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5 May 2017 Consumer Cyclical | Automobiles & Components Neutral Automobiles & Components Stocks Covered: 3 Competition In The New Era Ratings (Buy/Neutral/Sell): 1 / 2 / 0

We expect growth in ’s PV market to slow to 5%/3% in 2017/2018 Top Pick Target Price respectively, due to diminishing effects of purchase tax cuts. We see three Automobile Holdings (175 HK)– BUY HKD12.00 key trends in China’s PV market over the next three years: 1. Local brands to expand market share; 2. EV sales to grow at a higher pace vs fuel ; 3. SUVs to continue to lead the market. China’s PV sales and growth rate on the uptrend Our sector Top Pick is Geely on its improved model portfolio and good synergy with Volvo. We also initiate coverage on BYD and GWM with NEUTRAL recommendations. Our sector call is NEUTRAL.

We initiate coverage on China’s auto manufacturers with a NEUTRAL weighting. We expect passenger vehicles and minibus (collectively known as PV) sales in 2017/2018 to grow by 5%/3% respectively, slowing from 7%/15% registered in 2015/2016 respectively. This is as due to the diminishing effects of purchase tax discounts on cars with 1.6L displacement and below, to 25% starting 2017 from 50% in Oct 2015. Note that part of 2017’s PV sales were pre- sold in 2016, and part of PV sales in 2018 would be partially pre-sold in 2017. Solid growth expected in various segments, such as sport utility vehicles (SUVs), electric vehicles (EVs), vehicles, cars with displacements above 1.6L, premium brands, price-insensitive auto buyers, and in areas such as lower- Source: China Passenger Association (CPCA) tier cities. Hence we value auto manufacturers based on their respective special competitive advantages as highlighted above. Since new auto models are Sales growth for local brands leading the pack usually planed 5-8 years ahead, we believe companies with a good sense of the market, flexibility and efficiency would be well prepared. Also, the soft market helps to eliminate uncompetitive players, which would improve industry concentration and market share expansion for key players, in our view: i. Prefer market leaders of local brands, as we see creativity and upgrades in local brands driving the growth in smart cars and renewable energy vehicles. We like local brand manufacturers with execution ability and efficiency, and are in tune with Chinese consumers’ preferences and government policies – BYD’s EVs, Geely Automobile’s (Geely) Lynk & Co, and Great Wall Motor’s (GWM) WEY. Due to the joint venture (JV) structure of mass market manufactures and local governments’ protection of local brands against JV brands, we see relatively slower application of creativity and improvements in JV brands vs local brands;

ii. EV sales continue to be strong, driven by government policies and Source: CPCA subsidies. We expect Chinese EV sales – PV and commercial vehicles (CV) – to reach 2,035,000 units in 2020, and grow at CAGR of 40% with a penetration rate of 6% in the overall market, driven by government Table Of Contents subsidies, the 5L cap on fuel consumption per 100km by 2020, plate Peer Comparison 2 lottery/bidding, and tail number restrictions; Investment Thesis 3 Mild Growth Prospects Ahead 5 iii. SUVs’ solid growth to continue. We forecast a CAGR of 13.2% for SUV Local Brands – New Era For Market Leaders 8 sales in China up to 2020, which would result in SUV sales reaching 48% of EV Sales Stay Strong On Government Policies 9 overall PV sales by then, driven by the Government’s second-child policy, SUVs: The Growth Continues 14 Geely Automobile Holdings 17 and higher demand for SUVs in third- or lower-tier cities. Great Wall Motor 29 Our sector Top Pick is Geely, for its strong 2016 model portfolio, successful BYD 40 launches of Boyue, GC, and the new Emgrand, as well as margin improvement driven by synergies with Volvo (VOLVB SS, NR). We also initiate coverage on BYD with a NEUTRAL call – we like its strength in EVs and rapid shift into the mono rail market but we are cautious on the drop in its EV gross margins and mono rail execution. We initiate coverage on GWM with a NEUTRAL rating – we like its solid leadership in the SUV market, which should remain stable, but we are concerned over its margin deterioration.

% Upside P/E (x) P/B (x) Yield (%) Analyst Company Name Rating Price Target (Downside) Dec-18F Dec-18F Dec-18F Zhuang Dan Geely Automobile Holdings BUY HKD10.22 HKD12.00 17.4 8.8 2.0 1.1 BYD Co Ltd NEUTRAL HKD44.00 HKD40.40 (8.2) 18.5 1.6 0.8 +852 2103 9414 Great Wall Motor Co NEUTRAL HKD8.11 HKD8.13 0.2 5.4 1.0 5.6 [email protected] Source: Company data, RHB

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Figure 1: Peer comparison I

Note: Data as of 4 May 2017 Source: RHB, Bloomberg

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Figure 2: Peer comparison II

Note: Data as of 4 May 2017 Source: RHB, Bloomberg

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Investment Thesis Mild growth prospects ahead We expect growth in China’s PV market to slow to 5% and 3% in 2017 and 2018 respectively from 15% in 2016, due to the diminishing effects of purchase tax cuts. The tax rate on small-engine vehicles with engine sizes of up to 1.6L has been raised to 7.5% in 2017 from 5% in 2016, albeit still below the normal 10%. In other words, the purchase tax cuts have been reduced to 2.5% in 2017, from 5% in 2016. The purchase tax cuts on small-engine vehicles would be reduced further to 0% in 2018.

Figure 3: Purchase tax cuts and tax rates for small-engine vehicles Effective period Purchase tax cuts Tax rates 1 Oct 2015-31 Dec 2016 Reduced to 5% from 10% 5% 1 Jan 2017-31 Dec 2017 Reduced to 2.5% from 5% 7.5% From 1 Jan 2018 To reduce to 0% from 2.5% 10%

Source: Ministry of Finance (MoF)

1Q17 auto sales grew 5.1% YoY. For the next three quarters, we expect PV sales to grow at 4.3%, 2.3% and 5.4% YoY in 2Q17, 3Q17 and 4Q17 respectively: i. +4.3% YoY growth projected for 2Q17 to be supported by the low comparison base in 2Q16; ii. +2.3% YoY growth projected for 3Q17 is relatively softer, given the higher comparison base in 3Q16, and the seasonally slower Jul-Aug period for auto sales; iii. +5.4% YoY growth for 4Q17F, as we believe sales demand in 2017 would mostly be back-loaded towards year-end, considering consumers’ purchases before the Lunar New Year and pre-consumption ahead of 2018.

Figure 4: China’s PV sales and forecasts Figure 5: China’s PV sales – quarterly growth

Source: CPCA, RHB Source: CPCA, RHB

Prefer market leaders of local brands over mass-market JV brands We prefer market leaders of local brands, such as Geely, GWM, and BYD, over (DFM) (489 HK, NR) and Changan Auto (Changan) (000625 CH, NR). Over the past few years, local brands have expanded their market share to 41% in 2016 from 32% in 2009, due to: i. More rapid increases in demand for autos in lower tier cities, where local brands win on low prices; ii. Improved brand image and product upgrades by local brands, which have drawn consumers away from JV brands.

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Although we expect some market share squeeze from lower-priced autos – mainly from local brands in 2017 as price-sensitive buyers would have pre-purchased in 2016 – we view this positively as it would actually eliminate uncompetitive local players and improve industry concentration, as well as support market share expansion for key players which are stronger, such as GWM, Geely and BYD. We believe Geely and GWM have strong new car pipelines coming up, which would boost their respective sales. The improvement in quality has gradually changed the image of local brands whilst we believe local brands have managed to ride on government policies and subsidies, thereby benefiting from the growth in the EV market.

EV sales continue to be solid, driven by government policies and subsidies We expect Chinese EV (PV and CV) sales to reach 2,035,000 units in 2020, or a 4-year CAGR of 40% and a penetration rate of 6% in the total autos market, as guided by the Energy Saving and New Energy Vehicles Development Plan set by the state council and announced in 2012. For 2017, we expect Chinese EV sales to reach 682,657 units, representing a 40% and 13% growth in PV and CV respectively. We believe EV sales would be underpinned by the Chinese Government’s efforts in boosting EV sales, due to: i. Severe air pollution; ii. Reduced dependency on imported oil – at the end of 2015, China's car ownership reached 172m, or +11.5% YoY. China's oil dependency increased to 60.6% in 2015, from 36% in 2003. iii. Support for growth in local auto sales. We believe these policies would underpin EV penetration and sales growth in the future. The Government has guided for strong EV sales growth of 40% over the next four years, driven by: i. Government subsidies; ii. Imposition of an upper limit of 5L fuel consumption per 100km for auto manufactures; iii. Plate lottery or plate bidding; iv. Tail number restrictions. In fact, there are two types of policies currently driving growth in the EV industry – subsidies and fuel consumption limits: i. Subsidies apply to both auto manufacturers and consumers, and are given by both the central and local governments although these have been stepped down gradually; ii. Policies are in the form of caps on average vehicle emissions, and requirements for production side reforms such as “Made in China 2025”, “Energy Saving”, the New Electric Vehicle (NEV) Development Plan and Parallel Measurement of Average Fuel Consumption initiatives, and NEV credits.

SUV segment’s growth continues We believe SUV sales would continue to grow at a rapid pace compared with sedans. We expect SUV sales to grow at a 3-year CAGR of 13%, driven by: i. China’s second child policy – this should underpin demand from Chinese families, especially for the 7-seaters; ii. Long distance travel – although most first-, second-, and third-tier cities in China are equipped with convenient public transportation, there are still traffic jams and air pollution. We therefore view the need for long distance travelling, vs everyday commute, as one of the major reasons for auto purchases in China. As such, we believe SUV sales would continue to grow at 15% and 13% YoY in 2017 and 2018 respectively. SUVs or city utility vehicles (CUVs) have been enjoying relative good margins in the auto market. However, we are expecting fierce competition between JV branded and local branded SUVs, resulting in some margin squeeze going forward.

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Mild Growth Prospects Ahead China’s passenger vehicle (excluding minibus) sales have grown at a rapid pace – at a CAGR of 17% over the past 10 years – to 24.3m units in 2016 from 5.15m units in 2006 (Figure 6), driven by rising GDP per capita (Figure 7). We note that China’s PV sales (in units) are strongly correlated with GDP per capita. Based on the relationship shown in Figure 7, we forecast PV sales to grow at a CAGR of 6.2%, to reach 30.9bn units in 2020. Our forecast range is based on the following assumptions: i. GDP per capita growth expected to in the 5.5-6% range from 2017 to 2020 (3-5% real GDP growth, plus 2.5-3% inflation, according to our economics team; ii. Population is kept at the same level as the second-child policy is not expected to result in a noticeable increase in overall population.

Figure 6: China’s PV market sales Figure 7: GDP per capita vs vehicle ownership

Source: CPCA Source: Wind, CPCA

2017 sales forecast We expect growth in China’s PV market (passenger vehicles and minibus) to slow down to 5% and 3% in 2017 and 2018 respectively, from 15% in 2016. This is due to diminishing effects of the purchase tax cut – the rate has fallen from 5% in 2016 to 2.5% in 2017, and is expected to fall further to 0% in 2018. 1Q17 auto sales increased 5.1% YoY. For the next three quarters, we expect PV sales to grow by 4.3%, 2.3% and 5.4% YoY in 2Q17, 3Q17 and 4Q17 respectively. i. 2Q17: Projected 4.3% YoY growth is considered mild given the relatively low base in 2Q16. In addition, the Shanghai Auto Show in April was when we saw the deepest discounts and new car models being launched for the first time; ii. 3Q17: Projected slower growth of 2.3% YoY as the period of sales boom in 3Q16 set a high base of comparison. Furthermore, July and August are usually off-season months for auto sales; iii. 4Q17: Projected growth of 5.4% YoY as we expect auto demand in 2017 to be back- loaded in 4Q17, as some consumers’ purchases would be brought forward from 2018.

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Figure 8: PV sales market share by segment Figure 9: China auto sales by sector

Source: CPCA Source: CPCA

Subsidies utilised as a tool to boost auto sales We are not worried about auto sales going into negative growth, as we believe the Chinese Government would intervene in the auto market and utilise tax cuts or auto subsidies as tools to support auto sales. Nevertheless, we do not expect subsidies to support traditional auto sales in the short term. As for the purchase tax effect, we examined 2009’s (Figure 6) purchase tax cut and sales growth. We note that 2009 was loaded with all kinds of subsidies and enjoyed a strong 53% YoY growth in auto sales, with the strong momentum carrying into 2010 with a 33% YoY growth. Although the bulk of policy support ended in 2009, 2010 sales growth stepped down gradually and only hit bottom in Jun 2011 with 0% growth in sales. Hence, we do not expect to see auto sales step down sharply in 2017 – although 2018 could be a tougher year for the auto market as a whole, in our view.

Figure 10: China’s auto industry policies and subsidies in 2009-2010 Policy Release date or effective period Details Fuel tax reform 1/1/2009 Increase tax on fuel from CNY0.2 to CNY1 but no change to retail price Cancelled road maintenance fee Purchase tax cut 20 Jan 2009-31 Dec 2009 Purchase tax cut reduced to 5% from 10% for small dispacement PVs of 1.6L or under Automobile-to-rural area policy 1 Mar 2009-31 Dec 2009 CNY50bn from Central Government to subsidise and mini-truck sales in rural areas Automobile trade-in policy 01 Jun 2009-31 May 2010 CNY50bn from Central Government to subsidise automobile trade-in, up to CNY6,000 per car

2016 China auto industry policies and subsidies Purchase tax cut 1 Oct 2015-31 Dec 2016 Purchase tax cut reduced to 5% from 10% on small dispacement PVs of 1.6L or under Source: Ministry of Industry and Information Technology (MIIT), MoF, Ministry of Transportation (MOT)

Some points to note: i. The Government may intervene in the event auto sales drop severely. For example, in 2008, growth in auto sales dropped to 7% from 22% in 2007, and the Government supported auto sales with a 50% purchase tax cut – similar to 2015, when auto sales growth dropped to 7% from 16% in 2014; ii. However, based on previous experience in 2009, we do not believe that the Government would implement tax cuts in 2018, given that slow growth has been priced in already, in our view; iii. Furthermore, as the Government is focusing on EV development as a result of air pollution, we may not see it supporting the entire sector over the short term.

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Local Brands – New Era For Market Leaders We prefer market leaders of local brands, such as Geely, GWM and BYD, over DFM and Changan. Although we are likely to see market share squeeze for lower-priced autos, in particular the local brands as their target buyers are more price-sensitive, we view the impact positively as it would actually eliminate uncompetitive local players and improve industry concentration and market share expansion of key players, such as GWM, Geely and BYD. Over the past few years, local brands have expanded their market share to 41% in 2016 from 32% in 2009, due to: i. More rapid increase in auto market demand at lower tier cities, where local brands win on their lower price tags; ii. Improved brand image and product upgrades, which have drawn consumers from JV brands. We see local brands continuing to hit the spot in terms of meeting Chinese consumers’ needs. For example, GWM has been riding on the SUV boom when there were few SUV models, and its sales volume increased almost 10-fold to 1,074,000 units from 107,000 units over the past 10 years. GWM has therefore caught the attention of Chinese consumers for SUVs. Thereafter, we saw a couple of JV SUV models getting into the market in recent years, to regain some lost market share; iii. The Government’s focus on EV sales, as it determines the categories of EV models for subsidies, which excludes most foreign brands such as the BMW i3 and Tesla – we view this as the Government’s efforts in nurturing local Chinese brands.

Figure 11: China’s PV sales by brands’ country of origin

Source: RHB, CPCA

We see strong potential for further penetration of local brands in China given: i. The upgrade seen in newer car models – In the past, Chinese local brands gave the impression of low quality and bad taste hence the people’s desire for JV brands. In recent years however, the trend has changed, as Chinese local brands have invited designers from brands such as Mercedes, Volvo and Audi to design local brand models. In addition, local brands assemble parts from global players such as Bosch, Continental, and Infinity. Local brands also benefit from a margin premium compared to JV brands; ii. Proven capabilities to meet the demands of Chinese buyers – Currently, the market is led by JV brands whilst the SUV market is led by local brands. In the past, the SUV market enjoyed 5-year CAGR of 41%, which resulted in the success of companies such as GWM. Rapid growth in the EV market has also boosted companies such as BYD. In reality, it takes 5-8 years to build a new car model from scratch.

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Hence, BYD, GWM, and Geely’s successes in recent years can be attributed to their sharp sense of what is the trend in the Chinese market over the prior 10 years or even longer; iii. Brand recognition in lower-tier cities, where there is greater potential for market growth – Geely, GWM and BYD are popular brands in lower tier cities, supported by their low pricing and sales channel arrangements in these cities.

Figure 12: Annual household income vs desired PV prices Figure 13: Annual household income vs desired PV prices in Beijing in Chengdu

Source: Datacred, RHB Source: Datacred, RHB

EV Sales Stay Strong On Government Policies We forecast China’s EV sales (commercial and passenger vehicles included, but excluding hybrid electric vehicles (HEVs) to go up to 525,000, 887,000 and 1,286,000 units in 2017, 2018 and 2019 respectively. This implies a CAGR of 35%, driven by various measures implemented to drive EV sales growth – which include subsidies, average fuel consumption requirements, and a traditional car plate lottery. According to the Society of Automotive Engineers of China (SAE-China), the penetration rate of EV vehicles would reach 7%, 15% and 40% to reach 2,100,000 units, 5,250,000 units and 15,200,000 units in 2020, 2025, and 2030 respectively, up from a mere 525,000 units in 2016. We believe the following key factors are driving initiatives from the Chinese Government to push EV sales: i. Severe air pollution; ii. Reducing dependence on imported oil; iii. Supporting local auto sales growth. Furthermore on the consumer side, the Government is pushing for growth in new energy vehicles (NEV) sales by formulating polices and subsidies, such as attractive EV subsidies, the traditional car plate lottery, and tail number limit on traditional vehicles, which together, should drive consumers towards NEVs. On the manufacturers’ side, the Chinese Government has formulated strict policies, such as Energy Saving, New Energy Vehicle Development Plan and Made in China 2025, to cap average fuel consumption at 5L per 100km for auto manufacturers in 2020. At the same time, there are parallel measurements of average fuel consumption and NEV credits, which incentivises auto manufacturers to trade NEV credits with higher-than- average fuel consumption negative points. We believe that given the Chinese people’s continued love for SUVs, EV and/or NEV sales in general, would also be strong.

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EV sales continue to be strong driven by government policies & subsidies Over the past four years, China EV sales (excluding HEVs) have experienced strong growth, going up to 525,000 units in 2016 from only 20,000 in 2012, or at a 4-year CAGR of 127%. Electric PV sales have increased to 328,000 units from 9,700 units over the same period or at a 4-year CAGR of 141%, whilst Electric CV sales have risen to 176,000 units from 3,500 units or at a 4-year CAGR of 165%. The impressive growth rates were largely driven by government subsidies.

Figure 14: China’s total EV sales (monthly) Figure 15: China’s total EV sales (yearly)

Source: RHB, CPCA Source: RHB, CPCA

We expect total Chinese EV sales to reach 2,035,000 units in 2020, growing at a 4-year CAGR of 40%, with a penetration rate of 7% in terms of total auto sales, based on estimates highlighted in the Energy Saving and New Energy Vehicle Technology Road Map (The Road Map) and prepared by SAE-China. We expect electric PV sales to reach 459,000 units (+40% YoY) and electric CV sales to reach 223,000 units (+13% YoY) in 2017.

Figure 16: EV sales volume (YoY growth) Figure 17: EV sales volume (units)

Source: RHB, CPCA Source: RHB, CPCA

We believe the strong projected CAGR of 40% in Chinese EV sales over next four years would be driven by: i. Government subsidies: Although government subsidies have been stepping down gradually, some companies are willing to sacrifice margins to subsidise customers, in order to sustain sales growth;

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ii. 5L cap on fuel consumption per 100km by 2020 forces auto manufacturers to balance high fuel consumption vehicles with EVs. We believe the balance can be achieved by relying on both efforts to improve gasoline efficiency and the proportion of NEVs to total production; iii. Plate lottery or plate bidding in first tier cities. Plate lottery for traditional autos is a strong force in driving people in first tier cities to try EVs because there are no restrictions or relatively lower restrictions on EV plates. Take Beijing as an example, the poll for plate lottery is usually one plate for 100 applicants with a lottery frequency of once a month. So, on average, it would take eight years to obtain a plate; iv. Tail number restrictions. We believe this is also a strong factor in driving EV sales. For example, in Beijing, all tail numbers for traditional fuel cars would be banned for one day during weekdays, with no restrictions on weekends. On days with heavy pollution, usually during winter, there is an odd and even number restriction rule – this means that vehicles with plates that have even/odd tail numbers would be banned on every other day.

Government subsidies and polices shape the EV market There are two types of policies currently driving growth in the EV industry – subsidies and limitation on average emission by 2020. We believe these policies would actually determine EV penetration and sales growth in the future. Subsidies are given to both auto manufacturers and consumers, from both the central and local governments but these have been stepping down gradually. Policies set the upper level of average emission, which force production side reforms such as Made in China 2025, Energy Saving, NEV Development Plan and Parallel Measurement of Average Fuel Consumption, and NEV credits.

Figure 18: Major policies in the EV market Announcement date Policy Effective period Details

28 Jun 2012 Energy Saving and New Energy 2012-2020 2015 target： Vehicle Development Plan Cumulative sales 500,000 units for EVs & PHEVs; Average PV fuel consumption of 6.9L/100km 2020 target： Capacity for 2,000,000 units of EVs & PHEVs; Cumulative sales of 5,000,000 units; Average PV fuel consupmtion 5L/100km

2014 Notice on Exemption of Purchase 1 Sep 2014-31 Dec 2017 Tax exemption requirements: Tax for New Energy Vehicles Listed in the catalog; Excluding lead-acid battery; Battery driving range: BEV PV≥80 km, BEV bus≥150km, BEV truck≥80km, BEV SPV≥80km, PHEV≥50km, FCV≥150km for PV and buses, 200km for trucks and SPVs

22 Apr 2015 New energy vehicles promotion and 2016-2020 Subsidies to be reduced by 20% in 2017-2018 vs 2016, and down by 40% in 2019- financial support 2020 vs 2016

2015 Made in China 2025 May 2015 2020 target: Average PV fuel consumption of 5L/100km 2025 target： Average PV fuel consumption of 4L/100km 2020 sales target for local branded EV PHEV: 1,000,000 units, 70% market share 2025 sales target for local branded EV PHEV: 3,000,000 units, 80% market share

1 Sep 2016 Parallel Measurements of Average 2012-2020 The measurement is to use units of NEVs manufactured or imported to offset Fuel Consumption and NEV points average fuel consumption for all PVs manufatured or imported. 2016-2017 NEV points are not assessed. 2018-2020 minimum NEV points are 8%, 10% and 20% respectively. Source: MIIT, MoF, MOT

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We summarise the current EV policies and subsidies in Figure 18 above, to show the growth in the EV industry. Here are some major conclusions: i. The most important guidance is the 5L per 100km average fuel consumption cap for auto manufacturers. In 2012, goal of average fuel consumption for auto manufactures was set at 6.9L per 100km for 2015, and 5L per 100km for 2020. In 2015, tough penalties were imposed on companies which failed to meet the 6.9L per 100km limit, as listed in Figure 19 below. The suspension of applications for new capacity is detrimental to manufacturers, as it would actually limit the affected companies’ revenue growth.

Figure 19: Penalties and requirements for companies that failed to meet the 6.9L per 100km fuel consumption requirement in 2015 Names of companies would be made public. Suspension of acceptance of "Vehicle Manufacturers and Product Announcements" declaration for models which fail to meet the GB27999-2011 fuel consumption requirements. Application for capacity expansion would not accepted. More stringent supervision for customs clearance, import inspections, and production verification. Relevant national standards for fuel consumption requirements would be incorporated into and implemented in the appropriate manner, in the newly-revised Rules for Compulsory Product Certification. Source: MIIT, MoF, MOT

ii. Parallel Measurements of Average Fuel Consumption and NEV credits allow companies to trade NEV credits. If a company fails to meet the 5L per 100km fuel consumption requirement, the punishment would be to buy credits from other companies. For example, companies such as GWM, whose focus is on SUVs, need to invest in R&D to add EV models or improve the fuel consumption efficiency of existing car models. Otherwise, the company would need to buy credits from companies such as BYD. We believe the Central Government would gradually substitute EV subsidies with Parallel Measurements to drive EV growth. At the moment, the Parallel Measurements of Average Fuel Consumption and NEV credits are gradually substituting subsidies to drive growth in the EV market. Calculation method for parallel measurements:

Average fuel consumption = ∑ (fuel consumption * units produced or imported)/total units produced or imported Negative points: Average fuel consumption > 5L per 100km in 2020  Total negative points = (manufacturer’s average fuel consumption - 5L per 100km) * units sold Positive points: Average fuel consumption < 5L per 100km in 2020  Total positive points = (5L per 100km - manufacturer’s average fuel consumption) * units sold Each NEV credit sold by the auto company is counted as positive points, depending on the battery’s driving range (Figure 20). A company would need to clear its negative points or its production of high fuel consumption vehicles would be suspended.

Figure 20: Calculation of NEV points Vehicle type 80≤R<150 100≤R<150 250≤R<350 R≥350 R≥50 BEV 2 3 4 5 - PHEV - - - - 2 FCEV - - 4 5 - Source: MIIT, MoF, MOT

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iii. Stepping down of government subsidies. According to New Energy Vehicles Promotion and Financial Support, we list below the Central Government’s subsidies. The Central Government would tone down subsidies by 40% in 2019-2020, from 20% in 2017-2018, compared to levels seen in 2016. In addition, in different provinces, local government subsidies would be capped at 50% of the Central Government’s subsidies. For example, in Beijing, the purchase of BAIC EU260, priced at CNY205,900, which has a driving range of 260km, was subsidised by CNY55,000 from the Central Government, and CNY55,000 from the local Government in 2016. In 2017, the subsidy has been lowered to CNY44,000 from the Central Government and CNY22,000 from the Beijing Government.

Figure 21: EV subsidies: 2013-2020 (in CNY‘000) Vehicle type Driving range (km) 2013 2014 2015 2016 2017-2018 2019-2020

BEV 80≤R<150 35 33.25 31.5 - - - 100≤R<150 - - - 25 20 15 150≤R<250 50 47.5 45 45 36 27 R≥150 60 57 54 55 44 33 PHEV R≥50 35 33.25 31.5 30 24 18 FCEV - 200 190 180 200 200 200 Source: MoF, MIIT, NDRC

Figure 22: NEV R&D investments by corporates Corporate Date of anouncement Investment amount (CNYbn) Purpose Jianghuai Auto Jul 2015 4.5 NEV and parts R&D GWM Jul 2015 16.8 NEV R&D BYD Jul 2015 15 Strengthen NEV R&D Changan/SAIC/BAIC/GAC Before 2015 N/A NEV strategy Geely Jul 2015/Apr 2016 8.3 FCEV/AMA platform Source: Companies data

Subsidies are a major factor driving NEV sales. According to the 2013-2020 EV subsidy policy (Figure 21), the Central Government provides a subsidy of CNY25,000-55,000 on each vehicle, and local governments would pay almost the same amount to match the Central Government’s subsidy.

Figure 23: Subsidies for EV buses: 2016-2020 (in CNY’000) Vehicle type Standard length Driving range (km) (10

Stricter policies help improve NEV industry concentration Total EV sales went through a period of rapid growth from 2013 to 2015, with a 3-year CAGR of 157%, supported by a strong government push and subsidy support. In 2016, EV sales slowed to 56%, due to governance over-subsidy fraud. Going forward, we expect Chinese EV sales to continue to stabilise. NEV subsidies have stepped down gradually. Furthermore, the Central Government has restructured the NEV sector in 2016 as a result of subsidy fraud in 2015 and 2016 – it formulated policies to punish companies that were involved in subsidy fraud in 2016.

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Based on falling subsidies, punishment imposed for NEV subsidy fraud, and intensified competition between NEV manufacturers, we believe that the Government is keen to support a few competitive NEV manufacturers towards success. We believe this would actually increase NEV manufacturers’ competitiveness and improve industry concentration. At the moment, we believe that competition is undergoing the Matthew Effect, ie we would continue to see top auto players leading the NEV market There are generally two types of companies in the NEV market: i. Private companies such as BYD, Geely, and GWM. We believe local brands are the major leaders in the NEV industry, especially these three companies which have proven their capabilities in building NEVs, including investing in R&D, putting in capital resources and technology of their own; ii. State-owned enterprises (SOEs) such as BAIC Motor (BAIC) (1958 HK, NR), SAIC Motor (SAIC) (600104 CH, NR) and Chongqing (Changan) (000625 CH, NR). These SOEs benefit both from their government background and corporations with foreign brand names to build NEVs under their own brands. For example, BAIC’s E150, GAC’s , and Changan’s Eado. However, concerns include inefficiency and less aggressiveness compared with private companies.

EV margin squeeze As discussed above, EV sales would be sustained by government policies. Nevertheless, the step down in government subsidies would potentially impact EV margins. Furthermore, in order to gain market share, companies such as BYD would provide discounts to customers, thereby squeezing its own gross profit margins. As in the example discussed above, a BAIC EU260, priced at CNY205,900, with a driving range of 260km, has seen its subsidy fall 40% to CNY66,000 in 2017 from CNY110,000 in 2016. Under such an environment, original equipment manufacturers (OEMs) are trying to enter the market and gain market share first, in order to secure their positions. According to the national development and reform commission (NDRC), it is not necessary to support more than three NEV CV companies. It believes that in terms of industry concentration and resource efficiency, three NEV CV manufacturers sharing the market should be reasonable. We view Bus (600066 SH, NR) and BYD as the most competitive players in the NEV CV segment.

SUVs: The Growth Continues We forecast a 4-year CAGR of 13% for SUV sales in China for 2017-2020, with SUV sales reaching 48% of PV sales by 2020. SUV sales reached 8.9m units in 2016, and accounted for 37% of total PV sales, growing from 1.62m units in 2011 (11% of total PV sales) – this represented a CAGR of 41% during that time frame.

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Figure 24: China’s SUV sales and forecast Figure 25: PV sales market share by segment

Source: CPCA Source: CPCA

Chinese consumers prefer bigger vehicles with the same fuel consumption We found it interesting that Chinese consumers appear to value space in passenger vehicles but, at the same time, are concerned about fuel consumption. Over time, small cars (A00/A0 segments) have been losing market share in China, primarily to larger-sized vehicles (A/B/C segment). As shown in Figure 26, from 2010 to 2016, the market share of compact vehicles in segment A increased by 13ppts to 67% from 54%. On the contrary, market share for the A00 and A0 segments together fell by 14ppts to 13% from 27%. The B and C segments’ market share stabilised at 20% during the same period. At the same time, market share for sedans was down to 50% in 2016 from 70% in 2011, as shown in Figure 25. With policy support (50% cut in auto purchase tax for vehicles with 1.6L displacement and below), SUV sales went up 44% YoY in 2016 – this compares with a mere 4% YoY growth in sedan sales during the same period.

Figure 26: China’s PV sales by segment

Source: CPCA

See important disclosures at the end of this report 15

Automobiles & Components Hong Kong Sector Initiation

5 May 2017

Figure 27: PV sales trend by displacement

Source: CPCA

However, vehicles with displacement of 1.6L and under remain the fastest-growing segment, as shown in Figure 26.

Strong SUV demand in lower-tier cities. The share of total PV sales from China’s third- and lower-tier cities increased by almost 12ppts to 49% in 2013, from 37% in 2006, according to Xinhuaxin Consulting. For example, Chongqing, Tibet, Guizhou and some central and western provinces registered GDP growth of 10% in 2016. We expect SUV demand growth to be driven primarily by increasing sales in third- and fourth-tier cities, as vehicles with better road- handling abilities are better positioned in markets with relatively poor road infrastructure.

SUV sales to be driven by rising replacement demand i. According to Cred Data Consulting’s survey conducted in Oct 2016, out of over 20,792 replacement buyers and 7,114 potential replacement buyers, SUV owners showed high loyalty (55%) in the replacement choice of SUVs. Mid-sized car owners also showed high loyalty (40%) in the replacement choice of mid-sized cars. Furthermore, owners tended to buy SUVs or mid-sized cars as their replacement choice; ii. China’s second-child policy makes SUVs a necessary for most Chinese families. In Oct 2015, the plenary session of the Chinese Communist Party announced the second child policy, and we expect the new policy to drive demand for MPVs and SUVs with more room and seating capacity; iii. To satisfy the need for long distance travel. As most first-, second- and third-tier cities are equipped with convenient public transportation, the purpose of family cars is for long distance travelling.

Concerns over SUV margin squeeze due to fierce competition going forward We believe that SUV sales would continue to grow at 15% and 13% in 2017 and 2018 respectively. As new SUV models are launched in 2017 and 2018, there would be fierce competition between JV SUVs and local brand SUVs. SUVs and CUVs generally enjoy relative better margins vs sedans. CUVs generally enjoy the same pricing as SUVs, but its manufacturing cost is in fact similar to sedans – this is as the majority of CUV chassis is the same as a sedan but with the bigger wheels and a larger box. As a result, we expect greater pricing competition and margin pressure in the future.

See important disclosures at the end of this report 16

Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components Buy Geely Automobile Holdings Target Price: HKD12.00 Price: HKD10.20 A Newcomer To The 1000K Club Market Cap: USD11,711m Bloomberg Ticker: 175 HK

We initiate coverage on Geely with BUY and TP of HKD12.00 (17% upside). Share Data We expect it to catch up with GWM to become a leading local OEM in Avg Daily Turnover (HKD/USD) 844m/107m terms of annual sales volume (Geely’s 1.42m units vs GWM’s 1.48m units 52-wk Price low/high (HKD) 3.65 - 12.5 by 2019F). Its attractive products portfolio would help to maintain its stellar growth in 2017F-2018F, in our view. Also, margins may widen Free Float (%) 49 despite policy headwinds, thanks to product mix upgrades and cost Shares outstanding (m) 8,917 savings from Volvo’s CMA platform. Our TP implies 2017F P/E of 12.9x Estimated Return 17% (2SD above its 3-year mean) as we expect the stock to outperform the lacklustre market by a wide margin. Shareholders (%) Proper Glory Holding Inc 29.5 Strong model cycle in 2017 and 2018. We expect Geely Automobile Holdings (Geely) to book sales of 1.1m, 1.31m and 1.42m units in 2017-2019 respectively. This implies a 3-year sales CAGR of 23%, driven by a robust model portfolio and new car pipeline. After launching a strong new model cycle last year, the company should be able to continue booking healthy sales. The Share Performance (%) sales volume of its Boyue, New Emgrand (EC7) and GS models may reach over YTD 1m 3m 6m 12m 1m units in 2017. This is comparable to ’ (GWM) (2333 HK, Absolute 37.9 (15.5) 4.8 34.1 166.8 NEUTRAL, TP: HKD8.13) sales of 1.07m units in 2016. Relative 25.7 (17.2) (1.9) 25.1 146.5 Lynk & Co continues to deliver strong new models with quality designs, and Source: Bloomberg auto parts along with the support of Volvo’s compact modular architecture Geely Automobile Holdings (175 HK) (CMA) platform. According to management, Lynk & Co would launch its sport Price Close Relative to Hang Seng Index (RHS) utility vehicle (SUV) SUV-C01 in 4Q17, and first sedan, C03 in 1H18, plus 15 325 13 283 another new model. Geely would also introduce a new multi-purpose vehicle 11 242 9 200 (MPV) in 2H18, on top of new generation Borui and New Emgrand models next 7 158 year. In 2019, Lynk & Co would launch three more vehicle models. 5 117 3 75 300 Lynk & Co continues to drive sales. We expect sales to hit 250 200 6,000/180,000/264,000 units in 2017-2019 respectively. 150 100 Geely’s success is due to Volvo. Volvo is definitely its crown jewel and is the 50

factor that sets it apart from other local brands. So far, we believe synergies Volm

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between the two brands are positive and we remain excited over the CMA Jul

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Sep Nov May platform (a joint effort between Geely and Volvo), which cuts platform costs and improves R&D efficiencies. We also look forward to a sales boom for Lynk & Co, Source: Bloomberg as its first model built on the CMA platform may break the price ceiling for local brands. In the long run, we expect Volvo’s expertise in car safety to help differentiate Geely from not only its local competitors, but also JV brands and even IT-related auto manufacturers (eg Alphabet (GOOG US, NR) and Tesla).

Valuations. Our TP is based on 2017F P/E of 12.9x, 2SD above its 3-year P/E average – this reflects Geely’s strong new model pipeline, margin improvement and product upgrades. Our TP is backed by our DCF fair value of HKD13.50. Key risks include lower-than-expected sales volume for the Boyue, GS and EC7 models. Other risks are lower-than-expected margins (due to a lower purchasing tax discount) and insufficient cost savings from the CMA platform.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (CNYm) 30,138 53,722 81,173 102,831 112,692 Reported net profit (CNYm) 2,261 4,738 7,240 9,126 10,463 Recurring net profit (CNYm) 2,261 4,738 7,240 9,126 10,463 Recurring net profit growth (%) 8.4 109.6 52.8 26.0 14.7 Recurring EPS (CNY) 0.26 0.53 0.81 1.02 1.17 DPS (CNY) 0.03 0.11 0.08 0.10 0.12 Recurring P/E (x) 35.3 17.0 11.2 8.8 7.7 P/B (x) 4.08 3.27 2.57 2.03 1.64 P/CF (x) 8.23 6.93 5.98 4.98 4.17 Dividend Yield (%) 0.4 1.2 0.9 1.1 1.3 Analyst EV/EBITDA (x) 18.3 8.9 5.4 3.4 1.8 Zhuang Dan Return on average equity (%) 12.3 21.6 26.1 26.0 23.8 Net debt to equity net cash net cash net cash net cash net cash +852 2103 9414 Our vs consensus EPS (adjusted) [email protected]

Source: Company data, RHB

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Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Financial Exhibits

Financial model updated on : 2017-05-04. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (CNY) 0.26 0.53 0.81 1.02 1.17 Consumer Cyclical EPS (CNY) 0.26 0.53 0.81 1.02 1.17 Geely Automobile Holdings DPS (CNY) 0.03 0.11 0.08 0.10 0.12 Bloomberg 175 HK BVPS (CNY) 2.22 2.77 3.52 4.45 5.52 Buy Weighted avg adjusted shares (m) 8,810 8,917 8,917 8,917 8,917

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Our HKD12.00 is based on 12.9x PE of its earnings in Recurring P/E (x) 35.3 17.0 11.2 8.8 7.7 2017E, 2SD above its 3 year PE average, considering P/E (x) 35.3 17.0 11.2 8.8 7.7 its strong new model pipeline, margin improvement and product upgrade, backed by our DCF of HKD13.5. P/B (x) 4.08 3.27 2.57 2.03 1.64 FCF Yield (%) 7.5 10.5 14.7 18.1 22.0 Key drivers Dividend Yield (%) 0.4 1.2 0.9 1.1 1.3 Strong product pipeline-Boyue, EC7 continue to add EV/EBITDA (x) 18.3 8.9 5.4 3.4 1.8 incremental sale volume and industrial upgrades EV/EBIT (x) 25.9 11.4 6.3 3.7 2.0

including the car, auto parts, detailing, technology and design. Income statement (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F

Total turnover 30,138 53,722 81,173 102,831 112,692 Key risks Gross profit 5,471 9,842 14,871 19,044 21,208 Worse than expected auto sales of Boyue and EC7 EBITDA 3,874 7,523 10,319 12,307 14,047 models. Depreciation and amortisation (1,143) (1,654) (1,501) (1,080) (1,210) Company Profile Operating profit 2,731 5,868 8,819 11,226 12,837 Geely Automobile Holdings Limited, through its Net interest (6) (30) (119) (261) (264) subsidiaries, manufactures and sells automobiles and Income from associates & JVs 150 (9) 0 0 0 related components. Pre-tax profit 2,875 5,830 8,700 10,965 12,573 Taxation (586) (1,034) (1,450) (1,827) (2,095) Geely’s 3-year forward P/E Minority interests (28) (58) (10) (13) (14) Recurring net profit 2,261 4,738 7,240 9,126 10,463

Cash flow (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital 5,040 3,621 4,729 5,957 7,657 Cash flow from operations 9,694 11,646 13,499 16,195 19,364 Capex (3,677) (3,141) (1,619) (1,619) (1,619) Cash flow from investing activities (4,534) (2,557) (1,710) (1,713) (1,715) Proceeds from issue of shares 256 1,135 0 0 0 Dividends paid (281) (960) (724) (913) (1,046) Cash flow from financing activities (1,257) 1,477 (657) (843) (975)

Source: Bloomberg Cash at beginning of period 7,203 9,167 15,045 26,178 39,817 Net change in cash 3,902 10,566 11,132 13,639 16,674 Ending balance cash 11,126 19,802 26,178 39,817 56,491

Balance sheet (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 9,184 15,045 26,178 39,817 56,491 Tangible fixed assets 13,298 17,119 17,237 17,776 18,185 Total investments 1,994 1,002 1,032 1,063 1,095 Total other assets 1,654 2,213 2,279 2,348 2,418 Total assets 42,293 67,583 94,529 118,701 135,209 Short-term debt 0 174 180 185 191 Total long-term debt 1,929 2,068 2,130 2,194 2,260 Total liabilities 22,553 42,897 63,317 79,264 86,340 Shareholders' equity 19,524 24,437 30,953 39,166 48,583 Minority interests 216 249 259 272 286 Total equity 19,740 24,686 31,212 39,438 48,869 Net debt (7,255) (12,803) (23,868) (37,438) (54,040) Total liabilities & equity 42,293 67,583 94,529 118,701 135,209

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) 38.6 78.3 51.1 26.7 9.6 Recurrent EPS growth (%) 8.3 107.1 52.8 26.0 14.7 Gross margin (%) 18.2 18.3 18.3 18.5 18.8 Operating EBITDA margin (%) 12.9 14.0 12.7 12.0 12.5 Net profit margin (%) 7.5 8.8 8.9 8.9 9.3 Dividend payout ratio (%) 12.4 20.3 10.0 10.0 10.0 Capex/sales (%) 12.2 5.8 2.0 1.6 1.4 Interest cover (x) 26.4 50.8 74.1 43.0 48.6

Source: Company data, RHB

See important disclosures at the end of this report 18

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Set To Become a New Local Sales Champion We initiate coverage on Geely with a BUY rating. Our TP of HKD12.0, using a target 2017F P/E of 12.9x, is 2SD above its 3-year average. Our target P/E multiple is above the global auto original equipment manufacturers’ (OEMs) mean P/E of 11.4x. We believe that this is appropriate, given our expectations that the company’s strong model portfolio would continue to drive its auto sales and growth potential going forward. We expect its market share to expand to 5.1% from 3.3% in 2019, driven by: i. Strong model portfolio launched in 2016, such as the New Emgrand EC7, Boyue, GL and GS, which would continue to drive sales in 2017. We believe Geely’s current sales momentum would easily reach the 1000K club in 2017, close to GWM’s levels; ii. Strong pipeline of new products. The Lynk & Co series would continue to add incremental sales volume and improve margins from 2018 onwards. Lynk & Co’s first SUV, the C01 SUV is scheduled to be launched in 4Q17, followed by the C03 in 2018; iii. Margin improvements, driven by the upgraded product mix; iv. Margin and efficiency improvements supported by the CMA platform.

Figure 1: Geely’s new models – 2015 and 2016 Figure 2: Geely’s sales volume breakdown – 2016

Source: RHB, CPCA, Company data Source: RHB, CPCA, Company data

Figure 3: Geely’s sales volume breakdown and forecasts Figure 4: Geely’s sales volume and market share

Source: RHB, CPCA, Company data Source: RHB, CPCA, Company data

See important disclosures at the end of this report 19

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Strong model cycle for 2017-2019 In 2016, Geely registered sales of 768,000 units (+45% YoY) driven by its strong new model portfolio, We are forecasting sales of 1,095,000 units, 1,308,000 units and 1,419,000 units for 2017-2019 respectively, which is a CAGR of 23%, driven by its pipeline of new car models. Post the boom in new models in 2016, Geely is expected to continue to deliver popular new models with good design, auto parts, and support based on Volvo’s CMA platform in 2017 and 2018. According to management, the first Lynk & Co SUV-C01 should be launched in 4Q17, and the first sedan, the C03 in 1H18, with another model in 2H18. Also in the works are a Geely MPV in 2H18, and new generation Borui and New Emgrand models in 2018. In 2019, there are plans to launch three new Lynk & Co models. We are encouraged by Geely’s current strong model portfolio: i. The New Emgrand (EC7) – a compact sedan that sold more than 223,000 units, beating the performances of many multinational JV rebadged cars, such as the Bora and Golf – ranked 18th on the list of best-selling models in China (SUVs, MPVs, and sedans included); ii. The Boyue – priced at CNY98,800-157,800 and launched in Mar 2016, saw sales ramped up to 20,000 units in just six months, from 1,000 units per month initially. We view its price range as attractive, within the CNY100,000-160,000 range where most of the competitive compact SUV models are priced. This range includes best-selling models, such as the GWM’s H6 (No.1 best-selling SUV with 58,000 units sold in 2016) and Guangzhou Auto’s (GAC) GS4 (No.3 best-selling SUV with sales of 330,000 units in 2016); iii. GS – its compact SUV, which was launched in Mar 2016, and saw sales ramp up to 10,000 units per month in just five months, from 2,800 units per month initially; iv. Vision SUV – a compact SUV that was launched in Jul 2016, with sales rising to 10,000 units per month from 4,000 units per month in just two months; v. Vision – the compact sedan, which delivered total sales of 138,000 units in 2016. In the list above, we believe the most valued model is Boyue, priced at over CNY100,000, as it is not easy for local brands to be priced above that level and having sold more than 20,000 units per month. Given that it was a new model launch, we expect Geely to register sales of 20,000 units of Boyue per month in 2017. We believe Geely’s current model portfolio, with mostly new and upgraded models, is attractive and well-balanced. The existing mix of popular sedans and SUVs would easily drive 2017’s sales to 1m units in our view, which is comparable with GWM’s 1.074m units in 2016. As Geely’s popularity rises, we believe it would soon catch up with GWM’s market cap. In addition, the upcoming Lynk & Co model would be available by end-2017, which we believe would be another strong model series to underpin sales volume over the next couple of years.

Volvo – a key factor behind Geely’s success We view Volvo as a differentiating factor for Geely, when compared to other domestic OEMs. Volvo has come a long way, from being sold by AB Volvo to Ford in 1999, and thereafter sold to Geely in 2010. Synergies gained. The CMA platform, designed by China Euro Vehicle Technology Center (CEVT) – formed by Geely and Volvo – has brought benefits to Geely in terms of an upgraded image, improved technology, cost savings and enhanced efficiency. According to management, the CMA platform has helped Geely save thousands of CNY in terms of platform cost per car, which usually goes up to more than CNY10,000 per car. Geely’s GPM should improve by 0ppt/0.2ppts/0.3ppts from cost savings on the CMA platform over 2017-2019 respectively, which would offset pressures from the cuts in purchase tax discounts. At the same time, Geely’s parent company – which owns the CMA platform – did not incur any additional platform capex, as the platform expense was reflected in the cost of each car.

See important disclosures at the end of this report 20

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Over the longer term, we believe Geely’s acquisition of Volvo for its reputation in safety was a good strategic move, as it would help Geely anchor its success amid tough competition with smart car and electric vehicle (EV) models. We believe this competitive edge would extend beyond auto manufacturers in this mix, as we observe IT-related companies such as Alphabet and Tesla are advancing into the auto manufacturing space given their edge in smart systems development and EVs. This has lowered the bar for new entrants into the auto industry. Nevertheless, we believe a solid reputation in safety would remain the core differentiating factor between traditional auto manufacturers and IT-focused auto manufacturers.

CMA platform improves R&D efficiency and GP margins The CMA platform’s vehicle product line unites expertise and assets shared by Volvo and Geely. It is based on Volvo’s scalable platform architecture (SPA) that debuted in 2013, on which Volvo’s S40 model is built. The core of the module’s architecture is a fixed automotive chassis, suspension, electrical system and system. It has the flexibility for 3-cylinder and 4-cylinder engines, hybrid EVs (HEVs), and EVs and A0/A/B segment vehicles, covering sedans, crossovers, and SUVs. Management has highlighted that the CMA platform translates to savings of roughly a few thousand CNY on platform cost per car. The platform cost is usually around CNY10,000 for a CNY100,000+ car. With this flexibility in assembly, the CMA platform would mean savings on platform expenses as well as on research and development (R&D) time. At the same time, this shared platform with Volvo enhances Geely’s image, in our view.

Lynk & Co – a new driver On 17 Apr 2017, Lynk & Co’s SUV was launched at the 2017 Shanghai Auto Show. This was Geely’s very first vehicle built on the CMA platform, designed by Peter Horbury, who was previously a designer for Volvo. The first model in the C01 series would be available for sale by end-2017, and the C03 sedan, should be available in 2018. We forecast sales volume for the Lynk & Co series to reach 6,000 units, 180,000 units and 240,000 units respectively in 2017-2019. Our recent update with Geely’s management indicated that dealers are eager to get involved in its sales channel, but only one in four dealers can be included due to high demand. Lynk & Co’s edgy and international designs stand out amid local brands, along with their high-quality inner decoration, signature car sharing, and in-car mobile phone connectivity.

Figure 5: Geely’s Lynk & Co vs GWM’s WEY models Price range (CNY'000) Brand Available for sale SUV/Sedan Compact/mid/small- Lowest Highest EV/PHEV variant Key feature /MPV sized Geely's Lynk & Co C01 4Q17 SUV Compact 168 N/A Available in 2018 Connectiviy/car-sharing GWM's WEY WEY VV7 Apr 2017 SUV Mid-sized 168.8 188.8 Available in 2018 Connectivity WEY VV5 2H17 SUV Compact N/A N/A Available in 2018 Connectivity Source: RHB, Companies data

See important disclosures at the end of this report 21

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 6: Lynk & Co’s C01

Source: Company

Figure 7: Lynk & Co’s Concept 03

Source: Company

See important disclosures at the end of this report 22

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Forecasts We forecast 3-year CAGR of 28% and 27% for revenue and earnings respectively for Geely, on increasing unit sales for the New Emgrand, Lynk & Co, Boyue, and other models. We expect gross margin improvements of 0ppt in 2017, 0.2ppts in 2018 and 0.3ppts in 2019. This would be an improvement from a gross margin of 18.3% in 2016, driven by a better revenue mix of upgraded products, and cost savings on the CMA platform, which would be somewhat offset by cuts in purchase tax discounts.

Figure 8: Geely’s financials CNYm FY14 FY15 FY16 FY17F FY18F FY19F Sales revenue 21,738 30,138 53,722 81,173 102,831 112,692 COGS 17,776 24,668 43,880 66,302 83,786 91,483 Gross profit 3,963 5,471 9,842 14,871 19,044 21,208 Other income (excl. interest) 1,055 1,066 1,131 1,396 1,401 1,502 Selling and distribution costs 1,250 1,568 2,503 3,700 4,688 5,137 Administration expenses 1,118 2,176 2,560 3,706 4,489 4,694 Other expenses, net 60 62 42 42 42 42 EBIT 2,589 2,731 5,868 8,819 11,226 12,837 Income from JCE and associates 32 150 -9 0 0 0 Net interest expense 24 6 30 119 261 264 Exceptional gain/(loss) 0 0 374 0 0 0 Profit before tax 2,597 2,875 6,204 8,700 10,965 12,573 Tax 494 586 1,034 1,450 1,827 2,095 Net profit after tax 2,103 2,289 5,170 7,250 9,138 10,478 Minority interests 19 28 58 10 13 14 Profit attributable to shareholders 2,085 2,261 5,112 7,240 9,126 10,463

EPS, basic 0.24 0.26 0.58 0.82 1.04 1.19 EPS, diluted 0.24 0.26 0.57 0.81 1.02 1.17

Financial Ratios % FY14 FY15 FY16 FY17F FY18F FY19F BVPS (CNY) 1.98 2.24 2.80 3.55 4.48 5.55 ROE 12.37 12.15 23.02 25.90 25.83 23.70 ROA 5.88 5.68 9.31 8.93 8.56 8.24 ROIC 11.28 10.44 20.13 24.31 24.84 22.97 ROE 12.50 12.28 23.26 26.14 26.03 23.85 Dividend 173.83 280.96 960.05 723.99 912.56 1,046.31 DPS (CNY) 0.02 0.03 0.11 0.08 0.10 0.12 Source: RHB, Company data

See important disclosures at the end of this report 23

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Valuations Our HKD12.00 TP is based on 2017F P/E of 12.9x, or 2SD above its 3-year average P/E. We believe this is justified considering its strong new model pipeline, margin improvement and product upgrades. Our TP is backed by our DCF valuation of HKD13.50.

Figure 9: Geely’s DCF valuation CNYm 2017F 2018F 2019F 2020F 2021F 2022F TV EBIT*(1-t) 7,349 9,356 10,698 10,791 11,870 13,058 Dep 1,501 1,080 1,210 1,340 1,473 1,621 Chg in working capital (4,729) (5,957) (7,657) (3,098) (3,408) (3,749) Capex (1,619) (1,619) (1,619) (1,619) (1,619) (1,619) Dividends from investments 0 0 0 0 0 0 FCFF 2,502 2,860 2,632 7,413 8,317 9,310 100,248 Discount factor 1.00 1.11 1.24 1.39 1.54 1.72 1.72 PV of FCFF 2,502 2,566 2,118 5,352 5,386 5,409 58,241

Present corporate value 81,573 + cash 26,178 - Borrowings (2,310) Present equity value 105,441

DCF value per share TP (HKD) 13.5

Assumptions: WACC 11.5% Risk-free rate 4.5% Beta 1.3 Market return 10.2% Cost of equity 12.1% Cost of debt 6% Debt/(Debt+Equity) 10.0% Terminal growth 2% Source: RHB, Company data

Figure 10: Geely's 3 year forward P/E band Figure 11: Geely's 3 year forward P/B band

Source: Bloomberg, RHB Source: Bloomberg, RHB

See important disclosures at the end of this report 24

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 12: Geely’s peer comparison I 3-Yr 3-mth EPS EPS Mkt cap PER PER PER EPS Div yld Div yld P/B Hist P/B FY1 Company Ticker Price avg t/o FY1 FY2 PEG (x) (US$m) Hist (x) FY1 (x) FY2 (x) Cagr Hist (%) FY1 (%) (x) (x) (US$m) YoY% YoY% (%) GEELY AUTOMOBILE 175 HK 10.22 11,710 114.7 15.6 11.0 8.7 41.9 26.0 27.1 0.4 0.4 0.9 3.3 2.6 HSI 24,425 13.6 12.1 11.1 12.1 9.4 9.9 1.2 3.4 3.4 1.3 1.2 CSI300 3,440 15.8 13.2 11.7 19.2 13.2 183.4 0.1 2.0 2.2 1.9 1.6 Sector avg (Auto) 13.0 11.2 9.8 20.2 13.0 12.8 1.6 2.3 3.0 2.2 1.8 Chinese OEMs BYD CO LTD-H 1211 HK 44.00 17,981 30.0 20.8 20.1 19.2 3.5 4.4 5.0 4.0 1.0 1.0 2.2 1.8 GREAT WALL MOT-H 2333 HK 8.11 13,964 80.2 6.2 6.0 5.3 3.8 12.3 8.5 0.7 2.8 5.0 1.3 1.2 DONGFENG MOTOR-H 489 HK 8.26 9,145 23.9 4.7 4.9 4.7 (2.9) 3.1 2.0 2.4 2.8 3.2 0.7 0.6 GUANGZHOU AUTO-H 2238 HK 12.96 20,023 42.4 11.7 8.5 7.6 37.6 12.1 19.2 0.4 1.8 3.4 1.6 1.4 BRILLIANCE CHINA 1114 HK 13.26 8,588 29.5 16.1 12.3 9.5 30.6 29.9 28.7 0.4 0.8 0.9 2.5 2.2 GREAT WALL MO-A 601633 CH 12.28 13,964 69.5 10.6 10.5 9.6 0.9 9.4 4.9 2.2 1.5 2.8 2.3 2.1 GUANGZHOU AUTO-A 601238 CH 26.49 20,023 15.6 27.0 18.2 15.9 48.5 14.2 23.1 0.8 0.8 1.6 3.9 3.3 SAIC MOTOR-A 600104 CH 27.87 47,219 125.1 9.6 8.8 8.2 8.6 8.1 7.8 1.1 4.9 6.3 1.5 1.5 CHONGQING CHAN-A 000625 CH 14.88 9,621 76.6 6.8 6.2 6.1 8.8 2.4 2.3 2.7 4.3 5.0 1.6 1.4 Average 12.62 10.62 9.57 15.48 10.67 11.26 1.64 2.30 3.25 1.94 1.71 European OEMs BAYER MOTOREN WK BMW GY 88.13 62,494 129.7 8.4 8.6 8.4 (1.6) 2.2 0.8 11.3 3.6 4.1 1.2 1.1 DAIMLER AG DAI GY 68.19 79,591 236.5 8.6 7.6 7.8 12.0 (1.6) 3.5 2.2 4.8 5.0 1.3 1.1 FIAT CHRYSLER AU FCA IM 10.24 16,941 149.3 N/A 5.1 4.3 N/A 18.7 N/A N/A N/A 0.2 N/A 0.8 PEUGEOT SA UG FP 18.86 18,403 64.1 8.7 8.2 7.5 6.3 8.9 6.7 1.2 N/A 3.0 1.3 1.1 PORSCHE AUTO-PRF PAH3 GY 54.02 18,046 20.7 12.1 5.1 4.6 137.2 10.5 39.8 0.1 1.9 2.6 0.6 0.5 RENAULT SA RNO FP 84.21 27,179 72.7 6.7 6.0 5.6 11.4 6.5 7.3 0.8 2.9 4.0 0.8 0.7 VOLKSWAGEN AG VOW GY 147.60 79,965 11.5 14.4 6.3 5.9 127.6 6.3 36.8 0.2 0.1 2.0 0.8 0.8 VOLKSWAGEN-PREF VOW3 GY 144.40 79,965 147.8 14.1 6.2 5.8 127.6 6.3 36.8 0.2 0.1 2.1 0.7 0.7 Average 10.43 6.64 6.25 60.05 7.21 18.81 2.28 2.22 2.87 0.95 0.85 US OEMs FORD MOTOR CO F US 11.07 44,081 466.1 9.5 7.2 6.6 33.4 7.7 13.4 0.5 5.9 5.6 1.4 1.3 GENERAL MOTORS C GM US 33.48 50,525 550.9 5.5 5.5 5.6 (0.9) (0.7) (2.1) N/A 4.5 4.6 1.1 1.0 Average 7.51 6.34 6.10 16.27 3.51 5.62 0.54 5.21 5.07 1.27 1.15 European OEMs SUBARU CORP 7270 JP 4,283 29,198 140.8 7.7 11.1 8.6 (31.2) 28.8 (1.7) N/A 3.4 3.4 2.4 2.2 HONDA MOTOR CO 7267 JP 3,235 51,936 131.5 9.5 9.4 8.7 0.8 7.8 9.2 1.0 2.8 3.1 0.8 0.8 MAZDA MOTOR 7261 JP 1,603 8,523 89.9 10.2 7.4 6.6 37.7 12.6 21.7 0.3 2.2 2.7 0.9 0.8 MOTOR CO 7201 JP 1,077 40,269 125.9 8.6 7.1 6.8 20.6 4.3 11.1 0.6 4.5 4.5 0.9 0.9 SUZUKI MOTOR 7269 JP 4,712 20,505 65.7 20.1 13.5 14.6 48.7 (7.8) 14.6 0.9 0.7 0.8 1.9 1.9 MOTOR 7203 JP 6,143 177,653 363.2 8.3 10.4 9.3 (20.1) 10.9 (1.4) N/A 1.6 3.4 1.1 1.0 Average 10.71 9.82 9.12 9.42 9.44 8.91 0.73 2.53 2.97 1.33 1.28 Korean OEMs HYUNDAI MOTOR 005380 KS 152,000 29,540 76.0 7.6 7.2 6.5 5.0 11.5 7.7 0.9 2.6 3.0 0.5 0.6 KIA MOTORS CORP 000270 KS 35,250 12,607 30.2 5.1 6.0 5.1 (15.1) 18.9 2.2 2.7 3.1 3.3 0.5 0.5 Average 6.34 6.62 5.77 (5.09) 15.20 4.97 1.83 2.88 3.15 0.50 0.54 India OEMs ASHOK LEYLAND AL IN 83.4 3,697 14.7 22.2 25.3 22.5 (12.2) 12.1 7.0 3.6 1.1 1.6 4.8 4.0 BAJAJ AUTO LTD BJAUT IN 2,928.6 13,200 12.8 22.4 21.1 19.3 6.2 9.2 8.6 2.5 0.2 2.2 6.5 5.8 HERO MOTOCORP LT HMCL IN 3,375.1 10,507 21.9 21.8 20.0 16.4 9.0 22.2 14.6 1.4 2.6 2.4 8.5 N/A MAHINDRA & MAHIN MM IN 1,335.5 12,898 27.1 24.6 19.8 15.7 24.3 26.0 21.5 0.9 0.9 1.1 2.8 2.6 MARUTI SUZUKI IN MSIL IN 6,644.9 31,210 52.1 26.7 24.8 20.4 7.4 21.6 20.7 1.2 0.5 1.2 5.4 5.1 TATA MOTORS LTD TTMT IN 438.1 21,838 53.9 13.4 20.1 11.3 (33.2) 78.6 17.9 1.1 0.0 0.3 1.8 1.8 Average 0 0 0 22 22 18 0 28 15 2 0.9 1.5 5.0 3.8 Turkish OEMs TOFAS TOASO TI 29.28 4,129 5.4 15.1 13.0 11.8 15.9 10.0 10.0 1.3 2.4 4.6 5.0 3.9 FORD OTO FROTO TI 39.24 3,881 3.9 14.4 13.2 11.6 9.2 13.9 12.3 1.1 5.2 6.0 4.6 4.0 Average 14.76 13.12 11.72 12.58 11.91 11.15 1.19 3.78 5.27 4.79 3.92 Note: Share price data as at 4 May 2017 Source: RHB Bloomberg

See important disclosures at the end of this report 25

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 13: Geely’s peer comparison II Gross Net Net Rev Hist Rev FY1 NP Hist NP FY1 ROE Hist ROE Sh px Sh px Company Unlev beta margin Hist margin margin (US$m) (US$m) (US$m) (US$m) (%) FY1 (%) 1-mth % 3-mth % (%) Hist (%) FY1 (%) GEELY AUTOMOBILE 7,790 11,771 741 1,050 1.3 18.3 9.5 8.9 23.3 25.9 (15.5) 4.8 HSI 9.4 10.0 0.3 5.9 CSI300 11.7 12.1 (1.4) 1.9 Sector avg (Auto) 59,029 62,033 3,035 3,403 1.0 18.0 3,825 8,172 17.3 16.7 1.4 2.1 Chinese OEMs BYD CO LTD-H 14,531 17,770 733 773 1.0 19.0 5.0 4.3 12.4 10.3 0.8 2.7 GREAT WALL MOT-H 13,745 16,253 1,530 1,589 1.4 21.5 11.1 9.8 22.4 21.4 (12.9) 0.4 DONGFENG MOTOR-H 17,753 19,080 1,937 1,893 1.0 14.3 10.9 9.9 14.7 12.7 (5.7) 0.1 GUANGZHOU AUTO-H 7,166 9,392 912 1,290 1.0 15.1 12.7 13.7 18.5 18.0 0.0 17.8 BRILLIANCE CHINA 743 813 534 694 1.2 3.3 71.8 85.4 16.9 18.8 (2.1) 19.7 GREAT WALL MO-A 13,745 16,388 1,530 1,537 1.0 21.5 11.1 9.4 22.4 20.7 (2.4) 7.6 GUANGZHOU AUTO-A 7,166 9,692 912 1,409 0.5 15.1 12.7 14.5 15.2 19.3 0.9 12.4 SAIC MOTOR-A 108,600 119,075 4,642 5,356 0.7 12.9 4.3 4.5 16.2 17.8 9.8 11.0 CHONGQING CHAN-A 10,863 11,865 1,492 1,592 0.4 13.9 13.7 13.4 24.1 24.1 (5.7) (4.2) Average 21,590 24,481 1,580 1,792 0.9 15.2 17.1 18.3 18.1 18.1 (1.9) 7.5 European OEMs BAYER MOTOREN WK 86,238 88,993 6,285 6,206 0.8 19.9 7.3 7.0 15.7 13.5 4.9 4.8 DAIMLER AG 140,362 146,758 7,808 8,678 1.3 20.9 5.6 5.9 17.8 15.7 0.6 0.7 FIAT CHRYSLER AU 101,674 105,864 1,651 2,846 1.1 14.2 1.6 2.7 10.0 15.8 4.4 0.0 PEUGEOT SA 49,483 51,563 1,584 1,836 1.4 19.1 3.2 3.6 14.9 15.0 2.1 7.6 PORSCHE AUTO-PRF 0.9 0.9 1,258 2,617 1.4 N/A 137,400 285,718 5.0 9.3 6.8 (2.8) RENAULT SA 46,930 52,921 3,131 3,706 1.5 21.4 6.7 7.0 11.6 12.7 5.1 (0.8) VOLKSWAGEN AG 198,981 203,963 4,917 10,379 1.3 18.9 2.5 5.1 6.6 12.2 6.5 (1.0) VOLKSWAGEN-PREF 198,981 203,963 4,917 10,379 1.4 18.9 2.5 5.1 6.6 12.2 7.5 (0.4) Average 102,831 106,753 3,944 5,831 1.27 19.03 17,179 35,719 11.04 13.30 4.74 1.02 US OEMs FORD MOTOR CO 151,800 143,114 4,596 6,217 1.4 10.7 3.0 4.3 12.4 21.9 (2.6) (11.9) GENERAL MOTORS C 166,380 162,987 9,427 8,980 1.4 18.1 5.7 5.5 23.2 19.7 (2.3) (7.8) Average 159,090 153,051 7,012 7,599 1.43 14.40 4.35 4.93 17.80 20.79 (2.47) (9.85) European OEMs SUBARU CORP 28,647 29,371 3,870 2,620 1.4 32.3 13.5 8.9 22.9 21.1 6.7 (1.5) HONDA MOTOR CO 124,073 129,317 5,465 5,479 0.8 22.4 4.4 4.2 8.8 8.6 (0.8) (5.5) MAZDA MOTOR 28,489 29,820 831 1,142 1.6 23.8 2.9 3.8 9.4 12.2 4.6 0.5 NISSAN MOTOR CO 108,034 103,024 4,643 5,346 1.1 19.6 4.3 5.2 10.3 12.6 3.5 (4.4) SUZUKI MOTOR 28,190 27,649 1,034 1,373 1.1 27.3 3.7 5.0 14.0 14.6 2.3 4.8 TOYOTA MOTOR 251,734 240,189 20,497 15,747 0.7 20.4 8.1 6.6 10.7 10.4 2.7 (4.7) Average 94,861 93,228 6,057 5,285 1.11 24.31 6.16 5.62 12.69 13.22 3.17 (1.79) Korean OEMs HYUNDAI MOTOR 82,674 86,270 4,773 4,838 0 18.9 5.8 5.6 6.5 7.9 0.0 10.5 KIA MOTORS CORP 46,535 47,008 2,432 2,092 0 19.8 5.2 4.5 10.8 8.6 (3.0) (2.5) Average 64,605 66,639 3,602 3,465 0.46 19.34 5.50 5.03 8.66 8.25 (1.51) 4.03

India OEMs ASHOK LEYLAND 3,218 3,051 167 134 0.5 N/A 5.2 4.4 22.5 16.0 (0.8) (11.7) BAJAJ AUTO LTD 3,467 3,416 589 626 1.0 N/A 17.0 18.3 31.3 29.7 5.2 4.3 HERO MOTOCORP LT 4,389 N/A 482 525 1.2 N/A 11.0 N/A 42.7 N/A 5.5 5.1 MAHINDRA & MAHIN 10,871 13,050 500 625 0.6 N/A 4.6 4.8 11.8 13.1 3.6 5.7 MARUTI SUZUKI IN 10,426 12,177 1,170 1,242 1.0 N/A 11.2 10.2 23.2 21.4 9.2 8.5 TATA MOTORS LTD 42,101 43,577 1,717 1,061 1.3 N/A 4.1 2.4 16.1 8.9 (6.8) (16.1) Average 12,412 15,054 771 702 1 N/A 9 8 25 18 3 (1) Turkish OEMs TOFAS 4,117 5,125 274 323 N.A 9.9 6.6 6.3 35.0 34.5 7.7 11.2 FORD OTO 5,156 5,878 269 296 0.6 11.4 5.2 5.0 34.8 29.6 10.8 12.1 Average 4,637 5,502 271 309 0.56 10.66 5.93 5.67 34.92 32.05 9.25 11.63 Note: Share price data as at 4 May 2017 Source: RHB, Bloomberg

See important disclosures at the end of this report 26

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Key Risks Key downside risks to our investment thesis include: i. Lower-than-expected sales volume of the EC7, Boyue and GS; ii. Lower-than-expected margins, due to the cuts on purchase tax discounts, and insufficient cost savings from the CMA platform. Upside risks include: i. Higher-than-expected sales of the EC7, Boyue and GL; ii. Faster-than-expected model rollouts, including the EV and PHEV SUVs; iii. Faster-than-expected ramp up at Lynk & Co.

Company Profile Geely is an automobile manufacturer, focusing on development, manufacturing and sales of passenger vehicles. The company sells most of its products domestically, but has expanded its sales volume through exports to other developing countries over the past few years.

Figure 14: Geely’s shareholding structure

Source: RHB, Company data, Wind, Bloomberg

See important disclosures at the end of this report 27

Geely Automobile Holdings Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

SWOT Analysis

 Strong car model portfolio  Margin pressure due to market  CMA platform, co-designed with Volvo, saves cost as slowdown well as improves brand image and R&D efficiency

 Lynk & Co sales could take off in 2018

 Low pricing model could suffer from cuts in purchase tax discounts

Recommendation Chart

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Source: RHB, Bloomberg

See important disclosures at the end of this report 28

Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components Neutral Great Wall Motor Co Target Price: HKD8.13 Price: HKD8.11 SUV Leader But Margins Under Pressure Market Cap: USD13,966m Bloomberg Ticker: 2333 HK

We initiate coverage on GWM with a NEUTRAL call and HKD8.13 TP (0% Share Data upside). We expect the company to maintain its leadership in China’s SUV Avg Daily Turnover (HKD/USD) 585m/75.1m market but only via sacrificing margins on keener competition. New brand 52-wk Price low/high (HKD) 5.54 - 9.90 WEY should upgrade its SUV portfolio although it may cannibalise its H6 line. GWM is trailing others in meeting fuel consumption targets by 2020, Free Float (%) 39 which may force it to tread into unfamiliar segments, in our view. Our TP Shares outstanding (m) 9,127 is based on 6x 2017F P/E or 1SD below the 3-year mean given its Estimated Return 0.2% deteriorating ROEs and projected 3-year EPS CAGR of only 8.6%. Shareholders (%)

Striving to sustain its sports utility vehicle (SUV) market share. We are Baoding Innovation Great Wall Asset 56.0 forecasting 2017-2019 auto sales of 1.2m, 1.3m and 1.5m units respectively at Management Co Ltd a 3-year CAGR of 11.2% for Great Wall Motors (GWM). BlackRock 2.5 By segment, we expect SUV sales to grow at a CAGR of 12.2% to 1,324,000 JPMorgan Chase & Co 2.2 units by 2019. This is slightly slower than our China SUV market growth Share Performance (%) forecast of 13%, due to fierce competition in the SUV market. Nevertheless, we YTD 1m 3m 6m 12m believe GWM’s SUV market share can be sustained at above 10%, driven by the launch of its new WEY brand, albeit partly offset by slowing sales. Absolute 12.0 (12.9) 0.4 11.1 38.6 Relative (0.2) (14.6) (6.3) 2.1 18.3 We expect growth in sedan sales to fall to a 3-year CAGR of 6%, on its weak Source: Bloomberg sedan portfolio, although higher electric vehicle (EV) sedan sales to offset fuel consumption pressures should cushion the impact (2016: -43% YoY). Great Wall Motor Co (2333 HK) Price Close Relative to Hang Seng Index (RHS) WEY a life saver? We view WEY as the key to GWM’s future success, as it 11.1 161 10.1 149 would significantly expand room for growth – without this breakthrough, its SUV 9.1 138 line-up would be limited to slow growth, in our view. We are cautious on its mid- 8.1 126 7.1 114 sized W01 SUV and first model under the WEY brand, but positive on the W02 6.1 103 5.1 91 compact SUV. We expect the W02 to be another popular model for GWM, 350 300 following the success of the /H6 variants. 250 200 Margin pressure. We estimate GPMs to go down to 23.8%, 23.3%, and 22.8% 150 100 in 2017-2019 respectively (2016: 24.6%) to reflect GWM’s CNY1bn customer 50

rebate announced on 16 Mar – this was to ease fierce SUV competition and Volm

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Sep Nov cuts in purchase tax discounts. Pressures to meet the 2020 deadline for the May average 5L/100km fuel consumption requirements have also worsened its revenue mix and increased research & development (R&D) investments, as the Source: Bloomberg company intends to sustain market share by sacrificing margins. We initiate coverage on GWM with a NEUTRAL call and HKD8.13 TP based on a 2017F P/E of 6x. Our target P/E is 1SD below the 3-year average trading P/E of 7.8x. We believe this is appropriate, given our concerns over margin deterioration. Our TP is supported by our DCF valuation of HKD8.50/share. Key downside risks include lower-than-expected sales volume for the WEY SUVs (especially the W02) due to increased competition from other SUVs, and less-than-expected margins due to price competition.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (CNYm) 76,033 98,616 112,081 132,832 152,057 Reported net profit (CNYm) 8,053 10,554 10,958 12,317 13,511 Recurring net profit (CNYm) 7,713 10,379 10,783 12,143 13,336 Recurring net profit growth (%) 0.0 34.6 3.9 12.6 9.8 Recurring EPS (CNY) 0.85 1.14 1.18 1.33 1.46 DPS (CNY) 0.27 0.35 0.36 0.40 0.44 Recurring P/E (x) 8.50 6.32 6.08 5.40 4.92 P/B (x) 1.71 1.39 1.19 1.03 0.90 P/CF (x) 7.4 19.3 21.7 4.9 4.3 Dividend Yield (%) 3.8 4.9 5.0 5.6 6.2 Analyst EV/EBITDA (x) 5.49 4.08 3.89 3.36 2.95 Zhuang Dan Return on average equity (%) 22.4 24.7 21.4 20.8 19.8 Net debt to equity net cash net cash net cash net cash net cash +852 2103 9414 Our vs consensus EPS (adjusted) [email protected]

Source: Company data, RHB

See important disclosures at the end of this report 29 Powered by the EFA Platform

Great Wall Motor Co Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Financial Exhibits

Financial model updated on: 2017-05-04. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (CNY) 0.85 1.14 1.18 1.33 1.46 Consumer Cyclical EPS (CNY) 0.88 1.16 1.20 1.35 1.48 Great Wall Motor Co DPS (CNY) 0.27 0.35 0.36 0.40 0.44 Bloomberg 2333 HK BVPS (CNY) 4.20 5.18 6.02 6.97 8.00 Neutral Weighted avg adjusted shares (m) 9,127 9,127 9,127 9,127 9,127

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Our HKD 8.13 TP is based on 6x P/E, 1SD lower than Recurring P/E (x) 8.50 6.32 6.08 5.40 4.92 GWM’s 3 year average of 7.8x, which reflects our P/E (x) 8.14 6.21 5.98 5.32 4.85 concerns over its margin deterioration and auto market slowdown in China, backed by our DCF of P/B (x) 1.71 1.39 1.19 1.03 0.90 HKD8.50. FCF Yield (%) 4.7 (5.0) (7.1) 6.9 7.9 Dividend Yield (%) 3.8 4.9 5.0 5.6 6.2 Key drivers EV/EBITDA (x) 5.49 4.08 3.89 3.36 2.95 Relative stable SUV market, GWM's leading position EV/EBIT (x) 6.66 4.93 4.67 4.08 3.63

of SUV market for years and its new car model of WEY brand. Income statement (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F

Total turnover 76,033 98,616 112,081 132,832 152,057 Key risks Gross profit 19,169 24,255 26,674 31,005 34,744 i. Lower than expected sales volume of WEY EBITDA 11,242 14,832 15,310 17,434 19,422 SUVs due to increased competition from the other SUVs; Depreciation and amortisation (1,970) (2,555) (2,555) (3,071) (3,647) ii. Competition from similar vehicles in the market. Operating profit 9,273 12,276 12,755 14,362 15,774 Exceptional income - net 408 207 207 207 207 Company profile Pre-tax profit 9,681 12,483 12,961 14,569 15,981 Great Wall Motors (GWM) is China’s largest SUV and Taxation (1,628) (1,929) (2,003) (2,251) (2,470) pickup manufacturer. It owns three brands: Recurring net profit 7,713 10,379 10,783 12,143 13,336 i. Haval; ii. WEY; iii. Great Wall. Cash flow (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital 407 (4,504) (1,551) (1,916) (1,691) GWM’s 3-year forward P/E band Cash flow from operations 8,912 3,401 3,024 13,340 15,326 Capex (5,857) (6,684) (7,687) (8,840) (10,166) Cash flow from investing activities (12,374) (15,052) (11,341) (8,840) (10,166) Proceeds from issue of shares (679) 1,605 0 0 0 Dividends paid (2,434) (2,495) (3,195) (3,287) (4) Cash flow from financing activities (6,875) (2,057) (5,731) (4,981) (4,056) Cash at beginning of period 3,394 3,642 2,154 3,919 7,005 Net change in cash (10,336) (13,707) (14,048) (480) 1,104 Ending balance cash (6,099) (10,905) (11,894) 3,438 8,109

Balance sheet (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 3,642 2,154 3,919 7,005 8,310 Tangible fixed assets 19,156 24,715 29,925 35,738 42,382 Source: Bloomberg, RHB Intangible assets 3,138 3,216 3,132 3,051 2,972 Total investments 601 3,204 3,168 3,131 3,094 Total other assets 8,626 7,246 5,885 5,885 5,885 Total assets 71,911 92,309 104,817 123,699 140,913 Short-term debt 300 250 0 0 0 Total long-term debt 50 50 1,050 3,050 3,050 Other liabilities 1,687 1,653 1,653 1,653 1,653 Total liabilities 33,524 44,956 49,792 60,051 67,806 Shareholders' equity 38,331 47,295 54,963 63,583 73,039 Minority interests 56 59 62 65 69 Total equity 38,387 47,354 55,025 63,648 73,107 Net debt (3,292) (1,854) (2,869) (3,955) (5,260) Total liabilities & equity 71,911 92,309 104,817 123,699 140,913

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) 21.5 29.7 13.7 18.5 14.5 Recurrent EPS growth (%) (66.7) 34.6 3.9 12.6 9.8 Gross margin (%) 25.2 24.6 23.8 23.3 22.8 Operating EBITDA margin (%) 14.8 15.0 13.7 13.1 12.8 Net profit margin (%) 10.6 10.7 9.8 9.3 8.9 Dividend payout ratio (%) 31.0 30.3 30.0 0.0 0.0 Capex/sales (%) 7.7 6.8 6.9 6.7 6.7

Source: Company data, RHB

See important disclosures at the end of this report 30

Great Wall Motor Co Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Investment Thesis Pressure on margins We initiate coverage on GWM with a NEUTRAL call and TP of HKD8.13. We forecast a 3-year revenue CAGR of 15.5%, driven by volume growth, which – considering China’s relatively solid SUV market – is expected to grow at a 3-year CAGR of 13%, in our view. As for the entire passenger vehicle (PV) market, we expect GWM to continue to expand its market share to 4.8% in 2019, from 4.1% in 2016, as we believe the SUV segment would grow at a faster rate vs the whole market. However, we expect earnings to grow at a slower CAGR of 8.6% for the next three years, as we are projecting GP margin deterioration of 0.8ppts, 0.5ppts and 0.5ppts in 2017-2019 respectively, on: i. Cuts in purchase tax discounts in 2017 and 2018, and fierce competition in the SUV market; ii. Concerns over the pressure to meet the average 5L per 100km fuel consumption requirement by 2020. GWM may need to sacrifice both its GP and OP margins to sell sedans, especially EVs, which have long been its weakness; iii. GWM’s intention to sustain its market share by sacrificing margins, iv. Haval brand has been fully lined up with models of all sizes hence new models with incremental sales may be hard to achieve. Our HKD8.13 TP is based on a 2017F P/E of 6x, and backed by our DCF valuation of HKD8.50 per share. Our target P/E is 1SD below GWM’s 3-year average P/E of 7.8x, reflecting our concerns over its margin deterioration and slowdown in China’s auto market.

Striving to sustain SUV market share We are positive on GWM’s future growth and forecasting auto sales of 1,188,000, 1,339,000 and 1,477,000 units for 2017-2019 respectively (CAGR of 11.2%), driven by a continued solid trend in the Chinese SUV market, which is expected to grow at CAGR of 13%. We expect GWM’s market share to expand to 4.8% in 2019, from 4.1% in 2016. However, by segment, we see fierce competition in the SUV market and expect GWM’s sales volume to grow at a below the SUV market’s 3-year CAGR of 12.2% to 1,324,000 units in 2019 – this is slightly slower than the projected growth in China’s SUV market. We believe GWM’s SUV market share could be sustained 10%, driven by the launch of its new WEY brand albeit the impact would be partially offset by the obsolete Haval brand.

Figure 1: GWM’s sales volume mix in 2016 Figure 2: GWM’s SUV sales volume mix (in '000)

Source: Company data, RHB Source: Company data, RHB

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Figure 3: GWM’s PV sales and market share vs China PV Figure 4: GWM’s SUV sales and market share vs China SUV

Source: RHB, Company data, China Passenger Car Association (CPCA) Source: RHB, Company data. CPCA

We like the Haval brand for its full-range of SUV models, which anchors GWM’s unique and leading position in the SUV market. However, in China, the most popular SUVs are compact car-based utility vehicles (CUVs), priced at around CNY100,000-150,000. As such, the H6/H2 are the most popular models, and have been leading the Chinese SUV market for many years. We also like its H3/H5 models, which are professional, off-road SUVs that have sealed GWM’s position as a professional SUV manufacturer. With the H3/H5’s good reputation among off-road SUV buyers, GWM has built up its reputation in the niche market without spending much on advertising. The relatively low volume H3/5/9, together registered sales of 34,000 units in 2016, and has built GWM’s competitive edge in differentiating itself from other locally branded and even JV branded SUVs. However, the downside to a full line-up of SUV models include: i. Slower sales for the less popular large-sized SUVs, such as the H7, H8 and H9 models, which registered sales of only 49,000, 7,500 and 11,500 units respectively in 2016; ii. Similar designs for the entire model line-up from H1 to H9, which may result in the entire brand name sliding in popularity once the most popular models (H2/H6) undergoes a down cycle. We note that the H6 model ramped up to 580,000 units in 2016 from 132,000 units in 2012, with growth rates of 65%, 44%, 18% and 56% in 2013-2016 respectively. However, if we eliminate the purchase tax cut effect in 2016, the growth trend would have shown a slowdown.

Figure 5: Comparison of models

Source: Autohome, RHB

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Figure 6: GWM’s sales volume forecasts Volume （ 000 units） FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F Pickup 122 137 136 118 99 106 115 121 127 Growth 23% 12% 0% -13% -16% 6% 9% 5% 5%

W01 0 0 0 0 0 0 19 50 60 W02 0 0 0 0 0 0 20 80 100 W EV 40 100 H1 0 0 0 13 75 69 49 44 40 H2 0 0 0 49 168 197 247 222 222 H5 105 81 62 46 23 23 23 25 27 H6 0 133 219 316 373 581 600 630 661 H7 0 0 0 0 0 49 74 82 90 H8 0 0 0 0 9 8 8 9 10 H9 0 0 0 5 14 11 12 13 14 M 32 66 139 90 37 0 0 0 0 SUV 147 280 420 519 699 938 1,051 1,194 1,324 Growth 8% 90% 50% 24% 35% 34% 12% 14% 11%

Sedan 188 199 205 91 54 31 22 23 25 Growth 53% 6% 3% -56% -41% -43% -29% 7% 8%

Total 463 621 771 731 853 1,074 1,188 1,339 1,477 Growth 27% 34% 24% -5% 17% 26% 11% 13% 10% Source: RHB, Company data

WEY- Key to future success We view the WEY brand as the key to GWM’s future success as it would significantly expand room for growth. Without the breakthrough in WEY, GWM’s SUV line-up would be limited to slow growth, in our view. We are not overly optimistic about the W01 model, which was launched in April and priced at CNY168,000-188,000 – we believe this price range is at a premium to average locally branded SUVs. In the past, GWM had tried to break the price ceiling for locally branded SUVs – for example, the H8 mid-sized SUV, priced at CNY188,800-256,800 sold a total of 8,653 units in 2016, which we believe was not as successful as other smaller SUVs in the market. We are more positive on the W02 compact SUV, which would be launched in 2H17. Similar to 2014, GWM first launched the H8 to attract the market’s attention and test the waters, targeting the niche market of big and luxury SUV users. We expect the W02 model to be another popular model, which would lead the success of the WEY series. We are forecasting a ramp up in sales to 3,000 units per month for the W01 in 2H17, and 8,000 units per month for the W02 by end-2017. We have assumed GP margins of 25% for the W01 and 24% for the W02 in 2017, during the start-up stage for these models. Cannibalisation of Haval. We are concerned about the WEY models’ cannibalisation of Haval sales, given the similarity in size for the W02 and H6/H2 models. We have therefore assumed conservative forecasts for H6’s sales volume.

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Figure 7: WEY 01 Figure 8: WEY 02

Source: WEY.com Source: WEY.com

Margins pressure ahead We expect GWM’s GP margins to fall to 23.8%, 23.3% and 22.6% in 2017F-2019F respectively from 24.6% in 2016, due to: i. Pressures to meet the 2020 deadline for average 5L per 100km fuel consumption requirement, which would result in price cuts and higher R&D investments; ii. CNY1bn worth of customer rebates as a result of cuts in purchase tax discounts in 2017F and 2018F, and fierce competition in the SUV segment; iii. GWM’s intention to maintain its market share at the expense of margins. Margin pressures and rebates. We have adjusted down our GP margin assumptions by 0.8ppts, 0.5ppts and 0.5ppts to reflect the CNY1bn rebate announced on 16 Mar 2017, and fierce competition in the SUV market as a result of the cuts in purchase tax discounts. On 16 Mar, 2017, GWM issued rebates of CNY1bn, to be applied for purchases of H2,H5,H7,H8,H9 and H6 Coupe 1.5T Blue Label. Following the rebate announcement, GWM’s H-shares traded down 8.8% on the same day, and reflected investors’ concerns over the pressure on margins and sales. GWM has a long history of strong pricing with less discounting vs other local brands, even JV brands, but it justified the rebates as acceptable since it needed to clear old inventory to make room for the production of the new WEY models. We have quantified CNY500m worth of rebates in our 2017 GP forecast. We have assumed that GWM would continue to price its models competitively in order to sustain market share. Fuel consumption pressure leads to worsened product ASP mix. As discussed above, auto manufacturers face strict average fuel consumption rules by 2020, of 5L per 100km. The punishment for brands failing to meet these requirements would be a ban on capacity expansion, as the Government is determined to deal with the severe air pollution problem in the country. GWM, which specialises in SUVs, is not well positioned in the EV market. GWM’s trial at launching EV products has also been delayed. The new product pipeline in 2017 includes one C30 EV. We are concerned that in order to boost sales of the C30 EV, the company would have to resort to discounts, resulting in lower margins. As the C30 model has not been a very popular model, it is possible that the upcoming EV model based on the C30 may not be attractive enough for consumers.

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Company Financials We are forecasting a 3-year CAGR (2017-2019) of 15.5% for revenue and 8.6% for earnings at GWM, with rising unit sales for SUVs, and lower GP margins of 23.8%, 23.3% and 22.8% in 2017F-2019F respectively (24.6% in 2016).

Valuations Our HKD8.13 TP for GWM is based on a 2017F P/E of 6x, or 1SD below its 3-year average trading multiple – we believe this is appropriate given concerns over margin pressure due to cuts on purchase tax discounts in 2017 and 2018, fierce competition in the SUV market, pressure to meet the average fuel consumption requirement by 2020, and GWM’s intention to maintain its market share at the expense of margins. Our TP is supported by our DCF valuation of HKD8.50 per share (Figure 9).

Figure 9: GWM’s DCF valuation CNYm 2017F 2018F 2019F 2020F 2021F 2022F TV EBIT*(1-t) 10,783 12,143 13,336 14,670 16,137 17,751 Dep 2,555 3,071 3,647 4,012 4,413 4,855 Chg in working capital (2,975) (1,888) (1,672) (1,840) (2,024) (2,226) Capex (7,687) (8,840) (10,166) (10,166) (10,166) (10,166) Dividends from investments 37 37 37 41 45 49 FCFF 2,714 4,523 5,183 6,717 8,406 10,263 69,915 Discount factor 1.00 1.12 1.25 1.40 1.56 1.75 1.75 PV of FCFF 2,714 4,046 4,146 4,807 5,380 5,876 40,028

Present corporate value 66,996 + cash 3,075 - Borrowings (1,050) Present equity value 69,022

DCF value per share TP 8.5

Assumptions WACC 11.8%

Risk-free rate 4.2% Beta 1.3 Market return 10.2% Cost of equity 13.0%

Cost of debt 7%

Debt/(Debt+Equity) 20.0% Terminal growth 2% Source: RHB

Figure 10: GWM’s 3 year forward P/E band Figure 11: GWM’s 3 year forward P/BV band

Source: Bloomberg, RHB Source: Bloomberg, RHB

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Figure 12: GWM’s peer comparison I 3-Yr 3-mth EPS EPS Mkt cap PER PER PER EPS Div yld Div yld P/B Hist P/B FY1 Company Ticker Price avg t/o FY1 FY2 PEG (x) (US$m) Hist (x) FY1 (x) FY2 (x) Cagr Hist (%) FY1 (%) (x) (x) (US$m) YoY% YoY% (%) GREAT WALL MOT-H 2333 HK 8.11 13,964 80.2 6.2 6.0 5.3 3.8 12.3 8.5 0.7 2.8 5.0 1.3 1.2 HSI 24,425 13.6 12.1 11.1 12.1 9.4 9.9 1.2 3.4 3.4 1.3 1.2 CSI300 3,440 15.8 13.2 11.7 19.2 13.2 183.4 0.1 2.0 2.2 1.9 1.6 Sector avg (Auto) 13.0 11.2 9.8 20.2 13.0 12.8 1.6 2.3 3.0 2.2 1.8 Chinese OEMs GEELY AUTOMOBILE 175 HK 10.22 11,710 114.7 15.6 11.0 8.7 41.9 26.0 27.1 0.4 0.4 0.9 3.3 2.6 BYD CO LTD-H 1211 HK 44.00 17,981 30.0 20.8 20.1 19.2 3.5 4.4 5.0 4.0 1.0 1.0 2.2 1.8 DONGFENG MOTOR-H 489 HK 8.26 9,145 23.9 4.7 4.9 4.7 (2.9) 3.1 2.0 2.4 2.8 3.2 0.7 0.6 GUANGZHOU AUTO-H 2238 HK 12.96 20,023 42.4 11.7 8.5 7.6 37.6 12.1 19.2 0.4 1.8 3.4 1.6 1.4 BRILLIANCE CHINA 1114 HK 13.26 8,588 29.5 16.1 12.3 9.5 30.6 29.9 28.7 0.4 0.8 0.9 2.5 2.2 GREAT WALL MO-A 601633 CH 12.28 13,964 69.5 10.6 10.5 9.6 0.9 9.4 4.9 2.2 1.5 2.8 2.3 2.1 GUANGZHOU AUTO-A 601238 CH 26.49 20,023 15.6 27.0 18.2 15.9 48.5 14.2 23.1 0.8 0.8 1.6 3.9 3.3 SAIC MOTOR-A 600104 CH 27.87 47,219 125.1 9.6 8.8 8.2 8.6 8.1 7.8 1.1 4.9 6.3 1.5 1.5 CHONGQING CHAN-A 000625 CH 14.88 9,621 76.6 6.8 6.2 6.1 8.8 2.4 2.3 2.7 4.3 5.0 1.6 1.4 Average 13.66 11.17 9.95 19.72 12.19 13.33 1.61 2.03 2.79 2.16 1.86 European OEMs BAYER MOTOREN WK BMW GY 88.13 62,494 129.7 8.4 8.6 8.4 (1.6) 2.2 0.8 11.3 3.6 4.1 1.2 1.1 DAIMLER AG DAI GY 68.19 79,591 236.5 8.6 7.6 7.8 12.0 (1.6) 3.5 2.2 4.8 5.0 1.3 1.1 FIAT CHRYSLER AU FCA IM 10.24 16,941 149.3 N/A 5.1 4.3 N/A 18.7 N/A N/A N/A 0.2 N/A 0.8 PEUGEOT SA UG FP 18.86 18,403 64.1 8.7 8.2 7.5 6.3 8.9 6.7 1.2 N/A 3.0 1.3 1.1 PORSCHE AUTO-PRF PAH3 GY 54.02 18,046 20.7 12.1 5.1 4.6 137.2 10.5 39.8 0.1 1.9 2.6 0.6 0.5 RENAULT SA RNO FP 84.21 27,179 72.7 6.7 6.0 5.6 11.4 6.5 7.3 0.8 2.9 4.0 0.8 0.7 VOLKSWAGEN AG VOW GY 147.60 79,965 11.5 14.4 6.3 5.9 127.6 6.3 36.8 0.2 0.1 2.0 0.8 0.8 VOLKSWAGEN-PREF VOW3 GY 144.40 79,965 147.8 14.1 6.2 5.8 127.6 6.3 36.8 0.2 0.1 2.1 0.7 0.7 Average 10.43 6.64 6.25 60.05 7.21 18.81 2.28 2.22 2.87 0.95 0.85 US OEMs FORD MOTOR CO F US 11.07 44,081 466.1 9.5 7.2 6.6 33.4 7.7 13.4 0.5 5.9 5.6 1.4 1.3 GENERAL MOTORS C GM US 33.48 50,525 550.9 5.5 5.5 5.6 (0.9) (0.7) (2.1) N/A 4.5 4.6 1.1 1.0 Average 7.51 6.34 6.10 16.27 3.51 5.62 0.54 5.21 5.07 1.27 1.15 European OEMs SUBARU CORP 7270 JP 4,283 29,198 140.8 7.7 11.1 8.6 (31.2) 28.8 (1.7) N/A 3.4 3.4 2.4 2.2 HONDA MOTOR CO 7267 JP 3,235 51,936 131.5 9.5 9.4 8.7 0.8 7.8 9.2 1.0 2.8 3.1 0.8 0.8 MAZDA MOTOR 7261 JP 1,603 8,523 89.9 10.2 7.4 6.6 37.7 12.6 21.7 0.3 2.2 2.7 0.9 0.8 NISSAN MOTOR CO 7201 JP 1,077 40,269 125.9 8.6 7.1 6.8 20.6 4.3 11.1 0.6 4.5 4.5 0.9 0.9 SUZUKI MOTOR 7269 JP 4,712 20,505 65.7 20.1 13.5 14.6 48.7 (7.8) 14.6 0.9 0.7 0.8 1.9 1.9 TOYOTA MOTOR 7203 JP 6,143 177,653 363.2 8.3 10.4 9.3 (20.1) 10.9 (1.4) N/A 1.6 3.4 1.1 1.0 Average 10.71 9.82 9.12 9.42 9.44 8.91 0.73 2.53 2.97 1.33 1.28 Korean OEMs HYUNDAI MOTOR 005380 KS 152,000 29,540 76.0 7.6 7.2 6.5 5.0 11.5 7.7 0.9 2.6 3.0 0.5 0.6 KIA MOTORS CORP 000270 KS 35,250 12,607 30.2 5.1 6.0 5.1 (15.1) 18.9 2.2 2.7 3.1 3.3 0.5 0.5 Average 6.34 6.62 5.77 (5.09) 15.20 4.97 1.83 2.88 3.15 0.50 0.54 India OEMs ASHOK LEYLAND AL IN 83.4 3,697 14.7 22.2 25.3 22.5 (12.2) 12.1 7.0 3.6 1.1 1.6 4.8 4.0 BAJAJ AUTO LTD BJAUT IN 2,928.6 13,200 12.8 22.4 21.1 19.3 6.2 9.2 8.6 2.5 0.2 2.2 6.5 5.8 HERO MOTOCORP LT HMCL IN 3,375.1 10,507 21.9 21.8 20.0 16.4 9.0 22.2 14.6 1.4 2.6 2.4 8.5 N/A MAHINDRA & MAHIN MM IN 1,335.5 12,898 27.1 24.6 19.8 15.7 24.3 26.0 21.5 0.9 0.9 1.1 2.8 2.6 MARUTI SUZUKI IN MSIL IN 6,644.9 31,210 52.1 26.7 24.8 20.4 7.4 21.6 20.7 1.2 0.5 1.2 5.4 5.1 TATA MOTORS LTD TTMT IN 438.1 21,838 53.9 13.4 20.1 11.3 (33.2) 78.6 17.9 1.1 0.0 0.3 1.8 1.8 Average 0 0 0 22 22 18 0 28 15 2 0.9 1.5 5.0 3.8 Turkish OEMs TOFAS TOASO TI 29.28 4,129 5.4 15.1 13.0 11.8 15.9 10.0 10.0 1.3 2.4 4.6 5.0 3.9 FORD OTO FROTO TI 39.24 3,881 3.9 14.4 13.2 11.6 9.2 13.9 12.3 1.1 5.2 6.0 4.6 4.0 Average 14.76 13.12 11.72 12.58 11.91 11.15 1.19 3.78 5.27 4.79 3.92 Note: Share price data as at 4 May 2017 Source: RHB, Bloomberg

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Figure 13: GWM’s peer comparison II Net Net Gross Net Net Rev Hist Rev FY1 NP Hist NP FY1 Unlev ROE Hist ROE FY1 Sh px Sh px Company gearing gearing margin margin margin (US$m) (US$m) (US$m) (US$m) beta (%) (%) 1-mth % 3-mth % Hist (%) FY1 (%) Hist (%) Hist (%) FY1 (%) GREAT WALL MOT-H 13,745 16,253 1,530 1,589 3 6 1.4 21.5 11.1 9.8 22.4 21.4 (12.9) 0.4 HSI 9.4 10.0 0.3 5.9 CSI300 11.7 12.1 (1.4) 1.9 Sector avg (Auto) 59,029 62,033 3,035 3,403 23.5 22.2 1.0 18.0 3,825 8,172 17.3 16.7 1.4 2.1 Chinese OEMs GEELY AUTOMOBILE 7,790 11,771 741 1,050 0 0 1.3 18.3 9.5 8.9 23.3 25.9 (15.5) 4.8 BYD CO LTD-H 14,531 17,770 733 773 63 73 1.0 19.0 5.0 4.3 12.4 10.3 0.8 2.7 DONGFENG MOTOR-H 17,753 19,080 1,937 1,893 0 0 1.0 14.3 10.9 9.9 14.7 12.7 (5.7) 0.1 GUANGZHOU AUTO-H 7,166 9,392 912 1,290 0 0 1.0 15.1 12.7 13.7 18.5 18.0 0.0 17.8 BRILLIANCE CHINA 743 813 534 694 11 0 1.2 3.3 71.8 85.4 16.9 18.8 (2.1) 19.7 GREAT WALL MO-A 13,745 16,388 1,530 1,537 3 0 1.0 21.5 11.1 9.4 22.4 20.7 (2.4) 7.6 GUANGZHOU AUTO-A 7,166 9,692 912 1,409 0 0 0.5 15.1 12.7 14.5 15.2 19.3 0.9 12.4 SAIC MOTOR-A 108,600 119,075 4,642 5,356 9 0 0.7 12.9 4.3 4.5 16.2 17.8 9.8 11.0 CHONGQING CHAN-A 10,863 11,865 1,492 1,592 0 0 0.4 13.9 13.7 13.4 24.1 24.1 (5.7) (4.2) Average 20,929 23,983 1,492 1,733 10 8 0.9 14.8 16.9 18.2 18.2 18.6 (2.2) 8.0 European OEMs BAYER MOTOREN WK 86,238 88,993 6,285 6,206 82 0 0.8 19.9 7.3 7.0 15.7 13.5 4.9 4.8 DAIMLER AG 140,362 146,758 7,808 8,678 0 0 1.3 20.9 5.6 5.9 17.8 15.7 0.6 0.7 FIAT CHRYSLER AU 101,674 105,864 1,651 2,846 35 15 1.1 14.2 1.6 2.7 10.0 15.8 4.4 0.0 PEUGEOT SA 49,483 51,563 1,584 1,836 0 0 1.4 19.1 3.2 3.6 14.9 15.0 2.1 7.6 PORSCHE AUTO-PRF 0.9 0.9 1,258 2,617 0 0 1.4 N/A 137,400 285,718 5.0 9.3 6.8 (2.8) RENAULT SA 46,930 52,921 3,131 3,706 0 0 1.5 21.4 6.7 7.0 11.6 12.7 5.1 (0.8) VOLKSWAGEN AG 198,981 203,963 4,917 10,379 0 22 1.3 18.9 2.5 5.1 6.6 12.2 6.5 (1.0) VOLKSWAGEN-PREF 198,981 203,963 4,917 10,379 0 22 1.4 18.9 2.5 5.1 6.6 12.2 7.5 (0.4) Average 102,831 106,753 3,944 5,831 14.62 7.23 1.27 19.03 17,179 35,719 11.04 13.30 4.74 1.02 US OEMs FORD MOTOR CO 151,800 143,114 4,596 6,217 0 0 1.4 10.7 3.0 4.3 12.4 21.9 (2.6) (11.9) GENERAL MOTORS C 166,380 162,987 9,427 8,980 0 0 1.4 18.1 5.7 5.5 23.2 19.7 (2.3) (7.8) Average 159,090 153,051 7,012 7,599 0.00 0.00 1.43 14.40 4.35 4.93 17.80 20.79 (2.47) (9.85) European OEMs SUBARU CORP 28,647 29,371 3,870 2,620 0 0 1.4 32.3 13.5 8.9 22.9 21.1 6.7 (1.5) HONDA MOTOR CO 124,073 129,317 5,465 5,479 62 67 0.8 22.4 4.4 4.2 8.8 8.6 (0.8) (5.5) MAZDA MOTOR 28,489 29,820 831 1,142 0 0 1.6 23.8 2.9 3.8 9.4 12.2 4.6 0.5 NISSAN MOTOR CO 108,034 103,024 4,643 5,346 0 132 1.1 19.6 4.3 5.2 10.3 12.6 3.5 (4.4) SUZUKI MOTOR 28,190 27,649 1,034 1,373 0 0 1.1 27.3 3.7 5.0 14.0 14.6 2.3 4.8 TOYOTA MOTOR 251,734 240,189 20,497 15,747 71 82 0.7 20.4 8.1 6.6 10.7 10.4 2.7 (4.7) Average 94,861 93,228 6,057 5,285 22.16 46.92 1.11 24.31 6.16 5.62 12.69 13.22 3.17 (1.79) Korean OEMs HYUNDAI MOTOR 82,674 86,270 4,773 4,838 60 65 0 18.9 5.8 5.6 6.5 7.9 0.0 10.5 KIA MOTORS CORP 46,535 47,008 2,432 2,092 0 0 0 19.8 5.2 4.5 10.8 8.6 (3.0) (2.5) Average 64,605 66,639 3,602 3,465 29.94 32.47 0.46 19.34 5.50 5.03 8.66 8.25 (1.51) 4.03 India OEMs ASHOK LEYLAND 3,218 3,051 167 134 174 N/A 0.5 N/A 5.2 4.4 22.5 16.0 (0.8) (11.7) BAJAJ AUTO LTD 3,467 3,416 589 626 0 0 1.0 N/A 17.0 18.3 31.3 29.7 5.2 4.3 HERO MOTOCORP LT 4,389 N/A 482 525 0 N/A 1.2 N/A 11.0 N/A 42.7 N/A 5.5 5.1 MAHINDRA & MAHIN 10,871 13,050 500 625 104 127 0.6 N/A 4.6 4.8 11.8 13.1 3.6 5.7 MARUTI SUZUKI IN 10,426 12,177 1,170 1,242 0 0 1.0 N/A 11.2 10.2 23.2 21.4 9.2 8.5 TATA MOTORS LTD 42,101 43,577 1,717 1,061 27 36 1.3 N/A 4.1 2.4 16.1 8.9 (6.8) (16.1) Average 12,412 15,054 771 702 51 41 1 N/A 9 8 25 18 3 (1) Turkish OEMs TOFAS 4,117 5,125 274 323 89 59 N.A 9.9 6.6 6.3 35.0 34.5 7.7 11.2 FORD OTO 5,156 5,878 269 296 53 51 0.6 11.4 5.2 5.0 34.8 29.6 10.8 12.1 Average 4,637 5,502 271 309 70.79 55.04 0.56 10.66 5.93 5.67 34.92 32.05 9.25 11.63 Note: Share price data as at 4 May 2017 Source: RHB, Bloomberg

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Key Risks Downside risks for our investment thesis include: i. Lower-than-expected sales volume for the WEY SUVs due to increased competition from other SUVs; ii. Lower-than-expected margins, especially for sedans, due to strong price competition; iii. Lower-than-expected EV sales, which would result in the failure of the company to meet the Government’s average fuel consumption requirements by 2020. Upside risks include: i. Higher-than-expected sales for the WEY models, which would lead to the success of the entire WEY series; ii. Faster-than-expected model rollouts, including EVs and plug-in hybrid electric vehicle (PHEV) SUVs; iii. Higher-than-expected margins due to strong cost controls.

Company Profile GWM is China’s largest SUV and pickup manufacturer. It owns three brands – Haval, WEY and Great Wall – which cover three categories namely SUVs, sedans and pickups. With over 30 subsidiaries and four vehicle manufacturing bases, GWM has developed an independent matching capacity for core parts such as engine and transmission.

Figure 14: GWM’s holding structure

Source: RHB, Company

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SWOT Analysis

 China’s leading SUV manufacturer  Margin pressure due to purchase tax cuts  Pressured to meet average fuel consumption requirement of 5L per 100km by 2020

 Strong growth potential for its WEY brand

 Pressure to develop EVs may negatively impact product ASP mix

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-05-04 21 Source: RHB, Bloomberg 19 17 15 13 11 9 7 5 3 May-12 Aug-13 Nov-14 Feb-16

Source: RHB, Bloomberg

See important disclosures at the end of this report 39

Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components Neutral BYD Co Ltd Target Price: HKD40.40 Price: HKD44.08 Margins Pressure Due To EV Subsidy Cuts Market Cap: USD17,984m Bloomberg Ticker: 1211 HK

We initiate coverage on BYD with a NEUTRAL call and HKD40.40 TP, Share Data which implies an 8% potential downside. We expect solid topline growth Avg Daily Turnover (HKD/USD) 221m/28.4m at a 3-year CAGR of 19%, boosted by solid NEV sales and the monorail 52-wk Price low/high (HKD) 40.3 - 56.5 business starting to contribute. Even with strong NEV growth, however, we expect net profit to grow at a 3-year CAGR of only 5.2%, due to Free Float (%) 64 deteriorating margins as a result of the Government’s cuts on EV Shares outstanding (m) 2,728 subsidies, and uncertainty over the execution of the SkyRail system. Estimated Return -8%

We view BYD’s three businesses as staying in the fast lane. New energy Shareholders (%) vehicles (NEVs) and handset components accounted for 34% and 38% of 2016 Wang Chuanfu 18.8 revenue respectively, while SkyRail contributes to topline in 2017. Lv Xiangyang, Zhang Changhong 8.8 Strong electric vehicle (EV) growth by sacrificing margins. We forecast Berkshare Hathaway Energy 8.2 2017-2019 unit sales of 125,000, 172,000 and 233,000 respectively for BYD’s

NEV business at a 3-year CAGR of 35%. This is driven by its strong NEV Share Performance (%) portfolio and new car pipeline. For the entire Chinese EV sector, we expect the YTD 1m 3m 6m 12m 3-year growth CAGR to be at a similar 35%, driven by government policies on fuel consumption requirements and subsidies. Absolute 7.7 0.8 2.7 (9.2) (0.7) Relative (4.6) (1.0) (4.1) (18.3) (21.0) We believe BYD would continue to benefit from China’s EV growth, with market share sustaining at ~22%. This would be driven by its strong EV portfolio and Source: Bloomberg new models pipeline. This includes the Song-EV300 (on sale in April), Tang 100 BYD Co Ltd (1211 HK) and Qin 100 (on sale in February), and the upcoming Dynasty in 2H17. In Price Close Relative to Hang Seng Index (RHS) 2H18, there are two new models slated for launch, the Han and Ming, as well 58 119 as the second generation of the Qin and Tang vehicles. 53 108 48 97

Despite the 35% 3-year CAGR NEV volume growth, we are still concerned 43 85

38 74 about BYD’s deteriorating margins. Diminishing EV subsidies ought to bring 18 16 down gross margins, as we believe the firm would subsidise consumers to 14 12 sustain market share. Thus, we cut our FY17F-19F GPMs by 2.3ppts, 0.4ppts 10 8 and 0.4ppts respectively to reflect pressure on diminishing subsidies. This 6 4 should to be offset by a better revenue mix from new and upgraded EV models 2

– such as the Dynasty (2H17), and Han and Ming (both in 2H18) – and the Volm

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SkyRail business, of which gross margins are estimated at 25%. May SkyRail – go big or go home? BYD entered the monorail market in 2016, and Source: Bloomberg we forecast for this unit to start generating revenues of CNY6bn, CNY12bn and CNY15bn in FY17-19 respectively. This is based on management’s forecasts of new contracts of CNY10bn (FY17), CNY30bn (FY18) and CNY60bn (FY19). Initiate coverage with NEUTRAL and TP of HKD40.40, which implies an 8% potential downside. Our SOP-based TP uses 11x P/E applied to our 2017 EPS for BYD’s traditional auto business and 20x P/E for the NEV wing. We also apply a 23x P/E to handset components, 20x P/E to the battery business, and 14x P/E to SkyRail, backed by a DCF-derived valuation of HKD43.70. The current valuation looks justified, because the NEV, handset components and SkyRail businesses are in the fast lane. We are also positive on management’s intent on improving operating margins to offset GPM deterioration. Key risks. See page 52 for details on the key downside and upside risks.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (CNYm) 77,612 100,208 122,543 147,433 168,043 Reported net profit (CNYm) 2,824 5,052 5,507 5,740 6,142 Recurring net profit (CNYm) 2,824 5,052 5,507 5,740 6,142 Recurring net profit growth (%) 551.5 78.9 9.0 4.2 7.0 Recurring EPS (CNY) 1.14 1.96 2.02 2.10 2.25 DPS (CNY) na 0.58 0.40 0.32 0.34 Recurring P/E (x) 34.2 19.9 19.3 18.5 17.3 P/B (x) 2.93 1.84 1.70 1.56 1.44 P/CF (x) 24.8 na 10.5 8.8 6.7 Dividend Yield (%) na 1.5 1.0 0.8 0.9 Analyst EV/EBITDA (x) 11.1 8.0 8.5 7.6 7.0 Zhuang Dan Return on average equity (%) 9.8 12.1 10.3 9.9 9.7 Net debt to equity (%) 86.9 62.8 69.6 76.3 80.2 +852 2103 9414 Our vs consensus EPS (adjusted) (%) 5.9 (14.0) (15.2) [email protected]

Source: Company data, RHB

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BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Financial Exhibits

Financial model updated on: 2017-05-04. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (CNY) 1.14 1.96 2.02 2.10 2.25 Consumer Cyclical EPS (CNY) 1.14 1.96 2.02 2.10 2.25 BYD Co Ltd DPS (CNY) 0.00 0.58 0.40 0.32 0.34 Bloomberg 1211 HK BVPS (CNY) 13.3 21.1 23.0 25.0 27.1 Neutral Weighted avg adjusted shares (m) 2,476 2,581 2,728 2,728 2,728

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F We forecast BYD based on a SOTP basis, using a 11x Recurring P/E (x) 34.2 19.9 19.3 18.5 17.3 PE applied to our 2017 EPS for its traditional auto P/E (x) 34.2 19.9 19.3 18.5 17.3 business and 20x PE considering NEV premium, 23x PE applied to handsets,20x PE multiple applied to P/B (x) 2.93 1.84 1.70 1.56 1.44 battery, and 14x PE multiple applied to skyrail. FCF Yield (%) (4.5) (11.2) (3.1) (3.8) (2.5) Dividend Yield (%) 0.0 1.5 1.0 0.8 0.9 Key drivers EV/EBITDA (x) 11.1 8.0 8.5 7.6 7.0 Leading position in NEV auto sales and sky rail EV/EBIT (x) 23.7 15.8 16.5 16.2 15.5

business. Income statement (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Key risks Total turnover 77,612 100,208 122,543 147,433 168,043 Lower than expected sales volume of NEV models. Gross profit 11,860 19,018 20,512 24,018 26,731 EBITDA 11,746 17,451 18,339 21,716 24,986 Company Profile Depreciation and amortisation (6,245) (8,636) (8,867) (11,478) (13,741) BYD is a listed company, engaged in automobile Operating profit 5,501 8,815 9,472 10,238 11,245 business, including traditional fuel-powered vehicles and new energy vehicles and IT business related to Net interest (1,463) (1,647) (1,840) (2,276) (2,617) rechargeable battery business, handset and computer Income from associates & JVs (243) (600) (600) (600) (600) components and assembly services. Pre-tax profit 3,796 6,568 7,033 7,362 8,028 Taxation (657) (1,088) (1,055) (1,104) (1,204) BYD’s 3-year forward P/E band Minority interests (315) (428) (471) (518) (682) Recurring net profit 2,824 5,052 5,507 5,740 6,142

Cash flow (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital (4,287) (15,303) (4,371) (5,274) (4,313) Cash flow from operations 3,897 (1,693) 10,172 12,140 15,809 Capex (8,200) (9,565) (13,480) (16,218) (18,485) Cash flow from investing activities (10,736) (13,421) (16,413) (19,634) (22,478) Proceeds from issue of shares 4,104 13,909 0 0 0 Dividends paid 0 (1,487) (1,101) (861) (921)

Cash flow from financing activities 12,854 30,180 2,471 6,677 4,734

Cash at beginning of period 4,314 6,328 7,446 3,576 2,659 Net change in cash 6,015 15,065 (3,770) (817) (1,935) Ending balance cash 10,487 21,508 3,676 2,759 724

Balance sheet (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 6,328 7,446 3,580 2,665 731 Tangible fixed assets 38,126 42,049 47,062 53,132 59,502 Intangible assets 7,169 6,825 8,422 9,516 10,830 Total investments 1,889 2,245 2,469 2,716 2,988 Total other assets 13,783 15,599 16,378 17,197 18,057 Total assets 115,486 145,071 163,864 187,524 208,073 Short-term debt 26,413 32,928 36,221 43,466 47,812 Total long-term debt 11,230 9,339 9,339 9,339 10,339 Total liabilities 79,457 89,661 103,578 121,842 136,487 Shareholders' equity 32,294 51,256 55,662 60,541 65,761 Minority interests 3,735 4,153 4,624 5,142 5,824 Total equity 36,029 55,409 60,286 65,683 71,585 Net debt 31,315 34,821 41,979 50,139 57,419 Total liabilities & equity 115,486 145,071 163,864 187,524 208,073

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) 40.2 29.1 22.3 20.3 14.0 Recurrent EPS growth (%) 538.1 71.6 3.1 4.2 7.0 Gross margin (%) 15.3 19.0 16.7 16.3 15.9 Operating EBITDA margin (%) 15.1 17.4 15.0 14.7 14.9 Net profit margin (%) 3.6 5.0 4.5 3.9 3.7 Capex/sales (%) 10.6 9.5 11.0 11.0 11.0 Interest cover (x) 3.63 4.90 4.88 4.31 4.30

Source: Company data, RHB, Bloomberg

See important disclosures at the end of this report 41

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Investment Thesis Margin pressure offsets EV growth We initiate coverage of BYD with a NEUTRAL rating and HKD40.40 TP, which implies an 8% potential downside. We expect solid topline growth for BYD at a 3-year CAGR of 19%. This would be boosted by strong FY17-19 NEV sales of 125,000, 172,000 and 233,000 units at a CAGR of 35% over the three year period. This is up from 96,000 units in 2016, as well as the start of the company’s SkyRail business, which looks set to generate FY17-19 revenues of CNY6bn, CNY12bn and CNY15bn respectively, in our view. However, even with strong topline growth, we estimate that BYD’s 3-year net profit growth CAGR stands at 5.2%. This is due to company’s deteriorating margins because of the Government’s EV subsidy cuts, especially on the EV bus segment. Our SOTP-based HKD40.40 TP uses 11x P/E applied to our 2017 EPS for BYD’s traditional auto business and 20x P/E to its NEV division. We also apply 23x P/E to BYD’s handset components business, 20x P/E to the battery division and 14x P/E to SkyRail, backed by our DCF TP of HKD43.70. The current valuation looks justified, because the NEV, handset components and SkyRail businesses are in the fast lane currently. We also like management intent to improve operating margins to offset GPM deterioration.

Figure 1: BYD’s revenue breakdown Figure 2: BYD’s operating profit breakdown

Source: RHB Source: RHB

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BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Business And Industry Overview

Figure 3: BYD’s segmental forecasts (CNYm) FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F Revenue Automobile Total volume 456,318 505,719 439,802 455,834 504,074 561,948 630,261 713,111 (units) YoY growth 1.7% 10.8% -13.0% 3.6% 10.6% 11.5% 12.2% 13.1% ASP (CNY) 49,419 50,009 59,731 85,412 109,155 113,435 115,222 117,238 YoY growth 0.2% 1.2% 19.4% 43.0% 27.8% 3.9% 1.6% 1.7% Revenue 22,551 25,291 26,270 38,934 55,022 63,724 73,943 81,912 YoY growth 1.9% 12.1% 3.9% 48.2% 41.3% 15.8% 16.0% 10.8% Mobile handset Revenue 17,155 19,459 24,116 32,928 38,083 44,044 50,650 57,742 YoY growth -12.3% 13.4% 23.9% 36.5% 15.7% 15.7% 15.0% 14.0% Battery Revenue 4,675 5,018 4,980 5,750 7,103 8,774 10,839 13,390 YoY growth 1.2% 7.4% -0.8% 15.5% 23.5% 23.5% 23.5% 23.5% SkyRail Revenue 6,000 12,000 15,000 YoY growth 100.0% 25.0%

Source: RHB

BYD continues to lead the EV market We estimate FY17-19 unit sales of 125,000, 172,000 and 233,000 for BYD’s NEV business at a 3-year CAGR of 35%. This is up from the 96,000 units booked in 2016, and was driven by its strong NEV portfolio and new cars pipeline. For China’s entire EV sector, we expect growth to be at a 3-year CAGR of 35%, driven by government policies on fuel consumption requirements and subsidies. We like BYD’s current NEV portfolio and upcoming models. On 17 Apr, the company unveiled its new concept EV, the Dynasty. This is an SUV that was designed by Mr Wolfgang Egger, who was previously a designer with German automaker Audi. The Dynasty is slated to go on sale in August and is to include both PHEV and EV versions. Meanwhile, the petrol-fuelled Yuan is to get an EV variant in 2H17. Aside from the latter, BYD is set to beef up its EV portfolio following the introduction of the Song- EV300 (on sale since April), and the Tang 100 and Qin 100 (on sale since February). 2H18 ought to the launch of two new models, the Han and Ming, as well as the second generations of the Qin and Tang. For years, BYD’s EV models like the E6 and Tang have led the Chinese market. The company’s total NEV sales in 2016 stood at 96,000 units (including the K9 bus). This was a 70% YoY growth and accounted for 18% of the domestic market share. This growth was driven by strong sales of the Qin and Tang.

See important disclosures at the end of this report 43

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 4: BYD’s Dynasty

Source: Company

We forecast China’s EV growth at a 3-year CAGR of 35%, driven by government policies with regards to fuel consumption and subsidies. It is clear that there is strong political will to drive the EV growth of local brands, and to provide subsidies for both consumers and manufacturers. This is due to… i. Concerns over air pollution; ii. The need to reduce dependence on imported oil; iii. Supporting local auto growth …as discussed above. Also, government-set EV model categories designate the models available for subsidies and exclude most joint-venture (JV) EV brands or imported models, eg BMW’s i8 and Tesla’s cars. We believe that, together with the strict car plate lottery rules, EV subsidies and categories look set to push local EV brands into the fast lane.

Figure 5: BYD vs China market EV sales (commercial vehicles included)

Source: RHB, Centre of Automotive Management (CAM), Company data

See important disclosures at the end of this report 44

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Concerns over margins deterioration The easing off on EV subsidies brings concerns over BYD’s gross margins. Hence, we cut down our 2017 GPM forecast by 2.3ppts to reflect the pressure from diminishing subsidies. This is offset by a better revenue mix from upgraded new EV models, such as the Dynasty in 2H17, and the Han and Ming in 2H18. It also includes BYD’s SkyRail business, for which gross margins are estimated at 25%. The subsidy on EV purchases, depending on the model, is usually between 30-50% of its price. So, a 20% decrease in subsidies is 6-10% of the price difference between 2016 and 2017. As discussed above in the EV section, the Government’s subsidies for such vehicles may diminish by 20% from 2016 levels for both passenger and commercial vehicles. For example, BYD’s E5 sedan (battery driving range: 300km) is priced at a range of CNY195,900-215,900. It enjoyed a government subsidy of CNY55,000 and local government subsidy of CNY55,000 in 2016. In 2017 and 2018, these subsidies are set to decrease to CNY44,000 (the Government) and CNY22,000 or less from local governments. In terms of EV buses, BYD has only one model, the K9. Priced at CNY2m, it had received government subsidies of CNY500,000 and close to CNY500,000 from local governments. In 2017, the total subsidy per bus is to go down by more than CNY400,000. As a result, the revenue of each K9 would go down 20-30%.

Figure 6: 2016-2020 EV bus subsidies (CNY’000)

Source: RHB, Ministry of Finance (MOF)

Figure 7: 2013-2020 passenger vehicle EV subsidies (CNY’000)

Source: RHB, MOF

See important disclosures at the end of this report 45

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

SkyRail could drive future revenue growth BYD launched its SkyRail elevated urban transportation system in 2016, and we forecast that the company is to generate revenues of CNY6bn, CNY12bn and CNY15bn for FY17- 19 respectively. This is based on management’s estimates of forecast of CNY10bn (FY17), CNY30bn (FY18) and CNY60bn (FY19) in new contracts. However, we maintain a cautious outlook on the execution of BYD’s monorail system – taking on board the debt pressures of China’s local governments and the company’s own inexperience in the infrastructure sector. In actual fact, the room for monorail adoption is big. This is given the strict government rules on subway construction for local governments. Given the high cost in developing a subway system – around CNY700-800m per km – the green light for such systems has minimum requirements of: i. A population of no less than 1.5m; ii. Fiscal income of not less than CNY100bn per year. Hence, China’s lower tier cities – which cannot meet these requirements to begin subway construction works – may opt for a monorail system as a substitute. According to management, BYD has already signed new contracts with the local governments of Shantou (250 km – works started in 2016), Guang’an (10km – slated to traffic in August), Xian (3km), Bengbu (10km) and Shenzhen. The company provides infrastructure construction and trains for each SkyRail project. In terms of construction, monorails are relatively easier and cheaper to build when compared with subways. Revenue generated by a monorail network is around CNY200- 300m per km vs CNY700-800m per km for subways. Also, the construction period is usually around 1-2 years. The waiting period between signing a contract to executing works is usually half year, so, the payback should be better than big infrastructure projects. However, our concerns over BYD SkyRail business is the company’s capability in executing complicated construction infrastructure projects – this is different from its auto manufacturing or handset components business – and the debt pressures of China’s local governments. As a result, we forecast a low conversion ratio based on BYD’s new contracts forecast.

Figure 8: Artist’s impression of BYD’s SkyRail system

Source: BYD, RHB

See important disclosures at the end of this report 46

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

BYD’s handset components business For BYD Electronic International Co Ltd (BYD Electronic) (285 HK, NR) – according to our technology analyst Mr Ken Chui – the metal casing segment (30% of total FY16 revenue) ought to be the key growth driver. In our view, that segment should continue to grow robustly in this year. This would be supported by: i. Continuously rising metal casing adoption among Chinese smartphone brands to 71.6% this year from 48.3% in last year (according to Mr Chui’s estimates); ii. Stabilising Samsung Electronics Co Ltd (Samsung) smartphone shipments; iii. Potentially higher allocation of metal casings from Samsung. Given the better profitability of the metal casing segment over the electronic manufacturing services (EMS) business, a better revenue mix should also help enhance BYD’s overall profitability.

Financials And Valuations Company financials BYD ought to continue to deliver strong topline growth. However, it should also experience slow earnings growth due to concerns over the easing of EV subsidies. We forecast for the company’s 3-year revenue and net profit growth CAGRs at 19% and 5.2% respectively. Although, management said it plans to cut opex to offset any subsidy loss, we remain cautious on BYD’s capability in squeezing down SG&A expenses. We cut down such expenses by 0.5ppts to reflect management’s efforts with regards to operating efficiency improvements. Also, we are cautious on the company’s gearing ratio of 67.9% in 2016, down from 97% in 2015, because of a non-public A-shares issuance of CNY14.5bn.

Figure 9: BYD's 3 year forward P/E band Figure 10: BYD's 3 year forward P/B band

Source: Bloomberg, RHB Source: Bloomberg, RHB

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BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 11: BYD’s P&L

Source: RHB, Company data

See important disclosures at the end of this report 48

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Valuations We initiate coverage of BYD with a NEUTRAL rating and HKD40.40 TP, which implies an 8% potential downside. We forecast for 3-year revenue and net profit growth CAGRs of 19% and 5.2% respectively due to our concerns that BYD’s deteriorating margins. This is due to the Government’s EV subsidies cuts, especially on the K9 EV bus. Our forecast for BYD is based on an SOP basis, using a 11x P/E applied to our 2017 EPS for its traditional auto business and 20x P/E to the NEV business. It also applies 23x P/E for handset components and 20x P/E to batteries businesses, as well as 14x P/E multiple applied to SkyRail, backed by our DCF TP of HKD43.70. The current valuation looks justified, because the NEV and SkyRail businesses are in the fast lane currently. It also takes into account management’s intent to improve operating margins to offset GPM deterioration.

Figure 12: BYD’s SOP valuation

Source: RHB, Bloomberg, Company data

Figure 13: BYD’s DCF valuation CNYm 2017F 2018F 2019F 2020F 2021F 2022F TV EBITDA*(1-t) 8.052 8,702 9,558 10,514 11,565 12,722 Depreciation 8,867 11,478 13,741 15,115 16,627 18,290 Chg in working (4,371) (5,274) (4,313) (4,744) (5,218) (5,740) capital Capex (13,480) (16,218) (18,485) (18,485) (18,485) (18,485) Dividends from 284 312 344 378 416 457 investments FCFF (649) (999) 846 2,779 4,905 7,244 169,571 Discount factor 1.00 1.07 1.15 1.24 1.33 1.43 1.43 PV of FCFF (649) (930) 733 2,243 3,686 5,069 118,667 Present corporate 128,820 value + cash 7,446 - Borrowings (23,590) Present equity value 112,676 DCF value per

share

TP 43.70 Assumptions WACC 7.4% Risk-free rate 4.2% Beta 1.3 Market return 10.2% Cost of equity 13.0% Cost of debt 5% Debt/(debt + equity) 70% Terminal growth 3%

Source: RHB

See important disclosures at the end of this report 49

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 14: BYD’s peer comparison I 3 - mth 3 - Y r Div yld Mkt c a p P ER Hist P ER FY 1 P ER FY 2 EP S FY 1 EP S FY 2 Div yld P /B Hist P /B FY 1 Compa ny Tic ke r P ric e a vg t/o EP S P EG (x) FY 1 (US $ m) (x) (x) (x) Y oY % Y oY % Hist (%) (x) (x) (US $ m) Ca gr (%) (%) BYD CO LTD- H 1211 HK 44.00 17,981 30.0 20.8 20.1 19.2 3.5 4.4 5.0 4.0 1.0 1.0 2.2 1.8 HSI 2 4 ,4 2 5 13 .6 12 .1 11.1 12 .1 9 .4 9 .9 1.2 3 .4 3 .4 1.3 1.2 CS I3 0 0 3 ,4 4 0 15 .8 13 .2 11.7 19 .2 13 .2 18 3 .4 0 .1 2 .0 2 .2 1.9 1.6 Sector avg (Auto) 13 .0 11.2 9 .8 2 0 .2 13 .0 12 .8 1.6 2 .3 3 .0 2 .2 1.8 Chinese OEMs GEELY AUTOMOBILE 175 HK 10.22 11,710 114.7 15.6 11.0 8.7 41.9 26.0 27.1 0.4 0.4 0.9 3.3 2.6 GREAT WALL MOT- H 2333 HK 8.11 13,964 80.2 6.2 6.0 5.3 3.8 12.3 8.5 0.7 2.8 5.0 1.3 1.2 DONGFENG MOTOR- H 489 HK 8.26 9,145 23.9 4.7 4.9 4.7 (2.9) 3.1 2.0 2.4 2.8 3.2 0.7 0.6 GUANGZHOU AUTO- H 2238 HK 12.96 20,023 42.4 11.7 8.5 7.6 37.6 12.1 19.2 0.4 1.8 3.4 1.6 1.4 BRILLIANCE CHINA 1114 HK 13.26 8,588 29.5 16.1 12.3 9.5 30.6 29.9 28.7 0.4 0.8 0.9 2.5 2.2 GREAT WALL MO- A 601633 CH 12.28 13,964 69.5 10.6 10.5 9.6 0.9 9.4 4.9 2.2 1.5 2.8 2.3 2.1 GUANGZHOU AUTO- A 601238 CH 26.49 20,023 15.6 27.0 18.2 15.9 48.5 14.2 23.1 0.8 0.8 1.6 3.9 3.3 SAIC MOTOR- A 600104 CH 27.87 47,219 125.1 9.6 8.8 8.2 8.6 8.1 7.8 1.1 4.9 6.3 1.5 1.5 CHONGQING CHAN- A 000625 CH 14.88 9,621 76.6 6.8 6.2 6.1 8.8 2.4 2.3 2.7 4.3 5.0 1.6 1.4 Ave ra ge 12 .0 4 9 .6 1 8 .4 1 19 .7 5 13 .0 7 13 .7 1 1.2 5 2 .2 3 3 .2 3 2 .0 6 1.8 0

European OEMs BAYER MOTOREN WK BMW GY 88.13 62,494 129.7 8.4 8.6 8.4 (1.6) 2.2 0.8 11.3 3.6 4.1 1.2 1.1 DAIMLER AG DAI GY 68.19 79,591 236.5 8.6 7.6 7.8 12.0 (1.6) 3.5 2.2 4.8 5.0 1.3 1.1 FIAT CHRYSLER AU FCA IM 10.24 16,941 149.3 N/A 5.1 4.3 N/A 18.7 N/A N/A N/A 0.2 N/A 0.8 PEUGEOT SA UG FP 18.86 18,403 64.1 8.7 8.2 7.5 6.3 8.9 6.7 1.2 N/A 3.0 1.3 1.1 PORSCHE AUTO- PRF PAH3 GY 54.02 18,046 20.7 12.1 5.1 4.6 137.2 10.5 39.8 0.1 1.9 2.6 0.6 0.5 RENAULT SA RNO FP 84.21 27,179 72.7 6.7 6.0 5.6 11.4 6.5 7.3 0.8 2.9 4.0 0.8 0.7 VOLKSWAGEN AG VOW GY 147.60 79,965 11.5 14.4 6.3 5.9 127.6 6.3 36.8 0.2 0.1 2.0 0.8 0.8 VOLKSWAGEN- PREF VOW3 GY 144.40 79,965 147.8 14.1 6.2 5.8 127.6 6.3 36.8 0.2 0.1 2.1 0.7 0.7 Ave ra ge 10 .4 3 6 .6 4 6 .2 5 6 0 .0 5 7 .2 1 18 .8 1 2 .2 8 2 .2 2 2 .8 7 0 .9 5 0 .8 5 US OEMs FORD MOTOR CO F US 11.07 44,081 466.1 9.5 7.2 6.6 33.4 7.7 13.4 0.5 5.9 5.6 1.4 1.3 GENERAL MOTORS C GM US 33.48 50,525 550.9 5.5 5.5 5.6 (0.9) (0.7) (2.1) N/A 4.5 4.6 1.1 1.0 Ave ra ge 7 .5 1 6 .3 4 6 .10 16 .2 7 3 .5 1 5 .6 2 0 .5 4 5 .2 1 5 .0 7 1.2 7 1.15 European OEMs SUBARU CORP 7270 JP 4,283 29,198 140.8 7.7 11.1 8.6 (31.2) 28.8 (1.7) N/A 3.4 3.4 2.4 2.2 HONDA MOTOR CO 7267 JP 3,235 51,936 131.5 9.5 9.4 8.7 0.8 7.8 9.2 1.0 2.8 3.1 0.8 0.8 MAZDA MOTOR 7261 JP 1,603 8,523 89.9 10.2 7.4 6.6 37.7 12.6 21.7 0.3 2.2 2.7 0.9 0.8 NISSAN MOTOR CO 7201 JP 1,077 40,269 125.9 8.6 7.1 6.8 20.6 4.3 11.1 0.6 4.5 4.5 0.9 0.9 SUZUKI MOTOR 7269 JP 4,712 20,505 65.7 20.1 13.5 14.6 48.7 (7.8) 14.6 0.9 0.7 0.8 1.9 1.9 TOYOTA MOTOR 7203 JP 6,143 177,653 363.2 8.3 10.4 9.3 (20.1) 10.9 (1.4) N/A 1.6 3.4 1.1 1.0 Ave ra ge 10 .7 1 9 .8 2 9 .12 9 .4 2 9 .4 4 8 .9 1 0 .7 3 2 .5 3 2 .9 7 1.3 3 1.2 8 Korean OEMs HYUNDAI MOTOR 005380 KS 152,000 29,540 76.0 7.6 7.2 6.5 5.0 11.5 7.7 0.9 2.6 3.0 0.5 0.6 KIA MOTORS CORP 000270 KS 35,250 12,607 30.2 5.1 6.0 5.1 (15.1) 18.9 2.2 2.7 3.1 3.3 0.5 0.5 Ave ra ge 6 .3 4 6 .6 2 5 .7 7 (5 .0 9 ) 15 .2 0 4 .9 7 1.8 3 2 .8 8 3 .15 0 .5 0 0 .5 4

India OEMs ASHOK LEYLAND AL IN 83.4 3,697 14.7 22.2 25.3 22.5 (12.2) 12.1 7.0 3.6 1.1 1.6 4.8 4.0 BAJAJ AUTO LTD BJAUT IN 2,928.6 13,200 12.8 22.4 21.1 19.3 6.2 9.2 8.6 2.5 0.2 2.2 6.5 5.8 HERO MOTOCORP LT HMCL IN 3,375.1 10,507 21.9 21.8 20.0 16.4 9.0 22.2 14.6 1.4 2.6 2.4 8.5 N/A MAHINDRA & MAHIN MM IN 1,335.5 12,898 27.1 24.6 19.8 15.7 24.3 26.0 21.5 0.9 0.9 1.1 2.8 2.6 MARUTI SUZUKI IN MSIL IN 6,644.9 31,210 52.1 26.7 24.8 20.4 7.4 21.6 20.7 1.2 0.5 1.2 5.4 5.1 TATA MOTORS LTD TTMT IN 438.1 21,838 53.9 13.4 20.1 11.3 (33.2) 78.6 17.9 1.1 0.0 0.3 1.8 1.8 Ave ra ge 22 22 18 0 28 15 2 0 .9 1.5 5 .0 3 .8 Turkish OEMs TOFAS TOASO TI 29.28 4,129 5.4 15.1 13.0 11.8 15.9 10.0 10.0 1.3 2.4 4.6 5.0 3.9 FORD OTO FROTO TI 39.24 3,881 3.9 14.4 13.2 11.6 9.2 13.9 12.3 1.1 5.2 6.0 4.6 4.0 Ave ra ge 14 .7 6 13 .12 11.7 2 12 .5 8 11.9 1 11.15 1.19 3 .7 8 5 .2 7 4 .7 9 3 .9 2 Note: Data as at 4 May 2017 Source: RHB Bloomberg

See important disclosures at the end of this report 50

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Figure 15: BYD’s peer comparison II Ne t Ne t Gross Ne t Ne t S h px S h px Re v Hist Re v FY 1 NP Hist NP FY 1 ge a rin Unle v ROE Hist ROE FY 1 Compa ny ge a ring ma rgin ma rgin ma rgin 1- mth 3 - mth (US $ m) (US $ m) (US $ m) (US $ m) g FY 1 be ta (%) (%) Hist (%) Hist (%) Hist (%) FY 1 (%) % % (%) BYD CO LTD- H 14,531 17,770 733 773 63 73 1.0 19.0 5.0 4.3 12.4 10.3 0.8 2.7 HSI 9 .4 10 .0 0 .3 5 .9

CS I3 0 0 11.7 12 .1 (1.4 ) 1.9

Sector avg (Auto) 5 9 ,0 2 9 6 2 ,0 3 3 3 ,0 3 5 3 ,4 0 3 2 3 .5 2 2 .2 1.0 18 .0 3 ,8 2 5 8 ,17 2 17 .3 16 .7 1.4 2 .1

Chinese OEMs

GEELY AUTOMOBILE 7,790 11,771 741 1,050 0 0 1.3 18.3 9.5 8.9 23.3 25.9 (15.5) 4.8 GREAT WALL MOT- H 13,745 16,253 1,530 1,589 3 6 1.4 21.5 11.1 9.8 22.4 21.4 (12.9) 0.4 DONGFENG MOTOR- H 17,753 19,080 1,937 1,893 0 0 1.0 14.3 10.9 9.9 14.7 12.7 (5.7) 0.1 GUANGZHOU AUTO- H 7,166 9,392 912 1,290 0 0 1.0 15.1 12.7 13.7 18.5 18.0 0.0 17.8 BRILLIANCE CHINA 743 813 534 694 11 0 1.2 3.3 71.8 85.4 16.9 18.8 (2.1) 19.7 GREAT WALL MO- A 13,745 16,388 1,530 1,537 3 0 1.0 21.5 11.1 9.4 22.4 20.7 (2.4) 7.6 GUANGZHOU AUTO- A 7,166 9,692 912 1,409 0 0 0.5 15.1 12.7 14.5 15.2 19.3 0.9 12.4 SAIC MOTOR- A 108,600 119,075 4,642 5,356 9 0 0.7 12.9 4.3 4.5 16.2 17.8 9.8 11.0 CHONGQING CHAN- A 10,863 11,865 1,492 1,592 0 0 0.4 13.9 13.7 13.4 24.1 24.1 (5.7) (4.2) Ave ra ge 2 0 ,8 4 1 2 3 ,8 14 1,5 8 1 1,8 2 3 3 1 0 .9 15 .1 17 .6 18 .8 19 .3 19 .9 (3 .7 ) 7 .7

European OEMs

BAYER MOTOREN WK 86,238 88,993 6,285 6,206 82 0 0.8 19.9 7.3 7.0 15.7 13.5 4.9 4.8 DAIMLER AG 140,362 146,758 7,808 8,678 0 0 1.3 20.9 5.6 5.9 17.8 15.7 0.6 0.7 FIAT CHRYSLER AU 101,674 105,864 1,651 2,846 35 15 1.1 14.2 1.6 2.7 10.0 15.8 4.4 0.0 PEUGEOT SA 49,483 51,563 1,584 1,836 0 0 1.4 19.1 3.2 3.6 14.9 15.0 2.1 7.6 PORSCHE AUTO- PRF 0.9 0.9 1,258 2,617 0 0 1.4 N/A 137,400 285,718 5.0 9.3 6.8 (2.8) RENAULT SA 46,930 52,921 3,131 3,706 0 0 1.5 21.4 6.7 7.0 11.6 12.7 5.1 (0.8) VOLKSWAGEN AG 198,981 203,963 4,917 10,379 0 22 1.3 18.9 2.5 5.1 6.6 12.2 6.5 (1.0) VOLKSWAGEN- PREF 198,981 203,963 4,917 10,379 0 22 1.4 18.9 2.5 5.1 6.6 12.2 7.5 (0.4) Ave ra ge 10 2 ,8 3 1 10 6 ,7 5 3 3 ,9 4 4 5 ,8 3 1 14 .6 2 7 .2 3 1.2 7 19 .0 3 17 ,17 9 3 5 ,7 19 11.0 4 13 .3 0 4 .7 4 1.0 2

US OEMs

FORD MOTOR CO 151,800 143,114 4,596 6,217 0 0 1.4 10.7 3.0 4.3 12.4 21.9 (2.6) (11.9) GENERAL MOTORS C 166,380 162,987 9,427 8,980 0 0 1.4 18.1 5.7 5.5 23.2 19.7 (2.3) (7.8) Ave ra ge 15 9 ,0 9 0 15 3 ,0 5 1 7 ,0 12 7 ,5 9 9 0 .0 0 0 .0 0 1.4 3 14 .4 0 4 .3 5 4 .9 3 17 .8 0 2 0 .7 9 (2 .4 7 ) (9 .8 5 )

European OEMs

SUBARU CORP 28,647 29,371 3,870 2,620 0 0 1.4 32.3 13.5 8.9 22.9 21.1 6.7 (1.5) HONDA MOTOR CO 124,073 129,317 5,465 5,479 62 67 0.8 22.4 4.4 4.2 8.8 8.6 (0.8) (5.5) MAZDA MOTOR 28,489 29,820 831 1,142 0 0 1.6 23.8 2.9 3.8 9.4 12.2 4.6 0.5 NISSAN MOTOR CO 108,034 103,024 4,643 5,346 0 132 1.1 19.6 4.3 5.2 10.3 12.6 3.5 (4.4) SUZUKI MOTOR 28,190 27,649 1,034 1,373 0 0 1.1 27.3 3.7 5.0 14.0 14.6 2.3 4.8 TOYOTA MOTOR 251,734 240,189 20,497 15,747 71 82 0.7 20.4 8.1 6.6 10.7 10.4 2.7 (4.7) Ave ra ge 9 4 ,8 6 1 9 3 ,2 2 8 6 ,0 5 7 5 ,2 8 5 2 2 .16 4 6 .9 2 1.11 2 4 .3 1 6 .16 5 .6 2 12 .6 9 13 .2 2 3 .17 (1.7 9 )

Korean OEMs

HYUNDAI MOTOR 82,674 86,270 4,773 4,838 60 65 0 18.9 5.8 5.6 6.5 7.9 0.0 10.5 KIA MOTORS CORP 46,535 47,008 2,432 2,092 0 0 0 19.8 5.2 4.5 10.8 8.6 (3.0) (2.5) Ave ra ge 6 4 ,6 0 5 6 6 ,6 3 9 3 ,6 0 2 3 ,4 6 5 2 9 .9 4 3 2 .4 7 0 .4 6 19 .3 4 5 .5 0 5 .0 3 8 .6 6 8 .2 5 (1.5 1) 4 .0 3

India OEMs

ASHOK LEYLAND 3,218 3,051 167 134 174 N/A 0.5 N/A 5.2 4.4 22.5 16.0 (0.8) (11.7) BAJAJ AUTO LTD 3,467 3,416 589 626 0 0 1.0 N/A 17.0 18.3 31.3 29.7 5.2 4.3 HERO MOTOCORP LT 4,389 N/A 482 525 0 N/A 1.2 N/A 11.0 N/A 42.7 N/A 5.5 5.1 MAHINDRA & MAHIN 10,871 13,050 500 625 104 127 0.6 N/A 4.6 4.8 11.8 13.1 3.6 5.7 MARUTI SUZUKI IN 10,426 12,177 1,170 1,242 0 0 1.0 N/A 11.2 10.2 23.2 21.4 9.2 8.5 TATA MOTORS LTD 42,101 43,577 1,717 1,061 27 36 1.3 N/A 4.1 2.4 16.1 8.9 (6.8) (16.1) Ave ra ge 12 ,4 12 15 ,0 5 4 771 702 51 41 1 N/A 9 8 25 18 3 (1)

Turkish OEMs

TOFAS 4,117 5,125 274 323 89 59 N.A 9.9 6.6 6.3 35.0 34.5 7.7 11.2 FORD OTO 5,156 5,878 269 296 53 51 0.6 11.4 5.2 5.0 34.8 29.6 10.8 12.1 Ave ra ge 4 ,6 3 7 5 ,5 0 2 271 309 7 0 .7 9 5 5 .0 4 0 .5 6 10 .6 6 5 .9 3 5 .6 7 3 4 .9 2 3 2 .0 5 9 .2 5 11.6 3 Note: Data as at 4 May 2017 Source: RHB, Bloomberg

See important disclosures at the end of this report 51

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

Key Risks The key downside risks to our investment thesis on BYD include: i. Lower-than-expected slow sales volume of NEV models due to increased competition from other EV brands; ii. Lower-than-expected margin due to government EV subsidy cuts; iii. Lower-than-expected of new contracts and lack of execution for SkyRail due to local governments’ high debt levels; iv. Incapable of securing cash to pay back debt due to a high gearing ratio. The key upside risks to our investment thesis include: i. Higher-than-expected contract execution for SkyRail; ii. Faster-than-expected model roll outs, including EV and plug-in hybrid electric vehicle (PHEV) SUVs; iii. Higher-than-expected margins improvements driven by strong cost controls.

Company Profile BYD is a listed company, engaged in the automobile business. This includes traditional fuel-powered vehicles and NEVs. The company is also involved in the IT business related to rechargeable batteries, handset and computer components, and assembly services.

Figure 16: BYD’s company structure

Source: RHB, Wind

See important disclosures at the end of this report 52

BYD Co Ltd Hong Kong Initiating Coverage

5 May 2017 Consumer Cyclical | Automobiles & Components

SWOT Analysis

 Owns technologies in electric vehicles (EVs) and  Margin pressure batteries due to cuts in EV subsidies  Has a diversified business  Monorail execution capability

 Potential revenue from the SkyRail monorail venture

 Slow growth in traditional vehicles

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-05-04 69 Source: RHB, Bloomberg 59

49

39

29

19

9 May-12 Aug-13 Nov-14 Feb-16

Source: RHB, Bloomberg

See important disclosures at the end of this report 53

Automobiles & Components Hong Kong Sector Initiation

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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54

Automobiles & Components Hong Kong Sector Initiation

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Automobiles & Components Hong Kong Sector Initiation

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United States This report was prepared by RHB and is being distributed solely and directly to “major” U.S. institutional investors as defined under, and pursuant to, the requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). RHB is not registered as a broker- dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all other securities discussed herein must be placed with and through such other registered U.S. broker-dealer as appointed by RHB from time to time as required by the Exchange Act Rule 15a-6.

This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees, agents and advisors, as applicable.

Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority (“FINRA”) rules on communications with a subject company, public appearances and personal trading.

Investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States. The financial instruments discussed in this report may not be suitable for all investors.

Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United States.

OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST

Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: a) -

RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for: a) -

RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered in this report in the last 12 months except for: a) -

RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for: a) -

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Automobiles & Components Hong Kong Sector Initiation

Thailand RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions.

Indonesia PT RHB Securities Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of affiliation above.

Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows:

1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;

2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;

3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same;

4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;

5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or

6. Affiliation between the Company and the main Shareholders.

PT RHB Securities Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider information prohibited by law.

Insider means: a. a commissioner, director or employee of an Issuer or Public Company; b. a substantial shareholder of an Issuer or Public Company; c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this report, except for: (a) -

The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions of any issuer whose securities are covered in this report, except for: (a) -

RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1% or more in the securities covered in this report) that may create a potential conflict of interest, except for: (a) -

Hong Kong RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be) the securities in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company’s market capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”); and/or (b) an amount equal to or more than 1% of the subject company’s issued share capital, or issued units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.

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Automobiles & Components Hong Kong Sector Initiation

RHBSHK or any of its group companies may make a market in the securities covered by this report. RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group companies serving as an officer of the company or any of the companies covered by this report. RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the companies covered by this report within the past 12 months.

Note: The reference to “group companies” above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong Limited.

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd RHB Securities Hong Kong Ltd. RHB Research Institute Singapore Level 3A, Tower One, RHB Centre 12th Floor Pte Ltd. Jalan Tun Razak World-Wide House 10 Collyer Quay Kuala Lumpur 50400 19 Des Voeux Road #09-08 Ocean Financial Centre Malaysia Central, Hong Kong Singapore 049315 Tel : +(60) 3 9280 8888 Tel : +(852) 2525 1118 Tel : +(65) 6533 1818 Fax : +(60) 3 9200 2216 Fax : +(852) 2810 0908 Fax : +(65) 6532 6211

Jakarta Shanghai Bangkok

PT RHB Securities Indonesia RHB (China) Investment Advisory Co. Ltd. RHB Securities (Thailand) PCL Wisma Mulia, 20th Floor Suite 4005, CITIC Square 10th Floor, Sathorn Square Office Tower Jl. Jenderal Gatot Subroto No. 42 1168 Nanjing West Road 98, North Sathorn Road, Silom Jakarta 12710, Indonesia Shanghai 20041 Bangrak, Bangkok 10500 Tel : +(6221) 2783 0888 China Thailand Fax : +(6221) 2783 0777 Tel : +(8621) 6288 9611 Tel: +(66) 2 862 9999 Fax : +(8621) 6288 9633 Fax : +(66) 2 862 9799

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