China Consumer Discretionary 15 April 2016

Dongfeng Motor Group (489 HK)

Target price: HKD10.60 (from HKD12.20) Share price (14 Apr): HKD9.30 | Up/downside: +13.9%

Positive as a laggard play Kelvin Lau (852) 2848 4467  We revise down our 2016-17 EPS forecasts due to cautious guidance [email protected]  However, we view valuations as undemanding Brian Lam (852) 2532 4341  Revising TP to HKD10.60 from HKD12.20, reiterating Outperform (2) [email protected]

What's new: Following Dongfeng Motor’s (DFM) 2015 results and our Forecast revisions (%) recent discussions with management, we revise our assumptions and, in Year to 31 Dec 16E 17E 18E turn, our 2016-17E earnings and target price. We still view valuations as Revenue change 12.0 21.3 n.a. Net profit change (9.4) (7.4) n.a. attractive. Core EPS (FD) change (9.4) (7.4) n.a. Source: Daiwa forecasts What's the impact: DFM’s 2015 results were mostly in line with our expectations, though management’s guidance for 2016 was more cautious Share price performance than we had expected; it is looking for new car sales from DF and (HKD) (%) DF to record only 4.9% YoY and 5.9% YoY increases, respectively, 14 105 whereas we had been forecasting increases of 17% YoY and 15% YoY, 12 95 11 85 respectively. A possible reason is a sharp decline in sales of current models 9 75 is likely to weigh on YoY growth from new models. 7 65 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Separately, management expects cooperation with PSA (not rated) to Dongfeng M (LHS) Relative to HSI (RHS) create synergies in terms of joint procurement and shared platforms (namely, the CMA platform), which should be operating by 2019. Dongfeng 12-month range 7.05-13.32 Getrag, a JV with GETRAG (not listed), has completed building its factory Market cap (USDbn) 10.33 and will soon start producing its own gearboxes, as per management. 3m avg daily turnover (USDm) 17.35 Shares outstanding (m) 8,616

Major shareholder Dongfeng Motor Corporation (66.9%) For DFM’s commercial vehicle (CV) sales, management expects flat YoY growth and aims to break even in terms of cash flow and the bottom line for Financial summary (CNY) 2016. It is targeting to maintain an average inventory level of 1.5 months for Year to 31 Dec 16E 17E 18E 2016 (currently 1.5-1.8 months). However, management expects its self- Revenue (m) 129,508 132,586 133,347 owned brand, JV with PSA (DPCA), and financing service to improve in Operating profit (m) 1,943 2,254 2,667 Net profit (m) 11,964 12,583 12,934 profitability YoY. We revise up our 2016-17E revenue by 12-21% Core EPS (fully-diluted) 1.389 1.460 1.501 considering the better-than-expected guidance on the self-owned brand, EPS change (%) 3.6 5.2 2.8 DF PV, for which we now forecast a 9% YoY increase in sales volume in Daiwa vs Cons. EPS (%) (6.2) (5.5) 1.1 PER (x) 5.6 5.3 5.2 2016 (previous: 2% YoY increase; management guides for 10.9% YoY). Dividend yield (%) 2.7 2.8 2.9 However, we revise down our 2016-17E EPS by 7-9% as we scale back DPS 0.208 0.219 0.225 our sales growth forecasts for DF Nissan and DF Honda to 2-6% YoY for PBR (x) 0.7 0.6 0.6 2016-17E (previous: flat to 17% YoY rise). As such, we cut our 12-month EV/EBITDA (x) 8.2 6.2 3.0 ROE (%) 13.3 12.5 11.6 TP to HKD10.70 (from HKD12.20) on an unchanged 2016E PER of 7x. Source: FactSet, Daiwa forecasts

What we recommend: Although earnings growth for 2016-18E seems unexciting, valuations appear undemanding, with the stock trading at a 30% discount to peers on PER compared with an average discount of less than 24% over the past 3 years. We reiterate our Outperform (2) rating. The key risk: lower-than-expected sales units, especially for Dongfeng Honda and Dongfeng Nissan.

How we differ: Our 2016-17E EPS are 6% below the Bloomberg consensus, as we are more cautious on the profit contributions from DF Nissan and DF Honda.

See important disclosures, including any required research certifications, beginning on page 5

Dongfeng Motor Group (489 HK): 15 April 2016

Global auto manufacturers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 15-Apr-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E China H-share listed Geely Automobile Holdings Lt * 175 HK HKD 3.92 Buy 8.6 7.3 1.3 1.1 3.1 2.2 1.5 1.7 16.0 16.2 BAIC Motor Corp Ltd-H * 1958 HK HKD 6.18 Sell 10.5 9.6 1.0 1.0 4.6 3.7 3.3 3.6 10.4 10.5 BYD Co Ltd-H * 1211 HK HKD 43.20 Outperform 34.1 22.9 2.0 1.8 10.9 9.1 n.a. n.a. 6.7 7.9 Great Wall Motor Company-H * 2333 HK HKD 6.54 Hold 7.0 6.8 1.2 1.0 4.6 4.4 4.4 4.6 17.6 16.1 Guangzhou Automobile Group-H * 2238 HK HKD 8.58 Hold 10.2 9.9 1.1 1.0 21.5 15.6 3.2 3.3 11.4 10.8 Dongfeng Motor Grp Co Ltd-H * 489 HK HKD 9.30 Outperform 5.6 5.3 0.7 0.6 8.2 6.3 2.7 2.8 13.3 12.5 Brilliance China Automotive * 1114 HK HKD 8.22 Buy 8.9 8.1 1.5 1.3 n.a. n.a. 1.7 1.9 18.0 17.2 China A-share listed Byd Co Ltd -A 002594 CH CNY 58.75 NR 42.2 29.3 4.2 3.7 13.9 11.7 0.0 0.0 11.1 13.5 Guangzhou Automobile Group-A 601238 CH CNY 21.64 NR 25.5 20.3 3.2 2.8 30.4 41.1 0.0 0.0 13.2 14.4 Great Wall Motor Co Ltd-A 601633 CH CNY 9.11 NR 9.3 8.6 1.8 1.6 5.8 5.4 0.0 0.0 20.7 19.7 Saic Motor Corp Ltd-A 600104 CH CNY 20.58 NR 7.1 6.9 1.2 1.1 11.1 10.0 0.1 0.1 17.0 16.5 Chongqing Changan Automobi-B 200625 CH HKD 13.81 NR 4.6 4.3 1.3 1.0 12.5 14.9 0.0 0.1 29.1 26.7 Faw Car Company Limited-A 000800 CH CNY 13.71 NR 403.2 548.4 2.4 2.3 17.2 17.5 n.a. n.a. 3.6 3.4 Anhui Jianghuai Auto Co-A 600418 CH CNY 12.40 NR 13.2 10.4 1.8 1.6 10.0 8.9 0.0 0.1 14.7 16.4 Jiangsu Yueda Investment C-A 600805 CH CNY 8.94 NR 11.4 9.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tianjin Faw Xiali Automobi-A 000927 CH CNY 6.84 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 11.76 NR 28.7 21.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 5.63 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Shenyang Jinbei Automotive-A 600609 CH CNY 4.93 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. US Ford Motor Co F US USD 13.09 NR 6.6 6.4 1.5 1.3 3.1 3.0 0.0 0.0 25.6 22.1 General Motors Co GM US USD 30.72 NR 5.6 5.4 1.0 0.9 2.3 2.2 0.0 0.0 21.2 18.2 Europe Daimler Ag-Registered Shares DAI GR EUR 63.75 NR 7.4 7.2 1.2 1.1 2.4 2.3 0.1 0.1 17.1 15.9 Bayerische Motoren Werke AG BMW GR EUR 78.81 NR 8.2 7.9 1.1 1.0 6.8 6.6 0.0 0.0 14.4 13.5 Volkswagen AG VoW GR EUR 127.78 NR 7.4 6.2 0.7 0.6 1.4 1.3 0.0 0.0 9.3 9.3 Fiat Chrysler Automobiles NV FCA IM EUR 6.79 NR 5.2 4.0 0.6 0.6 1.4 1.3 0.0 0.0 12.5 14.8 Peugeot SA UG FP EUR 14.09 NR 8.3 7.4 1.0 0.9 1.7 1.7 0.0 0.0 13.4 13.5 Renault SA RNO FP EUR 88.10 NR 7.4 6.6 0.8 0.7 4.6 4.4 0.0 0.0 11.8 12.3 Honda Motor Co Ltd *, ** 7267 JP JPY 3066.00 Hold 10.1 9.6 0.8 0.7 7.0 6.7 0.0 0.0 7.7 7.6 Nissan Motor Co Ltd *, ** 7201 JP JPY 1042.00 Hold 7.8 7.6 0.9 0.8 2.8 2.8 0.0 0.0 11.2 10.4 Motor Corp *, ** 7203 JP JPY 5806.00 Outperform 7.8 8.1 1.0 0.9 8.9 9.2 0.0 0.0 13.4 11.6 Korea Hyundai Motor Co * 005380 KS KRW 152000.00 Buy 5.7 5.2 0.5 0.4 4.8 4.1 3.0 3.3 10.8 10.9 Kia Motors Corp * 000270 KS KRW 48050.00 Buy 6.3 5.9 0.7 0.6 3.8 3.4 2.5 2.7 12.0 11.6 India Tata Motors Ltd ** TTMT IN INR 408.75 NR 11.8 9.2 1.8 1.5 4.4 3.7 0.0 0.0 16.8 17.9 Mahindra & Mahindra Ltd ** MM IN INR 1332.45 NR 22.2 17.6 2.9 2.6 13.1 10.7 0.0 0.0 12.8 14.0 Total Weighted average 11.1 10.6 1.2 1.1 6.6 6.4 0.4 0.4 14.2 13.4 High 403.2 548.4 4.2 3.7 30.4 41.1 7.0 8.0 29.1 26.7 Low 4.6 4.0 0.5 0.4 1.4 1.3 0.0 0.0 3.6 3.4 Median 8.2 7.6 1.2 1.0 5.3 4.9 0.0 0.0 13.4 14.0

Source: Bloomberg, *Daiwa forecasts Note: **Mar year-end

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Dongfeng Motor Group (489 HK): 15 April 2016

Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E DF Nissan sales volume (units) 809,000 773,000 926,000 952,000 1,001,000 1,058,000 1,081,000 1,090,000 DF PSA sales volume (units) 404,000 440,000 550,000 704,000 711,000 713,000 719,000 716,000 DF Honda sales volume (units) 255,000 282,000 321,000 308,000 406,000 432,000 458,000 482,000 DF Nissan sales volume growth n.a. (4.4) 19.8 2.8 5.1 5.7 2.2 0.8 (YoY %) DF PSA sales volume growth n.a. 8.9 25.0 28.0 1.0 0.3 0.8 (0.4) (YoY %) DF Honda sales volume growth n.a. 10.6 13.8 (4.0) 31.8 6.4 6.0 5.2 (YoY %)

Profit and loss (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Commercial vehicles 35,473 2,784 24,527 44,787 36,344 36,344 36,344 36,344 Passenger vehicles 94,921 3,254 11,905 36,671 88,218 90,725 93,467 94,228 Other Revenue 1,047 52 831 1,656 2,004 2,439 2,774 2,775 Total Revenue 131,441 6,090 37,263 83,114 126,566 129,508 132,586 133,347 Other income (3,425) (168) (1,448) (1,848) (4,494) (4,403) (4,243) (4,000) COGS (105,051) (5,736) (32,582) (72,297) (109,637) (112,154) (114,819) (115,479) SG&A (9,916) (1,518) (4,447) (7,527) (10,835) (11,008) (11,270) (11,201) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 13,049 (1,332) (1,214) 1,442 1,600 1,943 2,254 2,667 Net-interest inc./(exp.) 652 420 374 333 643 727 535 476 Assoc/forex/extraord./others 660 10,064 11,552 12,846 11,822 11,745 12,238 12,264 Pre-tax profit 14,361 9,152 10,712 14,621 14,065 14,415 15,027 15,407 Tax (3,401) (45) (109) (1,364) (1,353) (1,387) (1,446) (1,482) Min. int./pref. div./others (479) (15) (75) (460) (1,162) (1,065) (998) (991) Net profit (reported) 10,481 9,092 10,528 12,797 11,550 11,964 12,583 12,934 Net profit (adjusted) 10,481 9,092 10,528 12,797 11,550 11,964 12,583 12,934 EPS (reported)(CNY) 1.216 1.055 1.222 1.485 1.341 1.389 1.460 1.501 EPS (adjusted)(CNY) 1.216 1.055 1.222 1.485 1.341 1.389 1.460 1.501 EPS (adjusted fully-diluted)(CNY) 1.216 1.055 1.222 1.485 1.341 1.389 1.460 1.501 DPS (CNY) 0.180 0.150 0.180 0.200 0.200 0.208 0.219 0.225 EBIT 13,049 (1,332) (1,214) 1,442 1,600 1,943 2,254 2,667 EBITDA 16,200 (1,120) (432) 3,010 3,300 3,500 4,009 4,645

Cash flow (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax 14,361 9,152 10,712 14,621 14,065 14,415 15,027 15,407 Depreciation and amortisation 3,151 212 782 1,568 1,700 1,557 1,755 1,978 Tax paid (4,315) (52) (206) (1,144) (2,020) (1,387) (1,446) (1,482) Change in working capital (2,505) (1,297) (8,825) (1,643) (595) (8,914) (5,281) 1,746 Other operational CF items (1,476) (10,771) (12,157) (14,174) (12,592) (11,475) (12,008) (12,074) Cash flow from operations 9,216 (2,756) (9,694) (772) 558 (5,804) (1,952) 5,576 Capex (7,019) (555) (1,332) (3,501) (3,795) (2,741) (3,082) (3,470) Net (acquisitions)/disposals (140) (310) 8,524 (10,183) (1,265) 0 0 0 Other investing CF items 6,624 5,634 10,790 12,787 9,306 5,849 6,216 6,825 Cash flow from investing (535) 4,769 17,982 (897) 4,246 3,108 3,134 3,355 Change in debt (701) (3,225) (145) 9,704 (2,701) (2,000) (2,000) (2,000) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (1,551) (1,551) (1,504) (1,551) (1,723) (1,723) (1,795) (1,888) Other financing CF items (937) 0 (257) 79 5,119 (270) (230) (190) Cash flow from financing (3,189) (4,776) (1,906) 8,232 695 (3,993) (4,025) (4,078) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 5,492 (2,763) 6,382 6,563 5,499 (6,689) (2,843) 4,853 Free cash flow 2,197 (3,311) (11,026) (4,273) (3,237) (8,544) (5,035) 2,106 Source: FactSet, Daiwa forecasts

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Dongfeng Motor Group (489 HK): 15 April 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment 31,381 10,288 16,670 23,233 28,732 22,043 19,200 24,053 Inventory 12,511 1,198 4,245 9,874 8,665 14,565 15,108 13,428 Accounts receivable 19,600 3,199 14,738 16,156 16,679 23,311 23,865 24,002 Other current assets 20,524 12,215 21,969 20,677 27,663 34,923 39,424 39,576 Total current assets 84,016 26,900 57,622 69,940 81,739 94,844 97,597 101,060 Fixed assets 21,578 2,430 9,418 11,862 12,929 14,058 15,339 16,792 Goodwill & intangibles 4,686 743 4,943 5,398 5,526 5,580 5,627 5,665 Other non-current assets 7,253 32,293 44,015 59,777 60,592 66,488 72,510 77,950 Total assets 117,533 62,366 115,998 146,977 160,786 180,971 191,074 201,467 Short-term debt 15,971 2,697 17,597 30,175 17,930 24,016 22,469 20,581 Accounts payable 23,055 1,964 13,480 16,279 17,170 17,945 17,223 17,322 Other current liabilities 25,689 3,580 17,612 21,261 23,536 25,554 26,139 26,284 Total current liabilities 64,715 8,241 48,689 67,715 58,636 67,515 65,831 64,187 Long-term debt 2,820 0 0 350 7,559 7,559 7,559 7,559 Other non-current liabilities 414 122 3,275 3,476 3,107 3,107 3,107 3,107 Total liabilities 67,949 8,363 51,964 71,541 69,302 78,181 76,497 74,853 Share capital 44,843 52,626 61,584 72,092 82,927 82,927 82,927 82,927 Reserves/R.E./others 1,551 1,292 1,551 1,723 1,723 11,964 22,752 33,799 Shareholders' equity 46,394 53,918 63,135 73,815 84,650 94,891 105,679 116,726 Minority interests 3,190 85 899 1,621 6,834 7,899 8,897 9,888 Total equity & liabilities 117,533 62,366 115,998 146,977 160,786 180,971 191,074 201,467 EV 55,900 27,201 32,749 26,234 20,726 28,669 24,942 13,753 Net debt/(cash) (12,590) (7,591) 927 7,292 (3,243) 9,532 10,828 4,088 BVPS (CNY) 5.385 6.258 7.328 8.567 9.825 11.013 12.265 13.547

Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) 7.4 (95.4) 511.9 123.0 52.3 2.3 2.4 0.6 EBITDA (YoY) (9.6) n.a. n.a. n.a. 9.6 6.0 14.5 15.9 Operating profit (YoY) (6.1) n.a. n.a. n.a. 11.0 21.4 16.0 18.3 Net profit (YoY) (4.6) (13.3) 15.8 21.6 (9.7) 3.6 5.2 2.8 Core EPS (fully-diluted) (YoY) (4.6) (13.3) 15.8 21.6 (9.7) 3.6 5.2 2.8 Gross-profit margin 20.1 5.8 12.6 13.0 13.4 13.4 13.4 13.4 EBITDA margin 12.3 n.a. n.a. 3.6 2.6 2.7 3.0 3.5 Operating-profit margin 9.9 n.a. n.a. 1.7 1.3 1.5 1.7 2.0 Net profit margin 8.0 149.3 28.3 15.4 9.1 9.2 9.5 9.7 ROAE 25.0 18.1 18.0 18.7 14.6 13.3 12.5 11.6 ROAA 9.2 10.1 11.8 9.7 7.5 7.0 6.8 6.6 ROCE 20.1 n.a. n.a. 1.5 1.4 1.5 1.6 1.8 ROIC 27.5 (3.2) (2.2) 1.8 1.7 1.8 1.7 1.9 Net debt to equity net cash net cash 1.5 9.9 net cash 10.0 10.2 3.5 Effective tax rate 23.7 0.5 1.0 9.3 9.6 9.6 9.6 9.6 Accounts receivable (days) 52.1 683.2 87.8 67.8 47.3 56.4 64.9 65.5 Current ratio (x) 1.3 3.3 1.2 1.0 1.4 1.4 1.5 1.6 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 14.8 14.2 14.7 13.5 14.9 15.0 15.0 15.0 Free cash flow yield 3.3 n.a. n.a. n.a. n.a. n.a. n.a. 3.2 Source: FactSet, Daiwa forecasts

Company profile

Dongfeng Motor Group (DFM) is engaged in the manufacture and sale of autos, engines and auto parts, as well as offering other auto-related business, such as auto finance. Through its subsidiaries and JVs with various foreign brands, DFM has a wide range of product lines, including 42 major commercial vehicle models, 35 truck models and 7 for buses. It also had 51 passenger vehicles models, consisting of 31 for sedans, 7 MPVs and 13 SUVs, as at the end-1H15. DFM also has a leading position in China’s CV market, especially for medium- and heavy-duty trucks.

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Dongfeng Motor Group (489 HK): 15 April 2016

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Dongfeng Motor Group (489 HK): 15 April 2016

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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. "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* 66.9% Hold** 19.7% Sell*** 13.5% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2016. * 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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