 in 2016 and hopefully the experience from CC and X65 would help the brand to set better pricing and position for the upcoming new model launches. Earnings forecasts for Beijing Motor domestic brand We lower our volume forecast for Beijing Motor (domestic brands) by 10%/15% to 307,168/338,306 units in 2015e/16e as a result of the weak YTD volume and lower assumption on upcoming new models.

We lower our GP margin forecast from 2.6% to -7.6% in 2015e as a result of the weak 1H15 GP margin (-9.7%) and our lower volume forecast. In the 1H15 analyst briefing, the company attributed the decline to increase in discount level as a result of high inventory level at dealer and the ramp up of X65 has been slower than anticipated therefore minimal initial costs were absorbed through additional sales volume. There could be some cost sharing between X55 and X65 but we believe the situation would not substantially improve in 2H15.

We increase our net loss forecasts from RMB1.8bn/1.6bn to RMB2.3bn/2.2bn in 2015e/16e for Beijing Motor domestic brand business.

5 BAIC Motor (1958 HK) Autos abc 19 October 2015

Sales volume assumptions of Beijing Motor domestic brand Revised Previous Chg% (Units) 2015e 2016e2017e 2015e 2016e 2017e 2015e 2016e 2017e Models manufactured by Beijing Motor Senova Senova D20 27,160 24,987 23,738 31,040 29,488 29,488 -12.5% -15.3% -19.5% Senova D80 100 1,000 1,000 2,000 4,000 4,000 -95.0% -75.0% -75.0% Senova D70 1,834 1,834 1,834 1,763 1,763 1,763 4.0% 4.0% 4.0% Senova D60/CC 1,800 3,600 3,600 10,000 18,000 18,000 -82.0% -80.0% -80.0% Senova D50 57,540 51,786 49,196 57,540 58,690 58,690 0.0% -11.8% -16.2% Senova X55 3,000 24,000 27,600 8,000 32,000 32,000 -62.5% -25.0% -13.8% Senova X65 25,000 28,750 25,875 32,000 38,400 38,400 -21.9% -25.1% -32.6% Senova X25 3,000 24,000 25,200 4,000 32,000 32,000 -25.0% -25.0% -21.3% Senova X35 - - 15,000 - N.A. BJ BJ40 1,000 - - 1,000 - - Wevan Wevan 306/307 49,000 39,200 37,240 63,000 47,250 47,250 -22.2% -17.0% -21.2% Wevan M20 59,000 59,000 59,000 57,000 58,140 58,140 3.5% 1.5% 1.5% New Energy 15,125 18,150 21,780 12,100 13,915 16,002 25.0% 30.4% 36.1% Own produced total 243,558 276,306 291,063 279,443 333,646 335,734 -12.8% -17.2% -13.3%

Models made by BAIC Limited/Yinxiang Wevan M20 59,000 59,000 59,000 57,000 59,850 59,850 3.5% -1.4% -1.4% Wevan 205 613 - - 613 - - 0.0% N.A. N.A. Wevan 206 1,197 - - 1,197 - - 0.0% N.A. N.A. BJ40 2,800 3,000 3,000 2,800 4,500 4,500 0.0% -33.3% -33.3% Outsourced total 63,610 62,000 62,000 61,610 64,350 64,350 3.2% -3.7% -3.7%

Beijing Motor 307,168 338,306 353,063 341,052 397,996 400,084 -9.9% -15.0% -11.8% YoY% -0.8% 10.1% 4.4% 10.1% 16.7% 0.5%

Source: HSBC estimates

Earnings revision for Beijing Motor domestic brand 2015e 2016e 2017e (RMB m) Revised Old Chg% Revised Old Chg% Revised Old Chg% Revenue 14,920 16,853 -11.5% 17,271 21,167 -18.4% 18,451 21,499 -14.2% COGS (16,055) (16,409) -2.2% (17,929) (20,120) -10.9% (19,055) (20,344) -6.3% Gross profit (1,136) 444 -355.7% (658) 1,046 -162.9% (604) 1,155 -152.3% GP margin % -7.6% 2.6% -3.8% 4.9% -3.3% 5.4%

Selling expenses (1,112) (1,614) -31.1% (1,205) (1,747) -31.0% (1,277) (1,791) -28.7% Administrative expenses (978) (950) 3.0% (1,030) (1,069) -3.7% (1,080) (1,105) -2.3% Other gains, net 1,539 850 81.0% 1,483 901 64.5% 1,629 902 80.7% Operating profit (1,688) (1,270) 32.9% (1,411) (869) 62.3% (1,331) (840) 58.6% EBIT margin % -11.3% -7.5% -8.2% -4.1% -7.2% -3.9%

Net finance cost (597) (486) 22.8% (717) (654) 9.6% (811) (718) 12.9%

Profit before tax (2,285) (1,756) 30.1% (2,128) (1,523) 39.7% (2,142) (1,557) 37.5% Taxation 46 53 -13.3% 43 46 -6.9% 43 47 -8.3% Net profit (2,239) (1,704) 31.4% (2,085) (1,478) 41.1% (2,099) (1,511) 39.0% Net profit margin % -15.0% -10.1% -12.1% -7.0% -11.4% -7.0%

Attributable to: Shareholders of the Company (2,322) (1,800) 28.9% (2,166) (1,574) 37.7% (2,182) (1,607) 35.8% Minority interest 82 97 -15.0% 81 96 -15.5% 83 96 -14.0%

Source: HSBC estimates

6 BAIC Motor (1958 HK) Autos abc 19 October 2015

Negative currency forex movement for BJ Benz in 2H15e Strong sales volume YTD BJ Benz sales volume remained strong in 3Q15, +91%YoY to 72,249 units. The sales volume of the new generation C-class launched in August 2014 continue to ramp up.

We think the upcoming launch of new generation of GLK (with new series name GLC) would continue to drive the positive performance of BJ Benz.

We revised up our volume forecast of BJ Benz by 7%/1% to 245,798/297,690 units in 2015/16e.

Sales volume assumptions of Beijing Benz Revised Previous Chg % (Units) 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e Sedan E Class (LWB) 61,576 70,812 77,893 61,576 73,891 84,974 0.0% -4.2% -8.3% C Class (LWB) 79,605 85,973 87,693 68,976 72,425 72,425 15.4% 18.7% 21.1% SUV GLK 66,618 72,614 76,244 66,618 79,942 79,942 0.0% -9.2% -4.6% GLA 38,000 53,200 55,860 33,000 46,200 46,200 15.2% 15.2% 20.9% Beijing Benz 245,798 282,599 297,690 230,169 280,457 299,541 6.8% 0.8% -0.6% YoY% (RHS) 69.0% 15.0% 5.3% 58.2% 21.8% 6.8%

Source: HSBC estimates

Negative currency movement in 2H15 The company have not hedged its EUR exposure in 2015e. BJ Benz posted Rmb608m FX gain in 1Q15 amid EUR depreciation but as EUR rebounded it turned into loss of RMB209m in 2Q15. As of the current level, RMB has further depreciated by 4% against EUR as compared to 30 June 2015. Assuming the FX rate to remain at current level until the end of the year, we estimate the company to incur RMB215m FX loss in 2H15m, leading the FX gain to narrow to RMB185m.

7 BAIC Motor (1958 HK) Autos abc 19 October 2015

Earnings forecasts of Beijing Benz

Earnings revision for Beijing Benz 2015e 2016e 2017e (RMBm) Revised Old Chg% Revised Old Chg% Revised Old Chg% Revenue 72,214 67,940 6.3% 82,445 81,821 0.8% 86,963 87,176 -0.2% COGS (55,456) (53,873) 2.9% (62,794) (64,359) -2.4% (66,239) (68,978) -4.0% Gross profit 16,758 14,067 19.1% 19,650 17,461 12.5% 20,724 18,198 13.9% GP margin % 23.2% 20.7% 23.8% 21.3% 23.8% 20.9%

Selling expenses (6,138) (5,571) 10.2% (6,843) (6,218) 10.0% (7,218) (6,625) 8.9% Administrative expenses (3,105) (3,193) -2.8% (3,463) (3,396) 2.0% (3,652) (3,661) -0.2% Other gains, net 268 1,623 -83.5% 94 197 -52.1% 99 203 -51.2% Operating profit 7,783 6,926 12.4% 9,439 8,044 17.3% 9,953 8,115 22.6% EBIT margin % 10.8% 10.2% 11.4% 9.8% 11.4% 9.3%

Net finance cost (158) (23) 588.9% (105) (6) 1559.9% (51) 118 -143.6%

Profit before tax 7,625 6,903 10.5% 9,334 8,038 16.1% 9,902 8,233 20.3% Taxation (1,906) (1,726) 10.5% (2,333) (2,009) 16.1% (2,475) (2,058) 20.3% Net profit 5,718 5,177 10.5% 7,000 6,028 16.1% 7,426 6,175 20.3% Net profit margin % 7.9% 7.6% 8.5% 7.4% 8.5% 7.1%

Attributable to: Shareholders of BAIC Motor 2,916 2,640 10.5% 3,570 3,074 16.1% 3,787 3,149 20.3% Minority interest 2,802 2,537 10.5% 3,430 2,954 16.1% 3,639 3,026 20.3%

Source: HSBC estimates

Earnings revision of overall company

Earnings revision for BAIC Motor (overall company) 2015e 2016e 2017e (RMBm) Revised Old Chg% Revised Old Chg% Revised Old Chg% Revenue 87,133 84,793 2.8% 99,716 102,987 -3.2% 105,414 108,675 -3.0% COGS (71,511) (70,282) 1.7% (80,724) (84,479) -4.4% (85,294) (89,321) -4.5% Gross profit 15,622 14,511 7.7% 18,992 18,508 2.6% 20,120 19,354 4.0% GP margin % 17.9% 17.1% 19.0% 18.0% 19.1% 17.8%

Selling expenses (7,250) (7,185) 0.9% (8,048) (7,965) 1.0% (8,495) (8,417) 0.9% Administrative expenses (4,084) (4,143) -1.4% (4,493) (4,465) 0.6% (4,732) (4,766) -0.7% Other gains, net 1,807 2,473 -27.0% 1,577 1,098 43.7% 1,728 1,105 56.4% Operating profit 6,095 5,656 7.8% 8,028 7,175 11.9% 8,622 7,275 18.5% EBIT margin % 7.0% 6.7% 8.1% 7.0% 8.2% 6.7%

Net finance cost (755) (509) 48.3% (823) (661) 24.5% (862) (600) 43.6% Share of result of JV 4,037 4,746 -14.9% 3,978 4,702 -15.4% 4,064 4,721 -13.9% Share of result of associates 115 115 0.0% 132 132 0.0% 150 150 0.0%

Profit before tax 9,491 10,007 -5.2% 11,316 11,349 -0.3% 11,973 11,546 3.7% Taxation (1,860) (1,673) 11.2% (2,291) (1,964) 16.7% (2,433) (2,011) 20.9% Net profit 7,631 8,334 -8.4% 9,025 9,385 -3.8% 9,541 9,534 0.1%

Attributable to: Shareholders of the Company 4,747 5,701 -16.7% 5,514 6,335 -13.0% 5,819 6,412 -9.3% Minority interest 2,884 2,634 9.5% 3,511 3,050 15.1% 3,722 3,122 19.2%

Sales volume Beijing Motor 307,168 341,052 -9.9% 338,306 397,996 -15.0% 353,063 400,084 -11.8% Beijing Benz 245,798 230,169 6.8% 282,599 280,457 0.8% 297,690 299,541 -0.6% Beijing Hyundai 1,011,805 1,033,275 -2.1% 1,021,677 1,029,630 -0.8% 1,052,913 1,024,065 2.8%

Source: HSBC estimates

8 BAIC Motor (1958 HK) Autos abc 19 October 2015

BAIC’s product portfolio and launch dates Beijing Motor Beijing Benz Beijing Hyundai Small-size sedan BJ E series, N/Mar-12 Verna, N/Aug-10 Senova D20, F/Nov-14 I20, N/2016 Compact sedan Senova D50, N/Apr-14 Elantra, N/Dec-03 Senova D60, N/1H15 Elantra Yuedong, N/Apr-08 Elantra Langdong, N/Jul-12 Elantra new generation, N/2016 Mid-size sedan Senova D70, N/May-13 C Class, N/2008 Sonata Monica, N/Aug-09 Senova D80, N/2Q15 C Class (LWB), N/Aug-14 Sonata 8th generation, N/Apr-11 C Class, S/2Q15 Mistra, N/Nov-13 Sonata 9th generation, S/1H15 Mid- to large-size sedan E Class (LWB), N/2010 E Class, S/2016 Small-size SUV BJ40, N/Dec-13 ix25, N/Oct-14 Senova X25, N/4Q15 Senova X35, N/3Q16 Compact SUV Senova X65, N/1Q15 GLA, N/2Q15 New ix35, N/Apr-10 Senova X55, N/4Q15 Tucson, N/Jun-05 Tucson new generation, S/3Q15 Mid-size SUV GLK, N/Oct-12 New Santa Fe, N/Dec-12 GLC, S/2016 Economy CUV Wevan 306, N/Mar-11 Wevan 205, N/Nov-12 Wevan 206, N/Nov-12 Wevan 307, N/Oct-13 MPV Wevan M20, N/Oct-13

Source: Company data, HSBC Research Note: N-brand new model, S-successor model, F-facelift, LWB-long wheel base. Upcoming models are in red

Valuation and risks

 We continue to use ROE-based PE valuation method as we believe it better reflect the company’s improving ROE

 Formula for calculating our ROE-based PE:

PE = (ROE – g) ÷ (ROE × [COE – g])

Fig 11: Key assumptions ROE 2015e 15.7% Cost of equity 9.9% Rf 3.5% Equity risk premium 5.5% Equity beta 1.16 g 1.5%

Source: HSBC estimates

 We make cut our long term growth assumption from 3.0% to 1.5% to factor in the uncertainty of the turnaround of the domestic brand. Our beta assumption is adjusted from 1.25 to 1.16 based on the updated 3-year historical beta of Dongfeng according to Bloomberg. Our cost of equity assumption is now 9.9% (previously 10.4%)

 We use our 2015e ROE assumption of 16.2% (revised from 17.7%) to derive a fair ROE-based PE multiple of 10.8x (previously 11.3x) for BAIC.

9 BAIC Motor (1958 HK) Autos abc 19 October 2015

 Applying our 2015e EPS estimate of RMB0.63 (previously RMB0.75) to our target PE, our fair value target price is HKD8.10 (previously HKD10.4).

Upside risks include: better than expected recovery of Beijing Hyundai business in 2016e, quicker than expected turnaround of domestic brand

Downside risks include: domestic brands’ failure to narrow the loss, slower than expected margin improvement from Beijing Benz, and higher pricing pressure faced by Beijing Hyundai.

10 BAIC Motor (1958 HK) Autos abc 19 October 2015

Disclosure appendix

Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Carson Ng and Mike Yip

Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

11 BAIC Motor (1958 HK) Autos abc 19 October 2015

As of 19 October 2015, the distribution of all ratings published is as follows: Buy 46% (31% of these provided with Investment Banking Services) Hold 40% (28% of these provided with Investment Banking Services) Sell 14% (17% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

Share price and rating changes for long-term investment opportunities BAIC Motor (1958.HK) Share Price performance HKD Vs HSBC rating history Recommendation & price target history From To Date

13 N/A Neutral (V) 25 January 2015 Neutral (V) Hold 23 March 2015 12 Hold Buy 25 March 2015 11 Target Price Value Date 10 Price 1 9.55 25 January 2015 9 Price 2 11.20 25 March 2015 Price 3 12.70 27 April 2015 8 Price 4 10.40 23 July 2015 7 Source: HSBC 6 5 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Source: HSBC

HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure BAIC MOTOR 1958.HK 7.60 19-Oct-2015 1, 5, 7 Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 30 September 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company

12 BAIC Motor (1958 HK) Autos abc 19 October 2015

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 19 October 2015. 2 All market data included in this report are dated as at close 19 October 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

13 BAIC Motor (1958 HK) Autos abc 19 October 2015

Disclaimer

* Legal entities as at 30 May 2014 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation The Hongkong and Shanghai Banking Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Corporation Limited Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ Level 19, 1 Queen’s Road Central HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Hong Kong SAR Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Telephone: +852 2843 9111 Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Fax: +852 2596 0200 Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Website: www.research.hsbc.com Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. 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Global Industrials Research Team

Industrials Transportation Colin Gibson Andrew Lobbenberg Global Sector Head, Industrials Analyst +44 20 7991 6592 [email protected] +44 20 7991 6816 [email protected] Scott Cagehin Aric Hui Analyst Associate +44 20 7992 1444 [email protected] +852 2822 3165 [email protected] Brian Cho Parash Jain Head of Research, Korea Analyst +822 3706 8750 [email protected] +852 2996 6717 [email protected] Paul Choi Achal Kumar Analyst Analyst +822 3706 8758 [email protected] +91 80 3001 3722 [email protected] Anderson Chow Wei Sim Analyst Analyst +852 2996 6669 [email protected] +852 2996 6602 [email protected] Puneet Gulati Shishir Singh Analyst Analyst +91 22 2268 1235 [email protected] +852 2822 4292 [email protected] Michael Hagmann Jack Xu Analyst Analyst +44 20 7991 2405 [email protected] +852 2996 6566 [email protected] Yeon Lee Joe Thomas Analyst Analyst +822 3706 8778 [email protected] +44 20 7992 3618 [email protected] Kristy Lee Construction & Engineering Analyst Levent Bayar +65 6658 0616 [email protected] Analyst Sean McLoughlin +90 212 376 46 17 [email protected] Analyst Tarun Bhatnagar +44 20 7991 3464 [email protected] Analyst Ashutosh Narkar +65 6658 0614 [email protected] Analyst Pierre Bosset +91 22 2268 1474 [email protected] Head of French Research Shrinidhi Karlekar +33 1 56 52 43 10 [email protected] Analyst Jonathan Brandt +91 22 6164 0689 [email protected] Analyst Mark Webb +1 212 525 4499 [email protected] Analyst Ivan Enriquez +852 2996 6574 [email protected] Analyst Nick Webster +52 55 5721 2397 [email protected] Analyst John Fraser-Andrews '+27 11 676 4537 [email protected] Analyst Thomas Zhu, CFA +44 20 7991 6732 [email protected] Analyst Tobias Loskamp +852 2822 4325 [email protected] Analyst Autos +49 211 910 2828 [email protected] Horst Schneider Lesley Liu Analyst Analyst +49 211 910 3285 [email protected] +852 2822 4524 [email protected] Yogesh Aggarwal Shishir Singh Analyst Analyst +91 22 2268 1246 [email protected] +852 2822 4292 [email protected] Henning Cosman Patrick Gaffney, CFA Analyst Analyst +49 211 910 2461 [email protected] +966 11 299 2100 [email protected] Vivek Gedda Nicholas Paton, CFA Analyst Analyst +91 22 6164 0693 [email protected] +971 4 423 6923 [email protected] Carson Ng Sean Tian Analyst Analyst +852 2822 4397 [email protected] +852 2996 6916 [email protected] Mike Yip Liwei Zhou Associate Analyst +852 2996 6942 [email protected] +852 2996 6743 [email protected] Emily Li Analyst +852 2996 6599 [email protected]

Specialist Sales Rod Turnbull +44 20 7991 5363 [email protected] Oliver Magis +49 21 1910 4402 [email protected] Billal Ismail +44 20 7991 5362 [email protected] Jean Gael Tabet +44 20 7991 5342 [email protected]