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Best Days Ahead; BUY 12M Price Target HKD 9.30 (+34%) Previous Price Target HKD 7.40

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Best Days Ahead; BUY 12M Price Target HKD 9.30 (+34%) Previous Price Target HKD 7.40 October 3, 2016 Geely Automobile (175 HK) BUY Share Price HKD 6.92 Best days ahead; BUY 12m Price Target HKD 9.30 (+34%) Previous Price Target HKD 7.40 Company Description Demand much stronger than expected; EPS/TP lifted Our channel checks indicate that the wait time for Geely’s two new Geely is one of the largest privately owned SUVs, Boyue and Emgrand GS have reached 3 to 4 months. We forecast automakers in China which has tech. collaboration with Volvo as both share the same parent-Zhejiang strong sales momentum in 2016-17 amid its capacity ramp up. The next Geely. driver for 2018-19 is a series of new models based on the CMA platform. Geely, along with Volvo, will announce more details of the technology Statistics this month in Europe, which will be the next catalyst. Maintain BUY and 52w high/low (HKD) 7.19/2.79 raise TP 26% to HKD9.3 on upwards revision to 2017/18 earnings and 3m avg turnover (USDm) 51.6 target PER multiple. Free float (%) 57.0 Capacity to reach 1.15m units next year Issued shares (m) 8,801 Market capitalisation HKD60.9B Automotive We maintain our view that Geely sales will surge 33% YoY this year to 678k units (vs. guidance of 660k units). Our channel checks and USD7.9B discussions with management have reaffirmed that the demand of the Major shareholders: Zhejiang Geely Holdings Group Co. Ltd. 42.6% new models exceeds capacity. The wait time for Boyue and Emgrand GS JPMorgan Asset Management (UK) Ltd. 3.0% have reached 3-4 months, while the pre-orders for the Emgrand GL has JPMorgan Investment Management, Inc. 2.3% reached 20k units. We project Geely’s annual capacity will reach over Price Performance 1.15m units next year, and the constraint will ease gradually after the production ramp up of the Baoji (宝鸡), Linhai (臨海) & Jinzhong (晋中) 7.50 280 China 7.00 260 plants. 6.50 240 L-brand & CMA platform – the next catalyst 6.00 220 5.50 200 Geely, Volvo and China Euro Vehicle Technology AB, (CEVT) will hold one 5.00 180 of the most important events this year in Gothenburg & Berlin this 4.50 160 4.00 140 month. We expect them to release the details of their Compact Modular 3.50 120 Architecture (CMA) platform and the models based on this technology. 3.00 100 We expect to see more details about the product specifications, the plan 2.50 80 2.00 60 on the new distribution network, and the L-brand positioning (i.e. Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Geely’s premium brand targeting JV market). In our view, this is the key Geely Automobile - (LHS, HKD) Geely Automobile / Hang Seng Index - (RHS, %) milestone for Geely’s 2020 sales target to reach 2 million units. TP lifted 26% on accelerating earnings growth -1M -3M -12M We raise our 2016/17 earnings forecasts by 6-7% (2016 unchanged) to Absolute (%) 11 65 88 reflect stronger sales volume assumptions. The demand of the four new Relative to index (%) 10 47 68 Source: FactSet models remains very strong, with the full year contribution in 2017. We expect Boyue monthly sales to reach 18k, while the combined monthly shipments of Engrand GS/GL will reach 26k units. Our TP of HKD9.3 is based on a 2017 PER of 13x (prior 11x), which is 1SD above the 4-yr avg. supported by our forecast 42% earnings CAGR in 2016-18E. FYE Dec (CNY m) FY14A FY15A FY16E FY17E FY18E Revenue 21,738 30,138 43,814 67,222 100,523 EBITDA 1,753 2,808 4,781 7,157 10,039 Core net profit 1,431 2,261 3,594 5,455 7,758 Core FDEPS (CNY) 0.16 0.26 0.41 0.62 0.88 Core FDEPS growth(%) (46.3) 57.9 59.0 51.8 42.2 Net DPS (CNY) 0.02 0.03 0.05 0.07 0.11 Core FD P/E (x) 36.6 23.2 14.6 9.6 6.8 P/BV (x) 3.0 2.7 2.3 1.9 1.5 Net dividend yield (%) 0.3 0.5 0.8 1.2 1.8 ROAE (%) 8.6 12.3 17.0 21.7 25.1 ROAA (%) 4.0 5.7 7.5 8.7 9.2 EV/EBITDA (x) 7.3 8.3 9.3 5.9 3.6 Net gearing (%) (incl perps) net cash net cash net cash net cash net cash Consensus net profit - - 3,835 5,413 6,516 MKE vs. Consensus (%) - - (6.3) 0.8 19.1 Ka Leong Lo Benjamin Ho [email protected] [email protected] (852) 2268 0630 (852) 2268 0632 THIS REPORT HAS BEEN PREPARED BY KIM ENG SECURITIES (HK) LTD SEE PAGE 13 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Geely Automobile 1. Strong orders Strong demand After the success of Borui (or GC9) last year, Geely has launched four new models in the past 9 months, including the Vision SUV, Boyue SUV, Emgrand GS SUV, and Emgrand GL. Our channel checks reaffirm strong end-use market demand. Management expects monthly sales of two new SUVs, Boyue and Emgrand GS, to reach 20k and 10k units by the end of this year amid the capacity ramp up. In addition, our channel check also indicates positive feedback from dealers about the new A-segment sedan Emgrand GL, which was launched in Sep. Management targets this model to become a top 10 best-selling sedan in China, pre-orders for which reached over 20k units in Sep. We noted that the current top-10 best-selling sedan models are dominated by foreign brands, with monthly sales of at least 18k units vs. our assumption of 13k units for Emgrand GL. Fig 1: China’s top 10 best-selling sedans Shipment MRSP Rank Manufacturer Brand-model (‘000 units) (‘000 CNY) 1 SAIC VW VW Lavida 316.3 101-160 2 FAW VW VW Jetta 237.8 80-121 3 SAIC GM Buick Excelle 232.1 101-160 4 FAW VW VW Sagitar 217.5 132-220 5 FAW Toyota Toyota Corolla 204.2 108-176 6 Dongfeng Nissan Nissan Sylphy 200.6 99-160 7 SAIC VW VW Santana 196.6 85-140 8 Changan Ford Ford Escort 174.8 97-120 9 BAIC Hyundai Elantra Langdong 145.8 106-128 10 SAIC GM Chevrolet Cruze 143.1 90-170 Total 2,068.8 Geely Emgrand GL n.a. 79-114 Source: CAAM, Autohome and Maybank Kim Eng Capacity ramping up A capacity constraint is one of the key challenges that Geely is facing this year. For instance, The Linhai (臨海) production plant now only has around 20k units of capacity per month to produce both the Emgrand GS (7.5k units shipped in Aug 16) and Emgrand GL. Also, the demand for the Boyue is much stronger than its current supply. This model is produced in the Baoji (宝鸡) plant, which has an annual design capacity of 200k units, but is now only producing 10k units a month because it is in the process of ramping up. Management targets the monthly production to reach 20k units by the end of this year. Overall, we estimate that Geely’s total capacity will reach 1.1m units in 2017 after the production ramp up of Baoji (宝鸡), Linhai (臨海) and Jinzhong (晋中). Fig 2: Geely annual production capacity will reach over 1 million units next year 2017 capacity 2017 Sales Production plant Platform Models Utilization rate (‘000 units) (‘000 units) Chunxiao 春曉 KC Borui (or GC9) 150 60 48.0% Baoji 宝鸡 KC Boyue 200 216 108.0% Linhai臨海 FE Emgrand GS/GL 200 156 78.0% Shanxi Jinzhong山西晋中 FE Emgrand GL/GS 200 156 78.0% Cixi 慈溪 FE EC7, Xindihao 200 160 90.0% Xiangtan 湘潭 FE New Vision 100 112 112.0% Chengdu 成都 Old SUV Vision SUV 100 78 78.0% Geey brand total 1,150 970 84.3% Luqiao路橋 / Zhangjiakou张家口(parent) CMA 1 sedan and 2 SUVs 400 32* NA L-brand total 400 32 NA Source: Maybank Kim Eng. * L brand production only; the plants will also produce Volvo vehicles October 3, 2016 2 Geely Automobile Fig 3: Geely Emgrand GS SUV (ASP: CNY78k-109k) Fig 4: Geely Emgrand GL sedan (ASP: CNY76k-114k) Source: Bitauto Source: Bitauto Fig 5: Geely Boyue SUV (ASP:CNY99k – 158k) Fig 6: Geely Borui (or GC9) sedan (ASP: CNY120k-230k) Source: Bitauto Source: Bitauto Fig 7: We expect Geely monthly shipment to reach 80k units Fig 8: We project shipment this year will increase by 33% by the end of this year. YoY to 678k units (vs. target of 660k units) (000's units) 2013 2014 2015 2016 (% yoy) Sales Vol. (RHS) YoY Growth (000's units) 90 100% 70 Geely's Aug shipment up 80% 80 60 69% YoY 60% 70 50 40% 40 Thousands 60 20% 30 50 0% 40 -20% 20 30 -40% 10 20 -60% 0 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Company and Maybank Kim Eng Source: Company and Maybank Kim Eng October 3, 2016 3 Geely Automobile 2. L brand debut – next catalyst CMA and L brand debut this month Geely, Volvo and China Euro Vehicle Technology AB, (CEVT) will hold events in Gothenburg and Berlin on 19-20 Oct 2016 to release the details of the Compact Modular Architecture (CMA) platform.
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