Hong Kong Equity | Automobile Company in-depth

BYD Company 比亞迪股份 (1211 HK) ACCUMULATE

Three to drive growth Share Price Target Price BYD enters into the new product cycle in 2018, the new generation NEVs with HK$47.2 HK$54.2 “DragonFace” design are well-accepted by buyers and achieved significant growth after launch. BYD will continue enhancing its competitiveness with upgrading its NEVs with long driving range and high battery density. In addition / Automobile / Auto Maker to the new Skyrail projects going into operation and the external sales of EV batteries to begin in 2019, we believe BYD will enter into upward cycle. Initiate 7 January 2019 Accumulate with TP of HK$54.2 and a 15% upside from here.

 New generation of NEPVs drive automobile segment growth: BYD entered into a new Alison Ho (SFC CE:BHL697) product cycle in 2018 and more than 10 NEPV models have been launched last year. (852) 3519 1291 Among them, Yuen EV, Tang DM and Qin Pro with the “Dragon Face” design recorded [email protected] significant sales volume growth, which also ranked top 20 of best-selling NEVs in China.

Given the new appearance and the improvement of driving range, we believe BYD’s NEPV are highly competitive and we expect its NEPVs sales to continue to trend up and Latest Key Data it is likely to offset the revenue loss from the subsidies cut. Total shares outstanding (mn) 2,728  The reduction of NEV subsidies to drag down EV buses’ GPM: The subsidies of EV Market capitalization (HK$mn) 128,768 buses have cut by 40% in 2018, we expect the subsidies will continue to reduce in 2019. Enterprise value (HK$mn) 257,537 Given that BYD’s EV buses sales volume is hard to increase substantially to offset the 12M average daily turnover (HK$mn) 355 subsidies cut resulting from the fierce market competition, we estimate EV buses 12M volatility (%) 41% PEG FY17-19E (x) 7.8 revenue and GPM to drop in 2019E. ROE avg FY17-19E (%) 7  EV batteries capacity increase to capture the growing demand for NEVs : BYD starts to P/B FY18E (x) 2.0 provide EV batteries to external customers in 2019E, the increase of EV batteries Net debt/equity FY18E (%) 97 capacity from 16Gwh in 2017 to 40Gwh in 2019E is likely to bolster its revenue and profit growth in the long run against the backdrop of strong demand for NEVs. Performance (%)  BYD benefits from the shifting demand to Glass casing: BYD guided that its glass casing 1M YTD 12M capacity will increase to 800k-900k pieces per day by end-2018, with yield improving to Absolute (18) (6) (33) 80% (2.5D) and 70% (3D). This implies an actual annual production capacity of over Relative to HSI (12) (5) (17) 200mn pieces. Given that BYD has already supplied both glass back-cover and metal middle frame to Huawei P20, Vivo X21 and Xiaomi 8, the expansion of glass capacity supports BYD to continue to gain market shares, we expect its mobile segment revenue Major Shareholders (%) to increase stably in 2019E. Wang Chuan Fu 28.5 Lv Xiang Yang 13.2  Account receivables days increase at a fast pace: BYD’s account receivable days Youngy Inv 8.9 increased from 167 days in 2016 to 189 days in 2017, which slow down the cash inflow and increase the risk of write off the bad debt.  Initiate with a Accumulate rating. BYD’s share price dropped 35% in the past 12 months Auditor as profit declined. However, we believe its profit growth will recover in 2019E driven by Ernst & Young the significant increase of NEV sales, beginning of external sales of EV batteries and the expansion of glass casing capacity. We initiate Accumulate rating with target price of HK$54.2, which implies FY19E P/E of 32.0x and FY19E P/B of 2.1x. Price Chart Turnover (HK$mn) Price (HK$) Investment Summary 2000 BYD 90.0 FY-end Dec 2016 2017 2018E 2019E 2020E HSI 1800 80.0 Turnover (RMB mn) 100,208 102,651 121,671 143,438 163,682 1600 Chg (%) 29 2 19 18 14 70.0 Net Profit (RMB mn) 1400 5,052 4,066 2,977 4,369 5,094 60.0 Chg (%) 79 (20) (27) 47 17 1200 50.0 EPS (RMB ) 1.875 1.401 0.998 1.509 1.774 1000 Chg (%) 40.0 67 (25) (29) 51 18 800 P/E (x) 22.1 29.5 41.4 27.4 23.3 30.0 600 P/B (x) 2.1 2.1 2.0 1.8 1.7 20.0 400 P/OCF (x) -57.9 17.7 19.9 12.3 14.4 10.0 EV/EBITDA (x) 14.2 15.0 15.1 12.5 11.4 200 DPS (RMB ) 0.555 0.141 0.109 0.240 0.373 0 0.0 18-Jan 18-Apr 18-Jul 18-Oct 18-Dec Yield (%) 1.3 0.3 0.3 0.6 0.9 Source: Company data, Bloomberg, Orient Securities (Hong Kong) Source: Bloomberg, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1

Hong Kong Equity | Automobile Company in-depth

NEV sales growth outperforms traditional vehicles

The slowdown of vehicles sales in China

The increase uncertainty amid the trade war slowed personal spending, the auto market Figure 1: Vehicles sales in China was also affected by the weak consumption sentiment and the sales growth has dropped Automobile accumulated sales since 6/2018. The monthly sales volume of automobiles was down by 13.9% yoy in China Mn unit volume (LHS) YOY growth(%) (RHS) % in 11/2018, the 4th consecutive month of decline, according to CAAM. Among which, the 35 15 US brands vehicles sales registered a significant decline after 4/2018 and performed 30 25 10 20 most badly (-32.7% yoy in 11/2018), which was primarily due to an increase tariff to US 15 5 10 0 imported vehicles. The sales of Chinese brand vehicles also performed weakly and 5 0 (5) recorded -23.3% yoy growth in 11/2018, underperformed the industry. The accumulated vehicles sales edged down by 1.65% yoy to 25.4 mn units in China in 11M2018. With the haze of the trade war, we believe the auto market may continue to decline if no preferential policy comes out in the future. Source: CAAM, Orient Securities (Hong Kong)

Figure 2: Monthly vehicles sales by brands Figure 3: Sales volume of NEVs in China

Sales volume of new energy car (LHS) 40.00 YOY growth (RHS) 30.00 Unit 20.00 1,200,000 400% 10.00 Chinese brands 1,000,000 350% 0.00 300% Japanese brands 800,000 250% -10.00 600,000 200% -20.00 Germany brands 400,000 150% 100% -30.00 US brands 200,000 50%

-40.00 0 0%

2018-02 2018-03 2018-04 2018-05 2018-06 2018-07 2018-08 2018-09 2018-10 2018-11 2018-01 Source: CAAM, Orient Securities (Hong Kong) Source: CAAM, Orient Securities (Hong Kong)

Strong Momentum of NEV sales in China According to CAAM, new energy vehicles (“NEVs”) sales maintain a strong momentum Figure 4: Cities restricting fuel vehicles despite the decline of auto market, which sales volume was up by 37.6% yoy to 169,000 licenses plates units in 11/2018. The accumulated sales volume was up by 68% yoy to 1.03 mn units in 1 11M2018, outperformed traditional fuel vehicles sales, the penetration rate keeps 2 increasing and rose from 2.7% in 2017 to 4.1% in 11M2018. 3 Guangzhou

4 Shenzhen The local government encouraged the use of NEVs against the backdrop of easing the air 5 Tianjin pollution, especially in the 1-st tier cities, the government highly restricts the number of 6 Guiyang 7 new license plates for fuel vehicles, but not for NEV plates, which bolsters the demand 8 Shijiazhuang for NEVs. Apart from that, the government subsidies, low energy cost and an increase 9 Hainan number of charging stations are also the reasons to attract car buyers to purchase NEVs. Source: Internet data, Orient Securities (Hong Kong) Given an upgrading technology and growing popularity of NEVs in China, NEV sales are expected to keep rising going forwards.

Figure 5: The reasons for Chinese drivers to buy NEVs Pros Cons

1 Lower energy costs 1 Lack of charging facilities

2 Easier to get license plates 2 Long charging hours

3 Government subsidies 3 Immature technology 4 Environmental protection 4 Worry about safety problem

Source: Internet data, Orient Securities (Hong Kong)

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High performance NEVs are entitled higher subsidies Low technology NEVs makers may exit the industry Figure 6: The subsidies for NEVs In order to encourage purchasing NEVs, the state and the local government both continue to reduce provided the huge amount of subsidies to NEV buyers in 2013-2015, the subsidies RMB 120-139 (WH/KG) normally reached 50% of NEVs’ price, which attracted car buyers to shift from traditional Year 150≤R<200 YOY change vehicles to NEVs. In 2016, the media reports that some low technology auto makers 2013 50,000 The cheated the subsidies by inflated the production volume or producing the low-qualities 2014 47,500 -5% subsidies NEVs, the government then raised their subsidies requirements and impose the stricter 2015 45,000 -5% for NEVs policy that only the NEVs with high battery energy density and long driving range can 2016 45,000 0% keep reducing 2017 36,000 -20% enjoy the higher subsides. Since NEV makers heavily depends on the government 2018 15,000 -58% subsidies, the strict policy may force low-technology NEV makers to exit the industry, the Source: Internet data, Orient Securities (Hong advance technology NEV makers such as BYD and would benefit from the industry Kong) consolidation and their market shares are expected to increase.

Figure 7: State subsidy for new energy passenger (“NEPV”) 2017 2018.2.11 2018.6.11 2018.12.31

2017-10.2.2018: Based on Transition period: The subsidy The NEVs with longer distance riding and higher density is subject to 70% of 2017’s can enjoy higher subsidies comparing with 2017. 2017 subsidies policy subsidies. New energy passenger cars Year 2017 2018.2.11 - 2018.6.11 2018.6.11 – 2018.12.31 RMB Battery energy density Battery energy density Battery energy density Driving Range 90-119 ≥120 90-119 ≥120 105-119 120-139 140-159 ≥160 (WH/KG) (KM) (WH/KG) (WH/KG) (WH/KG) (WH/KG) (WH/KG) (WH/KG) (WH/KG) 100-149 20,000 22,000 14,000 15,400 - - - -

150-199 36,000 39,600 25,200 27,720 9,000 15,000 16,500 18,000 200-249 36,000 39,600 25,200 27,720 14,400 24,000 26,400 28,800 250-299 44,000 48,400 30,800 33,880 20,400 34,000 37,400 40,800 300-399 44,000 48,400 30,800 33,880 27,000 45,000 49,500 54,000 ≥400 44,000 48,400 30,800 33,880 30,000 50,000 55,000 60,000 2018 vs 2017 Change (%) 150-199 -30% -30% -75% -62% -58% -55% 200-249 -30% -30% -60% -39% -33% -27% 250-299 -30% -30% -54% -30% -23% -16% 300-399 -30% -30% -39% -7% 2% 12% ≥400 -30% -30% -32% 3% 14% 24% Source: Internet data, Orient Securities (Hong Kong)

NEV subsidies is expected to set to end by 2020 The subsidies on NEVs gradually reduce year-over-year and is expected to completely phase out by the end of 2020. Figure 7 is showing the difference of NEVs subsidies between 2017 and 2018. In the transition period between 11.2.2018 and 11.6.2018, the government cut subsidies on NEVs by 30% yoy, which hit hard the NEV makers including BYD (BYD’s profit dropped by 72% yoy in 1H2018). After the transition period (12.6.2018 to 31.12.2018), the subsidies for NEVs with low energy density reduce from 7% to 75% vs 2017, but the NEVs with battery energy density ≥140WH/kg and driving range ≥300 KM not only enjoy higher subsidies from state government, but also get 1.1 times state government subsidies from local government, implying that new subsidy policy support the high-quality NEVs. Given that BYD continues to upgrade its NEVs, we believe the higher subsidies getting from its high performance NEVs can offset some of subsidies loss from its low-end NEVs in 2H2018, its profit growth is expected to recover in 2H2018.

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BYD – A leading NEV manufacturer BYD building vertically integrated auto business BYD Company is principally engaged in 1) automobile business, which includes the sales of traditional fuel vehicles and new energy vehicles, 2) rechargeable battery and

photovoltaic business and 3)handset components and assembly services business. The group, being a private-owned enterprise, was found in 1995 and is headquartered in Shenzhen. BYD entered into batteries industry and manufactured NiCd, NiMh and Li-ion batteries at the early stage (1995-2000). In 2003, the company acquired Xi’an Qin Chuan Auto Ltd., which was renamed as “BYD Automobile Company Ltd.” in the later time, the group then witnessed a significant changes in 2000s and launched the first vehicle -F3 in

2005. In 2010, the group announced to set up a with Daimler AG for the joint research and development of new . In 2011, BYD’s pure electric taxi e6 and pure K9 launched in Shenzhen. The joint venture of BYD and Daimler then launched the electronic vehicles – “ “ (騰勢) in 2012. After that, BYD’s Dynasty NEV series started to debut in 2013, up to now, “Qin” ,”Tang” ,”Song” ,”Yuen”

became the major series for BYD automobile.

Figure 8: BYD’s milestones

1995 1997 1998 2000 2002

Developed batteries business in 1990s BYD, was found in 1995, The group began to sell The group entered into In 2000, BYD became In 2002, BYD was listed engaged in the NiMh Batteries in 1997 . lithium-ion batteries Motorola’s first Chinese on HKEX and became development and market in 1998. lithium-ion battery ’s first Chinese production of NiCd supplier li-ion battery supplier batteries.

2003 2005 2008 2011 2016

Entered into automobile market in 2000s and expanded to NEV field in 2010s In, 2003, BYD acquired BYD launched the first The subsidiary of BYD was listed on The group launched the Xi’an Tsinchuan Auto vehicle – F3 in 2005. Warren Buffett’s A-share and it started to straddle monorail Ltd., which helped them Berkshire Hathaway, provide electric bus K9 “Skyrail” in 2016. to enter into auto MidAmerican Energy and e6 electric Taxis to market acquired 225mn BYD H the market shares in 2008.

Source: Company data, Orient Securities (Hong Kong)

“DragonFace“ concept attracted car buyers’ eye balls Figure 9: DragonFace look BYD invited Mr. Wolfgang Egger, a former Audi Group chief designer, to join the company

in 2016. Mr. Wolfgang Egger has designed Audi Q7, R8, A6 and Quattro before, and he

designed “DragonFace”, a vehicle with a large radiator grill flanked by slim LED

headlamps, for BYD’s Dynasty NEVs series. Song Max, the first NEV with “DragonFace”

appearance, was launched in 9/2017, its design was well-accepted by the customers and

the sales volume surged to 10,000 units in 3 months. Tang DM and Yuen EV also joined

DragonFace family with monthly sales reaching 5,000 units in 4 months after debut. Given the continuous upgrade of old car models to new design, we estimate BYD to have Source: Company data, Orient Securities (Hong Kong) a stable sales growth in 2019.

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Hong Kong Equity | Automobile Company in-depth

BYD’s vehicle models description (1)

Figure 10: Monthly sales of BYD’s vehicles

China NEV Ranking BYD’s models and sales volume

Top 20 EVs in China in 11/2018 EV Model Monthly Sales Volume Our view  Unit 0 5000 10000 15000 Unit Yuen EV with “Dragon Face” has debuted in 10,000 BAIC EC series 14205 5/2018, which sales immediately reached 5,000 5,000 BYD Yuan 6188 units in 9/2018 and becomes the 2nd best-selling 0 E200 5692 new energy SUV in China recently. Given the low BYD e5 5573 Yuen EV – SUV selling price but with 305km driving range, Yuen EV E100 5155 (RMB79,900-99,900) is highly competitive. EV 4508 Unit  According to Sohu, e5 accounted for 11.2% of BYD’s iEV6E 4503 6,000 total sales volume sales in 11/2018. The sales eQ EV 4352 4,000 K-ONE EV 4204 2,000 volume of e5 was stable in the past half year and ES8 3349 0 reached 4,000 units in 8/2018-10/2018. We XEV260 3257 e5 - observed that its sales momentum picked up and BAIC EU Series 2941 (RMB220,000-230,000) reached 5,500 units in 11/2018. Sylphy Zero Emission 2405

Santa Fe 2357 Unit 1,500  Qin EV is the one of the bestselling models in BYD. Hawtai EV160 1983 1,000 500 Yun 100 1958 New version of Qin EV debuted in 3/2018, we 0 Zotye E200 1904 found that its sales grows stably in the past 3 GE3 1749 Qin EV – Sedan months and reached 1,300 units in 11/2018. (RMB149,900-169,900) Tiggo 3xe 1545 Gleagle K27 1407 Unit 1,500  The new model of Song EV with dragon face design Fengshen E70 1395 1,000 launched in 8/2018, its monthly sales reached BYD Qin 1331 500 Arrizo 5e 1314 0 1,000 units in 11/2018. With the upgrade of the BYD Song 1235 driving range from 300km to 400km, it presents the Song EV – SUV best value for money for BYD’s new energy SUV. (RMB189,900-275,900) Source: CPCA, Sohu, Wind, Orient Securities (Hong Kong)

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BYD’s vehicle models description (2)

Figure 11: Monthly sales of BYD’s models China NEV Ranking BYD’s models and sales volume Top 20 Plug-in hybrid vehicles in China in 11/2018 Hybrid Model Monthly Sales Volume Our view 0 2000 4000 6000 8000 Unit Unit  New version of Tang DM with dragon face 10,000 BYD Tang 6405 appearance introduced in 6/2018 and it immediately 5,000 became the best-selling PHEV in China and hit 6,000 BYD Qin 3912 0 units in 9/2018. We found that its sales continues to BYD Song 3075

go up in 11/2018 and accounted for 12.9% of BYD’s

2017-10 2017-11 2017-12 2018-01 2018-02 2018-03 2018-04 2018-05 2018-06 2018-07 2018-08 2018-09 2018-10 2018-11 ei6 2689 Tang DM –SUV 2017-09 (RMB239,900-329,900) total sales volume in 11/2018. BMW 5 Series 2650  Qin, the first model of BYD Dynasty series, debuted Borui GE 2300 Unit 6,000 in 2012, then the company launched the upgraded Lynk 01 PHEV 1411 4,000 version in 2017. With the upgraded appearance and Trumpchi GS4 1214 2,000 engines, its sales volume surged in 7/2017. The 0 Roewe eRX5 1021 monthly delivery volume continue to be strong and reached 4000 units in 2Q 2018. As Qin Pro series

BMW X1 PHEV 909 Qin - Sedan

2017-03 2017-05 2017-07 2017-09 2017-11 2018-01 2018-03 2018-05 2018-07 2018-09 (RMB132,900-260,700) 2017-01 have been launched in 10/2018, we believe Qin Roewe e950 493 sales volume will pick up in 2019E. A6 e-tron 360 Unit VELITE 5 271 5,500  The new Song DM was launched in 8/2018 and it 3,500 P8 221 immediately becomes the top 3 best-selling PHEV in 1,500 China. Its sales volume climbed up after launch and X7 PHEV 102 Song DM –SUV it reached 3,000 units in 10/2018 and 11/2018. (RMB176,900-206,900) Top 10 MPV in 11/2018 MPV Model Monthly Sales Volume Our view

Units - 20,000 40,000 60,000 Unit  Song Max is not only the 3rd best-selling MPV in

Wuling Hongguang 51,117 20,000 China, but also the best-selling vehicles in BYD, Baojun 360 11,606 15,000 Song MAX which sales volume reached 10,000 units in 11/2018 10,032 10,000 Buick GL8 9,575 and accounted for 20.2% of BYD’s total sales volume. Baojun 730 7,253 5,000 Honor 4,846 0 7 seats and 6 seats of Song Max have debuted in Refine 4,700 9/2017 and 3/2018 respectively, we found sales Lingzhi 4,423

Elysion 4,224 volume reached 15,000 units in 3/2018, but its sales

2017-10 2017-11 2017-12 2018-01 2018-02 2018-03 2018-04 2018-05 2018-06 2018-07 2018-08 2018-09 2018-10 2018-11 Song Max 2017-09 Odyssey 3,952 (RMB799,000-129,900) dropped in 2Q2018 and stabilized in 3Q2018.

Source: CPCA, Sohu, Wind, Orient Securities (Hong Kong)

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BYD’s vehicle models description (3)

Figure 12: Prices for BYD’s vehicles NEV/ Launch Driving Battery energy Series Model Type Selling prices (after subsidies) (RMB Thousand) Fuel Date range (km) density (Wh/kg) Qin Sedan NEV 100 185.9-260.7 Qin Pro Sedan FUEL 9/2018 79.8-115.8 Qin Qin Pro DM Sedan NEV 9/2018 80 149.9-206.9 Qin Pro EV Sedan NEV 9/2018 420 160.9 169.9-299.9 Qin EV Sedan NEV 3/2018 400 101.75 149.9-169.9 Tang (new generation) SUV FUEL 6/2018 129.9-169.9 Tang Tang DM SUV NEV 6/2018 80 239.9-329.9 To be Tang EV SUV NEV launched 400 140.97 Song (new generation) SUV FUEL 8/2018 79.8-129.9 Song Song DM SUV NEV 8/2018 80 176.9-206.9 Song Max (6 Seats) MPV NEV 3/2018 80 79.9-129.9 Song EV SUV NEV 8/2018 500 140.97 189.9-275.9 Yuen Yuen EV SUV NEV 5/2018 305 146.27 79.9-99.9 F3 Sedan Fuel 3/2018 43.9-77.9 Others E5 Sedan NEV 3/2018 400 101.75 220-230 E6 Sedan NEV 2017 400 100 301-370 Source: Autohomes, company data, Orient Securities (Hong Kong) Our view: The above table shows BYD’s hot models information, which vehicles range from low-end A00 class to mid-to-high-end B class with the selling prices between RMB43,900 – RMB370,000, we think the wide ranges prices and models are good enough to fulfil most of customers’ need. BYD entered into a new product cycle since 2018 and more than 10 new versions vehicles have debuted in 2018, most of which are NEVs. Given the strict policy on NEVs subsidies, BYD upgraded its NEV vehicles with high driving range and battery energy density, we estimated that Qin Pro EV, Tang EV, Song EV, Yuen EV can enjoy higher subsidies comparing with last year. Given the advance technology and high R&D capabilities, we believe BYD can recover quickly from 1H2018 downturn.

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Hong Kong Equity | Automobile Company in-depth

BYD dominates the new energy vehicles market

Well positioned itself to benefit from the boom of NEV market

BYD is the market leader with 19.5% market shares in Chinese NEV market. Its

automobiles business includes the manufacture and sale of automobiles, auto-related

moulds and components, automobiles leasing, after sales service and “Skyrail” business.

BYD well positions itself as high-tech NEV leader as it not only manufactures the automobile, but also self-develops the auto parts such as EV batteries, and electric control, which are the most complicated and expensive parts in NEVs. With the Figure 13: Revenue by segment self-build automobile parts, BYD can reduce the production cost effectively and control Rechargeable batteries and photovoltaic business the quality efficiently. Mobile handset components and assembly service BYD’s NEV sales to outpace the fuel vehicles sales Automobiles and related products 8% Automobiles and related products accounted for 54% of BYD’s total revenue in 1H2018. Its sales volume of NEVs continued to increase and reached 201,161 units (~45% of total vehicles sales) in the first eleven months in 2018, among which, 190,142 units of new 38% 54% energy passenger cars (“NEPV”) (~94% of NEV sales) and 11,019 units of EV commercial vehicles (~6% of NEV sales) are sold in 11M2018.

Source: Company data, Orient Securities (Hong BYD launched new version of Qin/Tang/Song Series and Yuen EV in 2018, we founded

Kong) that lots of vehicles recorded dramatic sales growth after launch, for example, the monthly sales volume of Yuen EV, launched in 5/2018, reached 6,188 units in 11/2018 nd and becomes the 2 bestselling new energy SUV model in China. Tang DM also registered monthly sales volume of 6,405 units in Nov, which were only 1,800 units in the same period last year. The outperforming results proved the upgrade versions are well-accepted by the customers, and BYD is gaining market shares. Thanks to the technology enhancement and the launch of new models, we believe BYD’s NEVs sales

continue to gain momentum in 2019E.

Figure 14: BYD NEV sales and market shares Figure 15: BYD’s sales volume of NEVs and fuel vehicles Units 2,000,000 40.0% Units 25.2% 40,000 NEVs Fuel Vehicles 35,000 17.5% 18.9% 19.5% 14.2% 30,000 1,000,000 20.0% 25,000 20,000 15,000 10,000 - 0.0% 5,000 2014 2015 2016 2017 2018 11M 0 BYD NEV sales (LHS) China NEV sales (LHS) BYD Market shares in NEV (RHS)

Source: Company data, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

Fuel vehicles business keeps shrinking in 2H2018 With the sluggish demand for fuel vehicles in China and the focusing on development and expansion of NEVs by BYD, the group’s fuel vehicles sales volumes keep decreasing

and only reached 20,906 units in 11/2018, which are much lower than its 3/2018 sales of 29,216 units. Among which, we found that sedan sales dropped significantly from 7,967units in 3/2018 to 3,781 units in 11/2018 and MPV sales also declined from 15,074units in 2/2018 to 10,032 units in 11/2018. Given the weak demand for fuel vehicles and keen competitions among the market, we forecast that the sales volume of BYD’s fuel vehicles to keep shrinking in 2019E.

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BYD’s EV buses revenue to be dragged down by subsidies cuts

Figure 16: Main NECV players in China’s new energy commercial vehicles sales plummeted since 6/2018 China China’s new energy commercial vehicles (“NECV”) achieved >100% yoy monthly sales King FAW Foton growth in the first five month in 2018, but the sales dropped significantly since 6/2018, it Long 5% Ouhui 7% 3% may be probably due to excessive consumption in 2017 and the increasing tension of trade war. Finally, China’s NECV sales only grew by 7.8% yoy to 144,000 units in 11M2018. 7% Bus 28% Kaiwo According to Huieyes(慧眼看車), BYD ranks No. 2 in NECV market, following Yutong, and Auto 8% reaching 18% market shares in China. BYD Zhongt 18% ong Given the sluggish market condition, we expect the sales volume of BYD’s NECV will 8% CRRC Times Yinlong change by -15%/+5% yoy to 13,600 units/14,280 units in 2018E/2019E. 7% 9%

Source: Internet data, Orient Securities (HK)

Figure 17: Sales volume of New energy commercial vehicles in China Figure 18: BYD commercial vehicles sales volume

Units

Units Sales volume of NECV (LHS) YOY change (RHS) % 3,500 3,000 35,000 200 2,500 30,000 150 25,000 2,000 20,000 100 1,500 15,000 50 1,000 10,000 5,000 0 500 0 (50) 0

Source: Wind, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

NECV revenue is expected to drag down by subsidies shrinking Figure 19 shows that the government has slashed NECV subsidies significantly in 2018, for example, the subsidies on non-fast charging buses were cut by c.60% and c.40% in

transition period and 11/6/2018 – 31/12/2018 respectively. With the slash of government subsidies on NECV, BYD stated that they subsidy the customers by self-financing, the selling price of EV buses was around RMB1.2 mn/unit (the price after subsidies was around RMB 0.8-0.9 mn/unit), implying that BYD may need to subsidy around RMB120,000 for each electric buses with the length>10m. Given the continuous decrease of the government subsidies and most of BYD’s buses have the length >10m, we

estimated 2018E/2019E BYD’s NECV revenue to drop by 26.6%/0.2% yoy to RMB 14.7 bn/RMB 14.6 bn.

Figure 19: State subsidy for new energy buses 2017 2018.2.11 2018.6.11 2018.12.31

Based on 2017 Transition period: The subsidy is subject to 40% of 2017’s The subsidies dropped by RMB 35,000-120,000/unit subsidies policy subsidies. comparing with 2017. Electric buses subsidies (Non-fast charging) Year 2017 2018.2.11 - 2018.6.11 2018.6.11 – 2018.12.31

RMB Length(m) Length(m) Length(m) 6 10 6 10 6 10 EV bus 90,000 200,000 300,000 36,000 80,000 120,000 55,000 120,000 180,000 YOY change -60% -60% -60% -39% -40% -40% Source: Internet data, Orient Securities (Hong Kong)

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Long term prospect promising despite slow Skyrail cash inflow

Skyrail solve the “last few mile” problem and send residents to metro stations

Against the backdrop of resolving the traffic congestion problem and providing

low-carbon transportation, BYD started to research and develop Skyrail monorail mass

transit system since 2011. To compare with Metro transit, Skyrail can function as a small

scale Metro in 3rd -4th tier cities or connect resident areas to Metro stations in 1st-2nd tier

cities, which provide one more choice for residents to ride for a short distance. Given

that Skyrail construction cost is only 1/5 of Metro transit and it only takes 1-2 years for

construction, which is only 1/3 construction period comparing with Metro, the low cost

and short construction period of Skyrail are more suitable for small cities due to their

limit resources and budget.

Figure 20: Skyrail vs Metro

BYD Skyrail Metro Transit Constuction cost RMB 150 -250 mn/km RMB 600-700 mn/km One-way transportation capacity 10,000 - 30,000 people/ hr 25,000-60,000 people/hr Maximimun speed 80km/hr 120km/hr Construction period 1-2 years 3-6 years

Source: Internet data, Orient Securities (Hong Kong)

The slow approval procedures for Skyrail delays cash inflow “The Opinions on Further Strengthening Urban Rail Transit Planning and Construction Management (GBF [2018] No.52)”《关于进一步加强城市轨道交通规划建设管理的意 见》was issued in 6/2018, which raises the threshold of Subway application. Regarding for the subway construction application, the qualifications of general public budget revenue Figure 21: Cities signed the Skyrail contract with BYD and regional GDP for each city were raised from RMB10 bn and RMB100 bn to RMB30 bn Expected and RMB300 bn respectively, the imposition of strict rules by state government was construction Cities primarily due to the credit control and prevention of excess local debt burden arising by distance (km) local government. In addition, the local application should be examined and approved by 1 Shantou, Guangdong 63.66 the State Council, which may lengthen the approval period. With the strict regulation, we 2 Xian , Shaanxi 16.66 estimated that the number of cities that meets the minimum requirement would reduce 3 Handan , Anhui 53.8 significantly. We believe it not only extends BYD’s investment period, but also slows 4 Guangan , Sichuan 8.5 down the cash inflow from Skyrail projects. 5 Jilin City, Jilin - Tianjin Binhai New Optimistic outlook for long term development 6 57 Area BYD’s first commercially operated Skyrail commenced operation in Yinchuan, in 9/2017. 7 Guilin 28.1 BYD stated that it has received the Skyrail construction orders from 20 cities including 8 Huaibei , Anhui 100 Guilin, Shantou, Guang'an and Handan and it has also signed an agreement with 9 Hengyang , Hunan - to build a 20km Skyrail in 2019. BYD stated that it is building Skyrail for 2 10 Yichang 100 cities in 2018. Despite the long approval period, the construction ramp-up may help Source: Internet data, Orient Securities (Hong Kong) BYD’s revenue growth. As we expect more Skyrail projects will be approved by state government in 2019-2020, which would release BYD’s pressure from subsidy cuts on

NEPVs and NECVs.

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Hong Kong Equity | Automobile Company in-depth

Golden opportunity for BYD in EV Batteries business

External supply kicks off in 2019

BYD manufactures EV batteries but only for internal use, it guided that its EV batteries

will started to supply to external customers in 2019. Since EV battery is the most Figure 22: BYD EV Battery expensive parts in NEV, which accounted for 40% of total production cost, we expect the sales of EV batteries would support BYD’s sales growth and become the Company’s main growth in the next 3-5 years.

Demand for EV batteries keeps rising According to GGII(高工产研锂电研究所), the production volume of EV batteries increased by 44.9% yoy to 44.5Gwh in China in 2017. Among which, ternary lithium batteries “TLB” (三元电池) and lithium iron phosphate batteries “LIB” (磷酸铁锂电池) Source: internet, Orient Securities (Hong Kong) are the mainstream of NEV used batteries, which accounted for 44% and 49.3% of total production volume in 2017. Given the high energy density, good cycle performance and electrochemical stability, TLB grew rapidly in the past two years. BYD also speeds up its TLB production plan and expected to increase 80Gwh capacity in the future 5 years.

Figure 23: Top 10 Global EV Figure 24: Capacity Expansion Plan Batteries manufacturers in 2017 EV batteries projects Capacity contribution Rank Companies Sales 1 Existing production capacity 16 volume(Gwh) 2 Qinghai factory 24 1 Ningde Times 12 3 Project with ChangAn Auto 10 4 Chongqing project 20 2 Panasonic 10 5 Xian project 30 3 BYD 7.2 Total Capacity 100 Source: Company data, Orient Securities (Hong Kong) 4 Waterma 5.5 5 LG Chem 4.5 For manufacturers wise, BYD and CATL (宁德时代) are the top 2 EV batteries suppliers in Guoxuan China, with combined market shares of 27%. CATL and BYD sold 11.85Gwh and 7.2Gwh 6 High-tech 3.2 EV batteries in 2017, respectively. Given the acceleration of NEV demand, the EV 7 Samsung SDI 2.8 batteries sales are expected to go up dramatically in the next 3 years. In order to take an 8 National 1.9 Battery advantage from the growth, BYD decided to add 10Gwh and 14Gwh production 9 BAK 1.6 capacities in 2018 and 2019 respectively, the total capacity is expected to reach 40 Gwh Funeng 10 1.3 by the end of 2019. Group Source: GGII, Orient Securities (Hong Kong) BYD stated that they will start to sell its EV batteries to external customers in 2019. As BYD guided 2019 capacity will reach 40 Gwh, we thus forecast the utilization rate to reach 75% as some of capacity will be added in 2H2019, the production volume is expected to reach 30.0 Gwh in 2019E. Assuming that each NEPV and EV bus need 60kwh and 300kwh batteries respectively, the internal usage and external sales of EV batteries

may reach 28.2 Gwh and 1.8 Gwh respectively in 2019E. We estimate ASP of EV batteries to drop by 20% to RMB0.9/wh in 2019E, the EV batteries business finally may generate RMB1.9 bn revenue in 2019E.

Figure 25: BYD’s EV batteries business assumptions 2018E 2019E 2020E Capacity (Gwh) 26 40 52 Utilization rate (%) 70% 75% 70% Total production volume (Gwh) 18.2 30.0 36.4 Internal use (Gwh) - 28.2 31.9 Battery sales volume (Gwh) - 1.8 4.5 YOY growth (%) - - 155% Battery ASP (RMB/wh) 1.12 0.90 0.72 YOY growth (%) -20% -20% -20% EV batteries revenue (RMB mn) - 1,971 5,029

Source: Orient Securities (Hong Kong)

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BYD benefits from dual-credit point policy Revenue generating from dual credit scheme can offset part of loss from subsidies cuts In order to encourage the NEV production, the Chinese government announced a “Measures for the Parallel Administration of the Average Fuel Consumption and New Energy Vehicle Credits of Passenger Vehicle Enterprises” 《乘用车企业平均燃料消耗量

与新能源汽车积分并行管理办法》in 2017, which we called “dual-credit policy”. The

policy was effective in 4/2018. According to the scheme, the auto makers who produce

traditional fuel vehicles would get CAFC deficits (“Corporate average fuel consumption

deficits”), but NEV credits can be gained from each NEV production. Finally, CAFC deficits

and NEV credits would offset each other, the auto makers with negative CAFC deficits must buy the credit points from NEV auto makers, otherwise they cannot get the approval for new car models releasing. To avoid the extra cost of buying credits, NEV sales volume should reach 10% and 12% of each auto makers’ cars sales in 2019 and 2020, respectively. The dual-credit policy aims to encourage the auto manufacturers to produce high performance NEV as higher credit points can be generated from these NEVs. Figure 26: Dual-credit policy favors NEV makers Companies being regulated: The auto makers with 30,000 annual production volume CAFC credits NEV Credits The government base on below formula to obtain the Target CAFC, Factors of NEVs that affect NEV credit:

(Sales volume of fuel vehicles Electric range Energy efficiency X Target fuel consumption per vehicles)

Total passenger car sales Rated power of fuel cell systems if the auto makers’ actual CAFC > Target CAFC, it may have a CAFC deficits. The higher performance vehicles can have higher NEV credits

Actual Target Actual Target Surplus CAFC > CAFC = Deficit NEV > NEV = volume volume If car manufacturers failed to get the positive CAFC credits, they can use below methods to reach the standard: 1) Purchase the NEV points from other auto makers 2) Transfer the CAFC credits from affiliated companies 3) Use the banked CAFC credits from previous years Source: Internet data, Orient Securities (Hong Kong)

BYD gaining the highest credit points among auto makers in China According to government statistics, BYD gained the highest credit points (297,374 NEV credits) among auto makers in 2017 in China. BAIC BJEV and Geely ranked No. 2 and No. Figure 27: The highest NEV Credits points receivers in 2017 3 in China and got 219,302 and 143,605 credit points, respectively. With a significant increase of NEV sales, we expect BYD can gain even much higher credit points in 2018. 0 150,000 300,000

BYD 297,374 BAIC BJEV 219,302 BYD’s credit points are worth RMB600mn in 2018 Geely 143,605 BYD guided that they may have 600,000 NEV credits in 2018, each point is expected to be SAIC Motor 125,475 Zhejian Haoqing 111,725 worth RMB1,000 in 2018, implicating that RMB600 mn revenue can be generated if all Jiangnan Auto 98,390 NEV points sold in 2018. BYD stated that they haven’t sold the credit points to other auto Changan Auto 96,281 makers yet, but some of its credit points have transferred out as rebate when its Tesla Motors 85,014 81,589 customers bought the auto parts such as EV batteries from them. We estimated that 1.4 79,730 mn NEV credits can be gained by BYD in 2019E and 535,000 credit points are expected to JAC Motors 79,692 be sold in 2019E, we assume each point is worth RMB2,000, which may generate RMB

Source:Miit, Orient Securities (Hong Kong) 1.07 billion revenue in 2019E.

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Hong Kong Equity | Automobile Company in-depth

BYD’s revenue and profit trend

Figure 28: BYD revenue and profit trend Rechargeable batteries and photovoltaic business Mobile handset components and assembly service Automobiles and related products RMB mn We expect automobile segment revenue to rise 200,000 significantly in 2018 due to the new product cycle and the dramatic increase of NEV sales volumes 150,000 Revenue 100,000

50,000

0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2020 Rechargeable 2012 2014 2016 7 2018 7% batteries and % photovoltaic 10 9% 8% business % Mobile handset Revenue by components and 47 31% assembly service 38 segment 51 % 55 36 39 44 % 56 % 62% Automobiles and % % % % % related products

Rechargeable batteries and photovoltaic business Mobile handset components and assembly service 60% Automobiles and related products 50% DueDue to the to thesubsidies subsidies cut, cut,automobiles automobiles business revenue/profit dropped by 0.9%/42.7% yoy in 2017 Revenue 40% business profit dropped by 42.7% yoy in 2017 growth by 30% 20% segment 10% 0% -10% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E -20% Rechargeable batteries and photovoltaic business Mobile handset components and assembly service Automobiles and related products RMB mn On the back of strong growth of mobile handset profit, On the back of strong growth of mobile handset 15,000 BYD’s total profit only dropped by 20% yoy in 2017. profit, BYD’s total profit only dropped by 20% yoy in 10,000 2017. Profit 5,000

0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E (5,000)

Rechargeable batteries and photovoltaic business Mobile handset components and assembly service Automobiles and related products 200%

100% Profit growth by segment 0% -100% The profit growth of rechargeable batteries and photovoltaic business was volatile since the profit was highly affected by government policy. -200% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Rechargeable batteries and photovoltaic business Mobile handset components and assembly service 20% Automobiles and related products

Profit margin 10% by segment 0% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

-10% The profit margin of rechargeable batteries and photovoltaic business is expected to reduce due to the unfavorable government policy on solar segment. Source: Orient Securities (Hong Kong)

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The growth prospect of NEPVs favors BYD

Bright future for new energy passenger vehicles business

Given that 1) Chinese demand for NEPVs are increasing, 2)BYD enters into the new

product cycle in 2018 and 3) the new launched “dragon face” vehicles are well-accepted

by car buyers, which are expected to continue to boost new energy passenger vehicles

(“NEPV”)’ sales volume growth and we estimated BYD’s NEPV sales volume to grow by

133.9% and 44.8% yoy to 224,504 units and 325,046 units in 2018E and 2019E

respectively. The NEPV sale is expected to increase by 76.5%/37.5% yoy to RMB33.5 bn/

RMB46.1 bn in 2018E/2019E.

An increase of fuel vehicles ASP is expected to offset a decrease of sales volumes

The keen competition and sluggish growth of traditional vehicles market in China may

harm BYD’s fuel auto sales, we hence expected its fuel vehicles’ sales volumes growth to

change by +9.2%/-16.7% yoy to 267,352 units/222,682 units in 2018E/2019E. But the

increase of ASP resulting from the launch of new models may offset part of negative

impact of the decrease of sales volume, we estimate its fuel vehicles sales to change by

+10.1%/-9.5% to RMB16.5 bn/RMB14.9bn in 2018E/2019E.

Figure 29: BYD’s sales volume of NEPVs and fuel vehicles Figure 30: BYD’s automobile business revenue

NEPV (LHS) Fuel vehicles (LHS) RMB mn Battery Untis Commercial vehicles (LHS) NEV yoy growth (RHS) 120,000 30% Fuel vehicles yoy growth (RHS) BUS yoy growth (RHS) 450,000 250% 100,000 25% Skyrail 400,000 200% 20% 350,000 80,000 BUS 300,000 150% 15% 250,000 60,000 100% 10% Fuel 200,000 40,000 vehicles 150,000 50% 5% 100,000 NEV 0% 20,000 0% 50,000 0 -50% - -5% YOY growth 2015 2016 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E (RHS) Source: Company data, Orient Securities (Hong Kong) Source: Company data , Orient Securities (Hong Kong)

Skyrail to be the growth driver in 2019 BYD guided that 2 projects have started to construct in 2018 and totally 20km would be completed in 2018, assuming that the construction cost is around RMB200 mn/km, we estimate RMB4 bn revenue to be generated from the Skyrail projects in 2018. We then assume 5 projects totally 45km to be built in 2019E, the Skyrail revenue is expected to reach RMB9 bn in 2019E.

Figure 31: BYD’s Skyrail business estimation

Rmb mn 2018E 2019E 2020E Estimated complete distance 20 45 82 (KM) Revenue per km 200 200 200 Total Skyrail revenue 4,000 9,000 16,332

Source: Orient Securities (Hong Kong)

Given the contribution from Skyrail business and strong growth of NEPVs sales in 2018, which are expected to offset the decline of NECVs business, we estimated the revenue of automobile business to increase by 26.1% yoy to RMB68.7 bn in 2018E. As BYD will start its EV batteries external sales in 2019, we expect the auto business revenue to

continue to record a strong yoy growth of 23.2% to RMB84.70 bn in 2019E.

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Handset components and assembly services benefit from 5G

One of the leading suppliers for handset components and assembly operations Mobile handset components and assembly service revenue accounted for 38.3% of BYD's

total revenue in 1H2018. BYD holds 65.8% of BYD electronics “BYDE” (285 HK) equity stake in HKEX and ~98% of BYD’s 1H2018 mobile handset segment’s revenue came from BYDE. BYDE is one of the leading suppliers for handset components and assembly

operations, which provides assembly services for handsets, tablets, notebook computers and other consumer electronic products, its main customers are the leading smartphone manufacturers including Samsung, Apple and Huawei, etc. Figure 32: BYDE’s revenue forecast

Rmb mn Assembly Others Glass Plastic Metal parts benefit from an increase demand for higher-ASP metal middle frame 50,000 Metal YoY% 60% Our TMT analyst-Elsie Sheng issued a detailed BYDE report in 8/2018. We combined her 40,000 50% 40% forecast of BYDE into our BYD company’s expectation. According to her report, metal 30,000 30% parts is expected to account for 35%/37% of BYDE’s revenue and the sales growth is 20,000 20% estimated to increase by 9.4%/18.3% yoy in 2018E/2019E given the increasing demand 10,000 10% for higher-ASP metal middle frame (for glass back-cover), despite an estimated 5-10% 0 0% 2013 2014 2015 20162017E2018E2019E YoY decline in ASP of BYDE’s metal parts products as a result of the shifting from metal Source: Company data, Orient Securities (Hong Kong) back cover towards glass cover.

Figure 33: BYDE’s metal revenue breakdown by clients

Rmb mn 2016 2017 2018E 2019E Metal revenue - Samsung 5,650 6,360 6,171 6,265 Metal revenue - China android 5,350 7,212 8,670 11,288 Total metal parts revenue 11,000 13,571 14,841 17,552

Source: Company, Orient Securities (Hong Kong)

5G communication supports mobile handset business growth According to Elsie’s report, BYDE will also benefit from 5G communication as metal smart devices would highly interferes with RF signals and cannot support 5G communication, thus the smartphone producers would switch to non-metal materials including plastic and glass. Thanks to a large increase glass casing capacity of BYDE since 2017, the utilization of glass casing reached 80% currently and BYDE received glass casing orders for smartphone models from LG, Huawei, Vivo and Xiaomi in 2H18, which is expected to boost its revenue growth in 2018. The glass revenue is expected to increase by 344%/72.4% yoy to RMB2,000/RMB3,448mn in 2018E/2019E.

Figure 34: BYDE’s glass casing shipment & revenue 2017 2018E 2019E Capacity (k/day) 300 800-900 800-900 Shipment volume (mn) 11 43 73 Total glass revenue (Rmb mn) 450 2,000 3,448

Source: Company, Orient Securities (Hong Kong)

To conclude, with the stable growth of assemble services business, we expect BYD’s

mobile handset components and assembly service revenue business to increase by 9.9%/11.1% yoy to RMB 43.6 bn/RMB 48.5 bn in 2018E/2019E and contributed 35.9%/33.8% to BYD’s total revenue.

Figure 35: Revenue forecast RMB (mn) 2015 2016 2017 2018E 2019E 2020E Mobile handset components and assembly service 32,928 38,083 39,708 43,653 48,519 51,061 YoY Growth 36.5% 15.7% 4.3% 9.9% 11.1% 5.2% As % of revenue 42.4% 38.0% 38.7% 35.9% 33.8% 31.2% Source: Company data, Orient Securities (Hong Kong)

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Hong Kong Equity | Automobile Company in-depth

Stable growth of rechargeable batteries and photovoltaic business BYD – one of the leading global rechargeable battery manufacturers Rechargeable batteries business accounted for 8% of the group’s revenue in 1H2018. BYD mainly provides lithium-ion batteries and nickel batteries, which are widely used in smart products and consumer electronics like electric power tools and electric toys, etc. Its customers include the leading smartphone manufacturers such as Samsung and Huawei and leading smart products providers like Bosch. Besides, the group also produces energy storage battery, solar cell products, and develops photovoltaic power plants.

Figure 36: Rechargeable batteries usage Figure 37: Rechargeable batteries and photovoltaic business revenue forecast Smartphones RMB (mn) 2017 2018E 2019E 2020E 3% 3% 3% Computers 6% Rechargeable batteries 29% Tablet and photovoltaic business 8,442 9,286 10,215 11,236 9% revenue Electronic vehicles 9% Other portable electronic YoY Growth 18.9% 10.0% 10.0% 10.0% instruments 15% 23% Storage products Others As % of revenue 8.2% 7.6% 7.1% 6.9%

Source: Internat data, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

Rechargeable batteries revenue growth is driven by an increase of market shares According to the statistics from China Chanye Xinxi (中國產業信息網), Smartphones, computers, tablets and electronic vehicles accounted for 29%, 23%, 15% and 9% of total lithium-ion batteries sales in China. Given the sluggish growth of smartphone sales in 9M2018 and unfavorable solar policy, we believe they would be challenges to BYD, but the management stated that the revenue from rechargeable batteries and photovoltaic business would increase at a stable pace due to the consolidation of rechargeable batteries market and increase market shares of BYD. We thus forecast the segment revenue to grow by 10.0% and 10.0% yoy to RMB9.28 bn and 10.22 bn in 2018E and 2019E respectively.

2018 revenue growth is mainly driven by strong NEPVs sales Given an expected strong growth of NEPV sales as well as a stable growth of mobile handsets and rechargeable batteries businesses, we expect revenue of BYD to increase by 18.5% and 17.9% yoy to RMB 121.6 bn and RMB 143.4 bn respectively in 2018E and 2019E.

Figure 38: BYD revenue growth by segments Automobiles and related RMB mn products 180,000 45% Mobile handset components 160,000 40% and assembly service 140,000 35% Rechargeable batteries and 120,000 30% 25% photovoltaic business 100,000 20% 80,000 Rechargeable batteries and 15% photovoltaic business yoy 60,000 10% growth 40,000 Mobile handset yoy growth 5% 20,000 0% - -5% Automobiles yoy growth 2016 2017 2018E 2019E 2020E

Source: Company, Orient Securities (Hong Kong)

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Hong Kong Equity | Automobile Company in-depth

Earnings to decrease in 2018, but may improve in 2019

Increasing NEPVs and EV batteries sales to improve automobiles’ GPM in 2019

Given the reduction of subsidies by the government, the management guided that the Figure 39: BYD’s gross profit and GPM 2018 NECV’s GPM would decrease by 7-8 ppts yoy. Besides, BYD continues to upgrade their NEPVs to gain higher subsidies, but we estimated that the NEPVs’ GPM will RMB Gross Profit (LHS) mn decrease in 2018E under the consideration of the significant decline of subsidies of its GPM 30,000 20% best-selling models such as Song Max and Tang DM. 25,000 18% 20,000 16% 15,000 14% Despite the decrease of NEPVs’ GPM in 2018E, we expect BYD’s GPM of automobile 10,000 5,000 12% business to recover in 2019 on the back of 1) an increasing contribution of NEPVs sales 0 10% given the higher GPMs of NEPVs comparing to that of fuel vehicles; 2) speed-up the construction of skyrails projects and 3) starting external sales of EV batteries.

Source: Company data, Orient Securities (Hong Kong) See an improvement of GPM for mobile handsets business Due to 5-10% decline of ASP of metal parts, GPM of mobile handsets business is expected to reduce from 11.0% to 10.1% from 2017 to 2018E. However, given the increasing contribution of glass casing and improving production yield of these products, we expect 2019 mobile handset business’s GPM to improve to 11.1%.

With the subsidies cuts, we estimate BYD’s GPM to drop by 1.8ppt to 15.7% in 2018E, but the recovery of automobile and mobile handset businesses in 2019 is expected to boost GPM growth, we hence forecast BYD’s GPM to increase by 0.5 ppt to 16.1% in 2019E.

Figure 40: Expenses ratio Figure 41: Margins and financial cost ratio

5.2% 5.5% 5.0% 11.0% 4.8% 4.8% Selling 4.4% 8.8% Operating 4.2% expenses ratio 9.0% 7.9% 4.5% 4.0% 4.0% 7.1% Margin 3.7% 3.7% 3.6% 3.8% G&A expenses 6.6% 6.5% 7.0% 5.9% 3.2% ratio 5.0% Finance cost 3.5% 3.0% 2.9% 2.9% 2.9% R&D expenses 5.0% 3.6% 4.0% ratio 2.6% 2.3% 3.1% 2.3% 2.3% ratio 2.4% 3.0% 2.0% 2.0% 2.3% 2.3% 2.3% 2.5% 1.8% 3.0% 2.0% 1.8% 2.0% Net Margin Finance cost ratio 1.5% 1.0% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E

Source: Company data, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

Figure 42: BYD’s net profit An expected increase of S&D expenses and R&D expenses ratios The selling expense ratio kept rising in the past 2 years, we thus estimate the ratio to be RMB Net Profit (LHS) mn stable in 2018E and rise to 5.0% in 2019E. On the other hand, the R&D expenses ratio YoY Growth (RHS)

6,000 100% also has an upward trend in past 2 year, as the companies would enhance the technology 5,000 80% on EV batteries, we expect this ratio to rise to 3.8%/4.0% in 2018E/2019E 4,000 60% 40% 3,000 20% Net margins expected to decrease in 2018 but improve in 2019 2,000 0% 1,000 -20% We forecast 2018 operating margins to drop by 2ppt to 5.9% due to a decrease of GPM 0 -40% 2016 2017 2018E 2019E 2020E and slightly increase of research expenses ratios. The increase of borrowing results in a higher financial cost, but with the increase of revenue, its financial cost ratio is expected Source: Company data, Orient Securities (Hong Kong) to be stable at 2.3% in 2018E. The net profit margin is expected to decrease by 1.6ppt to 2.4% in 2018E and net profit is expected to drop by 27% yoy to RMB2.98 bn. In 2019, we expect a rebound for GPM, thus we estimate its operating margin to increase by 0.7ppt to 6.6%, the net profit margin is expected to improve 0.6ppt to 3.0% in 2019E. Net profit is estimated to rise by 47% yoy to RMB4.37 bn.

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Hong Kong Equity | Automobile Company in-depth

Continuing expansion results in high gearing level

CAPEX to reach c.12 billion in 2018E

BYD’s has auto production capacities of 800,000 units per annum, which is enough to

satisfy 500,000 units sales in 2018, thus we don’t think they will expand their auto

capacity in 2018 and 2019. However, in order to grab the opportunities of fast growing

EV batteries market, BYD guided that 10 Gwh and 14Gwh EV batteries capacities will be

added in 2018 and 2019 respectively, they estimate the Capex using on EV batteries plant

to reach RMB6 billion in 2018E. In addition, they would spend another RMB4 billion on

NEV research and equipment upgrade. The total capex on auto business is expected to

reach RMB10 billion in both 2018E and 2019E. On the other hand, BYD is building its

glass casing capacity and we expect mobile handset business’s capex to reach 2 billion in

2018E and 2019E. Hence, the total capex of BYD may reach 12 billion in 2018E/2019E.

Figure 43: Capex Figure 44: borrowings

RMB mn rmb MN 16,000 90,000 14,000 80,000 12,000 70,000 60,000 10,000 50,000 8,000 40,000 6,000 30,000 4,000 20,000 2,000 10,000 0 0 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E

Source: Company data, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

See an increase of net gearing ratio BYD guided its capex would be funded by internal cash flow and borrowings, we expect its borrowing to increase from RMB 56.5 billion in 2017 to RMB65.8 bn and RMB 71.8 bn in 2018E and 2019E respectively. The net debt position is expected to increase from 85% in 2017 to 97%/100% in 2018E/2019E, which BYD will be under pressure if interest rate increases or tightening credit control.

Cash level to increase steadily Due to the subsidies reduction in 2018, we expect the operating cash flow of BYD to reduce from 6.37 bn in 2017 to RMB 5.68 bn in 2018E, but we believe operating cash flow will increase to 9.19 bn in 2019E on the back of the strong sales volume growth of NEVs and increase sales of EV batteries. As BYD will continue to construct its EV batteries factories, we estimate its investing cash outflow to reach RMB11.10 bn and RMB 10.86 bn in 2018E and 2019E respectively. The total cash is expected to change from RMB8.9 bn in 2017 to RMB9.32 bn/RMB9.81 bn in 2018E/2019E.

Figure 45: Cash Flow Figure 46: Net debt ratio

Total Cash Flow from Operation % RMB mn Total Cash Flow from investment 120 102 97 100 20,000 Total Cash Flow from Finance 85 15,000 100 10,000 80 67 5,000 0 60 (5,000) 40 (10,000) (15,000) 20 (20,000) 2015 2016 2017 2018E 2019E 2020E 0 2016 2017 2018E 2019E 2020E Source: Company data, Orient Securities (Hong Kong) Source: Company data, Orient Securities (Hong Kong)

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Hong Kong Equity | Automobile Company in-depth

Valuation: SoTP methodology

Figure 47: Key assumptions on NEV We value BYD by using combination fair values of BYD auto business, batteries business business and BYD mobile handsets business, which suggests HKD54.2. Book value for NEV 28,604.5 business (RMB$mn) Book value for NEV 1) Auto business valuation: We apply PB-based analysis due to low volatility of book 32,636.0 business (HKD$mn) value versus earning; Peers PB ratio 2.59 2) Rechargeable batteries and photovoltaic business valuation: We apply PB-based BYD Premium 20% analysis; BYD Target Multiple 3.10 3) Mobile handset components and assembly service valuation: We apply DCF Value for BYD NEV 101,291 methodology (please refer to our TMT analyst – Elsie Sheng’s report) business (HK$mn)

BYD NEV business fair 37.1 value per share (HKD) BYD auto business valuation:

Source: Company data, Orient Securities (Hong Kong) 1) The fair value is HK$42.1 based on PB-based analysis

 NEV business: We value BYD NEV business by using the NEV industry’s average PB, which is 2.59x. Then we will imply a premium of 20% as our target multiple (equivalent to 3.1x) to average industry PB to reflect BYD’s NO.1 NEV market position in China. The fair value of BYD NEV business is HKD101.3 billion, implying HKD37.1/share.

Figure 48: NEV manufacturers Share price Trading 2018 BPS Stock code Company name 2018 PB ratio (trading currency) Currency (trading currency) Tsla US Equity TESLA INC 300.360 USD 34.58 8.68 600104 CH Equity SAIC MOTOR-A 24.750 CNY 21.29 1.16 000625 CH Equity CHONGQING CHAN-A 6.890 CNY 10.17 0.68 000800 CH Equity FAW CAR CO LTD-A 6.870 CNY 5.02 1.37 002176 CH Equity JIANGXI SPECIA-A 6.120 CNY 3.30 1.85 NIO US Equity NIO INC - ADR 6.050 USD 1.64 3.70 GM US Equity C 32.250 USD 27.46 1.17 175 HK Equity GEELY 11.880 HKD 5.73 2.07 Average 2.59

Source: Company data, Orient Securities (Hong Kong)

 Fuel vehicles business: We value fuel vehicles business by using HK listed auto Figure 49: Key assumptions on fuel vehicles business companies’ average PB, which is 0.9x. No premium would be added to value its Book value for fuel fuel vehicle business. The fair value of BYD fuel vehicles business is HKD13.6 billion, vehicles business 13,298.2 implying HKD5/share. (RMB$mn) Book value for fuel vehicles business 15,172.5  The fair value of BYD auto business is HKD42.1/share. (HKD$mn) Peers PB ratio 0.90 Figure 50: HK listed auto manufacturers BYD Premium 0% Stock code Company name 2018E PB ratio BYD Target Multiple 0.90 2238 HK Equity GUANGZHOU AUTO-H 0.84 BYD fuel vehicles fair 2333 HK Equity GREAT WALL MOT-H 0.65 13,618 value (HKD$mn) 175 HK Equity GEELY AUTOMOBILE 2.07 BYD fuel vehicles 1114 HK Equity BRILLIANCE CHINA 0.78 business fair value per 5.0 489 HK Equity DONGFENG MOTOR-H 0.44 share (HKD) 1958 HK Equity BAIC MOTOR-H 0.61 Average 0.90 Source: Company data, Orient Securities (Hong Kong) Source: Company, Orient Securities (Hong Kong)

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Hong Kong Equity | Automobile Company in-depth

Target price to reach HKD54.2

BYD’s rechargeable batteries and photovoltaic business valuation: 2) The fair value is HK$5.5 based on PB-based analysis

 We value BYD rechargeable batteries and photovoltaic business by using the industry’s average PB, which is 1.41x. Then we will imply a premium of 10% as our Figure 51: Key assumptions on BYD target multiple to average industry PB to reflect BYD’s global leading market rechargeable batteries and photovoltaic position. The fair value of this business is HKD14.9 bn, implying HKD5.5/share . business

Book value for the 8,411.5 business (RMB$mn) Book value for the Figure 53: Rechargeable batteries peers 9,597.0 business (HKD$mn) Stock code Company name 2018E PB ratio Peers PB ratio 1.41 6121 TT Equity SIMPLO TECH 1.86 BYD Premium 10% 6752 JT Equity PANASONIC CORP 1.20 BYD Target Multiple 1.55 006400 KS Equity SAMSUNG SDI CO 1.16 Fair value for 051910 KS Equity LG CHEM LTD 1.43 rechargeable batteries 14,886 Average 1.41 and photovoltaic business (HKD$mn) Source: Company, Orient Securities (Hong Kong) BYD rechargeable batteries fair value per 5.5 share (HKD) BYD mobile handset components and assembly service business valuation: Source: Company data, Orient Securities (Hong Kong) 3) The fair value is HK$6.6 based on DCF analysis

Our analyst – Elsie analyzed the fair value of BYDE using a two-stage growth DCF

valuation method. Firstly, we forecast income statement and balance sheet in

2018E-2021E with details in below table. Secondly, we conservatively assumed mild 3% Figure 52: Key assumptions on BYDE’s annual growth rate of free cash flow for the period between 2021E -2026E, as compared DCF model to the net profit 6-year CAGR of 27.5% in 2011-2017. Then, we assumed a terminal WACC 13.1% growth rate of 1% for the period beyond 2026E. We used a WACC of 13.1%, which is 2020-2026 annual growth 3% based on 3.6% risk free rate and 1.2 beta. rate

Terminal growth rate 1% Figure 54: BYD mobile handset business’s two-stage DCF model Total PV of FCF (HKD mn) 35,669.91 Rmb$mn 2018E 2019E 2020E 2021E 2026E Net Cash/Debt (HKD mn) 3,711.81 Pre-tax income 2,869 3,701 4,138 4,574 Total valuation 39,381.72 Tax paid Discount rate 30% (390) (503) (562) (622) Fair value for BYDE Depreciation & 27,567 1,858 1,913 1,933 1,952 business (HK$mn) Amortization Change in BYD Holdings 65.8% 613 (472) (237) (280) Working Capital Fair value of BYDE to BYD 18,128 Capex (2,155) (2,067) (2,087) (2,108) BYD mobile business fair Free Cash flow 6.645 3,288 3,027 3,746 3,859 4,473 value per share to BYD (HK$mn)

Source: Company data, Orient Securities (Hong Kong) Source: Company, Orient Securities (Hong Kong) 3% annual growth rate

 The fair value of BYD mobile handset business is around HKD27.6 bn, with 65.8% holding by BYD group, the fair value of BYDE to BYD group is around HKD18.1 bn, which is equivalent to HKD6.6/share.

In conclusion, based on above calculations, the target price for BYD Company should be the combination of the fair values of 3 businesses, which suggests to be HK$54.2.

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Hong Kong Equity | Automobile Company in-depth

Risk factors & Management background

Downside risks: 1) Rising tensions of trade war destroy customers’ confidence: The increasing tension of trade war would destroy the customers’ confidence, the decrease of demand for NEVs and fuel vehicles would drag down BYD’s auto revenue growth.

2) The reduction on 2019 NEVs’ subsidies: If the subsidies in 2019 cut significantly, the

GPM of BYD are expected to drop sharply, which would have a negative impact on

BYD’s net profit growth.

3) Unfavorable policy on Skyrail projects: The unfavorable policy on skyrail projects

may slow down BYD’s project construction, the cash inflow from Skyrail projects

may slower than our expectation.

4) An increase of interest rate: The continuous expansion would incur a huge capital expenditure and borrowings, the financial cost would increase if interest rate rises. 5) Strict policy on solar industry: If the government continues to reduce the feed-in tariff for solar projects and cap distributed project size, BYD may have a heavy loss in photovoltaic business. 6) Account receivables days increase at a fast pace: BYD’s account receivable days increased from 167 days in 2016 to 189 days in 2017, which slow down the cash inflow and increase the risk of write off the bad account.

Upside risks: 1) The government supports the NEVs sales: In order to control the pollution, the government may issue the favorable policy to encourage customers to buy the NEVs, BYD would benefit from it. 2) The overseas Skyrail orders increase: Since the low construction cost of Skyrail, the overseas orders for building Skyrail may increase, hence revenue from Skyrail business may rise.

Management background: Figure 55: Wang Chuan-fu  Mr Wang Chuan-fu (Executive Director)

 He was born in a farm village in one of China's poorest provinces in 1966. Mr Wang graduated from Central South Industrial University of Technology (中南工業 大學) in 1987, with a bachelor degree major in metallurgy physical chemistry.  In 1995, he founded Shenzhen BYD industries and took the position of chairman. Besides, he is a non-executive director and the chairman of BYD Electronic Company (Stock Code: 0285). Source: Company data, Orient Securities (Hong Kong)  In 1997, the global batteries price plummeted by 20%-40% due to an Asian

financial crisis, the low cost of BYD allowed it to gain more orders from foreign

customers, the company thus gained 40% market shares in nickel-cadmium

battery in 2000.

 In 2016, Mr. Wang had a net worth of RMB35.5 billion, making him the

forth-richest person in the China, according to Hurun Report.

 Mr. Wang, being a technology expert, enjoyed special allowances from the State Council. In June 2003, he was awarded Star of Asia by Business Week. He was awarded with Mayor award of Shenzhen in 2004 (2004 年深圳市市長獎).

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Hong Kong Equity | Automobile Company in-depth

Figure 56: Peer valuation table

Ticker Company Reporting Share Market P/E PEG P/B Div. Yield (%) EV/EBITDA Currency Price Cap. (x) (x) (x) (x) (US$mn) 17 18E 19E 20E 17-19E 17 18E 17 18E 17 18E 19E Auto manufacturers: 1211 HK BYD CO LTD-H CNY 47.20 16,441 29.5 41.4 27.4 23.3 7.8 2.1 2.0 0.3 0.3 15.0 15.1 12.5 TslaEquity US TESLA INC USD 300.3 51,582 48.5 28.9 11.4 8.7 0.0 0.0 1527 28.0 15.2 2238Equity HK GUANGZHOU CNY 7.456 9,732 5.4 5.4 4.9 4.4 1.0 0.9 0.8 5.8 5.9 2.84.8 4.4 3.7 2333Equity HK AUTOGREAT-H WALL MOT-H CNY 4.34 5,058 6.9 6.6 6.4 5.9 1.6 0.7 0.7 4.5 4.6 5.3 4.7 4.4 175Equity HK GEELY AUTOMOBILE CNY 11.88 13,624 8.7 6.9 5.7 4.9 - 2.4 2.1 2.3 3.4 5.9 4.6 4.0 1114Equity HK BRILLIANCE CHINA CNY 5.75 3,704 5.8 3.9 3.3 2.9 0.2 0.9 0.8 1.8 2.7 489Equity HK DONGFENG CNY 7.07 7,778 3.8 3.7 3.7 3.6 4.5 0.5 0.4 5.6 5.0 30.9 19.4 19.9 1958Equity HK MOTORBAIC MOTOR-H -H CNY 4.14 4,237 12.1 5.2 4.3 3.7 0.2 0.6 0.6 2.8 6.2 1.8 1.6 1.4 Equity Sector average* 7.1 5.3 4.7 4.2 1.5 1.0 0.9 3.8 4.6 9.7 6.9 6.7 EV batteries manufacturers: 1211 HK BYD CO LTD-H CNY 47.20 16,441 29.5 41.4 27.4 23.3 7.8 2.1 2.0 0.3 0.3 15.0 15.1 12.5 300750Equity CONTEMPORARY CNY 76.96 24,608 38.3 47.2 37.4 30.4 -0.4 6.1 5.2 0.2 36.3 27.9 20.9 CH 002074BYD Equity CO AGUOXUAN-A CNY 11.68 1,934 14.0 15.3 14.5 13.2 -0.1 1.5 1.5 0.9 0.9 CH300116LTD Equity-H HIGHSHAANXI-TEC J&R OP-A CNY 1.42 503 0.0 2.8 0.0 002190 SICHUAN CHENG-A CNY 16.57 866 0.0 3.0 4.2 0.0 CH EquityCNY CH300014 Equity EVE ENERGY-A CNY 15.92 1,984 33.9 26.1 20.4 16.9 -0.3 4.0 3.9 0.6 1.2 37.6 19.7 15.0 60.00 CH6752 Equity T PANASONIC CORP JPY 956.1 21,732 9.4 8.9 8.3 7.6 -0.1 1.2 1.2 3.1 3.6 3.6 3.2 3.0 300750 051910Equity KS LG CHEM LTD KRW 330,50 20,776 13.0 14.8 13.3 10.9 -0.1 1.3 1.4 1.8 1.8 5.4 5.9 5.3 CH Equity Equity Sector average* 00.00 23.0 25.6 20.2 17.1 -0.2 2.8 2.8 1.0 1.3 19.6 14.4 11.3 CONTE Source: Company data, Orient Securities (Hong Kong) * exclude outliners MPORARY HK$ A-A Figure CNY 57: P/E band Figure 58: Historical P/E 80.45 HK$140.0 (x) 60.0x 700.0 HK$120.0002074 52.0x 600.0 HK$100.0 500.0 CH Equity 44.0x HK$80.0 400.0 +1 Std GUOXUA 36.0x HK$60.0 300.0 Mean N 28.0x 200.0 HK$40.0 20.0x 100.0 HIGHHK$20.0-TEC 0.0 -1 Std HK$0.0CNY (100.0) 12.54

300116 CHSource: Equity Bloomberg, Orient Securities (Hong Kong) Source: Bloomberg , Orient Securities (Hong Kong)

SHAANXI J&R OP-A Figure 59: P/B band Figure 60: Historical P/B CNY

1.77 (x) HK$140.0 6.0 002190 HK$120.0 5.0x 5.0 CH Equity HK$100.0 4.1x 4.0 +1 Std HK$80.0 SICHUA 3.2x 3.0 HK$60.0 Mean N 2.3x 2.0 HK$40.0 1.4x CHENG-A 1.0 HK$20.0 -1 Std 0.5x 0.0 HK$0.0CNY 17.32 300014 Source: Bloomberg , Orient Securities (Hong Kong) Source: Bloomberg , Orient Securities (Hong Kong) CH Equity

EVE ENERGY-A See last page for disclaimer. 22 CNY 14.67

Hong Kong Equity | Automobile Company in-depth

Financial Statements & Forecast

Income statement (consolidated) Balance sheet (consolidated) FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E Revenue 100,208 102,651 121,671 143,438 163,682 Current assets 78,354 102,821 120,826 138,500 157,212 Inventories 17,378 19,873 25,134 29,467 34,393 Rechargeable batteries and photovoltaic business 7,103 8,442 9,286 10,215 11,236 Trade and other receivables 45,733 53,277 64,486 76,022 88,388 Mobile handset components Other debtors 7,515 13,078 14,229 15,546 16,771 and assembly service 38,083 39,708 43,653 48,519 51,061 Cash and cash equivalents 7,111 8,936 9,320 9,807 10,003 Automobiles and related Others 616 7,658 7,658 7,658 7,658 products 55,022 54,501 68,732 84,704 101,385 Non-current assets 66,717 75,278 79,688 83,314 84,734 Cost of goods sold (81,189) (84,716) (102,588) (120,275) (137,571) Net Intangible asset 6,759 8,218 9,254 10,106 10,306 Gross profit 19,018 17,935 19,083 23,163 26,111 PP&E 42,049 47,831 50,204 51,978 52,197 S&D expenses (4,196) (4,925) (5,840) (7,172) (8,511) Others 17,909 19,230 20,230 21,230 22,230 G&A expenses (3,690) (3,048) (3,528) (4,160) (4,747) Total assets 145,071 178,099 200,514 221,814 241,946 Government grants 711 1,276 1,217 1,434 1,473 Current liabilities 78,318 104,997 124,531 140,160 154,179 R&D expenses (3,172) (3,739) (4,624) (5,738) (6,547) Trade, bills and other payables 40,592 51,470 61,653 72,282 81,301 Other income 774 1,057 1,417 2,504 3,366 Loan and borrowings 32,928 45,649 55,000 60,000 65,000 Other expenses (629) (464) (558) (550) (524) Other liabilities 4,797 7,878 7,878 7,878 7,878 Operating Profit 8,815 8,092 7,166 9,482 10,620 Non-current liabilities 11,344 13,145 13,145 14,145 15,145 Finance income 153 96 178 187 191 Loan and borrowings 9,339 10,862 10,862 11,862 12,862 Finance costs (1,800) (2,343) (2,832) (3,234) (3,348) Other liabilities 2,005 2,283 2,283 2,283 2,283 Share of profits of JVs (620) (271) (250) (250) (250) Total liabilities 89,661 118,142 137,676 154,306 169,324 Share of profits of associates 20 46 23 30 33 Share capital 2,728 2,728 2,728 2,728 2,728 Profit before tax 6,568 5,621 4,285 6,215 7,246 Reserves 48,528 52,276 54,615 58,433 62,618 Income tax expenses (1,088) (704) (686) (932) (1,087) Shareholder's Equity 51,256 55,004 57,343 61,161 65,346 Non-controlling interests (428) (850) (623) (914) (1,065) Non-controlling interests 4,153 4,953 5,495 6,347 7,275 Net profit to Shareholders 5,052 4,066 2,977 4,369 5,094 Total equity 55,409 59,957 62,839 67,508 72,622 EBITDA 15,902 15,055 14,978 18,050 19,826 Total liabilities & equity 145,071 178,099 200,514 221,814 241,946 EBIT 8,815 8,092 7,166 9,482 10,620 Net cash/(debt) (34,573) (46,608) (55,576) (61,089) (66,893) EPS (RMB) 1.875 1.401 0.998 1.509 1.774 Change in Working capital (17,625) (7,966) (7,438) (6,557) (9,498) DPS (RMB) 0.555 0.141 0.109 0.240 0.373 Total capital employed 66,753 73,102 75,984 81,653 87,767 Net gearing (%) 67 85 97 100 102 Cash flow (consolidated) BVPS (RMB) 19.858 20.162 21.019 22.419 23.953 FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E Pre-tax profit 6,568 5,621 4,285 6,215 7,246 Key ratios Taxes paid (1,088) (704) (686) (932) (1,087) FY-end Dec 2016 2017 2018E 2019E 2020E Depreciation and amortization 6,917 6,963 7,811 8,567 9,206 Change in working capital (17,625) (7,966) (7,438) (6,557) (9,498) Growth (%) Others 3,382 2,454 1,709 1,901 1,963 Revenue 29 2 19 18 14 Operating cash flow (1,846) 6,368 5,682 9,194 7,830 Gross profit 60 (6) 6 21 13 CAPEX (12,096) (14,013) (11,655) (11,567) (10,087) EBITDA 45 (5) (1) 21 10 Disposals 2,471 1,185 1,379 1,520 1,657 EBIT 60 (8) (11) 32 12 Investments (336) (1,437) (822) (813) (809) Net profit 79 (20) (27) 47 17 Others (3,460) (1,452) 0 0 0 EPS 67 (25) (29) 51 18 Investing cash flow (13,421) (15,717) (11,099) (10,860) (9,240) DPS 1,425 (75) (23) 120 55 Change in bank borrowings 5,220 14,344 9,351 6,000 6,000 Margins (%) Dividends paid (1,053) (539) (465) (360) (792) Gross 19.0 17.5 15.7 16.1 16.0 Interest paid (1,985) (2,586) (3,085) (3,487) (3,601) EBITDA 15.9 14.7 12.3 12.6 12.1 Net proceeds from issuance of EBIT 8.8 7.9 5.9 6.6 6.5 ordinary shares 14,369 0 0 0 0 Net Profit 5.0 4.0 2.4 3.0 3.1 Others (281) (52) 0 0 0 Others (%) Financing cash flow 16,270 11,168 5,801 2,153 1,606 Effective tax rate 17 17 13 16 15 Free cash flow (13,942) (7,645) (5,973) (2,373) (2,257) Dividend payout ratio 29 9 10 15 20 Net cash flow 1,003 1,819 384 487 196 RoCE 8 6 4 5 6 Effect on exchange difference 97 6 0 0 0 Average RoE 10 7 5 7 8 Year-end cash 7,111 8,936 9,320 9,807 10,003 Average RoA 3 2 1 2 2 Interest cover (x) 5 3 3 3 3 Semi-annual breakdown Key Assumptions FY-end Dec (RMB mn) 2H16 1H17 2H17 1H18 2H18E Growth (%) 2016 2017 2018E 2019E 2020E Revenue 56,462 43,817 58,834 52,163 69,508 Rechargeable batteries and Gross profit 10,495 8,169 9,766 7,252 11,831 photovoltaic business 24 19 10 10 10 Operating profit 4,855 3,687 4,406 2,502 4,664 Mobile handset components Pre-tax profit 3,559 2,650 2,971 1,087 3,198 and assembly service 16 4 10 11 5 Tax (548) (485) (219) (213) (473) Automobiles and related Net profit 2,792 1,723 2,344 479 2,498 products 41 (1) 26 23 20 Gross margin (%) 18.6 18.6 16.6 13.9 17.0 Operating margin (%) 8.6 8.4 7.5 4.8 6.7 Effective tax rate (%) 15.4 18.3 7.4 19.6 14.8 Net margin (%) 4.9 3.9 4.0 0.9 3.6 EPS (RMB ) 1.008 0.588 0.813 0.132 0.866 DPS (RMB ) 0.576 - 0.141 - 0.240 Source: Company data, Orient Securities (Hong Kong)

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Hong Kong Equity | China Consumer Goods Company in-depth

Analyst Certification I, Alison Ho (Ho Tsz Ying), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

Meanings of Orient Securities Ratings Buy – Describes stocks that we expect to provide a total return of >10% within a 12-month period. Accumulate – Describes stocks that we expect to provide a total return of >0% within a 12-month period. Hold – Describes stocks that we expect to provide a total return of between -20% and +20% within a 12-month period. Sell – Describes stocks that we expect to provide a total return of <0% within a 12-month period.

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