HONG KONG Guangzhou Automobile 2238 HK Outperform Volume growth rate peaked in 1H Price (at 09:22, 29 Jul 2016 GMT) HK$9.96

Valuation HK$ 11.40 Event - PER 12-month target HK$ 11.40 . Guangzhou Auto (GAC) has achieved strong volume growth in 1H16, with unit Upside/Downside % +14.5 shipments up 31% YoY helped by the success of its own brand ’s 12-month TSR % +18.3 GS4 SUV and the launch of production in China. We believe, however, Volatility Index Medium that this represents the peak for volume growth, which is likely to slow to 13% GICS sector Automobiles & in 2H on softer sales from the JV and tougher comps for Trumpchi. Components Market cap HK$m 135,147 . The problem from a model mix perspective is that more of the growth is Market cap US$m 17,871 coming from low margin models, with growth from its higher margin JVs with Free float % 21 Honda and is more sluggish. As a result, we have lowered our 30-day avg turnover US$m 19.4 earnings estimates. We roll forward our PER to an average of 2016E and Number shares on issue m 13,569 2017E, based on a target PER of 9x as before, but we trim our target price to

Investment fundamentals HK$11.40 from HK$11.50 on lower estimates. We maintain our Outperform Year end 31 Dec 2015A 2016E 2017E 2018E rating but prefer other automakers on lower valuations (see Fig 25). Revenue m 29,418 44,242 46,959 51,525 EBIT m 387 2,528 2,866 3,063 Impact EBIT growth % nmf 553.4 13.4 6.9 Reported profit m 4,212 6,140 7,469 8,493 . Single model risk at Trumpchi: The outstanding growth at GAC’s own brand EPS rep Rmb 0.65 0.95 1.16 1.32 EPS rep growth % 31.9 45.8 21.6 13.7 is due entirely to the GS4 SUV, which accounted for over 90% of 1H16 PER rep x 13.1 9.0 7.4 6.5 volume. The 144.6k units sold in 1H16 compares with the previous full-year Total DPS Rmb 0.20 0.29 0.35 0.40 Total div yield % 2.3 3.3 4.1 4.6 record volume for any Trumpchi model of 70.5k (GS5 SUV in 2014). Given ROA % 0.6 3.6 3.8 3.7 the fickle nature of Chinese consumers, there is no guarantee it can sustain ROE % 11.4 14.9 16.1 16.3 EV/EBITDA x 8.2 5.6 4.8 4.4 these high volumes or achieve similar success with another model. Net debt/equity % 1.0 5.2 -0.1 -6.7 P/BV x 1.4 1.3 1.1 1.0 . Jeep doing better than expected: We are pleasantly surprised by the

2238 HK rel HSI performance, & rec success of the , launched in November 2015, and which history averaged monthly sales of 8.4k in 1H, ranking the 24th best-selling SUV in China. We are less optimistic that the new Renegade compact SUV do as well, as Honda appears to have cornered the market with its Vezel/XR-V. . Honda, Toyota – slow and steady: Honda and Toyota are both seeing lulls in their product cycles. Honda completed a renewal of its major products in 2H15, which helped it deliver 12% volume growth in 1H but we expect this to turn negative in 2H before the addition of the Avancier SUV late in 2H helps volumes return to growth. Toyota is hampered by a lack of capacity; we expect it to post 7.7% growth this year helped by the Highlander and hybrid Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Levin and 5.8% in 2017 on the back of the Yaris facelift. Source: FactSet, Macquarie Research, July 2016 (all figures in Rmb unless noted, TP in HKD) Earnings and target price revision

. We lower our 2016E EPS by 22%, 2017E by 18% and 2018E by 13% as more of the growth is coming from low-margin vehicles. We trim our TP to HK$11.40 from HK$11.50 despite rolling forward to an average of 2016E and 2017E due to lower profit estimates. Analyst(s) Price catalyst Janet Lewis, CFA +852 3922 5417 [email protected] Zhixuan Lin . 12-month price target: HK$11.40 based on a PER methodology. +86 21 2412 9006 [email protected] Allen Yuan . Catalyst: Monthly sales; 1H16 earning in late August. +86 21 2412 9009 [email protected] Action and recommendation 1 August 2016 Macquarie Capital Limited . We maintain our Outperform rating but as the shares are more richly valued than many peers, we prefer Dongfeng Motor for exposure to growth from Japanese OEMs in China. Please refer to page 16 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research Guangzhou Automobile

Analysis

Fig 1 Macquarie vs consensus forecasts Rmb m Revenue EBIT Pre-tax profit Net profit Basic EPS

2014 Actual 22,383 -491 3,066 3,194 0.50 2015 Actual 29,418 387 4,386 4,212 0.65 2016 MRE – old 25,316 585 8,041 7,838 1.22 2016 MRE – new 44,242 2,528 7,283 6,140 0.95 2016 Consensus 40,647 1,691 6,839 6,290 0.97 2017 MRE – old 30,946 648 9,375 9,151 1.42 2017 MRE – new 46,959 2,866 8,753 7,469 1.16 2017 Consensus 44,825 1,849 7,732 7,148 1.11 2018 MRE – new 51,525 3,063 9,866 8,493 1.32 2018 Consensus 49,251 1,997 8,432 7,744 1.20 Source: Bloomberg, Macquarie Research, July 2016

Strong sales but more modest improvements in profitability . New models, brands spur volume growth: GAC has benefited by a raft of new models, primarily SUVs, that have contributed to strong growth over the past few years. It has also, however, been impacted by the decline in demand for mid-sized sedans like the and . We believe in the past these have been major contributors to JCE (jointly controlled enterprise) profits, but their slowdown was a factor in lacklustre profits in 2014. SUVs helped to support the recovery in JCE profit in 2015, notably the new model of the and the successful launch of the Honda Vezel. . FCA continues to weigh on earnings: We believe that the JV (FCA) contributed a loss of over Rmb1bn in 2014 as sales of Fiat vehicle evaporated. While the successful launch of the Jeep Cherokee should reduce FCA related losses from 2016, the addition of a very expensive new factory in Guangzhou (Fig 13) is likely to keep the JV in loss until 2017 at the earliest. Further, with Fiat brand vehicles selling just Rmb9.3bn, we believe FCA needs to abandon the Fiat brand in China – it has already converted the most successful Fiat dealers to Jeep dealers – which could result in asset impairment charges. . Hopeful of more profits from own brand: Despite the strong success of the GS4 SUV, which began to deliver strong volumes in 2H15, there was a minimal improvement in GAC’s operating margin in 2H15. This suggests that they have underpriced the vehicle for the features it offers. There was a jump in operating profitability for the own brand in 1Q16, and we assume some of this is sustainable for the full year, a key factor in our above-consensus EBIT estimates. This is, however, a risk to our estimates, as one quarter hardly establishes a track record. A second risk is that the strong success of the GS4 is not sustainable or transferable to other models. The next big launch for GAC Trumpchi is the larger GS8, and we don’t expect this to be a volume model. . Expect strong 1H profit but slower growth in 2H: We expect 1H NPAT to post a 60.4% jump to Rmb2,624m on the back of improved profitability of the local brand. We also expect JCEs to post a 37% increase in profit as Honda in particular was very depressed in 1Q15 when it was paying big rebates on the Accord to destock excess inventory and the new Toyota Highlander only contributed one quarter. The 2H should see more muted growth, with NPAT up 35% YoY, within which JCEs should rise just 5% YoY as Honda sees volumes slip YoY in 2H.

Fig 2 Trend in sales by brand – growth is starting to slow at Toyota and Honda Units 2013 % YoY 2014 % YoY 2015 % YoY 1H 2016 % YoY 2016E % YoY 2017E % YoY

Trumpchi own brand 107,376 229.3% 135,049 25.8% 195,134 44.5% 159,421 140.1% 326,500 67.3% 349,000 6.9% GAC Honda 435,480 37.6% 480,060 10.2% 580,068 20.8% 273,987 12.0% 582,000 0.3% 666,000 14.4% GAC Toyota 303,088 21.2% 374,107 23.4% 403,088 7.7% 208,752 7.9% 434,000 7.7% 459,000 5.8% GAC Fiat-Jeep 48,375 68,433 41.5% 39,488 -42.3% 61,168 256.2% 146,000 269.7% 207,000 41.8% GAC MMC 43,036 63,199 46.9% 56,317 -10.9% 19,247 -37.4% 50,000 -11.2% 77,000 54.0% Source: Bloomberg, Macquarie Research, July 2016

1 August 2016 2 Macquarie Research Guangzhou Automobile

. Valuation is close to fair value: Our target price of HK$11.40 is based on a target PER of 9x average 2016E and 2017E EPS. It only barely stays an Outperform due to the contribution of the dividend, which helps to provide a TSR of 18.3% to our target price. This fair value is corroborated by RoE-g/COE-g, which suggests fair value of HK$10.46 based on average ROE for FY16-18E. As we highlight in Fig 25, this is at the rich end of auto share valuations, especially for SOEs. As such, our preference lies with Dongfeng Motor among JVs oriented to Japanese brands, given its more attractive valuations.

Fig 3 Volume growth has been driven by Trumpchi and recently Jeep

Units 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2012 2013 2014 2015 1H 2016 2016E 2017E 2018E

Trumpchi own brand GAC Honda GAC Toyota GAC Fiat-Jeep GAC MMC

Source: Bloomberg, Macquarie Research, July 2016

Japanese brands become less important in sales mix but core of profits . Mix is shifting towards lower margin products: Although GAC has posted solid volume growth recently, much of the growth is coming from lower-margin products like the Trumpchi GS4 and Jeep. As shown in Figure 4, the proportion of sales coming from Honda and Toyota has been declining steadily. They do, however, on our estimates account for more than 100% of JCE profits, with a profit contribution also coming from the financing JV Sofinco. We estimate that the FCA JV had a loss of over Rmb1bn in 2015. They also contribute virtually all of the dividends – Rmb6.4bn in 2015 – with motorcycle manufacturer Wuyang Honda also contributing Rmb185m in dividends in 2015.

Fig 4 Shifting brand mix – away from high margin Japanese brands to low margin own brand and Jeep

% of total 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012 2013 2014 2015 1H 2016 2016E 2017E 2018E

Trumpchi own brand GAC Honda GAC Toyota GAC Fiat-Jeep GAC MMC

Source: Bloomberg, Macquarie Research, July 2016

1 August 2016 3 Macquarie Research Guangzhou Automobile

Honda – solid volume growth but at cost to margins . Mix shift to SUVs: The success of the Vezel compact SUV (Fig 6), launched in 4Q14, helped GAC Honda to post 21% volume growth in 2015. This has helped to offset softer volumes of sedans, especially the Crider, which has faded after its initial success in 2013-14. The new Fit model launched in 2014 with a lower price (MSRP Rmb73,800-112,800) has also continued to sell well. The addition of the full-size Avancier SUV (Fig 7) as well as a new compact SUV (CDX) for , both coming before the end of the 2016, should help to boost the proportion of SUVs in GAC Honda’s total sales to 36% by 2017E from nothing prior to the launch of the Vezel.

Fig 5 Honda's growth has been driven by the Vezel SUV, with the Avancier to sustain it Crider did well its first 2 years % of total 274k 582k but volumes 316k 435k 480k 580k 666k 100% The Vezel have slipped 90% since boosted 80% volumes in 70% 2015; the 60% Avancier will 50% further boost 40% SUV volumes from 2017 A lower price 30% for the new 20% model Fit has 10% boosted 0% volumes 2012 2013 2014 2015 1H16 2016E 2017E Accord Accord HEV Crosstour City Fit Odyssey S1 Crider Vezel Avancier Acura Compact SUV

Source: Company data, Macquarie Research, July 2016

. Lower Accord sales mean lower margins: The Accord was in the past one of the highest margin vehicles for GAC. The lacklustre reception to the last model change, however, hit sales hard. In 2014 there was substantial over-production of the model, which led to big discounts. GAC Honda has subsequently cut inventory in the channel in a meaningful way resulting in the average discount falling to 8.1% in 1H16 from an average of 10.2% in 2015 based on our proprietary survey.

Fig 6 The Vezel has emerged as GAC Honda’s top- Fig 7 The Avancier, shown at the Beijing Auto Show, selling model is scheduled to launch in 4Q16

Source: Macquarie Research, July 2016 Source: Macquarie Research, July 2016

1 August 2016 4 Macquarie Research Guangzhou Automobile

. Below average discount levels: Overall like the other major Japanese brands, GAC Honda has an average discount level below other mass-market international brands, at 8.7% for June. The Japanese brands are bunched together, ranging from 7.1% for to GAC Honda at 8.7% (just slightly higher than Dongfeng at 8.6%) but much lower than the average for mass-market international brands at 11.1%. We attribute GAC Honda’s slightly higher discount level to the larger proportion of sedans in its model mix.

Fig 8 Discounts are below average for GAC Honda, with highest discounts on low- volume models

% discount 20% 18% 16% 14% 12% 10% Discounts on 8% the Vezel 6% remain low 4% almost 2 years 2% after launch

0%

14 15 14 14 14 15 15 15

14 15 14 15 16

15 16 16 14 14 15

14 15

14 15 16

14 15 15 14 16 16

------

- - - - -

------

- -

- - -

------

Jul Jul

Apr Oct Oct Apr Apr

Jan Jan Jun Jun Jan Jun

Mar Mar Mar

Feb Feb Feb

Sep Nov Aug Nov Dec Aug Sep Dec

May May May

Odyssey Fit Crosstour S1 City Fengfan Accord Crider Vezel

Source: ISE, Macquarie Research, July 2016

. Profitability should improve in 2016: We look at the difference in shareholders’ equity and add back dividends paid to get a proxy on net profit for the JVs. On this basis, Honda’s net profit (100% basis) appears to have declined to Rmb2,717m in 2015 from Rmb3,269 in 2014. We estimate that over 60% of profit came in 2H, highlighting the impact that extra rebates related to inventory clearance weighed on 1H results. Although Honda doesn’t have a lot of new models this year, with discounts in check and strong volumes from the Vezel, margins and profits should improve despite flat volume growth. . Limited impact from Acura initially: GAC Honda has just launched the first locally made Acura model, the compact SUV the CDX. We would expect a second model to launch in 2017 or 2018 with a target of 3 models by 2020. Overall we expect Acura to account for no more than 5% of GAC Honda’s volumes given the limited distribution network (fewer than 100 dealers) and brand recognition. Overall we believe it is the correct strategy to target the entry luxury market – the CDX is priced in the Rmb250-300k range – to attract the young, rising upper middle class buyers looking for something a little different. Toyota – constrained by lack of capacity . Waiting for factory expansion to grow: As detailed in GAC’s annual report, GAC Toyota is in the process of adding 220k in capacity, with a scheduled completion date of January 2018. Ahead of this it is unlikely to see meaningful volume growth as it is constrained from adding new models. It has a designed capacity of 380k and shipped over 403k units in 2016. Typically an OEM can produce at 120% utilisation or about 460k units in Toyota’s case. We project 7.7% growth in 2016 to 434k and another 5.8% growth in 2017 to 459k, with the Highlander providing much of the growth. . Looking to add another SUV: Currently the only SUV that GAC Toyota has is the Highlander, which mostly less as a 7-seater although it is also available as a 5-seater. The next model that we expect it to add in 2018 is a compact SUV based on the C-HR, though it could be tailored for the China market. We believe there could be support from its hybrid models, both the Levin and Camry. Currently the hybrid Camry uses an imported hybrid system, while the Levin uses a locally made system. Toyota may look to localise the hybrid system for the Camry to lower costs, which could boost demand as Toyota and other automakers make progress educating consumers about the benefits of HEV vehicles for the environment and fuel consumption.

1 August 2016 5 Macquarie Research Guangzhou Automobile

Fig 9 Toyota's sales mix has shifted from high-priced Camry & Highlander to lower priced models like the Levin & Yaris

303k 374k 403k 209k 434k 516k 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2013 2014 2015 1H16 2016E 2017E

Camry E'Z Highlander Yaris Levin Levin hybrid

Source: Company data, Macquarie Research, July 2016

. Profitability deteriorates in 2015: Based on our analysis of the changes in shareholders’ equity net of dividends paid, Toyota appears to have experienced a deterioration in profitability in 2015. We believe this is due to the steady decline in mix as the Highlander and Camry account for just 50% of volumes vs 90% in 2013 and 63% in 2014. This ratio declined further to 46% in 1H16 on weak Camry sales. We believe the Highlander, which only contributed three quarters of sales in 2015 following the launch of the new model, is the most profitable model in GAC Toyota’s line-up, especially given the continued absence of discounts (Fig 12), so profitability should improve a bit in 2016 vs 2015.

Fig 10 The Highlander continues to sell with no Fig 11 The hybrid Levin features a localised hybrid discounts more than a year after its launch system

Source: Macquarie Research, July 2016 Source: Macquarie Research, July 2016

. Good control of discounting: Despite a product line-up tilted towards sedans, GAC Toyota has done a good job at keeping its discounts under control. After averaging 8.3% in 2014, average discounts fell to 7.5%, second lowest among mass-market international auto brands to (6.9%). In 1H16 this has edged up to 7.8%, but this is tied with Dongfeng Honda for lowest average discount among international JVs. The low level is mainly due to the continued absence of discounts on the Highlander more than a year after the debut of the new model. We attribute Toyota’s success at minimising discounts to its discipline of not overloading the channel with inventory. That said, according to some of the dealers we spoke to, it did make one-off support payments to dealers due to the low profitability on auto sales.

1 August 2016 6 Macquarie Research Guangzhou Automobile

Fig 12 Discounts at GAC Toyota are brought lower by zero discount on the Highlander

% discount 16% 14% 12% 10% 8% 6% 4% 2%

0%

14 15 14 15 16

15 16 14 14 15

14 15 16

14 15 15 14 16 16

15 14 14 15

14 14 15 15

16 14 15

- - - - -

- - -

- -

- - -

------

------

- - -

Jul Jul

Apr Oct Oct Apr Apr

Jan Jan Jun Jun Jan Jun

Mar Mar Mar

Feb Feb Feb

Nov Nov Dec Dec

Sep Aug Aug Sep

May May May

Highlander Camry Yaris E'Z Levin

Source: ISE, Macquarie Research, July 2016

. Capital injection for new plant due to high dividends: GAC Toyota appears to consistently pay out most of its profit as a dividend. On a 100%, the dividend paid to GAC and Toyota has totalled Rmb2,747m in 2013, Rmb3,657m in 2014 and Rmb3,944m in 2015. Against that, in 2015 the two partners each injected Rmb209.54m into the JV and agreed to inject a further total of Rmb126.1m as fresh capital, presumably for the capacity expansion. As of the end of 2015, none of this second amount had been paid. FCA – launch of Jeep brand helps volume but costs high . Better success with Jeep than Fiat: The launch of the Fiat brand to local production in late 2012 has quickly fizzled, with sales of the Viaggio plummeting 55.4% YoY in 2015 to 21,399 units and the Ottimo falling 50.7% to 10,082. In 1H alone the Jeep Cherokee sold 50,167 units, better than the Viaggio in its best year. Jeep benefits from better name recognition as it was one of the first foreign brands allowed into China, before Chrysler decided to pull the brand in 2009. GAC FCA has proactively been converting the best Fiat dealerships into Jeep dealers to give it an adequate footprint. The idea is that they keep selling Fiat products, but given the 2 Fiat models sold less than 10k units in 1H16, we believe they would be better off to pull the brand and admit defeat in China.

Fig 13 The Cherokee was FCA’s first localised Jeep Fig 14 The Renegade recently started local model, launched in late 2015 production in China

Source: Macquarie Research, July 2016 Source: Macquarie Research, July 2016

1 August 2016 7 Macquarie Research Guangzhou Automobile

. Planned launches for Jeep: Following the launch of the Cherokee (Fig 13), a D-segment SUV, in June 16 FCA launched production of the Renegade (Fig 14), a B-segment SUV. In contrast to the Cherokee, which has been selling over 8k units per month, we expect the Renegade to sell 3-5k units per month. This is the category where the Honda Vezel and XR-V have dominated, and we believe the distinctive looks of the Renegade will limit the target customer base. A Chinese version of the Compass (C-segment) is expected before the end of the year. The Compass in the past has accounted for over half of Jeep imports (90k in 2014), so it should come closer to matching the Cherokee in volumes. A fourth model, a cross-over, is also in the pipeline according to the automotive press. . Aiming to trim losses: GAC FCA has never been profitable, and given the size of recent capital injections, we estimate that the JV lost well over Rmb1bn in 2015. The partners each injected Rmb1.2bn into the JV in 2015 and a further Rmb600m is scheduled to be injected by each partner. GAC FCA is already capitalised at Rmb4.8bn (US$720m), higher than GAC Honda at US$283.3m and GAC Toyota at US$518.2m as of the end of 2015. We expect the loss should narrow this year, with the caveat that it could be exacerbated by write-offs related to the failed Fiat brand.

Fig 15 Capex highlights different cost focus – Fiat pays much more per unit of capacity Planned investment Expected capacity Cost per unit of amount (Rmb '000) (units) capacity (Rmb)

GAC Honda Zengcheng factory 3,081,870 240,000 12,841 GAC Toyota capacity expansion 3,504,030 220,000 15,927 GAMC (own brand) Phase 3 of Factory 1 2,605,110 150,000 17,367 GAC Fiat-Chrysler Guangzhou sub-plant 6,451,690 160,000 40,323 Source: Company data, Macquarie Research, July 2016

. Over-spending on capacity: Despite the fact that the factory only used 24.4% of its 164k capacity in 2015. Despite the fact that the Changsha factory was built with an ultimate footprint of 500k of capacity envisioned, GAC FCA went ahead and built a new factory in Guangzhou. As we show in Figure 15, the cost per unit of capacity is more than twice that of both the Honda and Toyota expansions. We assume that is because it must include a new paint shop and press shop, while those facilities may be shared at the Honda and Toyota facilities, but it highlights the high costs that GAC FCA must overcome to achieve profitability. MMC – in need of more models . Focus on SUVs isn’t enough: Despite the fact that GAC Motors (GAC MMC) only produces SUVs, with the ASX the main model accompanied by the low-volume Pajero Sport, it has seen volumes come under pressure due to the entry of competing models. In 2015 volumes fell 10.9% YoY to 56,317 (of which the ASX was over 90% of sales), partly reflecting the end of local production of the Pajero SUV, which is now imported. Although it launched a facelift of the ASX in April, which should lead to better volumes during the rest of the year, we have cautiously estimated a full-year decline of 11.2% to 50,000. If ASX volumes surprise on the upside, there could be upside to this number. . Launching Outlander: GAC MMC will launch the Outlander (Fig 16) in 2H, tentatively in August. Initially it will launch with the gasoline version but it may consider adding the PHEV model at a later date. The Outlander is the best-selling PHEV in Europe and would help GAC improve overall fleet fuel economy within the group. Much of the Outlander’s potential success will depend on pricing of the new model and its relative competitiveness. We have cautiously assumed 2k units per month in 2017 but see upside to these numbers. . Possible reorganisation of MMC in China: In light of the proposed capital injection by Nissan into MMC, technically MMC will be involved in 3 joint ventures in China, including Mitsubishi, which focuses on sales of the Galant and Lancer sedans. In light of MMC’s strategic intent to focus on SUVs in the future, we expect it could fold it (Souteast MMC only sold 6,080 units in 2015 and just 1,366 in 1H 2016) or merge it into the GAC JV. . Small profit contribution: We estimate that GAC MMC is slightly profitable based on the trends in shareholders’ equity. It pays no dividend to the JV partners at the moment.

1 August 2016 8 Macquarie Research Guangzhou Automobile

. Capital injection planned: In 2015, it was agreed to inject up to Rmb174k into the JV, shared equally by the two partners. None of the capital had been injected as of the end of 2015. We believe it may be used to support expansion or upgrading of production facilities, especially if the Outlander proves successful.

Fig 16 The Outlander is due to launch in 3Q16 – the PHEV version on display at Beijing Auto Show may be introduced at a later date

Source: Macquarie Research, July 2016

Trumpchi own brand – more than a one-hit wonder? . Big surprise in success of the GS4: One of the big surprises of the past year has been the emergence of GAC Trumpchi’s GS4 SUV as one of the top-selling SUVs in China. Trumpchi is a relatively new brand, launched by GAC in 2011. From the beginning it has boasted strong technology supported by its JV partners. Its first factory effectively mirrored a Toyota plant, and its general manager was from Honda. Engines were provided by FCA’s . Its vehicles have typically scored top marks on safety tests but none until the GS4 had sustained a high level of sales. . Key question is sustainability of GS4 and new models: The key question is whether this is a watershed breakthrough for the Trumpchi brand, or whether it proves to be a short-lived one-hit wonder. As we believe the quality is better than other domestic models that have surged and faded, we are somewhat confident that volumes for the brand can continue to grow, but we have assumed growth slows to a slower pace. The main new model on the horizon is the GS8 (Fig 18), a full-sized SUV, which so far has been a tough market for domestic brands.

Fig 17 The GS4 has become a top-selling SUV Fig 18 The GS8 is scheduled to launch in 2H16

Source: Macquarie Research, July 2016 Source: Macquarie Research, July 2016

1 August 2016 9 Macquarie Research Guangzhou Automobile

Fig 19 Trend in Trumpchi volumes by model – dominated by GS4

Units 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2011 2012 2013 2014 2015 1H16 2016E 2017E

GA5 sedan GA3 sedan/GA3 Super GA6 sedan GA8 sedan GS5 SUV GS5 Super GS4 SUV GS4 BEV GS8 SUV GM8 MPV

Source: Company data, Macquarie Research, July 2016

. Volume at expense of margins: Despite the 31.4% revenue growth in 2015 on the back of the surge in sales of the GS4 SUV, margins showed only limited operating leverage, with the gross margin only improving by 0.3% points. We believe to some extent GAC Trumpchi has underpriced the vehicle relative to its features, with the MSRP ranging from Rmb99,800 for the standard shift Comfort model to Rmb146,800 for a DCT Premium model, both equipped with a 1.3L turbo engine. Based on 1Q earnings, however, GAC saw a jump in operating profitability, which suggests that given the volumes, it has been able to reduce costs per unit.

Fig 20 Trend in GAC's operating profitability – we expect a jump in margins in 2016 2011 2012 2013 2014 2015 1H16E 2016E 2017E

Revenue 10,984 12,964 18,824 22,383 29,418 20,794 44,242 46,959 % YoY 25.6% 18.0% 45.2% 18.9% 31.4% 81.6% 50.4% 6.1% Gross profit 424 690 1,994 2,552 3,444 3,119 6,636 7,279 GPM 3.9% 5.3% 10.6% 11.4% 11.7% 15.0% 15.0% 15.5% Operating profit -225 -1,164 -848 -491 387 1,156 2,528 2,866 OPM -2.0% -9.0% -4.5% -2.2% 1.3% 5.6% 5.7% 6.1% Source: Company data, Macquarie Research, July 2016

. Hard to read potential to build margins further: We believe Trumpchi needs to develop a broader model mix and higher volumes to see another meaningful jump in margins, but this is tough to forecast as there is no comparable domestic player that has yet to achieve a big jump in margins in such a short period of time. As such, we have forecast only a modest further improvement in operating margins supported mainly by further improvement to operating leverage into 2017. Our forecasts beyond that are tentative given the lack of details on the product pipeline. Scenarios – profits could swing higher or lower . Margins could swing profits in both directions: The limited disclosure means forecasting margins can be challenging among the different JVs as well as the local brand. Overall our view is that with increasing focus on improving fleet fuel economy, which will necessitate the launch of new energy vehicles that could be low volume initially, margins will be in downtrend. Mix and timing of new models, incentives and dealer support and operational leverage are other factors that can buffet margins. We believe currency factors are less important. Localisation rates are already quite high except for GAC MMC (where it hovers around 40-50%) and probably Fiat-Jeep, as it would not have had time yet to establish local supply chains. Further, even where components come from overseas via local entities, contracts are RMB denominated and typically pricing is only reviewed annually.

1 August 2016 10 Macquarie Research Guangzhou Automobile

. By JV, we expect the following:  Honda – Margins should improve in 1H due to easy comps as a year ago there was heavy incentives for the Accord due to high inventory; profitability of the Vezel should improve on the back of higher volumes and typically better margins in second year.  Toyota – The Highlander is likely a major contributor, especially as it still has no discounts, but the shift of mix to smaller vehicles detailed in Figure 9 will pressure margins.  MMC – The addition of the Outlander should contribute to better capacity utilisation, though in general MMC has a very low cost factory; MMC is vulnerable to the strong yen due to its low localisation rate. Overall we expect MMC to remain around break-even.  FCA – The costs of adding a completely new Guangdong factory will offset some of the better utilisation at the Changsha factory, but operating losses should narrow; a risk remains writing off the sub-scale Fiat business. Assuming Jeep can get to at least 200-300k in annual sales, it should eventually become profitable. . Trumpchi local brand could also swing: As we noted in the previous section, the lack of improvement in the core operating profits was disappointing in 2H15 given the jump in volumes on the success of the GS4. In light of the better margins in 1Q16, we are optimistic that profitability is improving, but in the past there have been big swings in margins from quarter to quarter due to timing of costs. We therefore see some risks to our forecast of an improvement in the OPM for the core operating business to 5.7% in 2016 from 1.3% in 2015. There is also the risk that sales fall suddenly if the GS4 is no longer the flavour of the day. . Various profit scenarios: Below we highlight how 50 bps and 100 bps changes in operating profitability could swing EPS up and down. For the JCEs, based on our assumptions, a 100% basis point change in the OPM would subtract Rmb0.10 per share on the downside or add Rmb0.11 per share on the upside. The potential impact from swings in the OPM for the local brand business is smaller, but we see the potential for greater swings. For the core operating entity, a 100bps swing in margins subtracts Rmb0.04 per share on the downside and adds Rmb0.05 per share on the upside.

Fig 21 Scenarios for profits based on different operating profit assumptions Bear case Base case Bull case -100bps -50bps +50bps +100bps 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

JCE profit EPS - RMB 0.85 0.91 0.90 1.04 0.95 1.16 1.01 1.22 1.06 1.29 EPS - HK$ 1.00 1.10 1.06 1.25 1.13 1.40 1.19 1.47 1.25 1.55

Core operating entity EPS - RMB 0.91 1.11 0.93 1.13 0.95 1.16 0.98 1.19 1.00 1.21 EPS - HK$ 1.07 1.34 1.10 1.37 1.13 1.40 1.15 1.43 1.18 1.46

HKD/RMB 1.18 1.20 1.18 1.20 1.18 1.20 1.18 1.20 1.18 1.20 Source: Macquarie Research, July 2016

1 August 2016 11 Macquarie Research Guangzhou Automobile

Fig 22 Macquarie P&L assumptions for JCEs Rmb m FY13 FY14 FY15 FY16E FY17E FY18E

Auto revenue – JCE 61,631 64,551 67,849 81,120 99,122 106,589 …Growth 32.0% 4.7% 5.1% 19.6% 22.2% 7.5% Other revenue – JCE (includes motorcycles, auto 4,369 5,686 5,882 6,470 7,117 7,828 finance & insurance, property investment) Total revenue – JCE 66,000 70,236 73,730 88,937 106,918 114,499 …Growth 29.1% 6.4% 5.0% 20.6% 20.2% 7.1% COGS – JCE 50,475 59,298 62,223 75,913 91,522 97,808 Gross profit 15,525 10,938 11,507 13,024 15,395 16,691 ...GPM 23.5% 15.6% 15.6% 14.6% 14.4% 14.6% Pro forma SGA 7,920 6,602 6,636 7,382 8,446 8,816 Pro forma SGA margin to sales 12.0% 9.4% 9.0% 8.3% 7.9% 7.7% Pro forma OP 7,605 4,336 4,871 5,642 6,949 7,875 …OPM 11.5% 6.2% 6.6% 6.3% 6.5% 6.9% Non-operating (interest net, other) -3,447 -238 -158 -200 -200 -200 Pro forma tax 1,039 1,024 1,178 1,361 1,687 1,919 Pro forma net profit 3,118 3,073 3,535 4,082 5,062 5,756

JCE profits – autos 3,100 3,213 3,677 4,232 5,212 5,906 …Net margin 4.7% 4.6% 5.0% 4.8% 4.9% 5.2% JCE profits – other 0 0 0 0 0 0 Total JCE profit 3,100 3,213 3,677 4,232 5,212 5,906 …Net margin 4.7% 4.6% 5.0% 4.8% 4.9% 5.2% …% chg YoY 53.9% 3.6% 14.4% 15.1% 23.2% 13.3% Source: Company data, Macquarie Research, July 2016

Balance sheet healthy, 30% payout ratio likely to be sustained . Debt and cash in balance: Over the past couple of years, GAC’s debt as reported on the balance sheet and its cash have roughly been in balance. If you include its time deposits, it is net cash. While demands on cash are likely to remain high, particularly given the aggressive goals of expanding both the FCA JV and its own business, we believe it is generating more than enough cash flow from the Honda and Toyota JVs in the form of dividends to cover these needs and keep its 30% payout ratio. . Sticking to 30% payout ratio: Since FY11 GAC has maintained a payout ratio in the 30% range, generally hovering at or just above 30%. The exception was in 2012 when earnings were depressed by the anti-Japan sentiment that hurt 2H auto sales and resulted in a 2H loss. That year the payout ratio jumped to 51% but fell from Rmb0.21 in 2011 to Rmb0.09. We have forecast a 30% payout ratio to continue but believe this number could rise should the need to continue capital injections into the FCA JV come down or disappear. Valuation – demanding versus peers though not in absolute terms . Target price of HK$11.40 based on 9x average 2016/2017E: We base our target price for GAC on 9x our estimated EPS for 2016E and 2017E. It is in line with the target valuation we use for Dongfeng and below the 10x we use for the other Chinese OEMs. We use a lower target PER to account for their more complex structure due to multiple JVs, with poor disclosure for the Japanese JVs, which adds uncertainty to forecasting. The 9x target PER is close to the 8.9x average FY1 PER since 2011. The shares have rallied 111% from their 52-week low on 7 September 2015 and are now trading at a premium to peers, notably Dongfeng Motor , which is the most similar in terms of business mix. As such we would not be chasing at current levels and would prefer to buy on weakness. Given the relative valuation and respective growth outlooks, our top picks in China autos are currently Changan, Great Wall and Dongfeng Motor. . ROE-g/COE-g suggests at fair value already: Using the relationship of ROE-g/COE-g as detailed in Figure 24, we noted that fair value based on average ROE for 2016-18E is HK$10.46, close to the current share price. This would also indicate that the shares are around fair value.

1 August 2016 12 Macquarie Research Guangzhou Automobile

Fig 23 FY1 PER – GAC has moved above average Fig 24 Based on ROE-g/COE-g GAC’s shares are PER of 8.9x fairly valued at current levels

ROE-g/COE-g (based on perpetuity growth rate) 17.0 Normalised 3y 15.0 ROE 2016 ROE (2016-2018) Equity beta (b) 1.06 1.06 13.0 Risk-free rate (Rf) (%) 3.0% 3.0% 11.0 Equity risk premium (Rm-Rf) (%) 7.0% 7.0% Cost of equity (Re =Rf+b(Rm-Rf)) (%) 10.4% 10.4% 9.0 ROE (%) 14.9% 15.8% 7.0 Perpetuity growth rate (%) 1.0% 1.0%

5.0 ROE-g (%) 13.9% 14.8% COE-g (%) 9.4% 9.4% 3.0

Ratio (implied book value) (x) 1.48 1.57

11 13 14 15 16 12

11 12 13 16 14 15

------

- - - - -

- BVPS (HK$) 6.30 6.68

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Fair value (HK$) $9.31 $10.46 1-yr fw per avg. +1 stdev -1 stdev

Source: FactSet, Macquarie Research, July 2016 Source: Bloomberg, Macquarie Research, July 2016

Fig 25 Comparative valuation of China auto stocks PER (x) Yield (%) Price/Book value (x) ROE (%) Name Ticker Rating Price (lcy) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E Brilliance China 1114 OP 9.17 11.4 10.3 9.4 1.1 1.3 2.9 2.0 1.7 1.5 19.0 17.8 17.1 BYD 1211 UP 50.05 37.8 24.7 19.9 0.0 0.8 1.3 3.3 2.3 2.1 9.8 11.5 11.1 175 OP 5.31 14.7 15.2 11.3 0.7 1.0 1.3 2.1 1.8 1.6 12.3 12.6 14.7 BAIC 1958 OP 7.10 14.0 9.1 6.7 2.5 5.0 6.7 1.3 1.1 1.0 9.7 13.3 15.4 GAC 2238 OP 10.30 13.5 9.3 7.6 2.3 3.2 3.9 1.5 1.3 1.2 11.4 14.9 16.1 Great Wall Motor 2333 OP 7.84 7.6 7.2 5.9 3.9 4.2 5.1 1.6 1.5 1.3 22.5 21.5 23.4 Dongfeng Motor 489 OP 9.81 6.6 6.3 5.3 2.4 3.2 4.7 0.9 0.8 0.7 14.6 12.9 13.7 Changan 200625 OP 12.79 5.2 4.6 4.1 5.8 7.6 9.8 1.5 1.2 1.1 33.2 29.2 28.4 SAIC 600104 OP 23.47 8.7 8.5 8.3 5.9 5.9 6.0 1.5 1.4 1.4 17.9 16.7 17.1 Prices at 28 July 2016 Source: Bloomberg, Macquarie Research, July 2016

Fig 26 Current ratings and target prices for China auto coverage Current Price Target Price (HK$) Upside/Downside Company Ticker Recommendation (HK$*)

Great Wall-H 2333 HK Outperform 7.84 12.50 59.4% Changan-B 200625 CH Outperform 12.79 29.50 130.6% Brilliance 1114 HK Outperform 9.17 9.60 4.7% SAIC 600104 CH Outperform 23.47 27.70 18.0% BAIC 1958 HK Outperform 7.10 8.10 14.1% Dongfeng 489 HK Outperform 9.81 15.80 61.1% GAC 2238 HK Outperform 10.30 11.40 10.7% Geely 175 HK Outperform 5.31 3.60 -32.2% BYD-H 1211 HK Underperform 50.05 26.10 -47.9% Notes: * Price of SAIC is in RMB; prices are as of 28 July 2016 Source: Bloomberg, Macquarie Research, July 2016

Companies mentioned: 7203Toyota Motor (7203 JP, ¥5,859, Outperform, TP: ¥7,300, Takuo Katayama) Honda Motor (7267 JP, ¥2,839, Outperform, TP: ¥3,600, Takuo Katayama)

1 August 2016 13 Macquarie Research Guangzhou Automobile Macquarie Quant View

The quant model currently holds a strong positive view on Guangzhou Attractive Displays where the Automobile Group. The strongest style exposure is Price Momentum, company’s ranked based on

indicating this stock has had strong medium to long term returns which s l the fundamental consensus

a often persist into the future. The weakest style exposure is Valuations, t

n Price Target and indicating this stock is over-priced in the market relative to its peers. e Macquarie’s Quantitative

m

a Alpha model. 35/389 d

n

u Two rankings: Local market Global rank in F (Hong Kong) and Global Automobiles & Components sector (Automobiles & Quant % of BUY recommendations 68% (17/25) Components) Local market rank Global sector rank Number of Price Target downgrades 2 Number of Price Target upgrades 12

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

Chongqing Changan Auto 2.2 Chongqing Changan Auto

Guangzhou Automobile Grou… 1.3 Guangzhou Automobile Grou…

Geely Automobile 1.2 Geely Automobile

SAIC Motor (A-Share) 1.0 SAIC Motor (A-Share)

Dongfeng Motor Group 0.7

Great Wall Motor Company 0.0 Great Wall Motor Company

Brilliance China Automoti… -0.8 Brilliance China Automoti…

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

Chongqing Changan Auto Chongqing Changan Auto -0.7 Guangzhou Automobile Grou… Guangzhou Automobile Grou… 1.0 Geely Automobile Geely Automobile 1.3 SAIC Motor (A-Share) SAIC Motor (A-Share) 0.0 Dongfeng Motor Group Dongfeng Motor Group -0.1

Great Wall Motor Company 0.0 Great Wall Motor Company

Brilliance China Automoti… -1.0 Brilliance China Automoti…

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative PEG Ratio Inverted 30% Score to sector(/389) to market(/715) Alpha Model Score 1.28 Price to Book NTM 30% Valuation -0.15 Price to Book FY1 30% Growth -0.09 Price to Book LTM 28% Profitability NaN Earnings Momentum 0.65 Altman Z-Score -36% Price Momentum 1.07 ROIC 12m Fwd -36% Quality NaN Capital & Funding 0.08 Earnings Certainty -37% Liquidity -0.96 Earnings Certainty (NTM) -40% Risk -0.42 Technicals & Trading 1.01 -60% -40% -20% 0% 20% 40% 60% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

1 August 2016 14 Macquarie Research Guangzhou Automobile

Guangzhou Automobile Group (2238 HK, Outperform, Target Price: HK$11.40) Interim Results 2H/15A 1H/16E 2H/16E 1H/17E Profit & Loss 2015A 2016E 2017E 2018E

Revenue m 17,969 20,794 23,448 22,071 Revenue m 29,418 44,242 46,959 51,525 Gross Profit m 2,369 3,119 3,517 3,421 Gross Profit m 3,444 6,636 7,279 7,986 Cost of Goods Sold m 15,600 17,675 19,931 18,650 Cost of Goods Sold m 25,975 37,606 39,681 43,539 EBITDA m 1,045 2,069 2,322 2,322 EBITDA m 2,047 4,391 4,927 5,264 Depreciation m 935 913 950 1,010 Depreciation m 1,660 1,863 2,060 2,202 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 110 1,156 1,372 1,312 EBIT m 387 2,528 2,866 3,063 Net Interest Income m -331 -361 -361 -371 Net Interest Income m -721 -721 -741 -638 Associates m 2,804 2,574 2,902 3,115 Associates m 4,720 5,476 6,628 7,441 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 2,583 3,369 3,913 4,057 Pre-Tax Profit m 4,386 7,283 8,753 9,866 Tax Expense m -319 -445 -445 -499 Tax Expense m -400 -890 -997 -1,066 Net Profit m 2,264 2,925 3,468 3,558 Net Profit m 3,986 6,393 7,756 8,800 Minority Interests m 198 -119 -134 -135 Minority Interests m 226 -253 -287 -306

Reported Earnings m 2,462 2,806 3,334 3,424 Reported Earnings m 4,212 6,140 7,469 8,493 Adjusted Earnings m 2,462 2,806 3,334 3,424 Adjusted Earnings m 4,212 6,140 7,469 8,493

EPS (rep) 0.38 0.44 0.52 0.53 EPS (rep) 0.65 0.95 1.16 1.32 EPS (adj) 0.38 0.44 0.52 0.53 EPS (adj) 0.65 0.95 1.16 1.32 EPS Growth yoy (adj) % 67.6 60.4 35.4 22.0 EPS Growth (adj) % 31.9 45.8 21.6 13.7 PE (rep) x 13.1 9.0 7.4 6.5 PE (adj) x 13.1 9.0 7.4 6.5

EBITDA Margin % 5.8 10.0 9.9 10.5 Total DPS 0.20 0.29 0.35 0.40 EBIT Margin % 0.6 5.6 5.8 5.9 Total Div Yield % 2.3 3.3 4.1 4.6 Earnings Split % 58.5 45.7 54.3 45.8 Basic Shares Outstanding m 6,435 6,435 6,435 6,435 Revenue Growth % 54.7 81.6 30.5 6.1 Diluted Shares Outstanding m 6,435 6,435 6,435 6,435 EBIT Growth % nmf 317.9 1,145.2 13.5

Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E

Revenue Growth % 31.4 50.4 6.1 9.7 EBITDA m 1,727 4,037 4,576 4,919 EBITDA Growth % 179.1 114.5 12.2 6.9 Tax Paid m 0 0 0 0 EBIT Growth % nmf 553.4 13.4 6.9 Chgs in Working Cap m 2,462 -3,613 -104 425 Gross Profit Margin % 11.7 15.0 15.5 15.5 Net Interest Paid m -176 -365 -391 -319 EBITDA Margin % 7.0 9.9 10.5 10.2 Other m -123 -715 -798 -853 EBIT Margin % 1.3 5.7 6.1 5.9 Operating Cashflow m 3,891 -656 3,283 4,172 Net Profit Margin % 14.3 13.9 15.9 16.5 Acquisitions m 0 0 0 0 Payout Ratio % 30.6 30.0 30.0 30.0 Capex m -4,322 -3,500 -3,500 -3,500 EV/EBITDA x 8.2 5.6 4.8 4.4 Asset Sales m -2,679 -193 157 157 EV/EBIT x 10.9 6.9 5.8 5.3 Other m 7,743 3,441 4,014 4,895 Investing Cashflow m 742 -252 671 1,552 Balance Sheet Ratios Dividend (Ordinary) m -1,068 -1,287 -1,842 -2,241 ROE % 11.4 14.9 16.1 16.3 Equity Raised m 0 0 0 0 ROA % 0.6 3.6 3.8 3.7 Debt Movements m -2,469 0 -1,300 -1,300 ROIC % 0.9 5.6 5.4 5.5 Other m 165 254 254 254 Net Debt/Equity % 1.0 5.2 -0.1 -6.7 Financing Cashflow m -3,372 -1,033 -2,888 -3,286 Interest Cover x 0.5 3.5 3.9 4.8 Price/Book x 1.4 1.3 1.1 1.0 Net Chg in Cash/Debt m 1,274 -1,940 1,066 2,438 Book Value per Share 6.0 6.8 7.6 8.6 Free Cashflow m -431 -4,156 -217 672

Balance Sheet 2015A 2016E 2017E 2018E

Cash m 11,548 9,608 10,674 13,112 Receivables m 8,727 13,124 13,930 14,845 Inventories m 1,927 2,296 2,437 2,674 Investments m 3,327 3,411 3,499 3,441 Fixed Assets m 10,581 11,810 12,962 14,060 Intangibles m 6,647 7,529 8,429 8,784 Other Assets m 24,462 25,615 26,683 28,282 Total Assets m 67,220 73,394 78,615 85,198 Payables m 14,151 15,303 16,147 17,717 Short Term Debt m 4,279 4,279 3,479 2,679 Long Term Debt m 7,649 7,649 7,149 6,649 Provisions m 0 0 0 0 Other Liabilities m 1,650 1,819 1,869 1,929 Total Liabilities m 27,728 29,049 28,644 28,974 Shareholders' Funds m 38,647 43,500 49,127 55,379 Minority Interests m 845 845 845 845 Other m 0 0 0 0 Total S/H Equity m 39,491 44,344 49,971 56,224 Total Liab & S/H Funds m 67,220 73,394 78,615 85,198

All figures in Rmb unless noted. Source: Company data, Macquarie Research, July 2016

1 August 2016 15 Macquarie Research Guangzhou Automobile Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 June 2016 AU/NZ Asia RSA USA CA EUR Outperform 45.17% 56.00% 36.36% 43.16% 63.39% 45.91% (for global coverage by Macquarie, 6.27% of stocks followed are investment banking clients) Neutral 36.21% 28.59% 40.26% 50.38% 29.46% 36.96% (for global coverage by Macquarie, 6.33% of stocks followed are investment banking clients) Underperform 18.62% 15.41% 23.38% 6.46% 7.14% 17.12% (for global coverage by Macquarie, 5.38% of stocks followed are investment banking clients)

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 08-Aug-2014 2238 HK Outperform HK$11.50 13-Feb-2014 2238 HK Outperform HK$8.30

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited and Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FCA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions which are contrary to the opinions expressed in this research. Macquarie Research produces a variety of research products including, but not limited to, fundamental analysis, macro-economic analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated. Country-specific disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organisation of the Australian Securities Exchange. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the 1 August 2016 16 Macquarie Research Guangzhou Automobile Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker- dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and sent to US persons. Any US person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. The Research Distribution Policy of Macquarie Capital Markets Canada Ltd is to allow all clients that are entitled to have equal access to our research. United Kingdom: In the United Kingdom, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 193905). Germany: In Germany, this research is issued and/or distributed by Macquarie Capital (Europe) Limited, Niederlassung Deutschland, which is authorised and regulated by the UK Financial Conduct Authority (No. 193905). and in Germany by BaFin. France: In France, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (No. 193905). Hong Kong & Mainland China: In Hong Kong, research is issued and distributed by Macquarie Capital Limited, which is licensed and regulated by the Securities and Futures Commission. In Mainland China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing and distributing research. Only non-A share research is distributed into Mainland China by Macquarie Capital Limited. Japan: In Japan, research is Issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the Tokyo Stock Exchange, Inc. and Osaka Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member of Japan Securities Dealers Association). India: In India, research is issued and distributed by Macquarie Capital Securities (India) Pvt. Ltd. (CIN: U65920MH1995PTC090696), formerly known as Macquarie Capital (India) Pvt. Ltd., 92, Level 9, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Research Analyst having registration no. INH000000545. Malaysia: In Malaysia, research is issued and distributed by Macquarie Capital Securities (Malaysia) Sdn. Bhd. (Company registration number: 463469-W) which is a Participating Organisation of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission. Taiwan: In Taiwan, research is issued and distributed by Macquarie Capital Limited, Taiwan Securities Branch, which is licensed and regulated by the Financial Supervisory Commission. No portion of the report may be reproduced or quoted by the press or any other person without authorisation from Macquarie. Nothing in this research shall be construed as a solicitation to buy or sell any security or product. Research Associate(s) in this report who are registered as Clerks only assist in the preparation of research and are not engaged in writing the research. Thailand: In Thailand, research is produced, issued and distributed by Macquarie Securities (Thailand) Ltd. Macquarie Securities (Thailand) Ltd. is a licensed securities company that is authorized by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is an exchange member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. Macquarie Securities (Thailand) Ltd does not endorse the result of the Corporate Governance Report of Thai Listed Companies but this Report can be accessed at: http://www.thai-iod.com/en/publications.asp?type=4. South Korea: In South Korea, unless otherwise stated, research is prepared, issued and distributed by Macquarie Securities Korea Limited, which is regulated by the Financial Supervisory Services. Information on analysts in MSKL is disclosed at http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002 001000. South Africa: In South Africa, research is issued and distributed by Macquarie Equities South Africa (Pty) Ltd, a member of the JSE Limited. Singapore: In Singapore, research is issued and distributed by Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services license holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of research produced by Macquarie Capital (Europe) Limited, Macquarie Capital Markets Canada Ltd, Macquarie Equities South Africa (Pty) Ltd and Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures Act. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group

1 August 2016 17

Asia Research Head of Equity Research Industrials Telecoms Peter Redhead (Global – Head) (852) 3922 4836 Janet Lewis (Asia) (852) 3922 5417 Nathan Ramler (Asia, Japan) (813) 3512 7875 Jake Lynch (Asia – Head) (852) 3922 3583 Patrick Dai (China) (8621) 2412 9082 Danny Chu (Greater China) (852) 3922 4762 David Gibson (Japan – Head) (813) 3512 7880 Leo Lin (China) (852) 3922 1098 Soyun Shin (Korea) (822) 3705 8659 Conrad Werner (ASEAN – Head) (65) 6601 0182 Kenjin Hotta (Japan) (813) 3512 7871 Chirag Jain (India) (9122) 6720 4352 James Hong (Korea) (822) 3705 8661 Prem Jearajasingam (ASEAN) (603) 2059 8989 Automobiles/Auto Parts Inderjeetsingh Bhatia (India) (9122) 6720 4087 Kervin Sisayan (Philippines) (632) 857 0893 Lyall Taylor (Indonesia) (6221) 2598 8489 Janet Lewis (China) (852) 3922 5417 Transport & Infrastructure Zhixuan Lin (China) (8621) 2412 9006 Internet, Media and Software Leo Lin (China) (852) 3922 1098 Janet Lewis (Asia) (852) 3922 5417 Takuo Katayama (Japan) (813) 3512 7856 Wendy Huang (Asia, China) (852) 3922 3378 Corinne Jian (Taiwan) (8862) 2734 7522 James Hong (Korea) (822) 3705 8661 David Gibson (Asia, Japan) (813) 3512 7880 Azita Nazrene (ASEAN) (603) 2059 8980 Amit Mishra (India) (9122) 6720 4084 Hillman Chan (China, Hong Kong) (852) 3922 3716 Lyall Taylor (Indonesia) (6221) 2598 8489 Nathan Ramler (Japan) (813) 3512 7875 Utilities & Renewables Soyun Shin (Korea) (822) 3705 8659 Financials Alan Hon (Hong Kong) (852) 3922 3589 Abhishek Bhandari (India) (9122) 6720 4088 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Scott Russell (Asia) (852) 3922 3567 Oil, Gas and Petrochemicals Prem Jearajasingam (Malaysia) (603) 2059 8989 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Karisa Magpayo (Philippines) (632) 857 0899 Elaine Zhou (Hong Kong) (852) 3922 3278 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Keisuke Moriyama (Japan) (813) 3512 7476 Aditya Suresh (Asia, China) (852) 3922 1265 Commodities Leo Nakada (Japan) (813) 3512 6050 Anna Park (Korea) (822) 3705 8669 Colin Hamilton (Global) (44 20) 3037 4061 Chan Hwang (Korea) (822) 3705 8643 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Ian Roper (65) 6601 0698 Suresh Ganapathy (India) (9122) 6720 4078 Isaac Chow (Malaysia) (603) 2059 8982 Jim Lennon (44 20) 3037 4271 Thomas Stoegner (65) 6601 0854 Pharmaceuticals and Healthcare Lynn Zhao (8621) 2412 9035 (Malaysia, Singapore) Matthew Turner (44 20) 3037 4340 Lyall Taylor (Indonesia) (6221) 2598 8489 Abhishek Singhal (India) (9122) 6720 4086 Gilbert Lopez (Philippines) (632) 857 0892 Wei Li (China, Hong Kong) (852) 3922 5494 Economics Passakorn Linmaneechote (Thailand) (662) 694 7728 Property Peter Eadon-Clarke (Global) (813) 3512 7850 Conglomerates Larry Hu (China, Hong Kong) (852) 3922 3778 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Tanvee Gupta Jain (India) (9122) 6720 4355 David Ng (China, Hong Kong) (852) 3922 1291 David Ng (China, Hong Kong) (852) 3922 1291 Conrad Werner (Singapore) (65) 6601 0182 Raymond Liu (China, Hong Kong) (852) 3922 3629 Quantitative / CPG Gilbert Lopez (Philippines) (632) 857 0892 Wilson Ho (China) (852) 3922 3248 Gurvinder Brar (Global) (44 20) 3037 4036 Consumer and Gaming William Montgomery (Japan) (813) 3512 7864 Woei Chan (Asia) (852) 3922 1421 Corinne Jian (Taiwan) (8862) 2734 7522 Danny Deng (Asia) (852) 3922 4646 Linda Huang (Asia, China, Hong Kong) (852) 3922 4068 Abhishek Bhandari (India) (9122) 6720 4088 Per Gullberg (Asia) (852) 3922 1478 Zibo Chen (China, Hong Kong) (852) 3922 1130 Aiman Mohamad (Malaysia) (603) 2059 8986 Terence Chang (China, Hong Kong) (852) 3922 3581 Kervin Sisayan (Philippines) (632) 857 0893 Strategy/Country Satsuki Kawasaki (Japan) (813) 3512 7870 Patti Tomaitrichitr (Thailand) (662) 694 7727 Viktor Shvets (Asia, Global) (852) 3922 3883 Kwang Cho (Korea) (822) 3705 4953 Chetan Seth (Asia) (852) 3922 4769 KJ Lee (Korea) (822) 3705 9935 Resources / Metals and Mining David Ng (China, Hong Kong) (852) 3922 1291 Stella Li (Taiwan) (8862) 2734 7514 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Erwin Sanft (China, Hong Kong) (852) 3922 1516 Amit Sinha (India) (9122) 6720 4085 Coria Chow (China) (852) 3922 1181 Peter Eadon-Clarke (Japan) (813) 3512 7850 Fransisca Widjaja (65) 6601 0847 Anna Park (Korea) (822) 3705 8669 Chan Hwang (Korea) (822) 3705 8643 (Indonesia, Singapore) Stanley Liong (Indonesia) (6221) 2598 8381 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Hendy Soegiarto (Indonesia) (6221) 2598 8369 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Karisa Magpayo (Philippines) (632) 857 0899 Technology Lyall Taylor (Indonesia) (6221) 2598 8489 Chalinee Congmuang (Thailand) (662) 694 7993 Damian Thong (Asia, Japan) (813) 3512 7877 Gilbert Lopez (Philippines) (632) 857 0892 Emerging Leaders George Chang (Japan) (813) 3512 7854 Conrad Werner (Singapore) (65) 6601 0182 Daniel Kim (Korea) (822) 3705 8641 Alastair Macdonald (Thailand) (662) 694 7753 Jake Lynch (Asia) (852) 3922 3583 Allen Chang (Greater China) (852) 3922 1136 Aditya Suresh (Asia) (852) 3922 1265 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Find our research at Timothy Lam (China, Hong Kong) (852) 3922 1086 Patrick Liao (Greater China) (8862) 2734 7515 Mike Allen (Japan) (813) 3512 7859 Louis Cheng (Greater China) (8862) 2734 7526 Macquarie: www.macquarie.com.au/research Kwang Cho (Korea) (822) 3705 4953 Thomson: www.thomson.com/financial Kaylin Tsai (Greater China) (8862) 2734 7523 Reuters: www.knowledge.reuters.com Corinne Jian (Taiwan) (8862) 2734 7522 Marcus Yang (Taiwan) (8862) 2734 7532 Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx Conrad Werner (ASEAN) (65) 6601 0182 CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeff Evans (Boston) (1 617) 598 2508 Amelia Mehta (Singapore) (65) 6601 0211 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Angus Kent (Thailand) (662) 694 7601 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Christina Lee (UK/Europe) (44 20) 3037 4873 Justin Morrison (Singapore) (65) 6601 0288 Daniel Clarke (Taiwan) (8862) 2734 7580 Riaz Hyder (Indonesia) (6221) 2598 8486 Sales Trading Nick Cant (Japan) (65) 6601 0210 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Mike Keen (UK/Europe) (44 20) 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Eric Roles (New York) (1 212) 231 2559 Gino C Rojas (Philippines) (632) 857 0861

This publication was disseminated on 29 July 2016 at 17:25 UTC.