China autos and auto parts

EQUITY: AUTOS & AUTO PARTS

New wheels and new drivers Global Markets Research

9 July 2014

Replacement, financing, and favourable seasonality

to fuel sales growth upgrade in 2H14F Anchor themes We raise our 2014F PV sales volume growth forecast to 13% from 12% We remain constructive on the Defying market concerns over a slowdown in the beginning of the year, 2H14F outlook for new auto including a real estate market slowdown and more new car sales restrictions, sales, underpinned by growing new passenger vehicle (PV) sales volume grew at 11% YTD, which beats replacement demand and consensus of 8-10% at end-2013. We attribute such resilience to the availability of auto financing. We emergence of replacement demand, auto financing, and rising affordability in prefer SUVs, entry-level luxury, lower-tier cities. As a result, we raise our PV sales volume growth forecast for and OEMs with strong new 2014F and 2015F to 12.9% and 11.4% (from 12.1% and 11.0%), respectively. model pipelines. Any risk of a significant slowdown in 2H14F should be well-contained, owing to these structurally positive factors, as well as further macro policy easing, as Nomura vs consensus projected by the Nomura economics team, in our view. We expect the Street to Our 2014F new PV sales start raising its forecasts around the interim results season in August. volume growth forecast of 13% Key beneficiaries of these positive trends will be SUVs (partly replacement- y-y is above consensus of 10%. demand driven), entry-level luxury models (thanks to rising affordability and availability of auto financing), and OEMs with strong new model pipelines (to Research analysts capture the peak-season demand from September onwards), in our view. Replacement demand is starting to make a real positive impact China Autos & Auto Parts Replacement demand is an increasingly critical driver for China’s auto Benjamin Lo - NIHK demand, contributing more than first-time buyers to PV sales growth by 2015F, [email protected] we estimate. This might explain why slower property sales this year have not +852 2252 6220 led to a visible and negative impact on PV sales, since replacement demand Joseph Wong - NIHK [email protected] should be less affected by property sales, as opposed to first-time buyers who +852 2252 6111 typically purchase their cars after buying their homes, in our view. Auto financing will help fuel growth in lower-tier cities In China, approximately 20% of car buyers utilise auto financing, compared with typically 70% in overseas matured markets. We believe more financing packages will help fuel auto penetration, especially in lower-tier cities. Stock picks: SAIC (OEM top pick) and Nexteer (auto parts top pick)

In view of our positive sector view and the favourable seasonality in 2H, we expect the sector P/E (now 8.8x) to be re-rated towards 10-11x. We initiate coverage of SAIC (OEM top pick) and Nexteer (auto parts top pick) with Buy, both offering c40% upside potential. Among the rest, we favour GAC (Buy), Dongfeng (upgrade to Buy) and Brilliance (upgrade to Neutral) going into the interim results season in August for their likely strong 1H numbers, but around results, recommend switching into Great Wall (Buy) and Geely (upgrade to Buy) on our expected 2H recovery. We have no Reduce-rated stocks.

Fig. 1: Stock for action 2014F 2015F 2014F Market Cap Price TP Up/downside EPS EPS 2014F 2015F 2014F 2014F Div yld Ticker Rating (USDm) (HKD) (HKD) (%) Growth Growth PER (x) PER (x) PBR (x) ROE (%) Brilliance 1114 HK NEUTRAL ↑ 10,012 15.44 15.1 ↑ -2.2% 29% 13% 14.2 12.6 3.7 29.2% 1.1% Dongfeng 489 HK BUY ↑ 15,853 14.26 16.6 ↑ 16.4% 17% 17% 7.9 6.8 1.4 18.2% 1.9% Geely 175 HK BUY ↑ 3,373 2.97 3.76 ↑ 26.6% -23% 30% 10.1 7.8 1.1 12.1% 1.2% Great Wall 2333 HK BUY 12,872 31.65 40.0 ↓ 26.4% 13% 29% 8.2 6.3 2.2 29.6% 3.2% GAC 2238 HK BUY 8,005 9.59 11.5 ↑ 19.9% 61% 28% 11.5 8.9 1.3 12.2% 2.2% SAIC Motor 600104 Ch BUY 27,650 CNY15.56 CNY21.2 36.2% 11% 11% 6.2 5.6 1.1 15.8% 8.6% Johnson 179 HK NEUTRAL 3,297 7.14 6.90 ↓ -3.4% 4% 7% 15.2 14.2 1.7 12.0% 1.7% Minth 425 HK BUY 2,194 15.56 18.6 ↑ 19.5% 14% 16% 12.2 10.5 1.6 14.3% 3.3% Nexteer 1316 HK BUY 1,769 5.49 7.50 36.6% 11% 27% 10.9 8.6 2.0 19.6% 1.8% Source: Bloomberg, Nomura estimates. Initiating coverage for SAIC Motor and Nexteer. Pricing as of 4 July 2014. Note: For Johnson Electric, "14F" here refers to the fiscal year ending in March 2015.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | China autos and auto parts 9 July 2014

Contents

4 Summary of our new ratings, TPs and estimates; initiate coverage on SAIC and Nexteer

5 PV sales volume growth - 5M14 at 11%; we raise our FY14F forecast to above-consensus 13%

7 Replacement demand: A long-term underpinning growth factor

9 Auto financing – fuelling further auto penetration in China

13 Valuations: Sector P/E likely to head higher from August onwards

14 Seasonality factor

18 Investment risks

22 Appendix 1 – New models in 2H14

24 Appendix 2 – Market share trends

24 Luxury segment – Germany’s big 3 still the dominant force

26 Mid-size segment

27 Compact and subcompact segments – Competition remains intense

28 SUV segment

29 Appendix 3 - China auto parts industry

29 Overview

30 Competitive landscape

31 Future development

32 Appendix 4 – Global auto market outlook

33 Brilliance China

37 Dongfeng Motor

41 Geely Automobile

45 Great Wall Motor

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Nomura | China autos and auto parts 9 July 2014

49 Guangzhou Auto

53 SAIC Motor

63 Johnson Electric Holdings

67 Minth Group

71 Nexteer Automotive

92 Appendix A-1

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Nomura | China autos and auto parts 9 July 2014

Summary of our new ratings, TPs and estimates; initiate coverage on SAIC and Nexteer We update and revise our estimates and target prices for all auto stocks under our coverage universe in this report in view of the release of the latest sales volume data as well as the themes discussed herein. Additional details can be found in the individual company reports in the companies section. The two figures below summarise our estimate revisions and valuation methodologies. We have more detailed discussions on valuations for the sector and for each of the companies under our coverage in the valuation section and the company sections of this report. Regarding our ratings, we upgrade Dongfeng and Geely to Buy, and Brilliance to Neutral. We maintain our Buy rating on GAC and Great Wall. We also initiate coverage on two companies, SAIC and Nexteer, with Buy ratings. There is no Reduce rating in our coverage universe.

Fig. 2: Summary of revisions to our ratings, TPs and EPS forecasts

Current Previous % change 2014F EPS 2015F EPS TP 2014F EPS 2015F EPS TP 2014F 2015F Ticker Rating (old rating) TP (HKD) (loc) (loc) (HKD) (loc) (loc) (HKD) EPS EPS OEM Brilliance 1114 HK NEUTRAL (REDUCE) 15.1 0.87 0.98 9.3 0.78 0.87 62.4% 11.0% 12.2% Dongfeng 489 HK BUY (NEUTRAL) 16.6 1.43 1.68 12.4 1.16 1.27 33.9% 23.6% 31.7% Geely 175 HK BUY (NEUTRAL) 3.76 0.23 0.30 3.4 0.27 0.30 4.7% -15.0% 0.9% Great Wall 2333 HK BUY (BUY) 40.0 3.07 3.96 47.2 3.41 4.16 -15.3% -10.0% -4.9% GAC 2238 HK BUY (BUY) 11.5 0.66 0.85 10.5 0.69 0.88 9.5% -3.8% -3.5% SAIC Motor 600104 CH BUY (NR) CNY21.2 2.51 2.79 n.a. n.a. n.a. n.a. n.a. n.a. Auto parts Johnson Electric 179 HK NEUTRAL (NEUTRAL) 6.9 0.06 0.06 7.3 0.06 0.06 -5.5% -0.2% -0.2% Minth Group 425 HK BUY (BUY) 18.6 1.02 1.18 18.2 1.07 1.19 2.2% -4.9% -1.0% Nexteer 1316 HK BUY (NR) 7.5 0.06 0.08 n.a. n.a. n.a. n.a. n.a. n.a.

Source: Bloomberg, Nomura estimates Note: For Johnson Electric, "14F" here refers to the fiscal year ending in March 2015

Fig. 3: Summary of valuation methodology

Company Ticker Rating TP (HKD) Valuation methodalogy Nomura comments OEM Brilliance 1114 HK Neutral 15.1 13.0x mid 15F P/E (representing LT Given our concern on Brilliance's growth and valuation headwinds have alleviated, we average) rebased our target multiple back to LT average. Dongfeng Motor 489 HK Buy 16.6 8.5x mid 15F P/E Despite a near-term pick-up in earnings growth, we still assign LT-average as our (DFM) (representing long-term average) target P/E multiple, as we do not see a multi-year re-rating story yet. Geely 175 HK Buy 3.76 1.3x P/B 2015F BVPS (representing - We raised our TP to reflect the roll-forward 2015F BVPS, allowing us to look past the 1 SD below historical mean) restructuring disruption in 2014F and hence better reflect the potential recovery Great Wall Motor 2333 HK Buy 40.0 9x mid 15F P/E We assign a lower target P/E (from LT average of 11x to -1 SD below mean) given the (GWM) (representing -1 SD below LT H8 uncertainty. Guangzhou Auto 2238 HK Buy 11.5 12.1x mid 15F P/E A robust new model pipeline should continue to underpin strong earnings growth for Corp (GAC) (representing long-term average) GAC, hence justifying our target P/E at LT average. SAIC 600104 CH Buy CNY21.2 8x mid 15F P/E We consider 8x P/E to be reasonable when compared with Dongfeng Motor which has (representing LT average) a similar LT growth profile and a LT-average P/E multiple of 8.5x. Auto parts Minth 425 HK Buy 18.60 13.5x mid 15F P/E We assign +1 SD above mean as our target P/E multiple owing to its high earnings (representing +1 SD above mean) quality and track record. Johnson Electric 179 HK Neutral 6.90 DCF with WACC of 8.3% Our target price is based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53) Nexteer 1316 HK Buy 7.50 13.0x mid 15F P/E Instead of its own histrocal average, we benchmark our multiple to Nexteer's peer average for its short trading history.

Source: Bloomberg, Nomura estimates

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Nomura | China autos and auto parts 9 July 2014

PV sales volume growth - 5M14 at 11%; we raise our FY14F forecast to above- consensus 13% China’s auto industry has enjoyed a satisfactory start to 2014, with passenger vehicle (PV) demand posting 11% y-y growth in 5M14, largely due to the continued strong demand for SUVs, increasing popularity of entry-level luxury models, and an overall rising affordability for passenger cars. In the beginning of the year, we introduced our FY14F PV sales volume growth forecast of 12%, at a time when consensus was looking at 10% (with some bears predicting single-digit growth). While some risks have materialised, including the introduction of new vehicle sales restriction in more cities (eg. Tianjin and Hangzhou) and a generally soft Chinese economy, PV sales volume growth has remained healthy at 11% YTD.

Fig. 4: China PV unit sales by segment Fig. 5: China monthly PV sales

Sedan SUV Others MPV (units mn) 2013 2014 y-o-y 120% 2.0 20% 100% 2% 3% 3% 3% 7% 9% 10% 18.0% 1.6 16% 19% 18% 16% 15% 9% 7% 7% 80% 13.7% 6% 10% 11% 13% 17% 20% 23% 1.2 11.6% 12% 60% YTD: 11.1% 0.8 7.9% 8% 7.0% 40% 72% 69% 70% 69% 67% 64% 60% 0.4 4% 20% 0.0 0% 0% Jul Apr Oct Jan Jun Feb Mar Aug Sep Dec Nov 2009 2010 2011 2012 2013 2014F 2015F May

Source: China Auto Market, Nomura estimates Source: China Auto Market, Nomura research

In our previous sector reported dated 13th January 2014 (Anchor Report: China autos - Careful climbing), we argued a positive view on the longer-term growth outlook underpinned by a growing replacement demand and rising affordability. While sales momentum could taper during the summer months of the slow season for the industry, for 2014F and beyond, we believe end demand will branch out regionally into lower-tier cities that enjoy faster growth in consumer affordability. We also recognise a growing importance of replacement demand, which is also receiving some policy support as the central government is keen to phase out old vehicles that do not meet emission standards. We further argue in this report that the increasing availability of auto financing packages will underpin a faster auto penetration into lower tier cities. Hence, we raise our FY14F PV sales volume growth forecast to 13%, and also lift FY15F PV sales volume forecast slightly from 11% to 11.4%. For the long-term (for the next three to five years), we believe PV sales volume can continue to grow at high-single-digit to 10% level p.a.

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Nomura | China autos and auto parts 9 July 2014

Fig. 6: China annual PV sales and forecasts for 2009-15F

China auto sales forecast 2009 2010 2011 2012 2013 2014F 2015F Sedan 7,460,638 9,494,194 10,124,599 10,745,776 12,008,272 12,892,867 13,628,892 y-o-y 48.0% 27.3% 6.6% 6.1% 11.7% 7.4% 5.7% % of total 72.3% 69.1% 69.8% 69.4% 67.0% 63.7% 60.4% SUV 657,494 1,317,585 1,617,502 1,998,192 2,988,753 4,035,479 5,135,088 y-o-y 47.4% 100.4% 22.8% 23.5% 49.6% 35.0% 27.2% % of total 6.4% 9.6% 11.2% 12.9% 16.7% 19.9% 22.8% MPV 248,954 445,401 497,483 493,341 1,289,907 1,815,869 2,289,693 y-o-y 26.1% 78.9% 11.7% -0.8% 161.5% 40.8% 26.1% % of total 2.4% 3.2% 3.4% 3.2% 7.2% 9.0% 10.2% Others 1,948,277 2,491,704 2,258,436 2,256,260 1,641,065 1,495,163 1,495,163 y-o-y 83.2% 27.9% -9.4% -0.1% -27.3% -8.9% 0.0% % of total 18.9% 18.1% 15.6% 14.6% 9.2% 7.4% 6.6% PV sales 10,315,363 13,748,884 14,498,020 15,493,569 17,927,997 20,239,378 22,548,836 y-o-y 52.9% 33.3% 5.4% 6.9% 15.7% 12.9% 11.4%

Source: China Auto Market, Nomura estimates

For 2014F and beyond, we believe that end-demand will branch out regionally into lower- tier cities which enjoy faster growth in consumer affordability. Despite near-term headwinds on potentially more cities adopting new car sale restrictions, we remain constructive on the long-term growth prospects of China’s passenger vehicle market, with a growing importance of replacement demand and auto financing. In the near term, new car sales might actually benefit from the bringing-forward of demand from buyers on worries over more restrictions later. Any risk of a significant slowdown in 2H14F should be well-contained, owing to these structurally positive factors, as well as further macro policy easing as projected by the Nomura economics team, in our view. We expect the Street to start raising its forecasts around the interim results season in August.

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Nomura | China autos and auto parts 9 July 2014

Replacement demand: A long-term underpinning growth factor We believe a growing replacement demand will be a structural underpinning factor for China’s PV sales in the mid-to-long term. Replacement demand is less affected by property sales (as opposed to first-time car buyers who typically purchase their cars after buying their homes). Its growing significance within the mix of new PV sales should reduce volatility (and hence, improve visibility) of future PV sales. We estimate replacement demand rising from our estimate of 23% of new PV sales in 2011 to 34% in 2015F.

Fig. 7: Replacement demand and its proportion to total new PV sales

(units mn) Replacement demand (LHS) 9 Proportion to total PV sales (RHS) 40% 34.0% 8 31.1% 35% 28.7% 7 7.7 30% 25.6% 6.3 6 22.6% 25% 5.1 5 20% 4.0 4 3.3 15% 3 10%

2 5%

1 0% 2011 2012 2013 2014F 2015F

Source: China Auto Market, Nomura estimates

At end-2012, there were approximately 103mn PVs registered in China. Based on an estimated c 5% replacement ratio (according to our estimates and checks with industry sources), this would imply approximately 5.1mn units as replacement demand for 2013F – this coincides with a typical seven-year auto replacement cycle, as new PV sales in 2006 (i.e. seven years before 2013) was 5.15mn units. We note 5.1mn units out of a total estimated 17.8mn PVs sold in 2013F would imply that approximately 29% of China’s new PV sales in 2013F were from replacement demand, with a majority of 71% from first-time new car registrations. If we do the same exercise for 2011 and 2012, we find that the replacement demand as a % of China’s total new PV sales has gradually risen from our estimated 22.6% in 2011, to 25.6% in 2012, and further to 28.9% in 2013F. Based on the same methodology and retaining our assumption of a seven-year replacement cycle, we can assume that there could be 6.3mn units of replacement demand in 2014F (as 6.3mn units of new PVs were sold in 2007). As a result, replacement demand would further rise to 31.6% of total new PV sales volume. We expect replacement demand to contribute over half of new PVs sold in a year, similar to the global benchmark. This is an important structural development for the industry, as we believe replacement demand is less affected by property sales (as opposed to first-time car buyers who typically purchase their cars after buying their homes). This might explain the disconnect between China new property sales and PV sales volume growth this year.

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Nomura | China autos and auto parts 9 July 2014

Fig. 8: Replacement demand will be more important than new Fig. 9: China property sales (GFA) growth vs. passenger buyers as the source of PV sales volume growth, by our vehicle sales volume growth – the latter has been out- estimates performing since 4Q13

New buyers Replacement demand 60% GFA PV sales Total y-o-y PV growth 50% 15.7% 40% 12.9% 30% 11.4% 20% 8.1% 10% 6.5% 6.9% 4.6% 0% -10% 2.1% -20% 7.6% 6.4% 6.8% 4.8% -30% -12 -12 -13 -14 y y y p Jul-12 Jul-13 Jan-14 Jan-13 Jan-12 Mar-14 Mar-13 Mar-12 Se Sep-13 Nov-13 2011 2012 2013 2014F 2015F Nov-12 Ma Ma Ma

Source: China Auto Market, Nomura estimates Source: CEIC, CAAM, Nomura research

We believe that the likely beneficiary of a rising replacement demand in coming years should be SUVs, which should be able to capture a large share of the future replacement demand given their rising popularity among car buyers in recent years and the availability of more choices (more auto makers diversifying their product line-up into SUVs, and also auto makers offering more SUV types, e.g. compact SUVs). We forecast above-industry average sales volume growth of 35% y-y for SUVs.

Fig. 10: SUVs growing as a % of China’s total PV sales volume, 2008-2015F

(units mn) SUV (LHS) Proportion to total PV sales (RHS)

6.0 23% 25% 5.1 5.0 20% 20% 17% 4.0 4.0 13% 15% 11% 3.0 3.0 10% 2.0 10% 2.0 7% 6% 1.6 1.3 0.7 5% 1.0 0.4

0.0 0% 2008 2009 2010 2011 2012 2013 2014F 2015F

Source: China Auto Market, Nomura estimates

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Nomura | China autos and auto parts 9 July 2014

Auto financing – fuelling further auto penetration in China Auto finance arises when the prices of cars are out of the reach of individual purchasers without any borrowing. In China, car buyers are becoming younger along with the continuous growth of the market. Different from those in the past who usually opted for lump-sum payment, young buyers nowadays are more open-minded towards personal finance options, making auto financing increasingly well-received among the general public. With the introduction of various auto finance packages, OEMs have become more capable of lowering the financial barrier of first-time car purchases, attracting more young buyers, and at the same time preserving their loyalty to the brands. The launch of different auto financing products and the enhancement of market penetration have become the key for OEMs to compete for market share, especially in the segment of younger consumers. While the penetration rate in overseas mature markets has reached approximately 70%, the average penetration rate in China is approximately 20%, with those of premium brands being marginally over 30%. The funding for personal car finance is provided either by a retail bank or a specialist car financing company. In the US, some car manufacturers own their own car financing arms, such as Ford with the Ford Motor Credit Company and General Motors with its GMAC Financial Services arm, which has now been renamed and rebranded as Ally Financial. The finance is typically arranged by the dealer which provides the car. In the case of Ford Motor Credit Company, it offers consumer loans and leases to car buyers, as well as business loans and lines of credit to dealerships selling Ford Motor Company products. In China, to take advantage of the booming market, banks and other well established OEMs are all setting their foot in the industry.

Fig. 11: List of auto financing vehicles of Chinese OEMs

Year of establishment Registered Capital Terms of OEM Auto finance vehicle in China Cooperative partner (CNY mn) years Shareholding structure Dongfeng Group Dongfeng Automotive Finance 1987 nil 1,319 nil 100% OEM SAIC GM SGM Auto Finance 2004 General Motor 500 n.a 60% GM; 40% SAIC Volkswagen VW Finance (China) 2004 Nil 500 n.a 100% OEM Toyota Toyota Auto Finance (China) 2005 Nil 1,800 n.a 100% OEM Ford Ford Automotive Finance (China) 2005 Nil 500 n.a 100% OEM Daimler-Chrysler DaimlerChrysler Auto Finance (China) 2005 Nil 500 n.a 100% OEM Dongfeng PSA DF PSA Auto Finance 2006 PSA Netherland Finance 500 n.a 50% OEM; 50% partner Volvo Volvo Auto Finance (China) 2006 Nil 500 n.a 100% OEM Dongfeng Nissan DF Nissan Automotive Finance 2007 Nissan Motor 1,200 n.a 65% Nissan; 35% DFM Fiat Fiat Automotive Finance 2007 Nil 500 n.a 100% OEM Chery Chery Motor Finance Service 2009 Huishang Bank 1,000 n.a 80% OEM, 20% partner BMW Brilliance BMW Auto Finance (China) 2010 BMW AG 500 n.a 42% OEM; 58% partner GAC GAC-SOFINCO Automobile Finance 2010 SOFINCO S.A 500 n.a 50% OEM; 50% partner Sany Sany Auto Finance 2010 Hunan Trust/ China Valin 800 n.a 92.5% OEM; 7.5% partners FAW Car FAW Car Auto Finance 2011 Bank of Jilin 1,000 n.a 66% OEM; 34% partner Beijing Hyundai Beijing Hyundai Auto Finance 2012 Hyundai 1,000 n.a 53% Hyundai; 47% BAIC CQ Rural Comm.Bank/Yufu Asset Qingling Chongqing Auto Finance (CQAFC) 2012 500 n.a 41% OEM; 59% partners Mgt JAC Fortune Auto Finance 2013 Santander Consumer Finance 500 n.a 50% OEM; 50% partner Geely Geely Auto Finance 2013 BNP Paribas Personal Finance 900 30 80% OEM; 20% partner Greatwall Tianjin GreatWall Binyin Automotive Finance 2013 Tianjin Binhai Rural Comm.Bank 550 n.a 90% OEM; 10% partner

Source: Companies data, Nomura research

The auto financing industry has experienced rapid development in China since 1998, when it received the go-ahead from the central government. According to the PBOC, auto loan outstanding was at CNY43.6bn in 2001, and has grown to CNY158.3bn in 2008 and exceeded CNY300bn by 2011. In 2012, the industry grew by 30% y-y to CNY392bn and we expect its growth to continue exceeding the total new car sales volume growth in the foreseeable future. While traditionally a majority of the auto loans was granted through commercial banks directly, followed by credit card loans, we believe

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Nomura | China autos and auto parts 9 July 2014 auto financing vehicles established jointly by OEMs and banks will take an increasingly prominent role. Along with the emergence of younger car buyers, the enhancement of personal information system, the optimisation of auto financing regulation and a wider participation of OEMs, we expect the penetration rate of auto financing in China will continue to increase in coming years. The following are examples of some auto financing plans currently offered in the market.

Fig. 12: Some auto financing packages currently offered in the market

Name of auto finance company Downpayment Loan period End-payment Toyota Auto Finance (China) 30% or more of car price 12/24/36 months 50%-60% of original purchase price VW Finance (China) 20% or more of car price 12-60 months 25-50% of original purchase price Audi Finance (China) 30% or more of car price 12-60 months 25-50% of original purchase price DF Nissan Automotive Finance 20-50% of car price 12-60 months Less than 25% of original purchase price Beijing Hyundai Auto Finance 20-50% of car price 12-60 months up to 50% of original purchase price Fortune Auto Finance Flexible 12/24/36 months n.a

Source: Companies data, Nomura research

Fig. 13: Example of a typical package offered by Toyota Finance Services for buyers of Crown and Corolla in China

Monthly instalment (CNY) Model Car price (CNY) Period Downpayment Final payment "wisdom" loan plan Fixed instalment Crown 2.5 328,500 4,127 7,775 Crown 3.0 468,400 36 months 30% 50% 5,885 11,086 Corolla 142,800 1,794 3,380

Source: Companies data, Nomura research

During the Beijing Auto Show in April 2014, Mercedes introduced a new auto financing product to its clients called the “value-preserving hire purchase plan”. The plan, which is different from traditional plans, does not require car buyers to pay huge upfront deposits, thereby lowering the entry requirement of purchasing premium vehicles. The plan offers an installment period of 24-36 months, maximising customers’ choice on which model to purchase at the end of the hire purchase agreement. Take the purchase of an A180 model for CNY252,000 as an example. Should the buyer opt for the new plan, he is only required to pay CNY5,388 as the monthly rental after paying 10% of the vehicle price for each deposit and prepayment and to agree to drive 20,000 km mileage per annum within the 24-month contract period. With reference to the depreciation schedule of Mercedes, the residual value of the A180 would be CNY141,000 at the end of the contract. By then, the car buyer can choose to: 1) return the vehicle to the dealers, 2) buy the car at its residual value, or 3) pledge the vehicle for a new Mercedes model. Anecdotal evidence in overseas markets shows that most of the buyers would opt for the option of pledging the old vehicle for a new one. This would indirectly enhance the customer loyalty of the brand. From April 2013 to April 2014, the number of subscription to Mercedes Auto Finance rose 153% y-y, with contract activation rate up 118% y-y and total loan outstanding up 31% y-y, according to Mr. Alexandre Mallmann, CEO of Mercedes-Benz Auto Finance (China), who also targets to lift Mercedes’ auto-financing penetration rate to over 50% (which would exceed the typically 30%+ penetration rate enjoyed by premium brands in China during 2013). In the case of BMW in China, 99% of its existing dealers are already in partnership with BMW Auto Finance which enjoyed a market penetration rate of 30% in 2013 with an average loan per vehicle of CNY300,000, according to Mr. Liu Jun, head of sales of BMW Auto Finance (China). Some of the leading domestic brands have also started to take initiatives in auto financing. Great Wall made an announcement in June that its application for a business license for its financing company has been officially approved by Tianjin Binhai New Area's Administration for Industry and Commerce. The new company, known as the Tianjin Great Wall Binhai Banking Automobile Finance Company, possesses registered capital of CNY550 million (USD89.46mn) and is a 90/10 joint venture between Great

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Nomura | China autos and auto parts 9 July 2014

Wall, and the Tianjin Binhai Rural Commercial Bank. At this point, details are still lacking with respect to the services it will offer and how it will work together with other internal departments and dealerships. According to our channel survey, currently majority of Great Wall's financial services are done in cooperation with the China Construction Bank, whose loan application policies require over a week to complete, which delays the processing of manufacturers. In several cities the financial penetration rate for Great Wall's services is between 15% and 20%, lagging premium brands at 30%+. Now that Great Wall has established an independent financing company, its loan processing time should be reduced, thereby attracting more customers to use auto financing services as well as helping Great Wall boost its sales volume, in our view. The availability of more auto financing packages should further enhance affordability in lower-tier cities With car purchase restrictions mostly falling in Tier-1 cities, OEMs are likely to continue focusing their marketing efforts on lower-tier cities which are enjoying faster growth in income levels and consumer affordability. Take BMW for example -- 60% of its new 4S shops opened in 2013 were located in Tier-4 and -5 cities.

Rising affordability in lower-tier markets is indeed an increasingly critical growth driver to our forecasts. Using the past as a learning guide, we believe China’s auto industry typically witnessed a boom (or a recovery) when rising incomes intersect with a decline in car prices. Notably, the auto market experienced three up-trends in 2006, 2008 and 2011, which corresponded to an affordability threshold. We had projected the fourth boom to commence around the middle of 2013 and should continue for much of 2014F when the income band of tier-4 markets again reaches the threshold.

Fig. 14: China auto sales growth and levels of income

Disposalble income per Tier 1 Income Band (LHS) Tier 2 Income Band (LHS) Avg. car capita (CNY) Tier 3 Income Band (LHS) Ti er 4 In c o me Ban d (LHS) prices (CNY) Average car price (RHS) 45,000 Tier 3 region auto sales were 300,000 pulled forward due to auto 40,000 stimulus package together with Disposable income per Disposable income per increasing affordability 250,000 35,000 capita in tier 1 band capita in tier 2 band (disposable income per capita reached CNY18k , which reached CNY16k, this reached CNY14k) 30,000 triggered the first wave led to the 2nd up cycle 200,000 of strong auto sales 25,000 150,000 20,000

15,000 100,000

10,000 We expect disposable income per capita in 50,000 The 5,000 tier 4 band will reach the level that will drive sweet next up cycle in 2013-14 spot 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F China PV y-y growth: 54% 30% 22% 7% 53% 33% 5% 7% 16% 13%

Source: China Auto Market, Nomura estimates

Entry-level luxury models are best-positioned to capture the long-term growth trends We continue to prefer the mass mid-market / entry-level luxury segment (typically priced between CNY100,000 and CNY300,000), which should best capture these long-term trends of more auto financing and rising affordability. The market share gainers will likely be entry-level models of luxury brands (the low prices of which are approaching CNY250k only), in our view. We have seen very robust growth for luxury brands in China since 2009, with Germany’s big three brands -- Audi, BMW and Mercedes -- taking the lion’s share of the luxury segment. From 2009 to 2013, luxury brands’ new car sales volume has recorded a

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Nomura | China autos and auto parts 9 July 2014

CAGR of 37%, outperforming the total market’s CAGR of 13%. Luxury brands’ combined market share in China has risen from 2.6% in 2009 to 5.7% in 2013. The luxury segment has reached a matured stage in the US, with its market share relatively stable over the past five years, standing at 6.9% in 2013. If we take 6.9% as the market share level, which luxury brands can also repeat in China, this would imply a CAGR of 17% for luxury brands’ sales volume during 2013-16F. An upside surprise is possible if affordability and auto financing are to grow stronger than our expectations.

Fig. 15: Luxury brands’ market share in China, US and Japan – We expect luxury brands’ sales volume in China to record a 17% CAGR during 2013-16F before matching the 6.9% market share level seen in the US

9% China US Japan 17% CAGR 8% 6.9% 7% 6.5% 6.1% 6% 5.4% 5.7% 5% 4.4%

4% 3.3% 3% 2.6% 2% 1% 0% 2009 2010 2011 2012 2013 2014F 2015F 2016F

Source: JAMA, Autodata, China Auto Market, Nomura estimates

Fig. 16: Luxury brands’ market share Fig. 17: Luxury brands’ market share Fig. 18: Luxury brands’ market share breakdown – China, 2013 breakdown – US, 2013 breakdown – Japan, 2013

Land Land Land Merced Rover Rover Merced Rover es- 6% 2% es- 2% Mercedes-BenzMerced Benz Lexus Benz Lexus es-Benz19% Mercedes-Benz Lexus Mercedes-Benz 25% 30% 6% 19% 29% 26% 30%

Audi BMW Audi BMW Audi BMW 39% 30% 15% 29% 16% 26%

Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research

We believe the local production of luxury models will help bring down ASP, making them more affordable to a bigger addressable market, especially in lower tier cities in China.

Fig. 19: Local production of more luxury models in China, 2014F-16F Brand Model Domestic JV partner Expected year of commencement Audi A3 Sportback (HB) FAW 2014 Audi A3(NB) FAW 2014 Audi A4L 45 TFSI FAW 2014 Audi Q3 1.4T FAW 2014 Mercedes New C-Class BAIC 2014 Mercedes New E-Class BAIC 2014 BMW 2 series Brilliance 2015 BMW Another model Brilliance 2016 Infiniti Q50 LWB Dongfeng 2014 Land rover Range Rover Evoque Chery 2015 Source: China Auto Market, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Valuations: Sector P/E likely to head higher from August onwards Since our last Anchor report in January 2014 (Anchor Report: China autos - Careful climbing), China’s auto sector P/E valuation has remained range-bound between 8x-10x during 1H14 as we have predicted in our report. That said, the sector average P/E did not touch the trough valuation of 7.5x seen over the past two years, as China’s new PV sales volume has continued to grow at a healthy pace of 11% y-y in 5M14, which remains solid when compared with the single-digit growth rates recorded in 2011-2012. Currently, the sector average P/E stands at 8.8x. For 2H14F, we expect the sector valuation to be re-rated higher towards 10x-11x during 2H14F, as we forecast China’s new PV sales growth to remain strong at double-digits (i.e. no visible slowdown when compared with 1H14) and as monthly sales volume starts to bottom out from August onwards (see our discussions on seasonality factor below).

Fig. 20: China autos sector P/E

China PV sales growth (RHS) Automaker P/E (exl. BYD) (LHS) Historical average since 2005 20 120% 18 16 80% 14 His. avg = 9.6x 12 10 40% 8 6 0% 4 2 0 -40% Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 Sep-06 Sep-05 May-14 May-13 May-12 May-11 May-10 May-09 May-08 May-07 May-06 May-05

Source: Bloomberg, China Auto Market, Nomura research

Fig. 21: 2014 OEM share price relative performance Fig. 22: 2014 parts makers’ share price relative performance

Johnson Electric Minth 120 Dongfeng Motor GAC 150 Geely Great Wall Motor Nexteers Xinchen 140 110 Brilliance China SAIC 130 100 120 110 90 100 80 90 80 70 Dec 31 13 = Rebased to 100 70 Dec 31 13 = Rebased to 100 60 60 9-Apr 4-Jun 1-Jan 9-Apr 1-Jan 4-Jun 7-May 7-May 23-Apr 18-Jun 15-Jan 29-Jan 23-Apr 12-Feb 26-Feb 12-Mar 26-Mar 15-Jan 29-Jan 18-Jun 12-Mar 26-Mar 12-Feb 26-Feb 21-May 21-May

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Seasonality factor China’s auto industry’s seasonally slow summer sales (May-August) have, in our view, consistently provided investors with a good entry point since 2010, as car sales’ momentum typically picks up after summer and accelerates towards January (i.e. the month before Chinese New Year). Since 2010, China’s auto sector’s share prices have exhibited a positive correlation with this industry’s seasonality with stronger performance during 2H of the year, especially from August onwards. The same course of events has repeated in 2H13; we have also seen a strong rally for the sector since July-2013, with sales rising by an average 37% until November. This was in line with our expectation and consistent with the sequentially improving monthly sales numbers during 2H13.

Fig. 23: China monthly PV unit sales Fig. 24: China auto stocks on an average better performed in 2H

(units '000) 2011 2012 2013 2014 Index Jan 2010 = 100 2,000 350% 1,800 300% 250% 1,600 200% 1,400 150% 100% 1,200 50% 1,000 0% 10 11 14 10 y y y 800 p Jan 11 Jan 10 Jan 12 Jan 13 Jan 14 Se Sep 11 Sep 12 Sep 13 Ma Ma Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec May 12 May 13 Ma

Source: China Auto Market, Nomura research Source: Bloomberg, Nomura research

The share price performance was typically mixed during the first-half of an year. We have witnessed a similar pattern in 1H14. However, as monthly sales volume starts bottoming out from the slow season and sequentially improves towards January, we recommend investors start positioning in the China auto sector from the second half of July onwards, to capture the sequentially stronger sales volume from August till January next year that we are anticipating.

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Nomura | China autos and auto parts 9 July 2014

Fig. 25: China auto sector valuations

Mkt Cap PE PB ROE EPS Growth Div yield Net Gearing Company NameTicker Rating TP Up/ Downside Closing (USDmn) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F Brilliance China 1114 HK Equity NEUTRAL 15.1 -2.2% 10,012 15.44 14.2 12.6 3.7 2.9 29% 26% 29% 13% 1.1% 3.0% BYD 1211 HK Equity BUY 64.0 39.1% 17,580 46.00 56.9 35.4 3.7 3.4 7% 10% 176% 61% n.a 97.1% Dongfeng Motor 489 HK Equity BUY 16.6 16.4% 15,853 14.26 7.9 6.8 1.4 1.2 18% 19% 17% 17% 1.9% net cash Geely Automobile 175 HK Equity BUY 3.76 26.6% 3,373 2.97 10.1 7.8 1.1 1.0 12% 14% -23% 30% 1.2% net cash Great Wall 2333 HK Equity BUY 40.0 26.4% 12,872 31.65 8.2 6.3 2.2 1.7 30% 30% 13% 29% 3.2% net cash Guangzhou Auto 2238 HK Equity BUY 11.5 19.9% 8,005 9.59 11.5 8.9 1.3 1.2 12% 14% 61% 28% 2.2% 0.3% Sector average 22.1 15.3 2.5 2.1 18% 19% 63% 32% 1.5% Sector average (excl. BYD) 9.9 8.2 2.0 1.7 22% 22% 23% 22% 2.1% A-share PV makers SAIC Motor 600104 CH Equity BUY 21.2 36.2% 27,650 15.56 6.2 5.6 1.1 1.0 16% 15% 11% 11% 8.6% net cash Great Wall -A 601633 CH Equity Not rated n.a n.a 12,872 26.72 8.1 6.2 2.3 1.7 28% 28% 22% 30% 3.4% net cash Chongqing Changan 000625 CH Equity Not rated n.a n.a 9,357 12.58 8.7 6.7 2.3 1.7 30% 27% 93% 31% 1.3% 54.3% Guangzhou Auto -A 601238 CH Equity Not rated n.a n.a 8,005 7.74 11.8 9.0 1.4 1.2 12% 14% 60% 32% 2.3% net cash Faw Car 000800 CH Equity Not rated n.a n.a 2,584 9.85 10.4 9.2 1.7 1.4 18% 16% 53% 13% 0.2% 12.7% Beiqi Foton 600166 CH Equity Not rated n.a n.a 2,337 5.16 14.6 12.4 0.9 0.8 7% 8% 30% 18% 2.9% 7.4% Haima Auto 000572 CH Equity Not rated n.a n.a 1,060 4.00 10.7 7.3 0.9 n.a 8% 9% 107% 47% n.a net cash Dongfeng Auto -A 600006 CH Equity Not rated n.a n.a 980 3.04 n.a n.a n.a n.a n.a n.a n.a n.a n.a 18.6% Tianjin Faw Xiali 000927 CH Equity Not rated n.a n.a 915 3.56 n.a n.a n.a n.a n.a n.a n.a n.a n.a 57.6% Liaoning SG Auto 600303 CH Equity Not rated n.a n.a 433 4.33 n.a n.a n.a n.a n.a n.a n.a n.a n.a 62.9% Sector average 7.9 6.5 1.5 1.2 19% 18% 34% 21% 4.8% Dealers Zhongsheng Group 881 HK Equity NEUTRAL 11.2 9.6% 2,831 10.22 12.8 10.8 1.5 1.3 14% 13% 20% 18% 1.6% 101.1% China Zhengtong 1728 HK Equity BUY 5.80 27.5% 1,297 4.55 7.8 6.4 1.0 0.9 13% 14% 22% 22% 2.7% 40.1% Baoxin Auto 1293 HK Equity Not rated n.a n.a 2,329 7.06 10.4 7.9 2.5 1.9 26% 28% 39% 32% 1.9% 203.7% Dah Chong Hong 1828 HK Equity Not rated n.a n.a 1,111 4.70 7.9 6.8 0.9 0.8 12% 13% 21% 17% 4.8% 58.7% Yonda 3669 HK Equity Not rated n.a n.a 1,314 6.88 10.0 7.6 1.9 1.6 21% 23% 38% 32% 1.8% 161.4% China Harmony 3836 HK Equity Not rated n.a n.a 712 5.04 8.5 6.4 1.7 n.a 21% 22% 13% 34% 1.3% 92.5% Sunfonda 1771 HK Equity Not rated n.a n.a 276 3.57 n.a n.a n.a n.a n.a n.a n.a n.a n.a 66.7% Meidong 1268 HK Equity Not rated n.a n.a 227 1.76 6.1 3.7 1.5 n.a 34% 39% 64% 67% n.a 136.9% Sector average 9.9 7.9 1.6 18% 19% 27% 25% Auto-part makers Johnson Electric 179 HK Equity NEUTRAL 6.90 -3.4% 3,297 7.14 15.2 14.2 1.7 1.6 12% 12% 4% 7% 1.7% net cash Minth Group 425 HK Equity BUY 18.6 19.5% 2,194 15.56 12.2 10.5 1.6 1.5 14% 15% 14% 16% 3.3% net cash Nexteer 1316 HK Equity BUY 7.50 36.6% 1,769 5.49 10.9 8.6 2.0 1.7 20% 21% 11% 27% 1.8% 43.6% Xinchen 1148 HK Equity Not rated n.a n.a 829 4.99 17.4 12.9 2.1 1.8 n.a n.a 4% 35% n.a net cash Xingda Intl 1899 HK Equity Not rated n.a n.a 653 3.32 8.5 7.2 0.8 0.7 10% 11% 19% 19% 3.9% 16.4% Sector average 13.3 11.5 1.7 1.5 13% 13% 9% 17% 2.1% CV makers Weichai Power 2338 HK Equity Not rated n.a n.a 6,367 31.45 11.6 10.2 1.5 1.4 15% 15% 21% 14% 0.9% 3.8% Jiangling Motor 000550 CH Equity Not rated n.a n.a 3,712 28.37 12.2 8.8 2.3 1.9 19% 22% 18% 39% 3.0% net cash Sinotruk HK 3808 HK Equity Not rated n.a n.a 1,407 3.95 17.4 13.3 0.5 0.4 3% 3% 82% 31% 1.4% 27.6% Qingling Motor 1122 HK Equity Not rated n.a n.a 714 2.23 11.0 10.3 0.6 0.6 5% 6% 9% 6% 6.0% net cash Shenyang Jinbe 600609 CH Equity Not rated n.a n.a 544 3.09 n.a n.a n.a n.a n.a n.a n.a n.a n.a 125.4% Sector average 11.9 9.7 1.5 1.3 13% 15% 25% 22% 1.8% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For Johnson Electric, "14E" refers to the fiscal year ending in March 2015, and so on. Pricing as on 4 July 2014.

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Nomura | China autos and auto parts 9 July 2014

Fig. 26: Nomura Global Auto Research – peer valuation comparisons Autos Mkt Cap Current Target Potential P/ E EV / EBITDA P / BV ROE Div Yield Company Ticker ($mn) Rating Price Price Upside 14E 15E 14E 15E 14E 15E 14E 15E 14E 15E US GM GM US 63,215 Reduce $ 37.74 € 32.00 -15% 11.0x 10.3x 2.8x 2.6x 1.5x 1.6x 13.4% 14.8% 2.8% 2.9% Ford F US 66,076 Neutral $ 17.32 € 15.00 -13% 13.7x 13.3x 7.5x 6.8x 2.6x 2.6x 18.8% 19.4% 2.5% 2.8% Average -14% 12.4x 11.8x 5.2x 4.7x 2.0x 2.1x 16.1% 17.1% 2.7% 2.8% Median -14% 12.4x 11.8x 5.2x 4.7x 2.0x 2.1x 16.1% 17.1% 2.7% 2.8%

Europe BMW BMW GY 84,689 Buy € 95.15 € 90.00 -5% 11.5x 11.2x 4.0x 3.9x 1.6x 1.4x 14.4% 13.5% 2.8% 2.9% Daimler DAI GY 102,025 Neutral € 70.44 € 60.00 -15% 11.8x 11.1x 4.7x 4.4x 2.0x 1.8x 17.7% 16.9% 3.4% 3.4% Volkswagen VOW3 GY 121,236 Neutral € 191.95 € 170.00 -11% 9.4x 8.8x 3.7x 3.5x 1.0x 0.9x 10.8% 10.6% 2.6% 2.6% Fiat F IM 12,936 Reduce € 7.62 € 4.00 -48% 33.9x 9.2x 2.5x 2.6x 1.5x 1.3x 4.1% 15.6% 0.0% 0.0% Peugeot SA UG FP 4,917 Reduce € 11.28 € 8.00 -29% N/A 10.0x -0.8x -1.0x 0.4x 0.4x -0.9% 3.7% 0.0% 0.0% Renault RNO FP 26,098 Neutral € 70.57 € 64.00 -9% 10.5x 8.3x 4.2x 3.5x 1.1x 1.1x 10.5% 13.3% 2.4% 2.8% Volvo VOLVB SS 28,514 Neutral € 96.45 € 85.00 -12% 19.3x 15.8x 8.0x 7.1x 2.5x 2.3x 13.2% 15.1% 3.1% Average -20% 16.1x 10.6x 3.8x 3.4x 1.4x 1.3x 10.0% 12.7% 2.1% 2.0% Median -13% 11.7x 10.0x 4.0x 3.5x 1.5x 1.3x 10.8% 13.5% 2.6% 2.7%

India Ashok Leyland AL IN 1,602 Buy INR 36.10 INR 38.00 5% 358.2x 17.2x 17.6x 9.4x 2.1x 1.9x 0.6% 11.8% 0.0% 2.1% Bajaj Auto BJAUT IN 11,098 Neutral INR 2,299.20 INR 1,966.00 -14% 18.8x 17.5x 12.9x 11.8x 5.9x 5.0x 33.8% 30.9% 2.3% 2.5% Hero Motocorp HMCL IN 8,608 Neutral INR 2,583.95 INR 2,140.00 -17% 18.9x 16.9x 12.2x 11.1x 7.0x 5.8x 40.7% 37.5% 2.2% 2.5% Mahindra & Mahindra MM IN 11,534 Buy INR 1,230.05 INR 1,460.00 19% 18.4x 15.9x 11.5x 9.6x 3.5x 3.0x 20.7% 20.5% 1.2% 1.3% Maruti Suzuki MSIL IN 13,312 Buy INR 2,642.50 INR 2,286.00 -13% 22.3x 17.3x 10.9x 8.4x 3.3x 2.8x 15.6% 17.4% 0.6% 0.7% Tata Motors TTMT IN 24,969 Buy INR 469.45 INR 482.00 3% 10.4x 9.3x 4.7x 4.0x 1.9x 1.6x 20.1% 18.7% 0.4% 0.4% Average -3% 67.1x 15.7x 11.6x 9.0x 4.0x 3.4x 22.0% 22.8% 1.1% 1.6% Median -5% 18.9x 17.0x 11.8x 9.5x 3.5x 2.9x 20.7% 19.6% 1.1% 1.3%

China Brilliance 1114 HK 10,012 Neutral HK$ 15.44 HK$ 15.10 -2% 14.2x 12.6x 13.6x 12.0x 3.7x 2.9x 29.2% 26.0% 1.1% 1.2% BYD 1211 HK 17,580 Buy HK$ 46.00 HK$ 64.00 39% 56.9x 35.4x 16.7x 13.7x 3.7x 3.4x 6.8% 10.0% 0.0% 0.0% Dongfeng Motor 489 HK 15,853 Buy HK$ 14.26 HK$ 16.60 16% 7.9x 6.8x 6.8x 5.4x 1.4x 1.2x 18.2% 18.6% 1.9% 2.2% Geely Auto 175 HK 3,373 Buy HK$ 2.97 HK$ 3.76 27% 10.1x 7.8x 6.0x 4.3x 1.1x 1.0x 12.1% 14.0% 1.2% 1.6% Great Wall 2333 HK 12,872 Buy HK$ 31.65 HK$ 40.00 26% 8.2x 6.4x 1.3x 1.0x 2.2x 1.7x 29.6% 30.2% 3.2% 4.2% GAC 2238 HK 8,005 Buy HK$ 9.59 HK$ 11.50 20% 11.5x 8.9x 3.1x 2.4x 1.3x 1.2x 12.2% 14.2% 2.2% 2.8% ZhengTong Auto 1728 HK 1,297 Buy HK$ 4.55 HK$ 5.80 27% 7.8x 6.3x 6.2x 5.3x 1.0x 0.9x 12.8% 14.1% 2.7% 3.2% Zhongsheng 881 HK 2,831 Neutral HK$ 10.22 HK$ 11.20 10% 12.8x 10.8x 11.6x 11.0x 1.5x 1.3x 13.6% 13.2% 1.6% 1.9% SAIC 600104 CH 27,650 Buy CNY 15.56 CNY 21.20 36% 6.2x 5.6x 3.4x 3.3x 1.1x 1.0x 15.9% 15.4% 8.6% 9.6% Average 22% 15.1x 11.2x 7.6x 6.5x 1.9x 1.6x 16.7% 17.3% 2.5% 3.0% Median 26% 10.1x 7.8x 6.2x 5.3x 1.4x 1.2x 13.6% 14.2% 1.9% 2.2%

Korea Hyundai Motor 005380 KS 61,257 Buy KRW 228,000 KRW 280,000 23% 7.5x 6.7x 8.8x 8.6x 1.0x 0.9x 14.2% 13.9% 0.8% 0.8% Kia Motors 000270 KS 21,792 Neutral KRW 54,500 KRW 60,000 10% 6.0x 5.4x 5.7x 5.3x 0.9x 0.8x 16.9% 16.0% 1.7% 1.8% Average 16% 6.8x 6.1x 7.2x 6.9x 1.0x 0.8x 15.5% 15.0% 1.3% 1.3% Median 16% 6.8x 6.1x 7.2x 6.9x 1.0x 0.8x 15.5% 15.0% 1.3% 1.3%

Japan Nissan 7201 JT 40,680 Neutral JPY 991 JPY 1,000 1% 10.0x 9.3x 9.4x 8.4x 0.9x 0.8x 9.2% 9.4% 3.3% 3.6% Toyota 7203 JT 192,335 Buy JPY 6,201 JPY 8,000 29% 10.6x 9.3x 9.4x 8.0x 1.3x 1.2x 12.4% 13.0% 2.9% 3.4% Mazda 7261 JT 14,433 Buy JPY 493 JPY 670 36% 8.4x 8.8x 5.6x 4.7x 1.8x 1.5x 23.6% 18.7% 0.6% 2.0% Daihatsu 7262 JT 7,399 Neutral JPY 1,773 JPY 1,660 -6% 10.2x 10.7x 2.8x 2.5x 1.3x 1.2x 12.9% 11.3% 3.2% 3.2% Honda 7267 JT 63,017 Buy JPY 3,570 JPY 4,900 37% 10.3x 9.4x 8.9x 8.0x 1.0x 0.9x 10.1% 10.3% 2.6% 3.0% Suzuki 7269 JT 18,652 Buy JPY 3,395 JPY 3,900 15% 14.9x 13.1x 4.0x 3.3x 1.3x 1.2x 9.2% 9.7% 0.8% 1.0% Fuji Heavy Inds 7270 JT 22,465 Buy JPY 2,939 JPY 3,800 29% 9.8x 9.4x 4.3x 3.8x 2.4x 2.1x 27.2% 23.8% 2.4% 3.1% Yamaha Motors 7272 JT 6,339 Neutral JPY 1,854 JPY 1,800 -3% 13.1x 12.1x 7.6x 6.9x 1.5x 1.4x 12.2% 12.1% 1.6% 1.9% Average 17% 10.9x 10.3x 6.5x 5.7x 1.4x 1.3x 14.6% 13.5% 2.2% 2.7% Median 22% 10.3x 9.4x 6.6x 5.8x 1.3x 1.2x 12.3% 11.7% 2.5% 3.0% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For the Japanese stocks, non-automotive debt is included in the calculation of EV. Where the fiscal year does not end in December, "13E" refers to the fiscal year ending in March 2014, and so on; pricing as of 4 July 2014.

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Nomura | China autos and auto parts 9 July 2014

Fig. 27: Nomura Global Auto Research – peer valuation comparisons (continued) P/ E EV / EBITDA P / BV ROE Div Yield Auto Parts Mkt Cap Current Target Potential Company Ticker ($mn) Rating Price Price Upside 14E 15E 14E 15E 14E 15E 14E 15E 14E 15E US BorgWarner BWA US 15,274 N/R $ 67.01 N/A N/A 16.9x 14.2x 9.1x 7.5x 3.2x 2.5x 20.0% 19.8% 0.6% 0.5% Goodyear GT US 6,922 N/R $ 27.91 N/A N/A 8.6x 8.0x 4.3x 3.9x 2.6x 2.0x 34.3% 28.5% 0.8% 0.9% Johnson Controls JCI US 35,206 N/R $ 51.43 N/A N/A 13.8x 11.8x 9.6x 8.4x 2.5x 2.3x 19.5% 20.3% 1.8% 2.1% Magna International MGA US 24,411 N/R $ 110.38 N/A N/A 11.4x 9.9x 6.9x 6.3x 2.2x 2.1x 20.6% 21.5% 1.6% 1.6% TRW Automotive TRW US 10,406 N/R $ 91.04 N/A N/A 10.6x 9.5x 5.6x 5.0x 1.9x 1.5x 19.7% 18.0% N/A N/A Average N/A 12.3x 10.7x 7.1x 6.2x 2.5x 0.8x 22.8% 85.4% 1.2% 1.3% Median N/A 11.4x 9.9x 6.9x 6.3x 2.5x 2.1x 20.0% 6.6% 1.2% 1.2%

Europe Autoliv ALV US 10,198 N/R $ 108.03 N/A N/A 14.9x 13.1x 7.7x 6.7x 2.2x 1.9x 15.6% 15.5% 2.1% 2.3% Continental CON GY 46,489 N/R € 171.20 N/A N/A 11.9x 10.9x 6.0x 5.3x 2.5x 2.3x 23.4% 22.0% 2.1% 2.4% Faurecia EO FP 4,461 N/R € 29.19 N/A N/A 10.5x 7.5x 3.3x 2.7x 1.8x 1.4x 18.0% 20.9% 1.8% 2.3% Michelin ML FP 22,260 N/R € 88.26 N/A N/A 9.9x 9.1x 4.3x 3.8x 1.4x 1.3x 15.3% 15.1% 3.5% 3.9% Valeo FR FP 10,725 N/R € 99.41 N/A N/A 11.9x 10.7x 5.0x 4.5x 2.3x 2.0x 21.2% 20.1% 2.5% 2.7% Average N/A 11.8x 10.3x 5.2x 4.6x 2.1x 0.7x 18.7% 50.6% 2.4% 2.7% Median N/A 11.9x 10.7x 5.0x 4.5x 2.2x 1.9x 18.0% 8.0% 2.1% 2.4%

Korea Hyundai Mobis 012330 KS 27,144 Buy KRW 281,500 KRW 360,000 28% 7.0x 6.5x 6.5x 5.9x 1.2x 1.0x 17.9% 16.4% 0.7% 0.7% Hankook Tire 161390 KS 7,166 Buy KRW 58,400 KRW 74,000 27% 9.0x 8.0x 6.1x 5.0x 1.6x 1.3x 18.6% 17.7% 0.7% 0.8% Mando 060980 KS 2,264 Neutral KRW 127,000 KRW 145,000 14% 10.6x 9.3x 5.9x 5.7x 1.2x 1.1x 12.1% 12.5% 0.9% 0.9% Nexen Tire 002350 KS 1,471 Neutral KRW 15,400 KRW 15,000 -3% 9.3x N/A 6.7x N/A 1.6x N/A 18.0% NA 0.5% 0.0% Average 17% 8.8x 7.6x 6.2x 5.4x 1.4x 1.1x 16.8% 15.9% 0.7% 0.6% Median 20% 9.0x 7.4x 6.1x 5.4x 1.3x 1.1x 17.9% 16.8% 0.7% 0.7%

Japan Toyota Boshoku 3116 JT 2,005 Neutral JPY 1,105 JPY 1,050 -5% 13.9x 11.6x 3.1x 2.7x 0.9x 0.9x 6.9% 7.9% 2.0% 2.3% Yokohama Rubber 5101 JT 2,872 Neutral JPY 880 JPY 1,100 25% 8.0x 7.7x 4.7x 4.3x 1.1x 1.0x 14.4% 13.4% 2.7% 3.0% Bridgestone 5108 JT 28,546 Neutral JPY 3,724 JPY 4,300 15% 10.3x 9.7x 4.7x 4.3x 1.5x 1.3x 15.5% 14.5% 1.6% 1.7% Sumitomo Rubber Inds 5110 JT 3,821 Neutral JPY 1,487 JPY 1,550 4% 8.3x 7.9x 4.8x 4.4x 1.1x 1.0x 13.5% 12.7% 2.7% 2.8% Unipres Corp 5949 JT 1,116 Buy JPY 2,422 JPY 2,200 -9% 11.5x 8.6x 3.4x 3.0x 0.9x 0.8x 8.4% 10.2% 1.2% 1.4% NHK Spring 5991 JT 2,347 Neutral JPY 1,020 JPY 1,200 18% 9.0x 8.4x 3.5x 3.0x 1.0x 1.0x 12.3% 11.9% 2.2% 2.4% Toyota Industries 6201 JT 16,552 Neutral JPY 5,420 JPY 5,300 -2% 16.0x 15.0x 9.4x 8.6x 0.9x 0.8x 5.5% 5.6% 1.5% 1.6% GS Yuasa 6674 JT 2,745 Neutral JPY 679 JPY 600 -12% 17.3x 14.8x 8.9x 7.8x 1.8x 1.7x 11.1% 11.8% 1.5% 1.8% Denso Corp 6902 JT 37,734 Buy JPY 4,805 JPY 5,550 16% 13.8x 12.8x 5.2x 4.5x 1.3x 1.2x 9.9% 10.0% 2.1% 2.3% Stanley Electric 6923 JT 4,481 Neutral JPY 2,696 JPY 2,450 -9% 15.0x 13.1x 5.6x 4.8x 1.6x 1.5x 11.2% 11.7% 1.3% 1.5% Musashi Seimitsu 7220 JT 809 Buy JPY 2,649 JPY 3,000 13% 10.6x 9.7x 4.7x 4.2x 1.2x 1.1x 12.1% 11.9% 1.9% 2.1% Nissin Kogyo 7230 JT 1,306 Neutral JPY 2,059 JPY 2,400 17% 10.9x 10.1x 3.4x 2.9x 1.2x 1.1x 11.4% 11.3% 2.2% 2.4% Tachi-S 7239 JT 582 Buy JPY 1,753 JPY 1,800 3% 14.2x 9.0x 5.2x 3.4x 0.9x 0.8x 6.0% 9.4% 0.9% 1.1% NOK Corp 7240 JT 3,547 Neutral JPY 2,116 JPY 2,000 -5% 12.4x 11.3x 4.6x 4.0x 1.0x 0.9x 8.5% 8.7% 1.2% 1.4% Keihin Corp 7251 JT 1,187 Neutral JPY 1,639 JPY 1,700 4% 9.9x 9.3x 2.6x 2.2x 0.7x 0.7x 7.8% 7.8% 2.1% 2.3% Aisin Seiki 7259 JT 11,124 Buy JPY 4,030 JPY 4,800 19% 11.8x 10.7x 3.1x 2.8x 1.1x 1.0x 9.3% 9.6% 2.5% 2.7% 11.7x 11.1x 3.1x 2.9x 0.9x 0.9x 8.2% 8.2% 2.6% 2.7% Koito Mfg 7276 JT 4,248 Neutral JPY 2,699 JPY 2,600 -4% 14.4x 12.9x 4.7x 4.0x 1.8x 1.6x 13.0% 13.0% 1.3% 1.5% Nifco 7988 JT 1,788 Buy JPY 3,455 JPY 3,400 -2% 15.2x 13.1x 6.6x 5.7x 1.6x 1.5x 10.9% 11.7% 2.0% 2.5% Exedy Corp 7278 JT 1,457 Buy JPY 3,090 JPY 3,200 4% 12.5x 11.4x 4.2x 3.8x 1.0x 0.9x 7.9% 8.2% 2.4% 2.6% F.C.C. Co. Ltd. 7296 JT 959 Neutral JPY 1,951 JPY 2,000 3% 10.5x 9.9x 3.6x 3.4x 0.9x 0.8x 8.9% 8.8% 2.2% 2.3% Toyoda Gosei 7282 JT 2,703 Neutral JPY 2,133 JPY 2,100 -2% Takata Corp 7312 JT 1,808 Neutral JPY 2,220 JPY 2,450 10% 9.5x 8.2x 3.5x 2.9x 1.0x 0.9x 10.6% 11.2% 1.6% 1.8% TS Tech Co 7313 JT 2,094 Buy JPY 3,145 JPY 3,100 -1% 8.9x 8.4x 2.5x 2.1x 1.2x 1.1x 14.9% 14.0% 2.1% 2.2% Average 4% 12.0x 10.6x 4.6x 4.0x 1.2x 1.1x 10.4% 10.6% 1.9% 2.1% Median 3% 11.7x 10.1x 4.6x 3.8x 1.1x 1.0x 10.6% 11.2% 2.0% 2.3%

Hong Kong Johnson Electric 179 HK 3,297 Neutral HKD 7.14 HKD 6.90 -3% 15.2x 14.2x 8.8x 7.9x 1.7x 1.6x 12.0% 11.7% 1.7% 2.0% Minth Group 425 HK 2,194 Buy HKD 15.56 HKD 18.60 20% 12.2x 10.5x 8.9x 7.7x 1.6x 1.5x 14.3% 15.1% 3.3% 3.8% Nexteer 1316 HK 1,769 Buy HKD 5.49 HKD 7.50 37% 10.9x 8.6x 5.6x 4.7x 2.0x 1.7x 19.6% 21.1% 1.8% 2.3% Average 18% 12.7x 11.1x 7.8x 6.8x 1.8x 1.6x 15.3% 16.0% 2.3% 2.7% Median 20% 12.2x 10.5x 8.8x 7.7x 1.7x 1.6x 14.3% 15.1% 1.8% 2.3%

Taiwan Cheng Shin Rubber 2105 TT 8,232 Neutral TWD 76 TWD 92 21% 12.1x 11.3x 7.5x 6.9x 2.8x 2.4x 24.2% 22.7% 3.4% 3.6%

Indonesia Astra International ASII IJ 25,448 N/R IDR 7,350 N/A N/A 12.4x 11.3x 10.5x 9.5x 2.7x 2.4x 23.4% 22.7% 3.5% 3.8% Indomobil Sukses International IMAS IJ 1,159 N/R IDR 4,900 N/A N/A 11.7x 10.3x 13.8x 11.6x 1.8x 1.6x 16.4% 16.4% 1.3% 2.4% Average N/A 12.1x 10.8x 12.1x 10.6x 2.3x 2.0x 19.9% 19.5% 2.4% 3.1% Median N/A 12.1x 10.8x 12.1x 10.6x 2.3x 2.0x 19.9% 19.5% 2.4% 3.1% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For the Japanese stocks, non-automotive debt is included in the calculation of EV. Where the fiscal year does not end in December, "13E" refers to the fiscal year ending in March 2014, and so on; for Johnson Electric, "14E" refers to the fiscal year ending in March 2015, and so on; pricing as of 4 July 2014.

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Nomura | China autos and auto parts 9 July 2014

Investment risks New car sales restrictions – potentially more cities in 2H14F and 2015F but share price impact increasingly limited Currently, Beijing, Shanghai, Guangzhou, Tianjin and Guiyang have new car sales restrictions in place through a quota and/or bidding system for new car licence plates. Considering the government’s focus on air pollution issues, along with increasing traffic congestion, we believe the risk of more cities adopting new car sales restriction has risen, which may pose downside risks to China’s new car sales. The latest city to adopt new car sales restrictions has been Tianjin. According to a notice issued by the city government on 15 December, Tianjin will restrict traffic and issue new car license plates via bidding and lottery in a drive to fight traffic jams and air pollution. The city started to impose the quota on its new car plates on 16 December, requiring buyers to join the lottery or bid in auctions to win a plate. The notice did not give details on the quota or how many plates will go for lottery compared with auction. More details will be separately announced later. Measures suggested in the past include restricting the number of vehicles per household, limiting auto penetration growth, or reducing licence registration through a lottery system. Tianjin will also follow Beijing's step in adopting a similar traffic restriction scheme, which blocks cars from streets depending on the last digit of their plates, with two numbers banned each workday, said Miao Hongwei, head of the city’s traffic management bureau. The ban has taken effect since 1 March 2014. Moreover, the city has also banned vehicles with non-local plates from driving into the city's outer ring road during morning and evening rush hours on workdays, Miao said. According to the MEP (Ministry of Environmental Protection), 34 of 74 major cities in China did not qualify under the MEP’s AQI (Air Quality Index) survey in October 2013. We notice that within these 34 cities, most are tier-one and tier-two cities, and concentrated around the Hebei Province.

Fig. 28: List of cities selected in EV program and their air quality status

Most polluted Most polluted city city rank City name Total (units) rank City Total (units) 13 Beijing 北京 35,020 Xiangyang 襄阳 5,000 Shenzhen 深圳 35,000 11 Taiyuan* 太原 5,000 6 Tianjin 天津 12,000 Jincheng* 晋城 5,000 12 Xi‘an 西安 11,000 Ningbo* 宁波 5,000 10 Wuhan 武汉 10,500 Zhangzhutan* 长株潭 5,000 18 Shanghai 上海 10,000 Haikou* 海口 5,000 Guangzhou 广州 10,000 19 Chengdu* 成都 5,000 17 Chongqing 重庆 10,000 Kunming* 昆明 5,000 9 Zhengzhou 郑州 5,500 8 Lanzhou* 兰州 5,000 1, 2, 3, 5, 7, 10, 21 Qingdao 青岛 5,200 Hebei 河北省城市群 13,141 15, 20, 27 Guanhu 莞湖 5,100 31, 34 Zhejiang 浙江省城市群 10,100 Dalian 大连 5,000 Fujian 福建省城市群 10,000 Hefei 合肥 5,000 29 Jiangxi 江西省城市群 5,000 Xinxiang 新乡 5,000 Guangdong 广东省城市群 10,000 Total EV 257,561

Note: Ranked in order of most polluted city in China. Source: d1EV, MEP, Nomura research

Tianjin accounted for 2% of China’s total new car sales in 2012. Back in July 2013, the China Association of Automobile Manufacturers (CAAM) reported that there might be more cities in China planning to curb auto purchases to fight pollution and congestion, highlighting eight possibilities -- Tianjin, Chengdu, Chongqing, Hangzhou, Qingdao, Shenzhen, Shijiazhuang and Wuhan. We estimate that these eight cities account for 11% of China’s total new car sales, and if we assume a 30% cut in sales in these cities (based on past experience), China’s total new car sales could be reduced by 3.3%.

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Nomura | China autos and auto parts 9 July 2014

Over the next few months, we believe that the market will continue to anticipate and price in similar restrictions spreading into more cities (especially in Tier-1 and 2 cities in northern China where air pollution is more severe), thereby capping the valuation upside for the sector in the near-term at or below its long-term average of 10x P/E.

Fig. 29: China PV sales volume by province

Shandong 9% Chongqing 2% Jiangsu 8% Fujian 2% Guangdong 8% Guangxi 2% Zhejiang 7% Heilongjiang 2% Hebei 6% Inner Mongolia 2% Henan 5% Jiangxi 2% Beijing 4% Jilin 2% Sichuan 4% Tianjin 2% Anhui 3% Xinjiang 2% Hubei 3% Yunnan 2% Hunan 3% Gansu <1% Liaoning 3% Guizhou <1% Shaanxi 3% Hainan <1% Shanghai 3% Ningxia <1% Shanxi 3% Qinghai <1% Tibet <1%

Source: China Auto Market, Nomura research

Investors are aware of the possibility of more cities imposing new car sales restrictions based on our survey among investors. However, we believe the market might start to anticipate similar restrictions spreading into more cities (especially tier-one and tier-two cities in northern China, where air pollution is more severe), thereby creating an overhang on auto share prices in the very near term, i.e., the industry risk has risen. The impact to actual sales volume of OEMs and dealers should be manageable, since their sales efforts have been focusing on lower-tier cities where restriction possibility is much lower. In the near- term, new car sales might actually benefit from the bringing forward of demand from buyers on worries over likely more restrictions later. However, sales momentum might taper off during 2Q14F and through summer months, which also coincided with the industry’s slow season. More extreme anti-corruption measures likely We have been cautious on the near- to medium-term sales outlook for the high-end luxury segment (see our last anchor report dated 30 July, 2013, Fork in the road), owing to the anti-corruption measures taken by China’s new leadership. China's anti-waste battle started in December 2012, when the new leadership pledged to improve the Party work style and to end extravagance and bureaucracy. In June 2013, China's leaders launched a one-year "mass-line" campaign to boost ties between the Communist Party of China (CPC) members and the people, while cleaning up the undesirable work styles characterised by formalism, bureaucracy, hedonism and extravagance. We believe this initiative has legs and will likely persist into 2014F. Recently, on 25 November 2013, Chinese authorities announced that they will cancel all official cars for general use and only keep "necessary" official vehicles for law enforcement, confidential communications, emergency services and other uses under stipulation. The move comes as part of the latest written regulations to standardise fund management and ban Party and government extravagance. It regulated that general official travel will be carried out through public transportation, and officials may receive transportation subsidies. The regulation, issued by the CPC Central Committee and the State Council, China's cabinet, outlined the proper management of funds for various uses, including official travel, receptions, meetings and buildings. It is meant to guide the Party and government organs in practicing frugality and rejecting extravagance, and is

19

Nomura | China autos and auto parts 9 July 2014 an important move in the spirit of the recently concluded Third Plenary Session of the 18th CPC Central Committee. Institutions have also been ordered to be transparent in their spending and publicise in detail their use of funds, assets and public resources, except in cases that involve national secrets. However, the November regulation is the first time the rules were issued as a legal document in order to rein in power and kill extravagance at its root. Do note that government purchases of vehicles should account for approximately 1% of total new car sales, based on industry estimates. Moreover, since we have already been cautious on our outlook on high-end luxury car sales, any further downside risks to our forecasts will come from further stringent anti-waste measures than we have already been anticipating. Potential impact of Sino-Japan tensions The controversial visit to the Yasukuni Shrine by Japanese Prime Minister Shinzo Abe on 26 December has renewed the geopolitical tensions between China and Japan. Given concerns over a possible disruption to Japanese brands’ auto sales, share prices of Dongfeng and GAC, the two major local JV partners for Japanese brands, both declined 4% in subsequent two trading days. Among the two, Dongfeng is the one with a relatively smaller exposure to Japanese brands thanks to its JV with PSA (UG FP) and larger commercial vehicle contribution (see figure below), although we would recommend GAC as the recovery play should tensions begin to fade. On the other hand, if the tensions worsen, we believe Great Wall Motor could be the biggest beneficiary.

Fig. 30: Dongfeng’s (LHS) and GAC’s (RHS) sales volume breakdown, 5M14

Others Others 15% GAMC 4% 13% GAC GAC Fiat Honda DF Nissan 7% CV 35% 34% 15% GAC Mitsubishi 5% GAC Toyota DF Honda 36% 11% DF PSA 25%

Source: Companies, Nomura research

Looking back, the impact of previous political disputes on Japanese brands’ sales volume has been short-lived. Practical values such as quality, design, durability, and value-for-money remain the most influential factors in the decision-making process. Once the political tensions faded, Japanese brands’ sales volume typically managed to recover within a year. The latest example has been this year’s recovery after the anti- Japan protests in September 2012 over disputed islands.

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Nomura | China autos and auto parts 9 July 2014

Fig. 31: Impact on Japanese brands’ auto sales post anti-Japanese protests

200% Anti-Japan protest in 2005: rejecting Japan's bid to become a permanent 150% member of the UN security Council Anti-Japan protest in 2010: Chinese fishing boat collides with a Japanese 100% vessel

50%

0%

-50%

Anti-Japan protests in 2012 following -100% dispute over islands r 14 p Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Apr 04 Oct 04 Apr 05 Oct 05 Apr 06 Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 A Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan

Source: China Auto Market, Nomura research

So far we have not heard of any disruption to Japanese auto sales resulting from Abe’s shrine visit. While it is difficult at this point to determine if there will indeed be any impact in the future, we estimate that for every 1% reduction in Japanese brands’ sales volume, our Dongfeng’s and GAC’s 2014F EPS estimates will be cut by approximately 1%.

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Nomura | China autos and auto parts 9 July 2014

Appendix 1 – New models in 2H14

Fig. 32: Honda new compact SUV (2H14) Fig. 33: Honda New Odyssey (4Q14)

Source: Nomura research Source: Nomura research

Fig. 34: Honda Spirior (4Q14) Fig. 35: Toyota Levin (3Q14)

Source: Nomura research Source: Nomura research

Fig. 36: Toyota Ranz (2H14) Fig. 37: Toyota Crown Majesta (4Q14)

Source: Nomura research Source: Nomura research

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Nomura | China autos and auto parts 9 July 2014

Fig. 38: Mitsubishi Outlander (4Q14) Fig. 39: Peugeot 408 (3Q14)

Source: Nomura research Source: Nomura research

Fig. 40: Fiat Viaggio hatchback (4Q14) Fig. 41: Fiat Freemount (2H14)

Source: Nomura research Source: Nomura research

Fig. 42: Haval H2 (3Q14) Fig. 43: Chevrolet Cruze (4Q14)

Source: Nomura research Source: Nomura research

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Nomura | China autos and auto parts 9 July 2014

Appendix 2 – Market share trends

Luxury segment – Germany’s big 3 still the dominant force

Fig. 44: China’s entry-level luxury market share, 5M14 Fig. 45: China mid-end luxury market share, 4M14

Volvo Lexus Volvo S60/S80, Acura TL, C30/C70/S IS/CT, 3% 6% 0% 40/S60, 7% Cadillac XTS, 6%

MB Lexus ES/GS, 9% A/B/C/CLK/ Audi Audi SLK, 17% A3/A4L, A5/A6L, 39% 37% MB E- BMW 1,3 Class, 12% BMW 5 Series, Series, 34% 30%

Source: LMC automotive, Nomura research Source: LMC automotive, Nomura research

Fig. 46: China premium luxury market share, 5M14 Fig. 47: China luxury SUV market share, 5M14

Cadillac Infiniti Lexus Infiniti Lexus LS, Escalade/S FX/M/G, RX/LX/GX, QX/EX, 1% 0% RX, 5% 9% 4% Porsche Volvo XC, Panamera, 5% 8% Porsche Aud i Q MB S/CLS, Series, 29% Cayenne, 5% 34% Jaguar XF/XJ, 16% BMW X BMW 7 Series, Series, Land 19% Rover, 22% 15% MB Audi A8, ML/G/GL/G 16% LK/R, 12%

Source: LMC automotive, Nomura research Source: LMC automotive, Nomura research

Fig. 48: China entry-level luxury market share trend

Low price High price (CNY'000) (CNY'000) 2009 2010 2011 2012 2013 YTD-14 1 Audi A3/A4L 255.0 328.0 42% 38% 42% 43% 44% 39% 2 BMW 1,3 Series 242.0 498.0 24% 27% 25% 26% 31% 34% 3 MB A/B/C/CLK/SLK 588.0 918.0 22% 26% 24% 19% 16% 17% 4 Volvo C30/C70/S40/S60 285.0 500.0 8% 5% 7% 6% 5% 7% 5 Lexus IS/CT 269.0 645.0 4% 4% 3% 6% 4% 3%

Source: LMC automotive, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Fig. 49: China mid-end luxury market share trend

Low price High price (CNY'000) (CNY'000) 2009 2010 2011 2012 2013 YTD-14 1 Audi A5/A6L 499.0 660.0 61% 48% 41% 45% 40% 37% 2 BMW 5 Series 428.6 796.7 16% 19% 27% 32% 31% 30% 3 MB E-Class 438.0 751.0 5% 16% 19% 12% 11% 12% 4 Lexus ES/GS 359.0 654.0 11% 12% 8% 7% 9% 9% 5 Cadillac XTS 350.0 570.0 0% 0% 0% 0% 5% 6% 6 Volvo S60/S80 283.0 529.8 6% 5% 6% 5% 4% 6% 7 Acura TL 498.0 645.0 0% 0% 0% 0% 0% 0%

Source: LMC automotive, Nomura research

Fig. 50: China premium luxury market share trend

Low price High price (CNY'000) (CNY'000) 2009 2010 2011 2012 2013 YTD-14 1 MB S/CLS 768.0 968.0 37% 37% 33% 41% 28% 29% 2 BMW 7 Series 928.0 2,518.0 35% 36% 34% 24% 25% 22% 3 Audi A8 871.0 2,648.0 10% 8% 11% 15% 17% 16% 4 Jaguar XF/XJ 550.0 1,888.0 4% 4% 5% 6% 15% 16% 5 Porsche Panamera 1,128.0 3,088.0 0% 3% 7% 7% 6% 8% 6 Infiniti FX/M/G 799.0 1,218.0 11% 10% 8% 8% 8% 9% 7 Lexus LS 1,398.0 2,388.0 3% 2% 1% 0% 0% 0%

Source: LMC automotive, Nomura research

Fig. 51: China luxury SUV market share trend

Low price High price (CNY'000) (CNY'000) 2009 2010 2011 2012 2013 YTD-14 1 Audi Q Series 383.6 567.7 9% 28% 27% 31% 31% 34% 2 Land Rover 398.0 3,398.0 14% 12% 11% 16% 14% 15% 3 MB ML/G/GL/GLK/R 408.0 558.0 23% 16% 19% 14% 13% 12% 4 BMW X Series 282.0 498.0 28% 19% 17% 15% 22% 19% 5 Porsche Cayenne 866.0 2,630.0 10%5%4%5%5%5% 6 Volvo XC 389.9 659.3 7% 6% 6% 6% 5% 5% 7 Cadillac Escalade/SRX 1,588.0 2,380.0 1% 5% 6% 6% 5% 5% 8 Lexus RX/LX/GX 515.0 945.0 7% 7% 8% 6% 4% 4% 9 Infiniti QX/EX 1,498.0 1,528.0 1% 2% 2% 1% 1% 1%

Source: LMC automotive, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Mid-size segment

Fig. 52: China mid-size market share 5M14

Volkswagen Passat NMS, 14.7%

Volkswagen Others, 31.6% Magotan, 11.3%

Hyundai Mistra, 6.4% Buick Lacrosse, Chevrolet Malibu, 3.9% 6.0% Mazda Mazda6, 4.0% Toyota Camry NG, 6.0% Buick Regal, 5.1% Nissan Teana, Ford Mondeo, 5.7% 5.3%

Source: LMC automotive, Nomura research

Fig. 53: China mid-size market share trend

Low price High price (Rmb'000) (Rmb'000) 2010 2011 2012 YTD-13 YTD-14

1 Volkswagen Passat NMS 129.8 303.8 0.0% 6.2% 12.5% 12.1% 14.7% 2 Volkswagen Magotan 155.8 334.8 5.3% 5.5% 10.3% 10.0% 11.3% 3 Hyundai Mistra 129.8 189.8 0.0% 0.0% 0.0% 0.9% 6.4% 4 Chevrolet Malibu 162.9 232.9 11.6% 0.0% 3.1% 5.3% 6.0% 5 Toyota Camry NG 137.8 329.8 0.0% 0.0% 7.0% 7.1% 6.0% 6 Nissan Teana 150.1 371.8 9.5% 9.9% 5.3% 5.7% 5.7% 7 Ford Mondeo 129.8 256.8 0.0% 0.0% 0.0% 1.9% 5.3% 8 Buick Regal 139.8 259.9 6.4% 5.0% 5.1% 4.6% 5.1% 9 Mazda Mazda6 135.25 214.8 7.1% 5.8% 5.1% 5.0% 4.0% 10 Buick Lacrosse 226.9 369.9 5.4% 6.5% 5.1% 4.8% 3.9%

Source: LMC automotive, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Compact and subcompact segments – Competition remains intense

Fig. 54: China compact market share, 5M14 Fig. 55: China subcompact market share, 5M14

Volkswagen Volkswagen Volkswagen Lavida, 7.6% Santana, Sagitar NCS, Others, Chevrolet Sail, 14.6% 4.4% 4.2% 24.6%

Volkswagen Jetta Series, 4.2% Hyundai Nissan Verna, 13.1% Buick Livina, 3.8% Excelle, 4.1%

Others, Ford Focus Chery E3, 58.3% NG, 3.7% 4.0% Buick Excelle Kia K2, 9.1% XT/GT, 3.6% Toyota Yaris , 4.6% Chevrolet Volkswagen Hyundai Changan Volkswagen Cruze, 3.5% Polo, 8.7% Elantra New Bora, Yuexiang V3, Beijing E Series, 5.1% Toyota Vios, Langdong, 3.4% 4.8% 7.7% 3.1%

Source: LMC automotive, Nomura research Source: LMC automotive, Nomura research

Fig. 56: China compact market share trend

Low price High price (Rmb'000) (Rmb'000) 2010 2011 2012 2013 YTD-14 1 Volkswagen Lavida 112.9 160.9 5.2% 4.8% 4.3% 6.2% 7.6% 2 Volkswagen Santana 84.9 123.8 4.6% 1.9% 1.8% 2.6% 4.4% 3 Volkswagen Sagitar NCS 101.8 185.8 0.0% 0.0% 3.1% 3.9% 4.2% 4 Volkswagen Jetta Series 75.8 88.8 4.6% 4.2% 4.2% 3.8% 4.2% 5 Buick Excelle 100.0 187.3 2.9% 4.9% 4.8% 4.2% 4.1% 6 Ford Focus NG 98.8 169.9 0.0% 0.0% 2.5% 3.6% 3.7% 7 Buick Excelle XT/GT 969.0 118.9 3.9% 2.6% 3.0% 2.9% 3.6% 8 Chevrolet Cruze 96.9 159.9 3.6% 4.3% 4.0% 3.5% 3.5% 9 Volkswagen New Bora 82.8 146.8 1.7% 4.0% 3.9% 3.4% 3.4% 10 Hyundai Elantra Langdong 105.8 149.8 0.0% 0.0% 1.4% 3.0% 3.1%

Source: LMC automotive, Nomura research

Fig. 57: China subcompact market share trend

Low price High price (Rmb'000) (Rmb'000) 2010 2011 2012 2013 YTD-14

1 Chevrolet Sail 81.9 101.9 131,381 8.7% 12.5% 12.9% 14.6% 2 Hyundai Verna 73.9 106.9 44,359 6.1% 9.1% 9.3% 13.1% 3 Kia K2 72.9 109.9 125,835 2.6% 6.4% 6.7% 9.1% 4 Volkswagen Polo 85.8 158.9 - 7.4% 7.0% 7.2% 8.7% 5 Toyota Vios 69.8 123.9 132,635 0.6% 0.4% 1.3% 7.7% 6 Beijing E Series 53.8 86.8 132,259 0.0% 0.9% 2.9% 5.1% 7 Changan Yuexiang V3 57.9 67.9 - 0.0% 0.7% 3.6% 4.8% 8 Toyota Yaris 87.0 106.8 74,005 0.8% 0.5% 0.6% 4.6% 9 Chery E3 52.9 67.9 111,114 0.0% 0.0% 1.4% 4.0% 10 Nissan Livina 85.8 129.8 - 4.3% 3.9% 3.2% 3.8%

Source: LMC automotive, Nomura research

27

Nomura | China autos and auto parts 9 July 2014

SUV segment

Fig. 58: China SUV market share 5M14

Haval H6, 6.5% Volkswagen Tiguan, 6.1% Honda CR-V, 4.3%

Hyundai ix35, 3.4% Ford Kuga, 3.0%

Toyota RAV4, 2.9% Others, 63.8% Audi Q5, 2.5%

Changan CS35, 2.5% Nissan Qashqai, BYD S6, 2.4% 2.5%

Source: LMC automotive, Nomura research

Fig. 59: China SUV models market share trends

Low price High price (Rmb'000) (Rmb'000) 2010 2011 2012 2013 YTD-14 1 Haval H6 92.8 170.8 0.0% 0.5% 6.3% 5.9% 6.5% 2 Volkswagen Tiguan 189.8 309.8 4.7% 6.5% 7.1% 5.7% 6.1% 3 Honda CR-V 193.8 262.8 8.4% 7.7% 6.5% 5.2% 4.3% 4 Hyundai ix35 169.8 242.8 3.8% 5.0% 4.2% 4.3% 3.4% 5 Ford Kuga 193.8 275.8 0.0% 0.0% 0.0% 2.6% 3.0% 6 Toyota RAV4 183.8 272.8 3.7% 4.8% 3.8% 3.2% 2.9% 7 Audi Q5 358.5 567.7 5.9% 2.9% 3.6% 2.9% 2.5% 8 Changan CS35 78.9 93.9 2.2% 0.0% 0.3% 2.1% 2.5% 9 Nissan Qashqai 139.8 219.8 0.0% 5.3% 4.1% 3.4% 2.5% 10 BYD S6 89.9 136.9 4.9% 2.9% 3.4% 2.5% 2.4%

Source: LMC automotive, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Appendix 3 - China auto parts industry

Overview Auto parts include any component used to assemble a vehicle, and normally include non-core external parts such as trim, body structure and tires, as well as core components such as the gear box and other motion systems. The former is typically characterised by lower-value products that OEMs tend to outsource without hesitation of the leakage of technological patents and licenses. In contrast, the latter usually involves high-precision products, which OEMs tend to develop themselves and are reluctant to delegate to third-party producers. Along with the strong growing momentum of the country's automotive industry, demand for spare parts, components and accessories has also picked up correspondingly in the past 10 years. According to Wind, the sector has been recording a CAGR of 28% since 2004, outperforming the automotive sector’s 19% growth. We estimate that the sector currently accounts for 37% of China’s entire auto industry. Compared to other developed market such as the US and Japan, of which the contribution of the auto-parts industry ranges from 60% to 70%, we still see ample room for China’s auto-parts industry to grow. In the first four months of this year, the auto-parts industry’s revenue grew at 11.8% y-y, and remains strong and comparable to that of whole vehicles.

Fig. 60: Industry revenue Fig. 61: Revenue growth for auto and auto-parts industry

(CNY bn) Automotives Auto-parts 45% 40% 42% 3,000 2,710 40% 37% 2,500 2,227 35% 1,978 37% 2,000 30% 1,632 25% 26% 26% 25% 29% 1,500 20% 27% 21% 1,147 20% 24% 914 893 1,000 724 15% 13% 527 375 500 312 10% 12% 11% 9% 9% 0 5% 8% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

4M14 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Wind, Nomura research Source: China Auto Market, Wind, Nomura research

Interestingly, we note that most of the industry growth in the past was derived from domestic players instead of foreign players, as opposed to what has been happening in the whole vehicle segment. However, until today, China remains a net importer of auto- parts, despite the fact that OEMs in China are localising their production in order to fulfil the regulatory requirement and to lower production cost.

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Nomura | China autos and auto parts 9 July 2014

Fig. 62: Import growth for whole vehicle vs. auto parts Fig. 63: China is still a net importer of auto parts

Motor vehicles Auto-parts USD bn 120% 3.0 99.0% 100% 2.5

80% 2.0 1.5 60% 45.5% 46.3% 46.4% 1.0 38.7% 40% 40.6% 0.5 19.7% 15.0% 33.5% 10.2% 0.0 20% 7.6% 10.4% 19.3% -4.5% 12 13

2.5% 11 12 13

-0.5 y y y 0% p p

1.4% Jul 11 Jul 12 Jul 13 Jan 13 Jan 14 Jan Jan 12 Jan Jan 11 Jan Mar 13 Mar 14 Mar 12 Mar 11 Sep 11 Se Se Nov 12 Nov 13 Nov 11 Ma Ma -1.0 Ma -20% -10.3% -1.4% 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1.5

Source: China Auto Market, Nomura research Source: Wind, Nomura research

Competitive landscape Despite the strong revenue growth, industry profitability, as indicated by its gross margins, is gradually declining. With low brand identity and high economies of scale, the low entry barriers have attracted thousands of newcomers rushing into the market over the past 10 years. According to Wind, the number of players increased from around 3,500 in 2003 to over 10,955 in 4M14. Potential price pressure exerted by OEMs Downstream OEMs have traditionally gained stronger bargaining power in pricing negotiation over upstream component producers. The former are generally not obligated to accept a price increase as they often reserve the ultimate right to terminate their purchase orders. Even when part suppliers successfully pass on a price increase, in most cases there will be delays before they could do so effectively. OEMs will also periodically request discounts from part suppliers, typically 1-3% per year, according to Nexteer, when the price protection period is over for their new models.

Fig. 64: Number of enterprises in the auto-parts industry Fig. 65: Gross margins for auto and auto-parts industry

Gross Units No. of enterprises y-y growth autos auto-parts margins (%) 14,000 26% 30% 27% 19 17% 16% 11,583 12,000 10,955 20% 23% 10,468 10,333 18 9,341 10,000 13% 8,396 10% 17 8,303 11% 7,171 11% 11% 8,000 0% 16 6,142 5,415 6,000 -10% 15 4,278 4,000 -20% 14 2,000 -30% 13 -28% 0 -40% 12 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 4M14 Jun 08 08 Oct Jun 09 09 Oct Jun 10 10 Oct Jun 11 11 Oct Jun 12 12 Oct Jun 13 13 Oct Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14

Source: Wind, Nomura research Source: Wind, Nomura research

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Nomura | China autos and auto parts 9 July 2014

Fig. 66: Porter’s 5 forces model for the China auto-parts industry

New High risk from new entrants: High buyer power: - Low brand identity for parts producers entrants - Lower OEM concentration vs parts suppliers in - High economies of scale and easily China achievable - OEMs buy in bulk - Relatively low capital requirment - Capability of backward integration - No absolute cost advanage over peers - Low switching costs given low brand identity for auto parts

Peer competition

Suppliers Buyers High intensity of rivalry

Medium supplier power: - Mostly trade through an exchange and material supplier with long-term contract - The use of financial derivatives mitigates price Medium threats from substitutes: risks - Low propensity to self production (OEMs) - Unlikely for parts producers to move into a more Substitutes given possible cost economies achieved capital and regulated indutry from outsourcing

Source: Nomura research

Future development • More of the design process to be transferred to tier-1 suppliers. We have been seeing OEMs involve their tier-1 suppliers in the vehicle design and customisation process where suppliers are required to tailor-make their own solutions to automakers to improve product design. We expect tier-1 suppliers to shoulder more responsibilities in the process should OEMs continue to see margins pressure. • More local players to be admitted to automakers’ global purchase systems. Some international OEMs such as Nissan constantly add in new suppliers to their worldwide purchase systems, which enables players to bid for contracts on a global basis once they are admitted. Chinese parts producers have always enjoyed cost advantages compared to most of their global peers. With improving production technology and better quality control, we expect more local players to gain admission to the systems and be able to capture more overseas opportunities. • Industry consolidation looks inevitable. With over 10,000 parts producers supplying only c120 automakers, we believe the industry is overcrowded. Smaller and inefficient suppliers are likely to be phased out in the near term, in our view. • Higher cost efficiency is desired. Lower product pricing and rising production costs have continuously put pressure on parts suppliers’ profit margins. We expect industry players to adopt more cost-efficiency measures to maintain profitability and survive.

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Nomura | China autos and auto parts 9 July 2014

Appendix 4 – Global auto market outlook

Becoming more positive on Europe: a 4% growth likely in both 2014F/15F Our auto analyst Masataka Kunugimoto now expects the region to grow by 4.3% y-y to 14.34mn units in 2014F and by a further 3.9% to 14.90mn units in 2015F. He thinks the European auto market has not only bottomed, but has also started to recover due to three reasons: 1) six consecutive years of declining sales leading to an aging vehicle fleet and thus creating associated pent-up demand, 2) improving macro, and 3) stronger- than-expected YTD sales. (For details please see Global autos outlook - It’s a brave new world)

China, Europe and India to be the new growth drivers China, the US and Southeast Asia have been driving growth for carmakers over the past three years. In the following three years, apart from China, we expect Europe and India to replace the US and Southeast Asia as the new growth drivers. We look at Japanese and Korean carmakers as the ones who most benefited from the growth in China, the US and Southeast Asia, as they were (and still are) highly exposed to these three markets. However, as Europe and India emerge as new growth frontiers, select carmakers such as Mazda, Suzuki and Hyundai would benefit more compared to the others.

Fig. 67: Global demand forecast

(million units) CY2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E US 16.56 16.15 13.24 10.43 11.59 12.78 14.49 15.60 16.00 16.30 16.60 yoy change -2.6% -2.5% -18.0% -21.2% 11.1% 10.3% 13.4% 7.6% 2.6% 1.9% 1.8% Western Europe (PC) 14.76 14.79 13.56 13.67 12.98 12.81 11.77 11.55 12.01 12.43 12.87 yoy change 1.8% 0.2% -8.3% 0.8% -5.0% -1.3% -8.1% -1.9% 4.0% 3.5% 3.5% Eastern Europe (PC) 1.06 1.21 1.18 0.86 0.82 0.80 0.75 0.76 0.84 0.92 0.99 yoy change 3.6% 14.6% -2.6% -27.2% -4.8% -2.2% -5.9% 1.1% 10.0% 10.0% 8.0% Total Europe (PC) 15.82 16.00 14.74 14.52 13.79 13.61 12.52 12.31 12.85 13.35 13.86 yoy change 1.9% 1.2% -7.9% -1.5% -5.0% -1.4% -8.0% -1.7% 4.4% 3.9% 3.8% Total Europe (LCV)2.102.242.011.421.541.651.441.441.491.541.60 yoy change 0.8% 6.6% -10.6% -29.4% 8.6% 7.5% -12.9% -0.4% 4.0% 3.5% 3.5% Total Europe 17.92 18.25 16.75 15.94 15.33 15.26 13.96 13.75 14.34 14.90 15.46 yoy change 1.8% 1.8% -8.2% -4.8% -3.8% -0.5% -8.5% -1.6% 4.3% 3.9% 3.8% Japan 5.74 5.35 5.08 4.61 4.96 4.21 5.37 5.38 5.31 5.20 5.10 yoy change -1.9% -6.7% -5.1% -9.3% 7.5% -15.1% 27.5% 0.1% -1.2% -2.1% -1.9% South Korea 1.201.271.221.451.551.581.541.541.581.611.61 change yoy 5.5% 5.7% -4.5% 19.6% 7.0% 1.5% -2.4% -0.1% 2.5% 2.0% -0.1% Brazil 1.83 2.34 2.67 3.01 3.33 3.43 3.63 3.58 3.40 3.47 3.61 change yoy 13.1% 27.8% 14.1% 12.6% 10.6% 2.9% 6.1% -1.5% -5.0% 2.0% 4.0% Russia 1.92 2.59 2.92 1.47 1.91 2.65 2.94 2.78 2.58 2.63 2.71 change yoy 24.1% 35.4% 12.4% -49.7% 30.5% 38.7% 10.7% -5.5% -7.0% 2.0% 3.0% India* 1.57 1.76 1.75 2.24 2.87 3.09 3.21 3.01 3.30 3.82 4.28 change yoy 22.1% 12.1% -0.6% 28.0% 28.1% 7.6% 3.9% -6.3% 9.8% 15.6% 12.0% China 7.18 8.78 9.36 13.62 18.04 18.53 19.30 21.99 24.29 26.60 28.99 change yoy 24.8% 22.3% 6.6% 45.5% 32.5% 2.7% 4.2% 13.9% 10.4% 9.5% 9.0% Thailand 0.68 0.63 0.62 0.55 0.80 0.79 1.44 1.33 0.95 1.12 1.20 change yoy -3.0% -7.5% -2.5% -10.8% 45.8% -0.8% 80.9% -7.3% -28.6% 17.6% 7.1% Indonesia 0.32 0.43 0.61 0.49 0.76 0.89 1.12 1.23 1.37 1.56 1.76 change yoy -40.3% 36.2% 39.9% -20.0% 57.3% 16.9% 24.8% 10.3% 11.0% 14.0% 13.0% Malaysia 0.49 0.49 0.55 0.54 0.61 0.60 0.63 0.66 0.68 0.70 0.72 change yoy -10.9% -0.7% 12.5% -2.1% 12.8% -0.8% 4.6% 4.5% 3.5% 3.5% 3.0% Argentina 0.440.540.590.480.680.850.800.930.750.820.88 change yoy 14.5% 23.5% 8.5% -19.1% 42.5% 26.2% -6.2% 15.9% -19.6% 9.1% 8.3% South Africa 0.61 0.58 0.45 0.33 0.40 0.47 0.51 0.62 0.52 0.55 0.62 change yoy 14.4% -5.2% -21.6% -26.3% 20.6% 16.8% 8.6% 21.0% -15.7% 5.3% 12.5% Turkey 0.62 0.59 0.50 0.55 0.77 0.87 0.78 0.86 0.71 0.78 0.84 change yoy -13.7% -5.2% -15.3% 10.4% 40.2% 12.5% -10.3% 10.5% -17.3% 9.1% 8.3% Emerging markets 15.66 18.74 20.01 23.27 30.18 32.18 34.36 36.99 38.55 42.04 45.61 yoy change 14.9% 19.7% 6.8% 16.3% 29.7% 6.7% 6.8% 7.6% 4.2% 9.0% 8.5% RoW 10.67 11.78 11.12 9.09 10.24 11.15 11.28 11.37 11.24 11.29 11.36 change yoy 6.1% 10.5% -5.7% -18.2% 12.7% 8.9% 1.2% 0.8% -1.2% 0.4% 0.6% Global Registrations 67.75 71.55 67.41 64.79 73.85 77.16 81.01 84.62 87.02 91.33 95.74 Change 3.8% 5.6% -5.8% -3.9% 14.0% 4.5% 5.0% 4.5% 2.8% 5.0% 4.8%

Source: LCMA, Autodata, Fourin, ACEA, KAMA, KAIDA, JAMA, SIAM, AEB, ANFAVEA, Nomura estimates

32

Brilliance China 1114.HK 1114 HK

EQUITY: AUTOS & AUTO PARTS

Upgrade to Neutral; new TP of HKD15.1 Global Markets Research

Near-term headwinds abated; LT growth roadmap 9 July 2014 Rating remains intact on more entry-level luxury models Up from Reduce Neutral

Action: Upgrade to Neutral; would turn even more constructive upon Target price HKD 15.10 more attractive valuations and/or growth surprises Increased from 9.30 After briefly touching our previous TP of HKD9.30 in March, Brilliance’s share Closing price HKD 15.44 price has rallied since then, underpinned by strong sales volumes YTD (+33% 4 July 2014 y-y in 5M14) and the extension of the BMW-Brilliance JV (by 10 years to Potential downside -2.2% 2028), as per BMW Group’s (BMW GY) Greater China CEO Karsten Engel

(Xinhua News, 23 Jun 2014). While we still project that growth in 2H14F will likely be slower than 1H14F (partly owing to the launch of Mercedes’ new C Anchor themes Class in August), the better-than-expected YTD data suggest that Brilliance We remain constructive on the should be able to meet its 30% sales volume growth target for FY14F (vs. our 2H14F outlook for new auto previous assumption of 25%). More importantly, our long-term positive view on sales, underpinned by growing replacement demand and BMW’s entry-level models remains intact (fitting in well with our sector themes availability of auto financing. We of replacement demand and rising affordability), upon the likely addition of prefer SUVs, entry-level luxury, more entry-level models for local production during 2015F-17F. and OEMs with strong new model Hence, we feel that the arguments underpinning our previous Reduce rating pipelines. have become less relevant. With the shares already trading at par with the LT average P/E of 13x, we rate Brilliance as Neutral. We would turn more positive Nomura vs consensus on the stock if risk-reward improves on the back of either better-than-expected Our FY14F EPS is in line with earnings growth in 2H14F or more attractive valuations. We raise our 2014F- consensus but we are 4% below for FY15F.

16F EPS by 11%-12% owing to higher sales volume assumptions (14F sales volume growth at 30% now, in line with company target) and margins. Research analysts Catalysts: Sales volumes; new models for local production Valuation: TP revised up to HKD15.1 China Autos & Auto Parts As our concerns have been alleviated, our previous target P/E of 9.5x (-1 SD Benjamin Lo - NIHK below mean) is no longer appropriate. We rebase our TP back to the long-term [email protected] average of 13x (mid-15F EPS: CNY0.92) and, along with our EPS revisions, +852 2252 6220 this results in an upgrade of our TP to HKD15.1. Joseph Wong - NIHK

[email protected] +852 2252 6111

Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 6,103 6,276 6,276 6,471 6,471 6,669 6,669 Reported net profit (mn) 3,374 3,919 4,369 4,412 4,927 5,052 5,666

Normalised net profit (mn) 3,374 3,919 4,369 4,412 4,927 5,052 5,666

FD normalised EPS 66.87c 77.67c 86.58c 87.45c 97.64c 1.01 1.12 FD norm. EPS growth (%) 46.6 16.2 29.5 12.6 12.8 15.0 15.0 FD normalised P/E (x) 18.3 N/A 14.2 N/A 12.6 N/A 10.9 EV/EBITDA (x) 17.7 N/A 13.6 N/A 12.0 N/A 10.3 Price/book (x) 4.7 N/A 3.7 N/A 2.9 N/A 2.4 Dividend yield (%) 0.6 N/A 1.1 N/A 1.2 N/A 1.4 ROE (%) 29.3 26.6 29.2 24.0 26.0 22.4 24.1 Net debt/equity (%) 4.8 5.0 3.0 2.8 1.2 0.8 net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Brilliance China 9 July 2014

Key data on Brilliance China Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA -42 -182 -145 -114 -81 Change in working capital 157 -413 -69 28 27 Other operating cashflow 0 -32 -26 -30 -183 Cashflow from operations 116 -627 -240 -115 -237 Capital expenditure -159 58 -398 -398 -398 Free cashflow -44 -568 -639 -513 -635 Reduction in investments 217 -101 0 0 0 Net acquisitions Dec in other LT assets -2,668 -2,577 -3,352 -3,756 -4,284 Inc in other LT liabilities 0 55 0 0 0 Adjustments 2,681 3,370 4,642 5,201 6,092 CF after investing acts 187 178 651 932 1,172 Source: Thomson Reuters, Nomura research Cash dividends 0 -394 -525 -697 -794 Equity issue 1 0 0 0 0 Notes: Debt issue -178 409 0 0 0 Convertible debt issue Others 241 -126 0 0 0 CF from financial acts 64 -111 -525 -697 -794 Performance Net cashflow 251 67 126 235 378

(%) 1M 3M 12M Beginning cash 586 837 903 1,030 1,265

Absolute (HKD) 20.2 30.4 89.0 M cap (USDmn) 10,012.4 Ending cash 837 903 1,030 1,265 1,642

Absolute (USD) 20.3 30.5 89.0 Free float (%) 57.5 Ending net debt 282 625 499 263 -114

Rel to MSCI China 19.3 27.6 73.5 3-mth ADT (USDmn) 13.9 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 837 903 1,030 1,265 1,642 Revenue 5,916 6,103 6,276 6,471 6,669 Marketable securities 1,112 1,213 1,213 1,213 1,213 Cost of goods sold -5,220 -5,417 -5,563 -5,723 -5,884 Accounts receivable 1,812 2,220 2,282 2,354 2,426 Gross profit 696 687 713 748 785 Inventories 838 769 891 919 947 SG&A -878 -1,008 -1,036 -1,068 -1,101 Other current assets 1,818 1,418 1,418 1,418 1,418 Employee share expense Total current assets 6,417 6,524 6,835 7,169 7,647 Operating profit -182 -321 -323 -320 -316 LT investments 631 631 631 631 631 EBITDA -42 -182 -145 -114 -81 Fixed assets 1,745 1,686 1,652 1,618 1,582 Depreciation -140 -139 -178 -207 -235 Goodwill Amortisation Other intangible assets 362 670 925 1,152 1,353 EBIT -182 -321 -323 -320 -316 Other LT assets 6,902 9,479 12,831 16,587 20,871 Net interest expense -100 -92 -104 -103 -101 Total assets 16,058 18,990 22,875 27,158 32,085 Associates & JCEs 2,526 3,641 4,634 5,189 5,923 Short-term debt 1,119 1,528 1,528 1,528 1,528 Other income 50 96 96 96 96 Accounts payable 3,120 2,991 3,071 3,160 3,249 Earnings before tax 2,295 3,325 4,303 4,861 5,602 Other current liabilities 2,618 2,274 2,309 2,347 2,386 Income tax -58 -8 -9 -9 -8 Total current liabilities 6,857 6,793 6,908 7,035 7,163 Net profit after tax 2,237 3,316 4,294 4,853 5,594 Long-term debt 0 0 0 0 0 Minority interests 64 58 75 74 72 Convertible debt Other items Other LT liabilities 2 56 56 56 56 Preferred dividends Total liabilities 6,859 6,849 6,964 7,091 7,219 Normalised NPAT 2,301 3,374 4,369 4,927 5,666 Minority interest -816 -874 -949 -1,023 -1,095 Extraordinary items Preferred stock Reported NPAT 2,301 3,374 4,369 4,927 5,666 Common stock 396 396 396 396 396 Dividends 0 -394 -655 -739 -850 Retained earnings Transfer to reserves 2,301 2,980 3,713 4,188 4,816 Proposed dividends Valuations and ratios Other equity and reserves 9,619 12,619 16,464 20,693 25,565 Reported P/E (x) 27.2 18.3 14.1 12.5 10.9 Total shareholders' equity 10,015 13,015 16,859 21,089 25,961 Normalised P/E (x) 27.2 18.3 14.1 12.5 10.9 Total equity & liabilities 16,058 18,990 22,875 27,158 32,085 FD normalised P/E (x) 27.3 18.3 14.2 12.6 10.9 Dividend yield (%) na 0.6 1.1 1.2 1.4 Liquidity (x) Price/cashflow (x) 541.9 na na na na Current ratio 0.94 0.96 0.99 1.02 1.07 Price/book (x) 6.2 4.7 3.7 2.9 2.4 Interest cover -1.8 -3.5 -3.1 -3.1 -3.1 EV/EBITDA (x) 25.0 17.7 13.6 12.0 10.3 Leverage EV/EBIT (x) 26.5 18.5 14.2 12.5 10.8 Net debt/EBITDA (x) na na na na na Gross margin (%) 11.8 11.2 11.4 11.6 11.8 Net debt/equity (%) 2.8 4.8 3.0 1.2 net cash EBITDA margin (%) -0.7 -3.0 -2.3 -1.8 -1.2 EBIT margin (%) -3.1 -5.3 -5.1 -4.9 -4.7 Per share Net margin (%) 38.9 55.3 69.6 76.1 85.0 Reported EPS (CNY) 45.80c 67.14c 86.92c 98.03c 1.13 Effective tax rate (%) 2.5 0.3 0.2 0.2 0.2 Norm EPS (CNY) 45.80c 67.14c 86.92c 98.03c 1.13 Dividend payout (%) 0.0 11.7 15.0 15.0 15.0 FD norm EPS (CNY) 45.61c 66.87c 86.58c 97.64c 1.12 ROE (%) 27.1 29.3 29.2 26.0 24.1 BVPS (CNY) 1.99 2.59 3.35 4.20 5.17 ROA (pretax %) 17.1 19.9 21.6 20.4 19.9 DPS (CNY) 0.00 0.08 0.13 0.15 0.17 Growth (%) Activity (days) Revenue -8.2 3.2 2.8 3.1 3.1 Days receivable 99.9 120.5 130.9 130.7 131.1 EBITDA -117.0 na na na na Days inventory 55.2 54.2 54.5 57.7 58.0 Normalised EPS 26.3 46.6 29.5 12.8 15.0 Days payable 195.8 205.9 198.9 198.7 199.3 Normalised FDEPS 26.9 46.6 29.5 12.8 15.0 Cash cycle -40.7 -31.2 -13.5 -10.2 -10.1 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

34

Nomura | Brilliance China 9 July 2014

Fig. 68: BMW-Brilliance – Monthly and annual sales volume

(units) 2011 2012 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 2013 2014F 2015F 2016F X1 - 20,483 3,308 6,722 6,134 6,148 3,547 2,612 3,882 4,684 3,963 22,312 44,624 53,549 62,920 3 series 42,290 34,768 14,172 17,954 14,325 14,503 8,186 6,573 8,081 7,692 7,977 60,954 88,383 114,898 140,750 5 series 65,097 105,598 30,568 32,968 32,557 27,367 12,252 9,646 12,279 12,390 12,116 123,460 137,041 149,374 160,577 Total 107,387 160,849 48,048 57,644 53,016 48,018 23,985 18,831 24,242 24,766 24,056 206,726 270,048 317,821 364,248 y-y growth X1 n.a n.a 79.7% -26.7% 7.6% 63.0% 195.8% 348.8% 154.2% 126.2% 64.8% 8.9% 100.0% 20.0% 17.5% 3 series 42.6% -17.8% 141.6% n.m n.m 65.1% 29.8% 124.4% 63.7% 34.3% 20.1% 75.3% 45.0% 30.0% 22.5% 5 series 58.7% 62.2% 47.3% 15.0% 8.8% 4.2% 6.1% 16.5% 14.4% 10.9% 10.7% 16.9% 11.0% 9.0% 7.5% Total 51.9% 49.8% 68.9% 51.2% 28.5% 23.7% 25.8% 59.7% 41.0% 30.6% 20.3% 28.5% 30.6% 17.7% 14.6% Sales mix X1 0.0% 12.7% 6.9% 11.7% 11.6% 12.8% 14.8% 13.9% 16.0% 18.9% 16.5% 10.8% 16.5% 16.8% 17.3% 3 series 39.4% 21.6% 29.5% 31.1% 27.0% 30.2% 34.1% 34.9% 33.3% 31.1% 33.2% 29.5% 32.7% 36.2% 38.6% 5 series 60.6% 65.7% 63.6% 57.2% 61.4% 57.0% 51.1% 51.2% 50.7% 50.0% 50.4% 59.7% 50.7% 47.0% 44.1% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Company data, Nomura estimates

Fig. 69: BMW-Brilliance – 2013 sales breakdown by variants Fig. 70: BMW-Brilliance – 2013 sales breakdown by region

520, 13% X1, 11% South, 19% 328, 2%

East, 34%

320, 26%

525, 39% North, 27% 316, 1%

535, 1% West, 20% 530, 7%

Source: Company data Source: Company data

Fig. 71: Luxury brands’ market share in China, 5M14 Fig. 72: Mercedes’ sales volume growth has bottomed since the middle of 2013 and has begun to outpace BMW and Audi

100% JLR Lexus Mercedes-Benz BMW Audi 8% 5% 80%

Benz 60% 18% BMW 40% 31% 20%

0%

-20%

-40%

Audi Jul-13 Oct-13 Apr-14 Jun-13 Jan-14 Jun-14 Feb-14 Mar-14 Aug-13 Sep-13 Nov-13 Dec-13 38% May-13 May-14

Source: LMC Automotive, Nomura research Source: LMC Automotive, Nomura research

During 2H14F to 1H15F, we anticipate more intense competition, predominantly coming from a rejuvenated Mercedes model line-up which will likely put pressure on sales volumes and ASPs of the BMW-Brilliance JV, which has no new models until 2H15F. Mercedes is launching new models (e.g. CLA and GLA) as well as new versions of its A, C and S classes from 2013 to 2014. This has already started to have an impact on

35

Nomura | Brilliance China 9 July 2014

Mercedes’ sales volumes since 3Q13. With more new models lined up for 2H14F (GLA and the new C Class long version), along with full-year contributions from CLA, E and S Class, we believe Mercedes’ sales momentum will persist and pose a threat to BMW.

Fig. 73: Key estimate changes

2013 2014F 2015F 2016F Actual New Old % diff New Old % diff New Old % diff BMW-JV BMW unit sales 206,726 270,048 258,371 4.5% 317,821 306,804 3.6% 364,248 350,514 3.9% EBIT margins 13.4% 13.5% 12.6% 0.9 ppt 13.0% 12.0% 1.0 ppt 12.9% 11.8% 1.1 ppt Net margins 9.4% 9.8% 9.2% 0.6 ppt 9.7% 8.9% 0.8 ppt 9.7% 8.9% 0.8 ppt

Brilliance Net profit (CNY mn) 3,374 4,369 3,919 11.5% 4,927 4,412 11.7% 5,666 5,052 12.2% EPS (CNY) 0.67 0.87 0.78 11.0% 0.98 0.87 12.2% 1.12 1.0 12.3%

Source: Company data, Nomura estimates

Valuation and risks We rebase our TP back to the long-term average of 13x (mid-15F EPS: CNY0.92) and, along with the EPS revisions, this results in an upgrade of our TP to HKD15.1.The benchmark index for the stock is MSCI China. Upside risks: 1) margin surprise on the upside due to better-than-expected cost management; 2) stronger-than-expected sales volumes; and 3) unexpected delays or drop-off of new models by major competitors. Downside risks: 1) delays in the proposed listing of BAIC; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition in the luxury car segment.

Fig. 74: P/E chart Fig. 75: P/B chart

(x) (x) 22 8 20 +2SD 19.7x 7 +2SD 6.5x 18 +1SD 16.3x 6 16 +1SD 5.5x 14 LT avg = 12.7x 5 LT avg = 4.5x 12 4 10 -1SD 3.5x 3 8 -1SD 9.5x 6 2 Jul-11 Jul-12 Jul-13 Jul-14 Jul-11 Jul-12 Jul-13 Jul-14 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Jan-11 Jan-12 Jan-13 Jan-14 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

36

Dongfeng Motor 0489.HK 489 HK

EQUITY: AUTOS & AUTO PARTS

Upgrade to Buy with a new TP of HKD16.6 Global Markets Research

New models to help drive earnings growth, but not a 9 July 2014 Rating multi-year re-rating story yet Up from Neutral Buy

Action: Growth momentum looks to pick up; upgrade to Buy Target price HKD 16.60 Dongfeng Motor (DFM) has been a laggard in the auto sector for the past two Increased from 12.40 years, until May this year upon the successful launch of Nissan X-Trail SUV Closing price HKD 14.26 and strong PV sales volumes (+21% y-y in 5M14). We believe 1H14F should 4 July 2014 likely be strong on both volume and margin gains (more SUVs and maiden Potential upside +16.4% contributions from new models), although 2H14F might look less robust in the absence of major new launches. In 2015F, we should see a steady flow of new models again, including the Nissan Qashqai, Infiniti Q50L, Honda Spirior Anchor themes and a new compact SUV. Its investment into PSA has become less We remain constructive on the controversial since Europe auto sales have begun to bottom out. Combining 2H14F outlook for new auto these positive factors has led us to upgrade our FY14F-15F EPS by 24-32% sales, underpinned by growing owing to our expected 5% higher sales volumes and 2pp higher gross margins replacement demand and in FY14F-15F (reflecting new models and better sales mix). We now look for availability of auto financing. We total PV sales volume growth of 17%/13% in 14F/15F, to drive a 14% EPS prefer SUVs, entry-level luxury, and OEMs with strong new model CAGR during 2013-16F, comparing favourably with flat earnings during 2011- pipelines. 13. We therefore feel comfortable upgrading DFM to Buy.

Catalysts: new model launches, strong 1H14F, dividend upside Nomura vs consensus 1) launch of new models; 2) strong 1H14F interim results (August) – we Our 2014F/15F EPS estimates expect over-20% y-y EPS growth; 3) potential upside in dividend payout are 7% above consensus, (currently at 15%, but has potential to be raised given net cash position). following our earnings revisions.

Valuations: New TP based on LT-average 8.5x P/E; not a multi-year re- Research analysts rating story yet, in our view Following our EPS revisions and roll-forward to mid-15F, we upgrade our TP China Autos & Auto Parts to HKD16.6, still based on the long-term average 8.5x P/E (mid-15F EPS: CNY1.55). However, we do not see a multi-year re-rating story (hence we do Benjamin Lo - NIHK [email protected] not assign a double-digit target P/E). We feel that the pick-up in near-term +852 2252 6220 earnings growth is mostly driven by the timing of new models, but DFM’s Joseph Wong - NIHK brands are not premium brands and in the long run are unlikely to be market- [email protected] share gainers in the Chinese auto market. +852 2252 6111

Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 37,263 174,035 58,876 192,751 65,539 72,207 Reported net profit (mn) 10,528 9,958 12,307 10,964 14,442 15,738

Normalised net profit (mn) 10,528 9,958 12,307 10,964 14,442 15,738

FD normalised EPS 1.22 1.16 1.43 1.27 1.68 1.83 FD norm. EPS growth (%) 15.8 7.6 16.9 10.1 17.3 9.0 FD normalised P/E (x) 9.3 N/A 7.9 N/A 6.8 N/A 6.2 EV/EBITDA (x) 7.7 N/A 6.8 N/A 5.4 N/A 4.6 Price/book (x) 1.5 N/A 1.4 N/A 1.2 N/A 1.0 Dividend yield (%) 1.6 N/A 1.9 N/A 2.2 N/A 2.4 ROE (%) 18.0 15.1 18.2 14.7 18.6 17.8 Net debt/equity (%) net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Dongfeng Motor 9 July 2014

Key data on Dongfeng Motor Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA -1,648 -657 696 1,319 1,615 Change in working capital -8,318 2,059 1,419 447 723 Other operating cashflow 7,412 -25,338 1,392 14,823 15,997 Cashflow from operations -2,554 -23,936 3,508 16,588 18,334 Capital expenditure -555 -1,364 -1,750 -1,750 -1,750 Free cashflow -3,109 -25,300 1,758 14,838 16,584 Reduction in investments 343 4,093 -8,560 0 0 Net acquisitions 0 0 5,715 6,053 6,925 Dec in other LT assets Inc in other LT liabilities Adjustments 4,981 15,253 12 16 20 CF after investing acts 2,215 -5,954 -1,076 20,908 23,529 Source: Thomson Reuters, Nomura research Cash dividends -1,551 -1,422 -1,682 -1,970 -2,223 Equity issue Notes: Debt issue -3,225 3,573 0 0 0 Convertible debt issue Others 7,450 7,602 -1,212 -13,869 -15,907 CF from financial acts 2,674 9,753 -2,894 -15,840 -18,130 Performance Net cashflow 4,889 3,799 -3,969 5,068 5,399

(%) 1M 3M 12M Beginning cash 13,051 17,940 21,739 17,770 22,838

Absolute (HKD) 23.6 30.6 43.8 M cap (USDmn) 15,853.3 Ending cash 17,940 21,739 17,770 22,838 28,237

Absolute (USD) 23.6 30.7 43.8 Free float (%) 33.1 Ending net debt 7,986 -15,864 -11,895 -16,963 -22,362

Rel to MSCI China 22.6 27.8 28.3 3-mth ADT (USDmn) 23.3 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 17,940 21,739 17,770 22,838 28,237 Revenue 6,090 37,263 58,876 65,539 72,207 Marketable securities 108 2,543 2,543 2,543 2,543 Cost of goods sold -5,736 -32,582 -49,750 -55,053 -60,654 Accounts receivable 4,067 25,266 39,920 44,438 48,959 Gross profit 354 4,681 9,126 10,486 11,553 Inventories 1,198 4,245 6,482 7,173 7,902 SG&A -2,211 -6,509 -9,891 -10,814 -11,770 Other current assets 3,587 3,829 3,829 3,829 3,829 Employee share expense Total current assets 26,900 57,622 70,544 80,821 91,471 Operating profit -1,857 -1,828 -765 -328 -217 LT investments EBITDA -1,648 -657 696 1,319 1,615 Fixed assets 2,430 9,418 9,293 9,128 8,921 Depreciation -209 -1,171 -1,462 -1,647 -1,831 Goodwill 212 1,587 1,587 1,587 1,587 Amortisation Other intangible assets 330 2,718 3,131 3,400 3,525 EBIT -1,857 -1,828 -765 -328 -217 Other LT assets 32,494 44,653 58,915 64,952 71,856 Net interest expense 420 374 352 243 382 Total assets 62,366 115,998 143,470 159,887 177,360 Associates & JCEs 10,064 11,429 12,106 13,849 14,818 Short-term debt 2,302 5,875 5,875 5,875 5,875 Other income 525 737 830 930 1,030 Accounts payable 3,943 34,750 53,060 58,716 64,689 Earnings before tax 9,152 10,712 12,523 14,694 16,013 Other current liabilities 2,012 8,064 8,064 8,064 8,064 Income tax -45 -109 -127 -150 -163 Total current liabilities 8,257 48,689 66,999 72,655 78,628 Net profit after tax 9,107 10,603 12,395 14,545 15,850 Long-term debt 0 0 0 0 0 Minority interests -15 -75 -88 -103 -112 Convertible debt Other items Other LT liabilities 106 3,275 3,275 3,275 3,275 Preferred dividends Total liabilities 8,363 51,964 70,274 75,930 81,903 Normalised NPAT 9,092 10,528 12,307 14,442 15,738 Minority interest 85 899 987 1,090 1,202 Extraordinary items 0 0 0 0 0 Preferred stock Reported NPAT 9,092 10,528 12,307 14,442 15,738 Common stock 15,486 16,731 16,731 16,731 16,731 Dividends -1,292 -1,551 -1,813 -2,128 -2,319 Retained earnings 37,140 44,853 53,665 64,009 75,206 Transfer to reserves 7,800 8,977 10,494 12,314 13,420 Proposed dividends 1,292 1,551 1,813 2,128 2,319 Valuations and ratios Other equity and reserves Reported P/E (x) 10.7 9.3 7.9 6.8 6.2 Total shareholders' equity 53,918 63,135 72,209 82,868 94,255 Normalised P/E (x) 10.7 9.3 7.9 6.8 6.2 Total equity & liabilities 62,366 115,998 143,470 159,887 177,360 FD normalised P/E (x) 10.7 9.3 7.9 6.8 6.2 Dividend yield (%) 1.3 1.6 1.9 2.2 2.4 Liquidity (x) Price/cashflow (x) na na 27.8 5.9 5.3 Current ratio 3.26 1.18 1.05 1.11 1.16 Price/book (x) 1.8 1.5 1.4 1.2 1.0 Interest cover na na na na na EV/EBITDA (x) 9.8 7.7 6.8 5.4 4.6 Leverage EV/EBIT (x) 10.0 8.6 7.6 6.0 5.2 Net debt/EBITDA (x) na na net cash net cash net cash Gross margin (%) 5.8 12.6 15.5 16.0 16.0 Net debt/equity (%) 14.8 net cash net cash net cash net cash EBITDA margin (%) -27.1 -1.8 1.2 2.0 2.2 EBIT margin (%) -30.5 -4.9 -1.3 -0.5 -0.3 Per share Net margin (%) 149.3 28.3 20.9 22.0 21.8 Reported EPS (CNY) 1.06 1.22 1.43 1.68 1.83 Effective tax rate (%) 0.5 1.0 1.0 1.0 1.0 Norm EPS (CNY) 1.06 1.22 1.43 1.68 1.83 Dividend payout (%) 14.2 14.7 14.7 14.7 14.7 FD norm EPS (CNY) 1.06 1.22 1.43 1.68 1.83 ROE (%) 18.1 18.0 18.2 18.6 17.8 BVPS (CNY) 6.26 7.33 8.38 9.62 10.94 ROA (pretax %) 10.4 13.8 10.3 10.3 10.2 DPS (CNY) 0.15 0.18 0.21 0.25 0.27 Growth (%) Activity (days) Revenue -5.6 511.9 58.0 11.3 10.2 Days receivable 79.3 143.7 202.1 234.9 236.7 EBITDA -14.2 na na 89.4 22.4 Days inventory 43.7 30.5 39.3 45.3 45.5 Normalised EPS -13.3 15.8 16.9 17.3 9.0 Days payable 177.2 216.7 322.1 370.5 372.3 Normalised FDEPS -13.3 15.8 16.9 17.3 9.0 Cash cycle -54.3 -42.6 -80.7 -90.4 -90.1 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

38

Nomura | Dongfeng Motor 9 July 2014

Key charts and tables

Fig. 76: Monthly and annual sales volumes (Units) 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 2013 2014F 2015F 2016F DF Nissan 171,410 223,928 228,254 302,637 75,624 54,361 82,652 91,806 83,058 926,229 1,023,377 1,168,377 1,272,377 DF Honda 62,774 76,614 75,431 106,590 24,653 21,470 28,240 32,219 26,568 321,409 364,500 434,500 484,500 DF PSA 142,675 134,221 123,065 150,046 65,033 40,089 60,036 60,068 60,582 550,007 697,000 755,000 825,000 Others 88,182 71,467 68,486 92,671 48,459 23,617 35,435 32,749 29,243 320,806 385,748 440,308 488,910 PV 465,041 506,230 495,236 651,944 213,769 139,537 206,363 216,842 199,451 2,118,451 2,470,625 2,798,185 3,070,787 DFM total 565,938 644,515 585,904 771,298 237,974 163,555 256,727 256,964 235,332 2,567,655 2,887,625 3,232,185 3,521,787 y-y growth DF Nissan -22.3% -4.4% 26.9% 118.7% -0.8% 60.7% 34.8% 23.9% 9.3% 19.8% 10.5% 14.2% 8.9% DF Honda -11.5% -3.9% 12.2% 80.3% 0.0% 63.8% 12.9% 27.9% 10.5% 13.9% 13.4% 19.2% 11.5% DF PSA 31.0% 34.6% 17.1% 17.9% 19.5% 2.1% 22.5% 32.6% 31.0% 25.0% 26.7% 8.3% 9.3% Others 35.6% 18.4% 13.9% 44.5% 29.5% 15.0% 17.3% 20.8% 22.4% 30.7% 20.2% 14.1% 11.0% PV -0.1% 6.8% 20.1% 67.6% 10.9% 30.8% 24.6% 26.3% 17.2% 21.7% 16.6% 13.3% 9.7% DFM total -4.2% 10.1% 17.8% 60.2% 7.0% 28.2% 18.9% 17.0% 10.1% 19.1% 12.5% 11.9% 9.0%

Source: Company data, Nomura research

Fig. 77: DF Honda four-week moving average sales Fig. 78: DF Nissan four-week moving average sales

1,600 Dongfeng Honda Dongfeng Nissan 4,500 1,400 4,000 1,200 3,500 1,000 3,000 800 2,500 600 2,000 400 1,500 200 1,000 0 500 12 12 W1 12 W2 13 W3 12 W2 13 W5 12 W1 12 W2 13 W4 13 12 W1 12 W4 13 W4 14 y y g p g r 13 W2 y y y p g p p Jul 13 W2 Jul 13 Apr 14 W3 Oct 12 W4 Apr 13 W3 Oct 13 W1 Jan 14 W1 Jun 14 W1 Jul 12 W4 12 Jul W1 13 Jul Jun 12 W3 Jan 13 W4 MarW1 14 MarW1 13 Au Se Au Dec 12 DecW2 12 Nov W3 13 Ma Oct 12 W3 Ma Apr 14 W2 A Jun 12 W2 Jan 13 W3 Feb 14W4 Feb 13W4 Se Au Se Dec 12 DecW1 12 DecW4 13 Nov W2 13 Ma Ma Ma

Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research

Fig. 79: New models pipeline – 2014F and 2015F

OEM Brand Model Year Month DF Nissan Venucia e30 2014 H2 DF Nissan Venucia SUV 2015 n.a DF Nissan Nissan Xtrail 2014 Q1 DF Nissan Nissan Murano 2015 n.a DF Nissan Nissan Qashqai 2015 n.a DF Nissan Infiniti Q50L 2014 4Q DF Nissan Infiniti Compact SUV 2015 n.a DF Honda Honda Spiror 2014 Nov DF Honda Honda Civic 2014 Jun DF Honda Honda Civic (Si) 2014 Q4 DF Honda Honda Compact SUV 2015 n.a DF Renault Renault Captur 2016 n.a DF PSA Peugeot 2008 2014 Apr DF PSA Peugeot 408 2014 Jul

Source: Company data, Nomura research

39

Nomura | Dongfeng Motor 9 July 2014

Fig. 80: Honda Spirior (4Q14) Fig. 81: Infiniti Q50L (4Q14)

Source: Nomura research

Source: Nomura research

A few words on accounting treatment – in mid-2013, DFM reorganised its commercial vehicle (CV) business via buying out its CV partner. The whole CV business has since been consolidated into DFM’s P&L since then, hence the step up in revenue/COGS in 2013 (half-year impact during 2H13) and further in 2014F (full-year impact). However, since the CV business is only modestly profitable by our estimate, the impact of the reorganisation on DFM’s bottom line is immaterial. Separately, at 2013 annual results, DFM has also changed the way it accounted for its major JVs (with Nissan, Honda and PSA) in its P&L, from a 50% proportional consolidation in the past, to equity accounting as jointly-controlled entities. This is a change in accounting treatment which has no impact on DFM’s net profit line.

Valuation and risks Following our EPS revisions and roll-forward to mid-15F, we upgrade our TP to HKD16.6, still based on the LT average 8.5x P/E (mid-15F EPS: CNY1.55). Risks: 1) lingering tensions between China and Japan may hamper the pace of recovery of Japanese-brand autos; 2) delay or cancellation of new model launches; and 3) lacklustre CV sales owing to continued weakness in the commercial vehicles segment.

Fig. 82: P/E chart Fig. 83: P/B chart

(x) (x) 18 4.0 16 3.5 +2SD 3.3x 14 +2SD 13.3x 3.0 +1SD 2.6x 12 +1SD 10.9x 2.5 10 LT avg = 2.0x LT avg = 8.5x 2.0 8 1.5 6 -1SD 6.0x 1.0 -1SD 1.3x 4 0.5 2 0.0 0 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

40

Geely Automobile 0175.HK 175 HK

EQUITY: AUTOS & AUTO PARTS

Upgrade to Buy with a new TP of HKD3.76 Global Markets Research

Bad news in the price; buy for 2H recovery although 9 July 2014 Rating still too early for a LT re-rating story Up from Neutral Buy

Action: Risk-reward improving; Buy for 2H recovery Target price HKD 3.76 Following a share price decline of c27% YTD and a close-to-trough P/B Increased from 3.38 valuation (<1x, or -1.5 SD below mean), we feel that much of the bad news is Closing price HKD 2.97 already in the price, as the share price has stopped reacting to poor monthly 4 July 2014 sales data in 2Q14. While sales volumes YTD have plummeted 32% owing to Potential upside +26.6% a restructuring of branding and dealer network (consolidating three brands into

one single Geely brand), we have just begun to see sequential m-m improvements in sales volumes. We believe that the worst is already behind Anchor themes us (in terms of the rate of volume decline), and forecast a 2H recovery (>40% We remain constructive on the improvement over 1H) on the back of new model launches via a revamped 2H14F outlook for new auto network. sales, underpinned by growing replacement demand and A good time to accumulate the stock could be around the interim results in availability of auto financing. We August, which should be poor reflecting the volume decline YTD and potential prefer SUVs, entry-level luxury, restructuring costs, but we consider these to be backward-looking and would and OEMs with strong new model recommend buying on a potential 2H recovery. That said, we still find it pipelines. challenging to build a multi-year LT re-rating story at this point, owing to a lack of execution track record and the challenges of improving brand recognition. Nomura vs consensus Future potential co-operation with the parent company’s Volvo might prove to Our FY14F/15F EPS is 22%/13% be a major breakthrough, but we believe this remains over 12 months away. below consensus, as we factor in We revise down our 2014F net profit estimate by 15% to reflect a 15% cut to lower sales volumes than the our sales volume forecast. Our 15F/16F forecasts remain largely unchanged. Street. Consensus is likely behind the curve pending more Catalysts: Interim results (earnings overhang cleared post results); future data. improving monthly sales data; new model launches (GX9 SUV and EC7 upgraded version – 2H14F) Research analysts Valuation: new TP of HKD3.76 Our TP continues to be based on 1.3x P/B (end-15F FD BVPS: CNY2.30) China Autos & Auto Parts representing -1 SD below the historical mean, but has been raised to HKD3.76 Benjamin Lo - NIHK reflecting the roll-forward from end-14F to end-15F BVPS. [email protected] +852 2252 6220 Joseph Wong - NIHK Year-end 31 Dec FY13 FY14F FY15F FY16F [email protected] Currency (CNY) Actual Old New Old New Old New +852 2252 6111 Revenue (mn) 28,708 28,701 23,624 31,494 30,923 33,234 33,961 Reported net profit (mn) 2,663 2,417 2,054 2,646 2,669 2,894 2,954

Normalised net profit (mn) 2,663 2,417 2,054 2,646 2,669 2,894 2,954

FD normalised EPS 30.42c 27.46c 23.34c 30.07c 30.33c 32.88c 33.56c FD norm. EPS growth (%) 15.5 -9.3 -23.3 9.5 29.9 9.4 10.7 FD normalised P/E (x) 7.7 N/A 10.1 N/A 7.8 N/A 7.0 EV/EBITDA (x) 4.9 N/A 6.0 N/A 4.3 N/A 3.5 Price/book (x) 1.2 N/A 1.1 N/A 1.0 N/A 0.9 Dividend yield (%) 1.6 N/A 1.2 N/A 1.6 N/A 1.8 ROE (%) 18.4 14.1 12.1 13.7 14.0 13.3 13.7 Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Geely Automobile 9 July 2014

Key data on Geely Automobile Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 2,538 3,369 2,775 3,753 4,334 Change in working capital 1,131 -358 -835 -587 -276 Other operating cashflow 532 392 367 392 -213 Cashflow from operations 4,201 3,403 2,307 3,558 3,846 Capital expenditure -2,042 -376 -2,500 -2,750 -3,000 Free cashflow 2,159 3,027 -193 808 846 Reduction in investments 40 -215 0 0 0 Net acquisitions Dec in other LT assets -129 206 -51 -49 -47 Inc in other LT liabilities 17 23 24 -24 -11 Adjustments 703 -559 233 59 601 CF after investing acts 2,789 2,483 13 794 1,388 Source: Thomson Reuters, Nomura research Cash dividends -170 -264 -283 -284 -338 Equity issue Notes: Debt issue -1,460 -930 0 0 0 Convertible debt issue Others CF from financial acts -1,631 -1,194 -283 -284 -338 Performance Net cashflow 1,158 1,289 -270 510 1,051

(%) 1M 3M 12M Beginning cash 3,030 4,189 5,478 5,207 5,717

Absolute (HKD) 6.5 -2.9 -1.0 M cap (USDmn) 3,372.9 Ending cash 4,189 5,478 5,207 5,717 6,768

Absolute (USD) 6.5 -2.9 -1.0 Free float (%) 57.4 Ending net debt -1,436 -4,512 -4,242 -4,752 -5,803

Rel to MSCI China 5.5 -5.8 -16.5 3-mth ADT (USDmn) 13.9 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 4,189 5,478 5,207 5,717 6,768 Revenue 24,628 28,708 23,624 30,923 33,961 Marketable securities 314 105 105 105 105 Cost of goods sold -20,069 -22,942 -19,135 -24,800 -27,101 Accounts receivable 13,476 14,785 11,351 14,859 16,319 Gross profit 4,559 5,766 4,489 6,123 6,860 Inventories 1,822 1,784 1,488 1,928 2,107 SG&A -2,881 -3,474 -2,961 -3,828 -4,219 Other current assets 55 99 99 99 99 Employee share expense Total current assets 19,855 22,251 18,251 22,709 25,398 Operating profit 1,678 2,291 1,528 2,294 2,641 LT investments 4 426 426 426 426 EBITDA 2,538 3,369 2,775 3,753 4,334 Fixed assets 7,008 6,209 6,785 7,454 8,194 Depreciation -860 -1,078 -1,247 -1,459 -1,693 Goodwill 6 6 6 6 6 Amortisation Other intangible assets 2,814 3,220 3,836 4,399 4,910 EBIT 1,678 2,291 1,528 2,294 2,641 Other LT assets 1,693 1,487 1,538 1,587 1,635 Net interest expense -195 -40 16 12 19 Total assets 31,380 33,599 30,843 36,582 40,569 Associates & JCEs -2 -10 -10 -10 -10 Short-term debt 1,379 966 966 966 966 Other income 1,048 1,062 1,015 1,015 1,015 Accounts payable 15,183 16,075 11,474 14,871 16,251 Earnings before tax 2,529 3,304 2,549 3,312 3,665 Other current liabilities 131 197 232 196 180 Income tax -479 -624 -481 -625 -692 Total current liabilities 16,693 17,237 12,672 16,033 17,396 Net profit after tax 2,050 2,680 2,067 2,687 2,973 Long-term debt 525 0 0 0 0 Minority interests -10 -17 -13 -17 -19 Convertible debt 849 0 0 0 0 Other items Other LT liabilities 109 133 157 132 121 Preferred dividends Total liabilities 18,176 17,370 12,829 16,165 17,517 Normalised NPAT 2,040 2,663 2,054 2,669 2,954 Minority interest 317 162 175 192 211 Extraordinary items Preferred stock Reported NPAT 2,040 2,663 2,054 2,669 2,954 Common stock 153 161 161 161 161 Dividends -261 -320 -247 -321 -355 Retained earnings Transfer to reserves 1,779 2,343 1,808 2,349 2,599 Proposed dividends Valuations and ratios Other equity and reserves 12,734 15,907 17,678 20,063 22,680 Reported P/E (x) 8.9 7.4 9.6 7.4 6.7 Total shareholders' equity 12,887 16,068 17,839 20,225 22,841 Normalised P/E (x) 8.9 7.4 9.6 7.4 6.7 Total equity & liabilities 31,380 33,599 30,843 36,582 40,569 FD normalised P/E (x) 9.1 7.7 10.1 7.8 7.0 Dividend yield (%) 1.4 1.6 1.2 1.6 1.8 Liquidity (x) Price/cashflow (x) 4.6 6.1 9.0 5.8 5.4 Current ratio 1.19 1.29 1.44 1.42 1.46 Price/book (x) 1.4 1.2 1.1 1.0 0.9 Interest cover 8.6 57.3 na na na EV/EBITDA (x) 7.9 4.9 6.0 4.3 3.5 Leverage EV/EBIT (x) 11.9 7.2 11.0 7.1 5.8 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 18.5 20.1 19.0 19.8 20.2 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 10.3 11.7 11.7 12.1 12.8 EBIT margin (%) 6.8 8.0 6.5 7.4 7.8 Per share Net margin (%) 8.3 9.3 8.7 8.6 8.7 Reported EPS (CNY) 27.05c 31.74c 24.48c 31.81c 35.20c Effective tax rate (%) 19.0 18.9 18.9 18.9 18.9 Norm EPS (CNY) 27.05c 31.74c 24.48c 31.81c 35.20c Dividend payout (%) 12.8 12.0 12.0 12.0 12.0 FD norm EPS (CNY) 26.34c 30.42c 23.34c 30.33c 33.56c ROE (%) 18.2 18.4 12.1 14.0 13.7 BVPS (CNY) 1.71 1.91 2.13 2.41 2.72 ROA (pretax %) 6.5 8.3 5.6 8.1 8.1 DPS (CNY) 0.03 0.04 0.03 0.04 0.04 Growth (%) Activity (days) Revenue 17.5 16.6 -17.7 30.9 9.8 Days receivable 190.9 179.7 201.9 154.7 168.0 EBITDA 26.7 32.8 -17.6 35.3 15.5 Days inventory 29.0 28.7 31.2 25.1 27.2 Normalised EPS 30.6 17.3 -22.9 29.9 10.7 Days payable 248.9 248.7 262.7 193.9 210.1 Normalised FDEPS 45.5 15.5 -23.3 29.9 10.7 Cash cycle -29.0 -40.3 -29.6 -14.0 -14.9 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

42

Nomura | Geely Automobile 9 July 2014

Fig. 84: Monthly and annual sales volumes

(units) 2011 2012 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 2013 2014F 2015F 2016F Export 39,600 101,908 24,334 26,104 30,221 38,253 3,667 3,162 6,480 9,048 6,265 118,912 95,000 115,000 126,500 Domestic 382,011 381,575 118,552 94,554 82,045 135,455 29,768 18,253 28,277 26,598 24,347 430,606 350,596 441,078 488,033 Total 421,611 483,483 142,886 120,658 112,266 173,708 33,435 21,415 34,757 35,646 30,612 549,518 445,596 556,078 614,533 y-y growth Export 92.7% 157.3% 44.0% 12.7% -1.4% 22.7% -56.5% -53.6% -28.7% 18.2% -31.2% 16.7% -20.1% 21.1% 10.0% Domestic -3.4% -0.1% 16.7% 17.1% 15.7% 5.5% -46.0% -26.0% -27.1% -27.8% -24.9% 12.8% -18.6% 25.8% 10.6% Total 1.4% 14.7% 20.6% 16.1% 10.6% 8.9% -47.4% -31.9% -27.4% -19.9% -26.3% 13.7% -18.9% 24.8% 10.5%

Source: Company data, Nomura estimates

Fig. 85: Export sales growth Fig. 86: Domestic sales growth

700% Export sales y-y growth 80% Domestic sales y-y growth 600% 60% 500% 40% 400% 20% 300% 0% 200% -20% 100% 0% -40% -100% -60% r-12 r-13 r-14 r-11 r-14 p p p p p Jul-11 Jul-12 Jul-13 Jul-11 Jul-12 Jul-13 Ap r-11 Oct-11 A Oct-12 A Oct-13 A A Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 A Jan-11 Jan-12 Jan-13 Jan-14 Jan-11 Jan-12 Jan-13 Jan-14

Source: Company data, Nomura research Source: Company data, Nomura research

Fig. 87: Monthly sales volume y-y growth by brands Fig. 88: Margins trend

Gross Margin EBIT Margin 100% Gleagle Englon Emgrand 25% Net Margin 80% 19.8% 60% 20.1% 19.0% 20.2% 20% 18.1%18.4% 18.2% 18.5% 40% 20% 15% 0% 9.3% 8.7% -20% 10% 8.9% 8.3% 8.7% 8.6% -40% 6.8% 7.4% 8.4% 8.0% -60% 6.8% 7.4% 7.8% 5% 6.5% 6.5% 6.5% -80% 0% Jul 13 Jul Oct 13 Oct Apr 14 Apr 13 Jun 13 Jun Jan 14 Jan Jan 13 Jan Feb 14 Mar 14 Feb 13 Mar 13 2009 2010 2011 2012 2013 2014F 2015F 2016F Aug 13 Sep 13 Nov 13 Dec 13 May 13 May

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

43

Nomura | Geely Automobile 9 July 2014

Fig. 89: Financial analysis Fig. 90: Top export destinations 2013

2013 2012 y-y Sales of vehicles (CNY m) 27,828 23,145 20.2% Russia Average unit price (CNY) 50,646 47,872 5.8% Return on equity 16.6% 15.8% 0.8 ppt Ukraine Gross margin 20.1% 18.5% 1.6 ppt Operating margin 12.0% 11.4% 0.6 ppt Saudi Arabia Selling expenses (% of T/O) 5.9% 6.0% -0.1 ppt Admin. expenses (% of T/O) 5.9% 5.4% 0.5 ppt Iran Accounts receivable days 180 191 -11 days Accounts payable days 249 249 0 days Inventory days 29 29 0 days Egypt

Source: Company data, Nomura research 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Source: Company data, Nomura research

Valuation and risks Our TP continues to be based on 1.3x P/B (end-15F FD BVPS: CNY2.30) representing - 1 SD below historical mean, but has been raised to HKD3.76 reflecting the roll-forward from end-14F to end-15F BVPS. The benchmark index for the stock is MSCI China. Risks: 1) lower export sales; 2) CNY depreciation; 3) failure of its brand restructuring exercise; and 4) delays in the launch of new models.

Fig. 91: P/E chart Fig. 92: P/B chart

(x) (x) 35 7

30 6

25 5 +2SD 4.4x +2SD 20.6x 20 4 +1SD 3.4x +1SD 15.7x 15 3 LT avg = 10.9x LT avg = 2.3x 10 2 1 5 -1SD 6.1x -1SD 1.3x 0 0 Jul-07 Jul-12 Apr-06 Oct-08 Apr-11 Oct-13 Jan-05 Jun-05 Jan-10 Jun-10 Feb-07 Mar-09 Feb-12 Mar-14 Nov-05 Sep-06 Dec-07 Aug-09 Nov-10 Sep-11 Dec-12 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 May-08 May-13 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates

44

Great Wall Motor 2333.HK 2333 HK

EQUITY: AUTOS & AUTO PARTS

No room for more hiccups; maintain Buy Global Markets Research

Cheaper valuations alone not enough; new model 9 July 2014 Rating launches critical for re-rating Remains Buy

Action: In the process of regaining investor confidence; maintain Buy Target price HKD 40.00 2014 has been a very bumpy year for Great Wall Motor (GWM) so far, and we Reduced from 47.20 believe is likely to be critical if GWM aims to cement its competitive position in Closing price HKD 31.65 the SUV segment. While investors have grown uncomfortable with GWM’s 4 July 2014 execution ability after two delays to the launch of the high-end SUV H8, we Potential upside +26.4% notice that GWM’s core product H6 remains the best-selling SUV in China (averaging 23.7k units in 5M14). GWM is still enjoying strong profit levels, free cash flows, net cash, and sustainable dividend payments. Valuations have Anchor themes already been de-rated by almost half from the 4Q13 peak on earnings We remain constructive on the downgrades and a slower growth outlook. The catalysts below, if materialise, 2H14F outlook for new auto should help dispel investors’ concerns of further earnings downside and sales, underpinned by growing induce at least a partial valuation mean-reversion by end-2014F, in our view. replacement demand and availability of auto financing. We Catalysts: H2 launch (end-July); H6 additional capacity (August- prefer SUVs, entry-level luxury, September); H8 re-launch (unclear but we assume to be by end-14F) and OEMs with strong new model The key for a re-rating from the current 7.3x P/E (near the trough since 2010) pipelines. remains the successful launch of new SUV models to rejuvenate its growth trajectory. While we expect GWM’s interim result (by end-August) to be flattish Nomura vs consensus y-y (owing to overall flat sales volumes and the booking of running costs at its Our EPS estimate is in line with new Xushui plant), its earnings will likely stage a h-h recovery in 2H14F thanks consensus for FY14F, but 6% to the launch of the new compact SUV H2 (end-July) as well as an additional higher for FY15F. Our FY14F 5k per month of production capacity for H6 (August-September). The timeline sales volume assumption of 874k for H8 re-launch remains unclear pending further announcement from GWM. is 2% below management's target of 890k. We trim our FY14F-16F EPS by 5-10% to reflect our lower sales volume assumptions (lower sedan sales, and zero contribution from H8 in 14F), and Research analysts hence slightly lower our margins estimate. Valuation: TP cut to HKD40.0 on lower EPS and target P/E China Autos & Auto Parts Following our EPS revisions, and assigning a lower target P/E of 9x (from the Benjamin Lo - NIHK LT average of 11x to -1 SD below mean, given the H8 uncertainty) (mid-15F [email protected] EPS at CNY3.51), we cut our TP to HKD40.0. +852 2252 6220 Joseph Wong - NIHK Year-end 31 Dec FY13 FY14F FY15F FY16F [email protected] Currency (CNY) Actual Old New Old New Old New +852 2252 6111 Revenue (mn) 56,784 72,676 69,703 92,009 91,882 108,337 105,812 Reported net profit (mn) 8,224 10,369 9,331 12,651 12,036 14,587 13,597

Normalised net profit (mn) 8,224 10,369 9,331 12,651 12,036 14,587 13,597

FD normalised EPS 2.70 3.41 3.07 4.16 3.96 4.79 4.47 FD norm. EPS growth (%) 44.5 26.1 13.5 22.0 29.0 15.3 13.0 FD normalised P/E (x) 9.3 N/A 8.2 N/A 6.3 N/A 5.6

EV/EBITDA (x) 1.5 N/A 1.3 N/A 1.0 N/A 0.8

Price/book (x) 2.7 N/A 2.2 N/A 1.7 N/A 1.4 Dividend yield (%) 3.3 N/A 3.2 N/A 4.2 N/A 4.7 ROE (%) 33.2 32.5 29.6 31.1 30.2 28.7 27.2 Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Great Wall Motor 9 July 2014

Key data on Great Wall Motor Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 9,148 12,768 14,820 19,230 21,949 Change in working capital -1,627 -1,194 -2,900 -4,616 -4,969 Other operating cashflow -3,183 -3,217 -3,993 -4,414 -6,440 Cashflow from operations 4,337 8,357 7,927 10,200 10,539 Capital expenditure -9,703 -5,549 -6,288 -6,288 -6,288 Free cashflow -5,366 2,808 1,638 3,911 4,251 Reduction in investments -5 19 0 0 0 Net acquisitions Dec in other LT assets -55 -3 -68 -80 -93 Inc in other LT liabilities 207 150 0 0 0 Adjustments 5,560 -506 264 -644 602 CF after investing acts 341 2,469 1,834 3,188 4,760 Source: Thomson Reuters, Nomura research Cash dividends -917 -2,114 -2,488 -2,842 -3,409 Equity issue 0 0 0 0 0 Notes: Debt issue 1 182 -20 -20 -20 Convertible debt issue Others -195 116 -10 -12 -14 CF from financial acts -1,112 -1,816 -2,518 -2,874 -3,443 Performance Net cashflow -770 654 -684 314 1,316

(%) 1M 3M 12M Beginning cash 7,107 6,337 6,991 6,306 6,620

Absolute (HKD) -1.2 -17.7 -1.9 M cap (USDmn) 4,219.3 Ending cash 6,337 6,991 6,306 6,620 7,936

Absolute (USD) -1.2 -17.6 -1.8 Free float (%) 44.0 Ending net debt -6,337 -6,808 -6,144 -6,478 -7,814

Rel to MSCI China -2.2 -20.5 -17.3 3-mth ADT (USDmn) 46.6 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 6,337 6,991 6,306 6,620 7,936 Revenue 43,160 56,784 69,703 91,882 105,812 Marketable securities 12 4 4 4 4 Cost of goods sold -31,562 -40,538 -50,186 -65,695 -75,391 Accounts receivable 16,744 21,219 25,972 35,494 42,325 Gross profit 11,598 16,246 19,517 26,186 30,421 Inventories 2,695 2,764 5,225 6,840 7,849 SG&A -3,400 -4,643 -6,134 -8,729 -10,581 Other current assets 60 49 49 49 49 Employee share expense Total current assets 25,848 31,026 37,556 49,006 58,163 Operating profit 8,198 11,604 13,383 17,458 19,840 LT investments 71 59 59 59 59 EBITDA 9,148 12,768 14,820 19,230 21,949 Fixed assets 14,009 18,646 23,276 27,576 31,546 Depreciation -949 -1,165 -1,437 -1,773 -2,109 Goodwill 2 2 2 2 2 Amortisation Other intangible assets 2,214 2,443 2,668 2,884 3,093 EBIT 8,198 11,604 13,383 17,458 19,840 Other LT assets 425 428 496 576 669 Net interest expense 105 84 95 85 91 Total assets 42,569 52,605 64,057 80,103 93,532 Associates & JCEs 2 11 11 11 11 Short-term debt 0 182 162 142 122 Other income -1,465 -1,779 -2,233 -3,036 -3,541 Accounts payable 18,727 21,954 26,124 32,398 35,113 Earnings before tax 6,841 9,920 11,256 14,518 16,401 Other current liabilities 592 703 847 1,095 1,250 Income tax -1,119 -1,688 -1,915 -2,470 -2,790 Total current liabilities 19,319 22,839 27,134 33,635 36,486 Net profit after tax 5,722 8,232 9,341 12,048 13,611 Long-term debt Minority interests -30 -8 -10 -12 -14 Convertible debt Other items Other LT liabilities 1,607 1,757 1,757 1,757 1,757 Preferred dividends Total liabilities 20,926 24,597 28,891 35,392 38,243 Normalised NPAT 5,692 8,224 9,331 12,036 13,597 Minority interest 129 12 22 34 48 Extraordinary items Preferred stock Reported NPAT 5,692 8,224 9,331 12,036 13,597 Common stock 3,042 3,042 3,042 3,042 3,042 Dividends -1,734 -2,495 -2,482 -3,202 -3,617 Retained earnings 11,799 18,225 25,068 34,261 44,449 Transfer to reserves 3,958 5,729 6,849 8,834 9,980 Proposed dividends Valuations and ratios Other equity and reserves 6,673 6,729 7,034 7,373 7,749 Reported P/E (x) 13.6 9.3 8.2 6.3 5.6 Total shareholders' equity 21,514 27,996 35,144 44,677 55,241 Normalised P/E (x) 13.6 9.3 8.2 6.3 5.6 Total equity & liabilities 42,569 52,605 64,057 80,103 93,532 FD normalised P/E (x) 13.6 9.3 8.2 6.3 5.6 Dividend yield (%) 2.2 3.3 3.2 4.2 4.7 Liquidity (x) Price/cashflow (x) 17.9 9.1 9.6 7.5 7.3 Current ratio 1.34 1.36 1.38 1.46 1.59 Price/book (x) 3.6 2.7 2.2 1.7 1.4 Interest cover na na na na na EV/EBITDA (x) 2.2 1.5 1.3 1.0 0.8 Leverage EV/EBIT (x) 2.5 1.6 1.5 1.1 0.9 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 26.9 28.6 28.0 28.5 28.8 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 21.2 22.5 21.3 20.9 20.7 EBIT margin (%) 19.0 20.4 19.2 19.0 18.8 Per share Net margin (%) 13.2 14.5 13.4 13.1 12.9 Reported EPS (CNY) 1.87 2.70 3.07 3.96 4.47 Effective tax rate (%) 16.4 17.0 17.0 17.0 17.0 Norm EPS (CNY) 1.87 2.70 3.07 3.96 4.47 Dividend payout (%) 30.5 30.3 26.6 26.6 26.6 FD norm EPS (CNY) 1.87 2.70 3.07 3.96 4.47 ROE (%) 29.8 33.2 29.6 30.2 27.2 BVPS (CNY) 7.07 9.20 11.55 14.68 18.16 ROA (pretax %) 26.3 28.4 25.9 26.6 25.0 DPS (CNY) 0.57 0.82 0.82 1.05 1.19 Growth (%) Activity (days) Revenue 43.4 31.6 22.8 31.8 15.2 Days receivable 115.1 122.0 123.6 122.1 134.6 EBITDA 59.9 39.6 16.1 29.8 14.1 Days inventory 31.7 24.6 29.1 33.5 35.7 Normalised EPS 53.7 44.5 13.5 29.0 13.0 Days payable 192.2 183.1 174.8 162.6 163.9 Normalised FDEPS 53.7 44.5 13.5 29.0 13.0 Cash cycle -45.4 -36.6 -22.2 -7.0 6.4 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

46

Nomura | Great Wall Motor 9 July 2014

Fig. 93: Monthly and annual sales data

(units) 2011 2012 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 2013 2014F 2015F 2016F Pick - up 121,673 136,694 34,906 32,607 30,257 29,036 11,563 8,996 11,682 11,493 11,199 10,188 136,132 140,000 145,000 150,000 SUV 147,341 279,956 92,797 93,808 111,905 118,872 41,386 30,297 42,321 39,445 35,993 35,831 420,302 578,000 791,000 893,000 Sedans 187,504 199,256 62,621 51,094 45,156 51,136 16,677 10,797 14,036 8,331 4,643 2,512 205,451 150,000 135,000 135,000 Others 6,161 5,532 6 18 12 11 2 1 3 4 2 2 8,734 6,000 6,000 6,000 Total sales 462,679 621,438 190,330 177,527 187,330 199,055 69,628 50,091 68,042 59,273 51,837 48,533 770,619 874,000 1,077,000 1,184,000 y-y growth Pick - up 23.3% 12.3% 3.5% -5.7% -3.9% -21.3% -12.4% 2.7% -9.7% 24.9% -5.1% -12.2% -0.4% 2.8% 3.6% 3.4% SUV 7.6% 90.0% 101.1% 55.8% 41.6% 25.7% 17.3% 22.6% 29.0% 31.9% 12.0% 12.8% 50.1% 37.5% 36.9% 12.9% Sedans 52.6% 6.3% 36.4% 28.5% -8.0% -20.7% -30.3% -47.0% -23.5% -58.4% -73.5% -81.5% 3.1% -27.0% -10.0% 0.0% Others 22.9% -10.2% n.a. n.a. n.a. n.a. n.a n.a 0.0% -20.0% -66.7% -71.4% n.a -31.3% 0.0% 0.0% Total sales 27.3% 34.3% 50.3% 31.1% 16.2% 0.6% -3.8% -7.0% 6.2% 0.3% -15.7% -14.8% 24.0% 13.4% 23.2% 9.9% Source: Company data, Nomura estimates

Fig. 94: Quarterly results summary, 2013 and 1Q14

(units) 1Q13 2Q13 3Q13 4Q13 2013 1Q14 y-y q-q Pick-up trucks and others 34,912 32,625 30,269 47,060 144,866 32,241 -7.7% -31.5% SUV 92,797 93,808 111,905 121,792 420,302 114,004 22.9% -6.4% Sedan 62,621 51,094 45,156 46,580 205,451 41,516 -33.7% -10.9% Total sales volume 190,330 177,527 187,330 215,432 770,619 187,761 -1.3% -12.8%

CNY mn Total Operating Revenue 12,755 13,662 14,358 16,009 56,784 14,735 15.5% -8.0% Total operating costs (10,514) (11,065) (11,833) (13,756) (47,168) (12,318) 17.2% -10.5% Operating costs (9,169) (9,597) (10,198) (11,574) (40,538) (10,604) 15.7% -8.4% Business tax and surcharges (468) (487) (521) (581) (2,057) (511) 9.2% -12.0% Selling expenses (410) (445) (483) (557) (1,895) (447) 9.0% -19.7% Administrative expenses (483) (551) (643) (1,071) (2,747) (780) 61.7% -27.1% Financial expenses 11 20 21 33 84 24 128.8% -25.8% Impairment loss on assets 5 (5) (9) (6) (14) 1 -86.8% -112.4%

Add: Gains from changes in fair value 11 (6) (8) (4) (7) (13) -214.9% 194.5% Investment income 17 14 14 15 59 4 -76.7% -74.2% Including: share of profit of associates and JCE 1 3 1 7 11 4 216.3% -45.9% Operating Profits 2,269 2,604 2,531 2,264 9,668 2,409 6.2% 6.4%

Add: Non-operating income 24 47 36 172 279 35 46.9% -79.8% Less: Non-operating expenses 2 9 7 8 27 6 151.0% -25.3% Including: Loss from disposal of non-current assets 1 4 4 5 14 3 227.8% -35.6% Total pre-tax profits 2,290 2,641 2,560 2,429 9,920 2,437 6.4% 0.4%

Less: Income tax expenses (392) (448) (473) (375) (1,688) (432) 10.3% 15.2% Net Profits 1,898 2,193 2,087 2,053 8,232 2,005 5.6% -2.3% Minority interests (2) (2) (2) (2) (8) 0 -112.0% -111.4%

Net profit attributable to shareholders 1,896 2,191 2,085 2,051 8,224 2,005 5.8% -2.2%

Basic earnings per share (CNY) 0.62 0.72 0.69 0.67 2.70 0.66 5.8% -2.2%

Gross margins 28.1% 29.8% 29.0% 27.7% 28.6% 28.0% -0.1 ppt 0.3 ppt Operating margins 17.8% 19.1% 17.6% 14.1% 17.0% 16.3% -1.4 ppt 2.2 ppt Net margins 14.9% 16.0% 14.5% 12.8% 14.5% 13.6% -1.3 ppt 0.8 ppt

Selling exp as a % of revenue 3.2% 3.3% 3.4% 3.5% 3.3% 3.0% -0.2 ppt -0.4 ppt Admin exp as a % of revenue 3.8% 4.0% 4.5% 6.7% 4.8% 5.3% 1.5 ppt -1.4 ppt SG&A as a % of revenue 7.0% 7.3% 7.8% 10.2% 8.2% 8.3% 1.3 ppt -1.8 ppt Source: Company data, Nomura research

47

Nomura | Great Wall Motor 9 July 2014

Fig. 95: 2014F Sales volume breakdown Fig. 96: SUV sales volume y-y comparisons

Units 2013 (LHS) 2014 (LHS) y-y (RHS) M series Others 45,000 35% 17% 18% 32% 40,000 30% H2 35,000 29% 25% 5% 30,000 23% 20% Sedan H3&H5 25,000 17% 7% 20,000 17% 13% 15% 15,000 12% 10% H8 10,000 0% 5,000 5% H6 0 0% 36% Jan FebMar AprMayJun Jul Aug Sep Oct NovDec

Source: Company, Nomura estimates Source: Company, Nomura research

Fig. 97: Key changes to our assumptions 2014F 2015F 2016F (units) New Old % diff New Old % diff New Old % diff Pick-up and others 146,000 146,000 0.0% 151,000 151,000 0.0% 156,000 156,000 0.0% Sedan 150,000 180,000 -16.7% 135,000 185,000 -27.0% 135,000 190,000 -28.9% SUV 578,000 566,000 2.1% 791,000 738,000 7.2% 893,000 874,000 2.2% Total sales volume 874,000 892,000 -2.0% 1,077,000 1,074,000 0.3% 1,184,000 1,220,000 -3.0%

(CNY mn) Total revenues 69,703 72,676 -4.1% 91,882 92,009 -0.1% 105,812 108,337 -2.3%

Gross profits 19,517 20,785 -6.1% 26,186 26,499 -1.2% 30,421 31,418 -3.2% GP margins 28.0% 28.6% -0.6%-pt 28.5% 28.8% -0.3%-pt 28.8% 29.0% -0.3%-pt

Net profits 9,331 10,369 -10.0% 12,036 12,651 -4.9% 13,597 14,587 -6.8% NP margin 13.4% 14.3% -0.9%-pt 13.1% 13.7% -0.7%-pt 12.9% 13.5% -0.6%-pt

Source: Nomura estimates

Valuation and risks Following our EPS revisions, and assigning a lower target P/E of 9x (from the LT average of 11x to -1 SD below mean given the H8 uncertainty) (mid-15F EPS of CNY3.51), we cut our TP to HKD40.0. The benchmark index for this stock is MSCI China. Risks: 1) delays or cancellation of new product launches; 2) worse-than-expected cost controls; and 3) a slowdown in industry SUV sales as a result of the possible change in government policy towards private vehicle ownership.

Fig. 98: P/E chart Fig. 99: P/B chart (x) (x) 5.0 18 4.5 16 4.0 14 +2SD 14.8x 3.5 12 3.0 +2SD 4.1x 10 +1SD 12.8x 2.5 8 2.0 +1SD 3.4x LT avg = 10.8x 6 1.5 LT avg = 2.7x 4 -1SD 8.8x 1.0 -1SD 2.0x 2 -2S D 6.8x 0.5 0 0.0 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates

48

Guangzhou Auto 2238.HK 2238 HK

EQUITY: AUTOS & AUTO PARTS

Buy maintained with new TP of HKD11.5 Global Markets Research

Strong earnings growth story intact on new models 9 July 2014 Rating and margin expansion Remains Buy

Action: We expect a strong 2H14F; reaffirm Buy Target price HKD 11.50 We have had a positive view on GAC since July 2013. We remain constructive Increased from 10.50 on the stock, and believe that current valuation at 9x forward P/E (broadly in Closing price HKD 9.59 line with the sector average) is compelling considering its expected 2013-16F 4 July 2014 EPS CAGR of 39% (sector average: 19%). Such strong growth is likely to be Potential upside +19.9% driven by: 1) our forecast for further total sales volume growth of 16% y-y in

2014F; 2) its strong new model pipeline, in particular Honda’s new compact SUV (4Q14F) and the Toyota Levin (end-July 2014) should be well-received Anchor themes by the market; and 3) continued gross margin expansion of GAC’s own brands We remain constructive on the thanks to scale economies on sales volume growth of 24% y-y. Looking 2H14F outlook for new auto beyond 2014F, GAC still has a number of new models in the pipeline, sales, underpinned by growing replacement demand and including the Toyota Highlander SUV in 2015 and the commencement of local availability of auto financing. We production for a Fiat Jeep SUV towards the end of 2015. prefer SUVs, entry-level luxury, We trim our FY14-15F EPS forecasts by 3%/2% each to reflect slower-than- and OEMs with strong new model expected sales volumes of the Honda Accord YTD. That said, in 2H14F, we pipelines. expect the GAC-Honda JV to benefit from the launches of the new Fit and new compact SUV, hence we don’t expect further deterioration in the remainder of Nomura vs consensus the year, following its 1% sales volume decline in 5M14. Our 2014F/15F EPS forecasts are in line with consensus, as the Catalysts: New models and above-industry monthly sales data Street has upgraded forecasts 1) New models including Honda’s new Fit (just launched), Honda’s new and caught up with our estimates. compact SUV (4Q14F), and the Toyota Levin (end-July 2014); and

2) Monthly sales volume data, which should continue to beat the industry Research analysts average. China Autos & Auto Parts Valuation: TP of HKD11.5 based on 12.1x one-year forward P/E Still based on a target P/E of 12.1x (LT average) but rolling forward to mid- Benjamin Lo - NIHK [email protected] 2015F EPS of CNY0.76, we revise our TP to HKD11.5 (from HKD10.5). +852 2252 6220

Joseph Wong - NIHK [email protected] +852 2252 6111 Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 18,824 21,501 21,307 22,497 22,407 23,012 Reported net profit (mn) 2,653 4,389 4,271 5,610 5,474 6,929

Normalised net profit (mn) 2,653 4,389 4,271 5,610 5,474 6,929

FD normalised EPS 41.23c 68.98c 66.37c 88.16c 85.07c 1.08 FD norm. EPS growth (%) 131.3 40.9 61.0 27.8 28.2 26.6 FD normalised P/E (x) 18.5 N/A 11.5 N/A 8.9 N/A 7.1 EV/EBITDA (x) 4.2 N/A 3.1 N/A 2.4 N/A 1.8 Price/book (x) 1.5 N/A 1.3 N/A 1.2 N/A 1.1 Dividend yield (%) 2.1 N/A 2.2 N/A 2.8 N/A 3.5 ROE (%) 8.2 12.6 12.2 14.5 14.2 16.0 Net debt/equity (%) 0.3 2.2 0.3 net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Guangzhou Auto 9 July 2014

Key data on Guangzhou Auto Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA -789 162 402 785 1,194 Change in working capital 2,196 -595 126 -31 -78 Other operating cashflow -1,450 -1,013 -403 -432 -360 Cashflow from operations -43 -1,447 125 322 757 Capital expenditure -2,932 -1,647 -2,482 -2,482 -2,482 Free cashflow -2,975 -3,094 -2,357 -2,160 -1,725 Reduction in investments 175 -364 -1,786 -1,796 -2,262 Net acquisitions Dec in other LT assets -1,285 910 -145 -112 -99 Inc in other LT liabilities 82 329 105 46 25 Adjustments 6,296 3,044 5,136 6,280 7,573 CF after investing acts 2,292 825 953 2,259 3,512 Source: Thomson Reuters, Nomura research Cash dividends -1,757 -538 -1,068 -1,369 -1,732 Equity issue 0 0 0 0 0 Notes: Debt issue 38 4,041 0 0 0 Convertible debt issue Others 503 440 105 46 25 CF from financial acts -1,215 3,942 -963 -1,322 -1,707 Performance Net cashflow 1,077 4,767 -10 937 1,805

(%) 1M 3M 12M Beginning cash 8,239 9,316 14,083 14,074 15,010

Absolute (HKD) 19.3 15.4 41.9 M cap (USDmn) 2,738.7 Ending cash 9,316 14,083 14,074 15,010 16,815

Absolute (USD) 19.3 15.5 41.9 Free float (%) 41.2 Ending net debt 975 89 98 -838 -2,643

Rel to MSCI China 18.3 12.6 26.4 3-mth ADT (USDmn) 6.7 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 9,316 14,083 14,074 15,010 16,815 Revenue 12,964 18,824 21,307 22,407 23,012 Marketable securities 6,227 4,956 5,145 5,050 5,098 Cost of goods sold -12,274 -16,830 -18,750 -19,382 -19,560 Accounts receivable 3,303 4,725 5,348 5,624 5,776 Gross profit 690 1,994 2,557 3,025 3,452 Inventories 1,397 2,036 2,269 2,345 2,367 SG&A -2,147 -2,784 -3,090 -3,316 -3,475 Other current assets 31 713 713 713 713 Employee share expense Total current assets 20,274 26,514 27,548 28,743 30,769 Operating profit -1,457 -789 -533 -291 -23 LT investments 16,984 18,618 20,215 22,105 24,320 EBITDA -789 162 402 785 1,194 Fixed assets 5,927 7,366 8,691 9,900 10,995 Depreciation -668 -951 -935 -1,076 -1,217 Goodwill 0 0 0 0 0 Amortisation Other intangible assets 3,076 3,084 3,230 3,352 3,450 EBIT -1,457 -789 -533 -291 -23 Other LT assets 3,172 2,262 2,407 2,519 2,618 Net interest expense -193 -169 -223 -218 -195 Total assets 49,434 57,843 62,091 66,619 72,151 Associates & JCEs 2,637 4,020 5,385 6,345 7,419 Short-term debt 2,515 9,397 9,397 9,397 9,397 Other income 13 -433 -250 -200 -150 Accounts payable 6,376 8,637 9,623 9,947 10,039 Earnings before tax 1,000 2,629 4,379 5,636 7,051 Other current liabilities 139 25 21 18 22 Income tax 65 -101 -151 -106 92 Total current liabilities 9,030 18,059 19,041 19,362 19,458 Net profit after tax 1,065 2,529 4,228 5,529 7,143 Long-term debt 7,776 4,775 4,775 4,775 4,775 Minority interests 69 124 42 -55 -214 Convertible debt Other items Other LT liabilities 564 893 998 1,044 1,070 Preferred dividends Total liabilities 17,370 23,727 24,814 25,181 25,302 Normalised NPAT 1,134 2,653 4,271 5,474 6,929 Minority interest 922 805 763 818 1,032 Extraordinary items Preferred stock Reported NPAT 1,134 2,653 4,271 5,474 6,929 Common stock 6,435 6,435 6,435 6,435 6,435 Dividends -579 -1,030 -1,068 -1,369 -1,732 Retained earnings 14,517 16,313 19,516 23,622 28,818 Transfer to reserves 555 1,623 3,203 4,106 5,196 Proposed dividends Valuations and ratios Other equity and reserves 10,190 10,563 10,563 10,563 10,563 Reported P/E (x) 43.4 18.5 11.5 8.9 7.1 Total shareholders' equity 31,142 33,311 36,514 40,620 45,816 Normalised P/E (x) 43.4 18.5 11.5 8.9 7.1 Total equity & liabilities 49,434 57,843 62,091 66,619 72,151 FD normalised P/E (x) 43.4 18.5 11.5 8.9 7.1 Dividend yield (%) 1.2 2.1 2.2 2.8 3.5 Liquidity (x) Price/cashflow (x) na na 390.8 152.3 64.7 Current ratio 2.25 1.47 1.45 1.48 1.58 Price/book (x) 1.6 1.5 1.3 1.2 1.1 Interest cover -7.6 -4.7 -2.4 -1.3 -0.1 EV/EBITDA (x) 10.3 4.2 3.1 2.4 1.8 Leverage EV/EBIT (x) 16.1 5.5 3.6 2.8 2.1 Net debt/EBITDA (x) na 0.55 0.24 net cash net cash Gross margin (%) 5.3 10.6 12.0 13.5 15.0 Net debt/equity (%) 3.1 0.3 0.3 net cash net cash EBITDA margin (%) -6.1 0.9 1.9 3.5 5.2 EBIT margin (%) -11.2 -4.2 -2.5 -1.3 -0.1 Per share Net margin (%) 8.7 14.1 20.0 24.4 30.1 Reported EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 Effective tax rate (%) -6.5 3.8 3.4 1.9 -1.3 Norm EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 Dividend payout (%) 51.1 38.8 25.0 25.0 25.0 FD norm EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 ROE (%) 3.8 8.2 12.2 14.2 16.0 BVPS (CNY) 4.89 5.18 5.67 6.31 7.12 ROA (pretax %) 3.1 7.7 10.6 12.2 13.8 DPS (CNY) 0.09 0.16 0.17 0.21 0.27 Growth (%) Activity (days) Revenue 18.0 45.2 13.2 5.2 2.7 Days receivable 88.7 77.8 86.3 89.4 90.7 EBITDA na na 148.9 95.1 52.2 Days inventory 43.7 37.2 41.9 43.4 44.1 Normalised EPS -74.4 131.3 61.0 28.2 26.6 Days payable 155.7 162.8 177.7 184.3 187.0 Normalised FDEPS -74.4 131.3 61.0 28.2 26.6 Cash cycle -23.3 -47.7 -49.6 -51.5 -52.2 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

50

Nomura | Guangzhou Auto 9 July 2014

Fig. 100: GAC monthly sales volumes

(units) 2011 2012 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 2013 2014F 2015F 2016F GAC Honda 362,294 316,405 77,606 99,584 105,252 153,038 30,834 19,388 31,412 26,178 33,701 40,043 435,480 430,000 545,000 586,000 GAC Toyota 274,417 250,088 64,692 74,520 78,698 85,178 30,226 22,366 33,885 30,032 30,780 29,012 303,088 408,000 450,000 487,000 GAC Mitsubishi - 2,574 6,351 7,684 11,490 17,510 3,800 2,650 4,306 4,780 6,616 7,386 43,035 54,400 64,800 77,200 GAC Fiat - 11,288 9,207 9,320 13,262 16,586 4,610 3,207 9,353 3,922 5,842 6,103 48,375 54,000 72,000 137,000 Others 103,652 131,880 35,594 39,879 34,477 64,687 13,022 9,960 13,542 17,580 15,314 13,886 174,637 213,750 240,691 267,132 Total GAC 740,363 712,235 193,450 230,987 243,179 336,999 82,492 57,571 92,498 82,492 92,253 96,430 1,004,615 1,160,150 1,372,491 1,554,332

y-y growth GAC Honda -6.1% -12.7% 7.6% 0.4% 49.1% 120.3% 36.5% 2.5% -13.0% -25.9% 10.1% 19.0% 37.6% -1.3% 26.7% 7.5% GAC Toyota 1.9% -8.9% -5.5% 11.6% 9.8% 79.8% 34.3% 50.6% 24.0% 29.0% 30.5% 4.9% 21.2% 34.6% 10.3% 8.2% GAC Mitsubishi n.a n.a n.a n.a n.a n.a n.a n.a 75.5% 150.9% 189.4% 111.5% n.a. 26.4% 19.1% 19.1% GAC Fiat n.a n.a n.a n.a n.a n.a n.a n.a 187.9% 30.5% 91.2% 87.3% 328.6% 11.6% 33.3% 90.3% Others 50.5% 27.3% 42.6% 10.5% -8.0% 88.6% 14.0% -10.5% 3.8% 36.9% 18.2% -1.4% 32.4% 22.4% 12.6% 11.0% Total GAC 2.2% -3.8% 16.9% 14.3% 34.6% 105.6% 31.3% 18.8% 12.6% 8.0% 27.3% 17.4% 41.1% 15.5% 18.3% 13.2%

Source: Company data, Nomura estimates

Fig. 101: GAMC sales volume and GAC gross margins Fig. 102: New product pipeline

(units) GAMC sales volume GAC's gross margins OEM Model Year Month GAC Honda Crosstour 2014 Apr 180,000 16% GAC Honda Fit 2014 Jun 13.5% 160,000 GAC Honda Odessy 2014 Q4 14% GAC Honda Jazz 2014 n.a 140,000 12.0% GAC Honda City 2015 n.a 10.6% 160,000 12% GAC Honda Concept V 2015 n.a 120,000 135,000 GAC Fiat Vaggio 2014 Q4 10% GAC Fiat Freemount 2014 n.a 100,000 7.7% GAC Mitsubishi Outlander 2014 Q4 8% 109,284 GAC Mitsubishi Mirage 2015 n.a 80,000 GAMC GS3 2014 Q4 4.7% 6% 60,000 GAMC Fangzhou 2014 H2 45,432 GAMC GA7 2015 n.a 40,000 4% GAC Toyota A Sedan(SAI) 2014 Jul 24,267 GAC Toyota Levin 2014 Jul 20,000 2% GAC Toyota C-Sedan 2014 Aug GAC Toyota B Sedan(Avalon) 2014 Q4 0 0% GAC Toyota E'Z 2014 H2 6M12 6M13 2013 2014F 2015F GAC Toyota New Camry 2015 H1 GAC Toyota Highlander 2015 n.a Source: Company data, Nomura estimates Source: Nomura research

Fig. 103: GAC Honda 4-week moving average sales Fig. 104: GAC Toyota 4-week moving average sales

3,000 GAC-Honda 1,800 GAC-Toyota 1,600 2,500 1,400 2,000 1,200 1,000 1,500 800 1,000 600 400 500 200 0 0 13 W1 12W1 13W5 14W2 12 W2 13 W5 12W1 12W2 13W3 W4 r 13 W1 r 14 y y y g r 14 W3 y y g p g p p p Jul 12 W2 Jul 13 W1 Oct 12 W4 12 Oct Oct 13 W3 13 Oct A A Jul 13 W2 13 Jul Jan 14 W1 14 Jan Jun 12 W1 12 Jun W2 13 Jan W3 14 Jun Feb 14 W4 Feb 13 W2 Mar 13 W3 Aug 12 W3 Sep 12 W3 Dec 12 W1 Au Sep 13 W2 Nov 13 W4 Apr 13 W3 A Oct 12 W4 Oct 13 W1 Ma Ma Ma Jun 12 W3 Jun 14 W1 Jan 13 W4 Jan 14 W1 Mar 13 W1 Mar 14 W1 Au Au Se W2 Dec 12 NovW3 13 Ma Ma

Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research

51

Nomura | Guangzhou Auto 9 July 2014

Fig. 105: Toyota Levin Fig. 106: New Honda compact SUV

Source: Nomura research Source: Nomura research

Valuation and risks Still based on a target P/E of 12.1x (LT average) but rolling forward to mid-2015F EPS of CNY0.76, we revise our TP to HKD11.5 (from HKD10.5. The benchmark index for this stock is MSCI China. Risks: 1) All of GAC's production is located in Guangdong province, where we believe it will continue to face pressure from rising labour and component costs; 2) lingering tension between China and Japan may hamper the pace of the recovery for Japanese- brand sales; and 3) delays/postponement of new model debuts/upgrades.

Fig. 107: P/E chart Fig. 108: P/B chart

(x) (x) 35 2.5 2.3 30 2.1 1.9 25 +2SD 1.7x 1.7 +1SD 1.5x 20 +2SD 18.2x 1.5 +1SD 15.2x 1.3 LT avg = 1.2x 15 LT avg = 12.1x 1.1 -1SD 9.1x 10 0.9 -1SD 1.0x 0.7 5 0.5 -11 -12 -13 -11 -12 -14 y y y g g g Feb-12 Feb-13 Feb-14 Feb-11 Au Au Au Nov-11 Nov-12 Nov-13 Nov-10 Ma May-13 Ma Ma Jul-11 Jul-12 Jul-13 Jan-11 Jan-12 Jan-13 Jan-14 Mar-11 Mar-12 Mar-13 Mar-14 Sep-11 Sep-12 Sep-13 Nov-10 Nov-11 Nov-12 Nov-13 May-11 May-12 May-13 May-14 Source: Bloomberg, Nomura research

Source: Bloomberg, Nomura research

52

SAIC Motor 600104.SS 600104 CH

EQUITY: AUTOS & AUTO PARTS

Initiate at Buy; 40%+ upside with dividends Global Markets Research

Hidden gem – a high quality, blue-chip OEM offered 9 July 2014 Rating at 6x FY14F P/E, 9% FY14F dividend yield Starts at Buy

Target price Action: Initiate at Buy on the best value OEM in the China auto universe Starts at CNY 21.20 SAIC is the biggest OEM in China, in terms of sales volume (2013: 5.1mn Closing price units) and market cap (USD27bn). Despite its scale, it is not short of growth 4 July 2014 CNY 15.56 potential, in our view – sales volumes at its two major JVs, Shanghai-VW (SVW) and Shanghai-GM (SGM), have outpaced industry volume growth over Potential upside +36.2% the past three years, and we look for sustainable strength (on well-recognised brands, new models) to drive a 12% EPS CAGR over 2013-16F. While this Anchor themes may not be considered high growth, we believe that SAIC offers sustainable We remain constructive on the profitability and that its shares have been over-penalised with its P/E of 6x 2H14F outlook for new auto (30% discount to H-share OEM average) and sector-high dividend yield of 9% sales, underpinned by growing supported by positive free cashflow and net cash. replacement demand and availability of auto financing. We Catalyst: Shanghai-HK through train (by end-2014) prefer SUVs, entry-level luxury, While SAIC’s monthly sales data and results should remain solid, we consider and OEMs with strong new model the most important catalyst to be implementation of the “Shanghai-HK through pipelines. train”, which will allow foreign investors to buy domestic A-shares directly. We believe SAIC’s low valuations have a lot to do with inefficiency in the A-share Nomura vs consensus market, as local investors tend to prefer high-growth stocks. With further We are 2% above consensus on opening of the A-share market to foreign investors, we expect SAIC’s below- both FY14F/FY15F EPS. The sector valuations to gradually align with the non-domestic H-share average. stock is also mostly covered by domestic local brokers.

Valuations: Potential upside of 45% including dividends

Our TP of CNY21.2 is based on the LT average P/E of 8x (mid-2015F EPS of Research analysts

CNY2.65). We believe increased foreign investor interest will see SAIC’s P/E normalise. We also consider 8x P/E to be reasonable compared to its closest China Autos & Auto Parts peer, H-share-listed Dongfeng Motor (489 HK, Buy), which has a similar LT Benjamin Lo - NIHK growth profile and a LT average P/E of 8.5x. [email protected] +852 2252 6220

Joseph Wong - NIHK [email protected] +852 2252 6111 Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 563,346 N/A 640,552 N/A 707,852 N/A 788,644 Reported net profit (mn) 24,804 N/A 27,635 N/A 30,810 N/A 34,764

Normalised net profit (mn) 24,804 N/A 27,635 N/A 30,810 N/A 34,764

FD normalised EPS 2.25 N/A 2.51 N/A 2.79 N/A 3.15 FD norm. EPS growth (%) 19.5 N/A 11.4 N/A 11.5 N/A 12.8 FD normalised P/E (x) 6.9 N/A 6.2 N/A 5.6 N/A 4.9 EV/EBITDA (x) 3.5 N/A 3.4 N/A 3.3 N/A 3.2 Price/book (x) 1.2 N/A 1.1 N/A 1.0 N/A 0.9 Dividend yield (%) 7.7 N/A 8.6 N/A 9.6 N/A 10.8 ROE (%) 16.2 N/A 15.9 N/A 15.4 N/A 15.2 Net debt/equity (%) net cash N/A net cash N/A net cash N/A net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | SAIC Motor 9 July 2014

Key data on SAIC Motor Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 32,575 22,439 23,755 25,543 27,670 Change in working capital -25,718 4,793 -8,283 -18,191 -19,741 Other operating cashflow -3,198 -30,546 16,636 18,707 21,048 Cashflow from operations 3,659 -3,314 32,108 26,060 28,977 Capital expenditure -16,009 -15,659 -15,000 -15,000 -15,000 Free cashflow -12,350 -18,974 17,108 11,060 13,977 Reduction in investments -21,122 -4,330 0 0 0 Net acquisitions Dec in other LT assets 5,062 -8,081 0 0 0 Inc in other LT liabilities Adjustments 15,045 50,780 0 0 0 CF after investing acts -13,365 19,396 17,108 11,060 13,977 Source: Thomson Reuters, Nomura research Cash dividends -4,962 -9,923 -13,986 -15,588 -17,489 Equity issue 0 0 0 0 0 Notes: Debt issue 3,639 15,734 0 0 0 Convertible debt issue Others 3,375 3,045 -2,400 3,880 4,759 CF from financial acts 2,052 8,856 -16,386 -11,707 -12,730 Performance Net cashflow -11,312 28,251 722 -647 1,247

(%) 1M 3M 12M Beginning cash 72,159 60,846 89,098 89,820 89,173

Absolute (CNY) 7.5 10.9 16.6 M cap (USDmn) 27,641.2 Ending cash 60,846 89,098 89,820 89,173 90,420

Absolute (USD) 8.3 11.1 15.0 Free float (%) 17.3 Ending net debt -22,292 -34,810 -35,533 -34,885 -36,132

Rel to MSCI China 4.4 5.9 -1.4 3-mth ADT (USDmn) 42.7 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 60,846 89,098 89,820 89,173 90,420 Revenue 478,433 563,346 640,552 707,852 788,644 Marketable securities Cost of goods sold -402,038 -489,570 -557,280 -615,831 -686,120 Accounts receivable 50,260 51,795 54,403 56,240 58,338 Gross profit 76,395 73,775 83,272 92,021 102,524 Inventories 24,951 30,915 33,589 37,119 41,355 SG&A -50,321 -56,195 -64,625 -71,960 -80,710 Other current assets 53,097 60,378 72,453 86,944 104,332 Employee share expense Total current assets 189,155 232,184 250,266 269,475 294,446 Operating profit 26,073 17,581 18,647 20,061 21,814 LT investments 69,264 73,594 82,594 91,594 100,594 EBITDA 32,575 22,439 23,755 25,543 27,670 Fixed assets 32,826 38,131 43,813 44,395 44,685 Depreciation -5,394 -3,955 -4,124 -4,417 -4,710 Goodwill Amortisation -1,107 -903 -984 -1,065 -1,146 Other intangible assets 5,612 5,711 6,681 6,616 6,470 EBIT 26,073 17,581 18,647 20,061 21,814 Other LT assets 20,347 24,021 24,021 24,021 24,021 Net interest expense 182 266 329 338 330 Total assets 317,203 373,641 407,374 436,102 470,216 Associates & JCEs 15,548 23,022 26,198 29,445 33,498 Short-term debt 37,607 48,023 48,023 48,023 48,023 Other income -1,647 624 -113 -113 -113 Accounts payable 72,805 92,501 109,929 126,541 146,623 Earnings before tax 40,156 41,493 45,061 49,731 55,529 Other current liabilities 45,939 45,815 37,463 22,518 6,418 Income tax -6,628 -5,909 -6,417 -7,082 -7,908 Total current liabilities 156,352 186,340 195,415 197,082 201,064 Net profit after tax 33,528 35,584 38,644 42,649 47,621 Long-term debt 947 6,264 6,264 6,264 6,264 Minority interests -12,776 -10,780 -11,009 -11,839 -12,857 Convertible debt Other items Other LT liabilities 14,898 19,305 19,305 19,305 19,305 Preferred dividends Total liabilities 172,197 211,909 220,984 222,650 226,633 Normalised NPAT 20,752 24,804 27,635 30,810 34,764 Minority interest 22,669 23,975 34,984 46,823 59,680 Extraordinary items Preferred stock Reported NPAT 20,752 24,804 27,635 30,810 34,764 Common stock 11,026 11,026 11,026 11,026 11,026 Dividends -6,615 -13,231 -14,741 -16,434 -18,544 Retained earnings 111,312 126,732 140,381 155,603 172,878 Transfer to reserves 14,136 11,573 12,894 14,375 16,220 Proposed dividends Valuations and ratios Other equity and reserves Reported P/E (x) 8.3 6.9 6.2 5.6 4.9 Total shareholders' equity 122,337 137,757 151,406 166,628 183,903 Normalised P/E (x) 8.3 6.9 6.2 5.6 4.9 Total equity & liabilities 317,203 373,641 407,374 436,102 470,216 FD normalised P/E (x) 8.3 6.9 6.2 5.6 4.9 Dividend yield (%) 3.9 7.7 8.6 9.6 10.8 Liquidity (x) Price/cashflow (x) 46.9 na 5.3 6.6 5.9 Current ratio 1.21 1.25 1.28 1.37 1.46 Price/book (x) 1.4 1.2 1.1 1.0 0.9 Interest cover na na na na na EV/EBITDA (x) 3.6 3.5 3.4 3.3 3.2 Leverage EV/EBIT (x) 4.1 4.0 3.8 3.7 3.5 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 16.0 13.1 13.0 13.0 13.0 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 6.8 4.0 3.7 3.6 3.5 EBIT margin (%) 5.4 3.1 2.9 2.8 2.8 Per share Net margin (%) 4.3 4.4 4.3 4.4 4.4 Reported EPS (CNY) 1.88 2.25 2.51 2.79 3.15 Effective tax rate (%) 16.5 14.2 14.2 14.2 14.2 Norm EPS (CNY) 1.88 2.25 2.51 2.79 3.15 Dividend payout (%) 31.9 53.3 53.3 53.3 53.3 FD norm EPS (CNY) 1.88 2.25 2.51 2.79 3.15 ROE (%) 14.9 16.2 15.9 15.4 15.2 BVPS (CNY) 11.10 12.49 13.73 15.11 16.68 ROA (pretax %) 16.6 15.0 14.9 14.9 15.2 DPS (CNY) 0.60 1.20 1.34 1.49 1.68 Growth (%) Activity (days) Revenue 10.5 17.7 13.7 10.5 11.4 Days receivable 39.8 33.1 30.3 28.5 26.6 EBITDA -12.4 -31.1 5.9 7.5 8.3 Days inventory 24.7 20.8 21.1 21.0 20.9 Normalised EPS 2.6 19.5 11.4 11.5 12.8 Days payable 76.8 61.6 66.3 70.1 72.9 Normalised FDEPS 2.6 19.5 11.4 11.5 12.8 Cash cycle -12.4 -7.7 -14.9 -20.6 -25.3 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

54

Nomura | SAIC Motor 9 July 2014

SAIC stands out among China OEMs SAIC is a large-cap, blue-chip OEM listed on the Shanghai A-share market. Its sales volume growth has consistently outpaced (or at least has been at par) with industry average growth. Yet the shares trade at the lowest P/E multiple and offer the highest dividend yield among listed A- and H-share OEMs.

Fig. 109: SAIC has the largest market cap among China Fig. 110: SVW has consistently outperformed industry PV OEMs sales volume growth, while SGM has been mostly in line

(USDmn) 80% China PV SVW SGM 30,000 60% 25,000

20,000 40% 15,000 20% 10,000 5,000 0%

0 -20% BYD GAC SAIC Geely -40% Faw Car Faw Brilliance Changan Faw Xiali Dongfeng r-11 r-12 r-13 r-14 Great Wall Beiqi Foton Beiqi Haima Auto p p p p Liaoning SG Jul-11 Jul-12 Jul-13 A Oct-11 A Oct-12 A Oct-13 A Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg, Nomura research Source: China Auto Market, Nomura research

Fig. 111: SAIC ranks cheapest on 2014F P/E… Fig. 112: … and offers the highest 2014F dividend yield

P/E (x) 9% 60 8% 7% 50 6% 40 5% 30 4% 3% 20 2% 10 1% 0 0% GAC BYD SAIC GAC Geely SAIC Geely Faw Car Faw Car Faw Changan Brilliance Changan Brilliance Brilliance Dongfeng Dongfeng Dongfeng Great Wall Beiqi Foton Beiqi Great Wall Wall Great Beiqi Foton Beiqi Haima Auto Haima

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

55

Nomura | SAIC Motor 9 July 2014

Financial analysis We expect SAIC’s sales volumes to continue to grow steadily with a relatively strong product cycle in the coming two years: 1) in SVW, an A+ compact sedan (at a higher price than the Lavida) will be launched in 2H14, a full-size sedan (C-sedan) and a mid- size SUV(B-SUV) may be launched in 2015/2016; 2) in SGM, further volume growth from the newly launched Chevrolet Trax SUV, the new Buick compact SUV to be launched in 4Q14, the new Sail and the localised Cadillac ATS in 2H14, and potential new Regal/Lacross launches in 2015/2016. Nevertheless, we think, SGM’s existing model sales might come under pressure due to fierce competition. We hold a constructive view on SAIC’s volume and profitability on a sustainable basis, with steadily rising margins attributable to scale, well-recognised JV brands, and a strong product line-up (see figure below).

Fig. 113: SAIC: Sales volume breakdown, 2010-2016F

(units) 2010 2011 2012 2013 2014F 2015F 2016F General Motor 1,038,988 1,231,539 1,392,658 1,575,167 1,694,600 1,818,600 1,941,600 Volkswagen 1,001,357 1,165,827 1,280,008 1,525,008 1,794,000 2,038,500 2,361,000 SAIC Motor 160,217 162,004 200,017 230,020 261,750 294,900 338,100 SAIC Wuling 1,234,508 1,301,118 1,458,188 1,600,550 1,760,000 1,932,000 2,112,000 Others 150,071 151,312 159,340 175,091 192,399 211,418 232,317 Total sales 3,585,141 4,011,800 4,490,211 5,105,836 5,702,749 6,295,418 6,985,017 y-y growth General Motor 42.8% 18.5% 13.1% 13.1% 7.6% 7.3% 6.8% Volkswagen 37.5% 16.4% 9.8% 19.1% 17.6% 13.6% 15.8% SAIC Motor 78.1% 1.1% 23.5% 15.0% 13.8% 12.7% 14.6% SAIC Wuling 8.5% 5.4% 12.1% 9.8% 10.0% 9.8% 9.3% Others 31.6% 0.8% 5.3% 9.9% 9.9% 9.9% 9.9% Total sales 28.2% 11.9% 11.9% 13.7% 11.7% 10.4% 11.0% Sales mix General Motor 29.0% 30.7% 31.0% 30.9% 29.7% 28.9% 27.8% Volkswagen 27.9% 29.1% 28.5% 29.9% 31.5% 32.4% 33.8% SAIC Motor 4.5%4.0%4.5%4.5%4.6%4.7%4.8% SAIC Wuling 34.4% 32.4% 32.5% 31.3% 30.9% 30.7% 30.2% Others 4.2%3.8%3.5%3.4%3.4%3.4%3.3% Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Company data, Nomura estimates

56

Nomura | SAIC Motor 9 July 2014

Fig. 114: SAIC: New model line-up

Brand Model Year Month

SAIC VW VW Polo 2014 Q2 SAIC VW VW A-Plus 2014 Q4 SAIC VW Skoda Octavia 2014 May SAIC VW Skoda Octavia classics 2014 H2 SAIC VW Skoda Spaceback 2014 Apr SAIC VW Skoda Xtreme City 2014 H2 SAIC GM Buick GL8 2014 Apr SAIC GM Chevrolet Cruze 2014 Q4 SAIC GM Chevrolet Trax 2014 Apr SAIC GM Cadillac ATS-L 2014 Q2 SAIC GM Wuling Baojun 610 2014 Apr SAIC GM Wuling Baojun 730 2014 H2 SAIC Motor MG MG5(NB) 2014 H2

Source: Company data, Nomura research

Given its scale and sustainable sales volume growth, we have witnessed a stable ROE performance for SAIC since it began to recover from the GFC in 2008. Its ROE averaged 17% during 2009-13, and we expect a still-steady 15.4% average for 2014-16F. Since 2011, SAIC has also accumulated a strong net cash position on its balance sheet, standing at over CNY30bn as at end-2013. Considering the consistently robust free cashflows generated, SAIC has modified its dividend policy, raising its dividend payout to 53% in 2013. SAIC intends to maintain the high payout and, by our estimates, this is sustainable as the dividend payments will be matched by our estimated free cashflows for 2014-16F.

Fig. 115: SAIC has maintained a consistent ROE since Fig. 116: SAIC has had a consistent track record in dividends recovering from the GFC in 2008

25% (CNY) DPS (LHS) Payout ratio (RHS) 1.8 1.68 60% 21.4% 53% 53% 53% 1.6 1.49 20% 1.34 50% 1.4 53% 1.20 18.8% 16.2% 15.9%15.4%15.2% 15.5% 1.2 40% 15% 14.9% 1.0 32% 26% 30% 0.8 16% 0.60 10% 0.6 13% 20% 5% 0.30 0.4 0.22 5% 10% 0.2 0.02 0.04 1.6% 0.0 0% 0%

2008 2009 2010 2011 2012 2013 2014F2015F2016F 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

Source: Bloomberg, Nomura estimates Source: Company data, Nomura estimates

57

Nomura | SAIC Motor 9 July 2014

Fig. 117: Strong net cash position, 2008-16F Fig. 118: Dividends supported by free cashflows, 2008-16F

(CNYmn) (CNYmn) FCF Dividend proposed 50,000 25,000 40,000 20,000 30,000 15,000 20,000 10,000 10,000 5,000 0 0 (10,000) (5,000) (20,000) (10,000) (30,000) (15,000) 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2014F 2015F 2016F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

58

Nomura | SAIC Motor 9 July 2014

Valuation methodology and risks Our TP of CNY21.2 is based on the LT average P/E of 8x and our mid-2015F EPS forecast of CNY2.65. We believe that increased foreign investor interest should help SAIC’s P/E multiple re-rate back to its norm. We also consider 8x P/E to be reasonable when compared with its closest peer, H-share-listed Dongfeng Motor (489 HK, Buy), which has a similar LT growth profile and a LT average P/E of 8.5x. The benchmark index for this stock is MSCI China. Risks:1) Delay or cancellation of the proposed ‘Shanghai-HK through-train’; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition among overseas brands.

Fig. 119: P/E chart Fig. 120: P/B chart

(x) (x) 4.0 16 3.5 +2SD 11.9x +2SD 2.9x 12 3.0 +1SD 9.9x 2.5 +1SD 2.2x LT avg = 7.9x 8 2.0 -1SD 5.9x LT avg = 1.6x 1.5 -1SD 0.9x 4 1.0 0.5 0 0.0 -08 -09 -11 -12 -13 -09 -10 -11 -12 -13 -14 -09 -10 -11 -12 -13 -14 -10 -11 -12 -13 y y y y y y p p p p p y y y y y y p p p p Jan-09 Jan-10 Jan-12 Jan-13 Jan-14 Jan-11 Se Sep-10 Se Se Se Se Ma Ma Ma Ma Ma Ma Jan-11 Jan-12 Jan-13 Jan-14 Jan-09 Jan-10 Sep-08 Sep-09 Se Se Se Se Ma Ma Ma Ma Ma Ma

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

59

Nomura | SAIC Motor 9 July 2014

Company background SAIC Motor is the largest auto-manufacturing group in China, and was listed as the largest auto company by market cap on the China A-share stock market in 2008. The company builds and sells passenger cars and commercial vehicles. Among them, SAIC Motor Passenger Vehicle Company, Shanghai Volkswagen, Shanghai General Motors, SAIC-GM-Wuling are the passenger car producers while SAIC Motor Commercial Vehicle Company, Nanjing Auto Corporation, Sunwin and SAIC-IVECO Hongyan Commercial Vehicle Company make vans, buses and trucks. In 2013, SAIC Motor sold 5.1mn vehicle units overall with the growth ratio reaching 13.7%. Meanwhile, with its domestic market share reaching 22.6%, SAIC Motor has maintained its leading position in the domestic auto market for eight consecutive years.

Fig. 121: SAIC corporate structure chart

Shanghai government

100%

Shanghai Automotive Industry (Group) Corp.

74.3%

Yuejin Automobile Shanghai Automoive Industry Co Ltd Public investors

3.75% 3.03% 18.92%

SAIC Motor (600104 CH)

Huayu Auto (600741CH; SGM (50% JV) SAIC-GM-Wuling (50.1% JV) SAIC Finance (100%) Other co. 60.1% JV)

SVW (50% JV) SGM Sales Co (51% JV) Other auto parts co. GMAC-SAIC (50%)

SVW Sales Co (60% JV) Consolidation

SAIC Motor (100%) Equity accounting

Other PV/CV Co.

Source: Company data, Nomura research

Fig. 122: SVW model details and sales volume breakdown

Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Skoda Fabia Sub-Compact Car 78.9k-115.9k 33,554 9,116 Skoda Octavia Compact Car 122k-210.9k 120,246 32,764 Skoda Rapid Compact Car 79.9k-116.9k 36,052 30,054 Skoda Superb Midsize Car 171.9k-243.9k 37,258 9,201 Skoda Yeti Compact SUV 165.8k-241.8k 4,090 6,380 Volkswagen Lavida Compact Car 107.6k-166.9k 433,870 193,165 Volkswagen Passat Midsize Car 183.8k-322.8k 23 1 Volkswagen Passat NMS Midsize Car 183.8k-322.8k 227,240 99,311 Volkswagen Polo Sub-Compact Car 85.9k-158.9k 154,235 53,885 Volkswagen Santana Compact Car 84.9k-123.8k 180,617 106,494 Volkswagen Santana Vista Compact Car 94.8k-99.8k 62,732 20,688 Volkswagen Tiguan Compact SUV 189.8k-315.8k 199,782 87,532 Volkswagen Touran Compact MPV/Minivan 149.8k-211.8k 35,310 12,112 Total 1,525,009 660,703

Source: LMCA, Nomura research

60

Nomura | SAIC Motor 9 July 2014

Fig. 123: SGM model details and sales volume breakdown

Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Buick Encore Compact SUV 149.9k-196.9k 61,563 26,321 Buick Excelle Compact Car 96.9k-115.9k 296,183 98,953 Buick Excelle XT/GT Compact Car 129.9k-187.3k 204,274 91,704 Buick GL8 Standard MPV/Minivan 209k-399.9k 31,997 15,603 Buick GL8 NG Standard MPV/Minivan 288k-388k 38,194 14,894 Buick Lacrosse Midsize Car 226.9k-369.9k 89,279 26,842 Buick Park Avenue Fullsize Car 378k-388k 161 - Buick Regal Midsize Car 178.9k-299.9k 86,050 32,484 Cadillac SLS Medium Luxury 388.8k-828k 117 - Cadillac XTS Medium Luxury 349.9k-569.9k 19,999 9,550 Chevrolet Aveo Sub-Compact Car 81.8k-114.8k 35,509 6,791 Chevrolet Captiva Midsize SUV 219.8k-263.8k 37,601 13,172 Chevrolet Cruze Compact Car 108.9k-159.9k 246,890 84,968 Chevrolet Epica Midsize Car 108.9k-196.9k 18,290 5,723 Chevrolet Trax Compact SUV 119.9k-159.9k - 1,846 Chevrolet Malibu Midsize Car 162.9k-232.9k 100,141 39,898 Chevrolet Sail Sub-Compact Car 56.8k-79.3k 276,311 84,949 Total 1,542,559 553,698

Source: LMCA, Nomura research

Fig. 124: SAIC Group model details and sales volume breakdown

Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Baojun Baojun 630 Compact Car 62.8k-95.8k 68,200 13,880 Baojun Lechi(Spark) Mini Car 39.8k-49.8k 32,300 11,824 Maxus Maxus Light Bus Van-Light Bus 146k-240k 11,302 4,648 MG MG3 Sub-Compact Car 69.7k-103.7k 45,101 11,725 MG MG5 Compact Car 87.7k-136.7k 9,065 1,793 MG MG6 Compact Car 124.8k-192.8k 19,423 4,933 MG MG7 Midsize Car 156.8k-288.8k 197 7 Roewe Roewe 350 Compact Car 89.7k-128.7k 113,057 36,512 Roewe Roewe 550 Compact Car 99.8k-259.8k 24,481 6,165 Roewe Roewe 750 Midsize Car 162.8k-251.8k 3,121 714 Roewe Roewe 950 Midsize Car 188.9k-319.9k 3,834 848 Roewe Roewe E50 Mini Car 234.9k-234.9k 409 - Roewe Roewe W5 Midsize SUV 162.8k-298.8k 10,512 5,069 Wuling Hongguang Mini Bus 44.8k-69.8k 530,050 270,118 Wuling Rongguang/Xingwang Mini Bus 27.5k-57.8k 339,298 142,493 Wuling Sunshine Mini Bus 29.8k-48k 455,718 123,265 Wuling Wuling Mini Truck Mini Truck 35.8k-39k 174,984 67,031 Yuejin Yuejin Light Truck Light Truck 94k-100k 104,076 30,726 Iveco Iveco Van-Light Bus 124.9k-222k 43,333 13,649 Total 1,988,461 745,400

Source: LMCA, Nomura research

61

Nomura | SAIC Motor 9 July 2014

Fig. 125: SVW Lavida Fig. 126: SVW Tiguan Fig. 127: SVW Passat

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

Fig. 128: SGM Buick Excelle Fig. 129: SGM Cruze Fig. 130: SGM Sail

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

Fig. 131: Baojun 630 Fig. 132: Roewe 950 Fig. 133: MG6 Magnette

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

62

Johnson Electric Holdings

0179.HK 179 HK

EQUITY: AUTOS & AUTO PARTS

Maintain Neutral; TP cut to HKD6.9 Global Markets Research

Near-term margins headwind an overhang 9 July 2014 Rating Remains Neutral

Action: Maintain Neutral on near-term margins headwind Target price HKD 6.90 After falling 21% shortly after its FY14 results announcement, the c. 14% Reduced from 7.30 recovery in Johnson’s share price in the past six weeks, led by strong US/EU Closing price HKD 7.14 auto sales growth YTD, does not alter our cautious view on Johnson’s near- 4 July 2014 term earnings outlook. We maintain our positive revenue growth assumption Potential downside -3.4% as a result of Johnson’s fast-growing auto products business and its

recovering industrial products business (especially in the European market). However, we note that these positives likely give in to the imminent start-up Anchor themes costs associated with the commencement of its new overseas production We remain constructive on the bases and rising labour costs in China, leading to a near-term margins 2H14F outlook for new auto setback, in our view. For instance, we largely maintain our revenue forecasts sales, underpinned by growing replacement demand and for FY15/16F, as opposed to a c10% cut in our net earnings forecasts to availability of auto financing. We reflect the net impact of our view. While Johnson’s current valuation of 15.2x prefer SUVs, entry-level luxury, FY15F P/E (EPS: USD0.06) does not seem demanding after the recent and OEMs with strong new model correction, it offers immaterial upside to our TP. We maintain our Neutral pipelines. rating.

Catalyst Nomura vs consensus Positives: potential acquisitions, unexpectedly strong auto sales in the Our FY15-17F net earnings are largely in line with consensus.

US/EU, more aggressive turnaround of its IPG business, dividend upside.

Negatives: stronger margins setback. Research analysts

Johnson also proposed a 4-for-1 share consolidation effective July 15 2014. Without any material impact to its earnings, we expect the event will be neutral China Autos & Auto Parts or slightly negative for the share price. Joseph Wong - NIHK [email protected] Valuation +852 2252 6111 Following the changes to our earnings assumptions, we cut our TP to HKD6.9 Benjamin Lo - NIHK (from HKD7.3). Our TP is based on DCF valuation which implies FY15F 15.2x [email protected] P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53). The cash flows are +852 2252 6220 discounted back to FY15F.

Year-end 31 Mar FY14 FY15F FY16F FY17F Currency (USD) Actual Old New Old New Old New Revenue (mn) 2,098 2,284 2,212 2,307 2,423 Reported net profit (mn) 208 244 217 232 250

Normalised net profit (mn) 208 244 217 232 250

FD normalised EPS 5.79c 6.81c 6.04c 6.47c 6.96c FD norm. EPS growth (%) 8.6 6.1 4.2 7.2 7.6 FD normalised P/E (x) 15.8 N/A 15.2 N/A 14.2 N/A 13.2 EV/EBITDA (x) 9.4 N/A 8.8 N/A 7.9 N/A 7.0 Price/book (x) 1.9 N/A 1.7 N/A 1.6 N/A 1.5 Dividend yield (%) 1.6 N/A 1.7 N/A 2.0 N/A 2.1 ROE (%) 12.6 12.3 12.0 11.7 11.6 Net debt/equity (%) net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Johnson Electric Holdings 9 July 2014

Key data on Johnson Electric Holdings Relative performance chart Cashflow statement (USDmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F EBITDA 276 302 317 338 362 Change in working capital -18 34 -73 -11 -14 Other operating cashflow Cashflow from operations 257 337 244 327 347 Capital expenditure -83 -102 -90 -90 -90 Free cashflow 174 235 154 237 257 Reduction in investments 128 -1 -46 -46 -46 Net acquisitions Dec in other LT assets 31 22 0 0 0 Inc in other LT liabilities Adjustments -93 -24 0 0 0 CF after investing acts 239 232 108 191 211 Source: Thomson Reuters, Nomura research Cash dividends -48 -52 -55 -61 -66 Equity issue -2 0 0 0 0 Notes: Debt issue -80 -8 200 -50 -50 Convertible debt issue Others -13 -9 0 0 0 CF from financial acts -143 -69 145 -111 -116 Performance Net cashflow 96 163 253 81 95

(%) 1M 3M 12M Beginning cash 385 481 644 897 977

Absolute (HKD) 5.6 -1.1 45.1 M cap (USDmn) 3,297.4 Ending cash 481 644 897 977 1,072

Absolute (USD) 5.7 -1.0 45.2 Free float (%) 39.2 Ending net debt -291 -474 -526 -657 -802

Rel to MSCI HK 5.4 -3.6 29.5 3-mth ADT (USDmn) 3.9 Balance sheet (USDmn) Income statement (USDmn) As at 31 Mar FY13 FY14 FY15F FY16F FY17F Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F Cash & equivalents 481 644 897 977 1,072 Revenue 2,060 2,098 2,212 2,307 2,423 Marketable securities 16 11 11 11 11 Cost of goods sold -1,482 -1,479 -1,568 -1,638 -1,714 Accounts receivable 412 443 455 474 498 Gross profit 578 619 644 669 709 Inventories 208 207 232 242 254 SG&A -393 -405 -420 -429 -451 Other current assets 3 2 2 2 2 Employee share expense Total current assets 1,120 1,306 1,596 1,706 1,836 Operating profit 185 214 224 240 258 LT investments 1 0 0 0 0 EBITDA 276 302 317 338 362 Fixed assets 359 392 411 426 437 Depreciation -69 -68 -71 -75 -79 Goodwill Amortisation -22 -21 -22 -23 -24 Other intangible assets 625 651 675 698 721 EBIT 185 214 224 240 258 Other LT assets 139 151 151 151 151 Net interest expense 5 9 9 12 14 Total assets 2,244 2,501 2,833 2,982 3,145 Associates & JCEs 0 0 0 0 0 Short-term debt 123 115 117 67 17 Other income 28 20 20 20 20 Accounts payable 342 386 348 364 380 Earnings before tax 218 243 253 272 292 Other current liabilities 73 91 93 97 101 Income tax -21 -28 -29 -31 -34 Total current liabilities 538 593 558 527 498 Net profit after tax 197 215 224 240 258 Long-term debt 2 1 200 200 200 Minority interests -6 -7 -7 -8 -8 Convertible debt 65 54 54 54 54 Other items Other LT liabilities 41 86 86 86 86 Preferred dividends Total liabilities 645 734 898 867 838 Normalised NPAT 191 208 217 232 250 Minority interest 30 34 41 49 58 Extraordinary items Preferred stock Reported NPAT 191 208 217 232 250 Common stock 17 16 16 16 16 Dividends -50 -53 -57 -64 -68 Retained earnings 1,551 1,717 1,879 2,050 2,234 Transfer to reserves 141 155 160 168 182 Proposed dividends Valuations and ratios Other equity and reserves Reported P/E (x) 17.1 15.8 15.1 14.1 13.1 Total shareholders' equity 1,569 1,732 1,894 2,066 2,250 Normalised P/E (x) 17.1 15.8 15.1 14.1 13.1 Total equity & liabilities 2,244 2,501 2,833 2,982 3,145 FD normalised P/E (x) 17.2 15.8 15.2 14.2 13.2 Dividend yield (%) 1.5 1.6 1.7 2.0 2.1 Liquidity (x) Price/cashflow (x) 12.8 9.8 13.5 10.1 9.5 Current ratio 2.08 2.20 2.86 3.24 3.69 Price/book (x) 2.1 1.9 1.7 1.6 1.5 Interest cover na na na na na EV/EBITDA (x) 11.0 9.4 8.8 7.9 7.0 Leverage EV/EBIT (x) 16.4 13.3 12.5 11.1 9.8 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 28.0 29.5 29.1 29.0 29.3 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 13.4 14.4 14.3 14.7 14.9 EBIT margin (%) 9.0 10.2 10.1 10.4 10.7 Per share Net margin (%) 9.3 9.9 9.8 10.1 10.3 Reported EPS (USD) 5.36c 5.82c 6.07c 6.50c 7.00c Effective tax rate (%) 9.7 11.6 11.6 11.6 11.6 Norm EPS (USD) 5.36c 5.82c 6.07c 6.50c 7.00c Dividend payout (%) 26.3 25.3 26.3 27.6 27.2 FD norm EPS (USD) 5.33c 5.79c 6.04c 6.47c 6.96c ROE (%) 12.6 12.6 12.0 11.7 11.6 BVPS (USD) 0.44 0.49 0.53 0.58 0.63 ROA (pretax %) 10.1 11.8 11.8 12.2 12.7 DPS (USD) 0.01 0.01 0.02 0.02 0.02 Growth (%) Activity (days) Revenue -3.8 1.8 5.5 4.3 5.0 Days receivable 70.5 74.3 74.0 73.7 73.2 EBITDA -10.8 9.6 5.0 6.5 7.0 Days inventory 55.2 51.2 51.1 53.0 52.8 Normalised EPS 3.7 8.6 4.2 7.2 7.6 Days payable 86.9 89.9 85.5 79.5 79.2 Normalised FDEPS 3.5 8.6 4.2 7.2 7.6 Cash cycle 38.8 35.7 39.6 47.2 46.8 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

64

Nomura | Johnson Electric Holdings 9 July 2014

Fig. 134: Revenue breakdown by region (FY15F) Fig. 135: We expect positive revenue growth

(USDmn) Total revenue (LHS) 2,500 y-y growth (RHS) 25% 2,423 2,400 21% 20% Total Asia 2,307 34% 2,300 15% Total 2,212 Europ e 44% 2,200 2,141 10% 2,104 2,098 5% 4% 5% 2,100 2,060 5% 2% 2,000 2% 0%

1,900 -4% -5% Total USA 1,800 -10% 22% FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Source: Nomura estimates Source: Company, Nomura estimates

Fig. 136: APG revenue breakdown by region (FY15F) Fig. 137: IPG revenue breakdown by region (FY15F)

Europe Asia 26% 30%

Asia 44% Europ e 51%

USA USA 19% 30%

Source: Nomura estimates Source: Nomura estimates

Fig. 138: Net cash balance (2010-15F) Fig. 139: Dividend payment and payout ratio

(USDmn) (USDmn) Dividend (LHS) 1,000 80 Payout ratio (RHS) 28% 27.6% 855 27.2% 800 710 70 68 27% 26.3% 26.3% 64 580 600 527 60 57 26% 24.7% 53 50 356 400 50 46 25.3% 25% 42 180 200 40 23.4% 24% 41 0 30 23% FY11 FY12 FY13 FY14 FY15F FY16F FY17F FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

65

Nomura | Johnson Electric Holdings 9 July 2014

Fig. 140: Key change in our earnings estimates

New estimates Previous estimates Changes % USD mn FY15F FY16F FY17F FY15F FY16F FY17F FY15F FY16F FY17F APG 1,538 1,627 1,736 1,662 n.a n.a -7.4% n.a n.a IGG 674 681 688 622 n.a n.a 8.4% n.a n.a Total revenue 2,212 2,307 2,423 2,284 n.a n.a -3.1% n.a n.a

Gross profits 644 669 709 663 n.a n.a -2.8% n.a n.a Gross margins 29.1% 29.0% 29.3% 29.0% n.a n.a 0.1% n.a n.a

Operating profits 244 260 278 261 n.a n.a -6.6% n.a n.a Operating margins 11.0% 11.2% 0.11 11.9% n.a n.a -0.9% n.a n.a Source: Nomura estimates

Valuation and risks Following our EPS revisions and based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53), we cut our TP to HKD6.9 (from HKD7.3). The benchmark index for this stock is MSCI HK. Risks: 1) uncertainty over the sustainability of US/ EU economic recovery, and auto demand recovery, and 2) rising commodity prices could exert pressure on gross margins.

Fig. 141: P/E chart Fig. 142: P/B chart

(x) (x) 40 25 35 20 30 +2SD 28.0x 25 +1SD 21.7x 15 +2SD 12.9x 20 LT avg = 15.5x 15 10 +1SD 8.7x -1SD 9.2x 10 LT avg = 4.6x 5 5 -1SD 0.5x 0 0 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Ap r-98 Ap r-99 Ap r-00 Ap r-01 Ap r-02 Ap r-03 Ap r-04 Ap r-05 Ap r-06 Ap r-07 Ap r-08 Ap r-09 Ap r-10 Ap r-11 Ap r-12 Ap r-13 Ap r-14

Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates

66

Minth Group 0425.HK 425 HK

EQUITY: AUTOS & AUTO PARTS

Maintain Buy; TP raised to HKD18.6 Global Markets Research

Clouds almost cleared; remains a high quality play 9 July 2014 Rating Remains Buy

Target price Action: Maintain Buy, target price fine-tuned to HKD18.6 Increased from 18.20 HKD 18.60 Following the SFC allegation in April this year, Minth has once been derated Closing price by the market and experienced a c. 20% decline in the share price. (For 4 July 2014 HKD 15.56 details, please refer to our report Quick Note - Minth Group (425 HK, Buy) - Already de-rated; wait for clouds to clear, 14 Apr 2014). However, over the Potential upside +19.5% past four weeks, the share price has gradually recovered to the pre-allegation level, thus reassuring investors who have grown uncomfortable with Minth’s corporate governance since the event. Barring any related legal proceedings Anchor themes in future, we continue to view Minth as one of the high-quality plays in the We remain constructive on the China auto-parts industry, given its strong liquidity position, a c.27% market 2H14F outlook for new auto sales, underpinned by growing share in the domestic market and clear and visible earnings growth profile. We replacement demand and stick to our belief that the SFC allegation itself has no direct impact to Minth’s availability of auto financing. We earnings, and therefore, we only trim down our 2014-15F net earnings prefer SUVs, entry-level luxury, forecasts moderately by 3.8/0.1% to incorporate the numbers of the actual and OEMs with strong new model 2013 results. Minth’s current valuation does not seem demanding when pipelines. considering its double-digit earnings growth profile and its historical long-term average of 10x. Maintain Buy. Nomura vs consensus Catalysts Our FY14-16F net earnings are Minth should remain a key beneficiary of healthy PV sales growth in China, largely in line with consensus, with domestic sales expected to contribute 70% of its total revenue in FY14F, despite our more conservative in our view. On the other hand, our auto analyst Masataka Kunugimoto has gross margin assumptions. turned more positive on Europe auto sales thanks to encouraging data released YTD and believes sales have started to recover from its financial- Research analysts crisis induced lows. We shall have more visibility on the SFC allegation on 9 July when the first hearing is held in the High Court. China Autos & Auto Parts Valuation Joseph Wong - NIHK [email protected] Following our EPS revisions and roll-forward to mid-15F EPS, we raise our TP +852 2252 6111 to HKD18.6 (from HKD18.2), still based on 13.5x P/E (1 SD above historical Benjamin Lo - NIHK mean; mid-15F EPS: CNY1.10). [email protected]

+852 2252 6220 Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 5,510 6,275 6,796 7,256 8,217 9,769 Reported net profit (mn) 971 1,154 1,111 1,284 1,286 1,481

Normalised net profit (mn) 971 1,154 1,111 1,284 1,286 1,481

FD normalised EPS 88.80c 1.07 1.02 1.19 1.18 1.35 FD norm. EPS growth (%) 14.2 17.3 14.4 11.2 15.7 15.2 FD normalised P/E (x) 13.9 N/A 12.2 N/A 10.5 N/A 9.1 EV/EBITDA (x) 10.9 N/A 8.9 N/A 7.7 N/A 6.6 Price/book (x) 1.8 N/A 1.6 N/A 1.5 N/A 1.4 Dividend yield (%) 2.9 N/A 3.3 N/A 3.8 N/A 4.4 ROE (%) 13.7 14.6 14.3 14.6 15.1 15.8 Net debt/equity (%) net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Minth Group 9 July 2014

Key data on Minth Group Relative performance chart Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 882 1,074 1,357 1,625 1,928 Change in working capital -463 -936 -349 -436 -473 Other operating cashflow 223 231 246 246 246 Cashflow from operations 643 369 1,253 1,435 1,700 Capital expenditure -595 -792 -910 -910 -910 Free cashflow 48 -423 343 525 790 Reduction in investments -328 -651 -65 -68 -71 Net acquisitions Dec in other LT assets Inc in other LT liabilities 98 128 7 9 10 Adjustments 122 248 -173 -206 -250 CF after investing acts -60 -699 112 260 479 Source: Thomson Reuters, Nomura research Cash dividends -332 -393 -439 -508 -585 Equity issue 0 1 0 0 0 Notes: Debt issue 632 952 0 0 0 Convertible debt issue Others 98 128 7 9 10 CF from financial acts 398 688 -432 -499 -575 Performance Net cashflow 338 -11 -320 -238 -96

(%) 1M 3M 12M Beginning cash 3,792 4,130 4,119 3,800 3,561

Absolute (HKD) 15.4 2.6 26.3 M cap (USDmn) 2,194.6 Ending cash 4,130 4,119 3,800 3,561 3,466

Absolute (USD) 15.5 2.7 26.3 Free float (%) 40.5 Ending net debt -2,672 -1,709 -1,389 -1,151 -1,055

Rel to MSCI China 14.5 -0.2 10.8 3-mth ADT (USDmn) 5.2 Balance sheet (CNYmn) Income statement (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 4,130 4,119 3,800 3,561 3,466 Revenue 4,330 5,510 6,796 8,217 9,769 Marketable securities Cost of goods sold -2,896 -3,692 -4,600 -5,595 -6,682 Accounts receivable 1,323 1,939 2,392 2,892 3,438 Gross profit 1,434 1,819 2,196 2,621 3,087 Inventories 697 928 1,097 1,334 1,593 SG&A -709 -891 -1,092 -1,300 -1,513 Other current assets 354 859 898 940 983 Employee share expense Total current assets 6,504 7,846 8,187 8,727 9,479 Operating profit 725 927 1,104 1,322 1,574 LT investments EBITDA 882 1,074 1,357 1,625 1,928 Fixed assets 1,889 2,546 3,204 3,812 4,369 Depreciation -146 -135 -242 -292 -343 Goodwill 15 15 15 15 15 Amortisation -11 -11 -11 -11 -11 Other intangible assets 33 40 39 38 36 EBIT 725 927 1,104 1,322 1,574 Other LT assets 932 1,045 1,104 1,164 1,226 Net interest expense 41 34 19 21 16 Total assets 9,374 11,493 12,549 13,756 15,126 Associates & JCEs 55 33 33 33 33 Short-term debt 1,271 2,385 2,385 2,385 2,385 Other income 223 231 246 246 246 Accounts payable 837 1,201 1,497 1,821 2,174 Earnings before tax 1,044 1,225 1,401 1,622 1,869 Other current liabilities 58 111 126 145 167 Income tax -148 -196 -224 -259 -299 Total current liabilities 2,167 3,698 4,009 4,352 4,727 Net profit after tax 896 1,029 1,177 1,362 1,570 Long-term debt 187 25 25 25 25 Minority interests -55 -58 -66 -77 -89 Convertible debt Other items Other LT liabilities 40 52 59 68 79 Preferred dividends Total liabilities 2,393 3,774 4,093 4,445 4,830 Normalised NPAT 841 971 1,111 1,286 1,481 Minority interest 208 262 328 405 494 Extraordinary items Preferred stock Reported NPAT 841 971 1,111 1,286 1,481 Common stock 109 110 110 110 110 Dividends -332 -393 -439 -508 -585 Retained earnings 6,664 7,346 8,018 8,796 9,692 Transfer to reserves 509 578 672 778 896 Proposed dividends Valuations and ratios Other equity and reserves Reported P/E (x) 15.8 13.8 12.1 10.4 9.0 Total shareholders' equity 6,774 7,457 8,129 8,906 9,802 Normalised P/E (x) 15.8 13.8 12.1 10.4 9.0 Total equity & liabilities 9,374 11,493 12,549 13,756 15,126 FD normalised P/E (x) 15.9 13.9 12.2 10.5 9.1 Dividend yield (%) 2.5 2.9 3.3 3.8 4.4 Liquidity (x) Price/cashflow (x) 20.8 36.6 10.8 9.4 7.9 Current ratio 3.00 2.12 2.04 2.01 2.01 Price/book (x) 2.0 1.8 1.6 1.5 1.4 Interest cover na na na na na EV/EBITDA (x) 11.8 10.9 8.9 7.7 6.6 Leverage EV/EBIT (x) 14.2 12.5 10.9 9.4 8.0 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 33.1 33.0 32.3 31.9 31.6 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 20.4 19.5 20.0 19.8 19.7 EBIT margin (%) 16.7 16.8 16.2 16.1 16.1 Per share Net margin (%) 19.4 17.6 16.3 15.6 15.2 Reported EPS (CNY) 78.10c 89.61c 1.02 1.19 1.37 Effective tax rate (%) 14.1 16.0 16.0 16.0 16.0 Norm EPS (CNY) 78.10c 89.61c 1.02 1.19 1.37 Dividend payout (%) 39.5 40.5 39.5 39.5 39.5 FD norm EPS (CNY) 77.79c 88.80c 1.02 1.18 1.35 ROE (%) 13.1 13.7 14.3 15.1 15.8 BVPS (CNY) 6.29 6.88 7.50 8.22 9.04 ROA (pretax %) 16.8 15.2 14.1 14.3 14.7 DPS (CNY) 0.31 0.36 0.40 0.47 0.54 Growth (%) Activity (days) Revenue 11.3 27.3 23.3 20.9 18.9 Days receivable 103.9 108.0 116.3 117.4 118.6 EBITDA 5.3 21.7 26.3 19.8 18.6 Days inventory 76.6 80.3 80.3 79.3 80.1 Normalised EPS 6.7 14.7 14.4 15.7 15.2 Days payable 94.4 100.7 107.0 108.2 109.4 Normalised FDEPS 7.0 14.2 14.4 15.7 15.2 Cash cycle 86.1 87.6 89.6 88.4 89.3 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

68

Nomura | Minth Group 9 July 2014

Fig. 143: Revenue and gross margins trends Fig. 144: Breakdown of COGS FY14F (CNY mn) Total Revenue Gross margins Depreciation, 12,000 43% 4%

9,769 10,000 40% Manufacturing 38.1% 8,217 cost, 36.6% 8,000 37% 20% 35.0% 6,796

6,000 33.1% 5,510 31.9% 34% 32.3% Direct 4,330 31.6% 3,576 3,889 33.0% Labour material 4,000 31% cost, 9% 2,545 cost, 68% 2,000 28%

0 25% 2009 2011 2013 2015F

Source: Company data, Nomura estimates Source: Nomura estimates

Fig. 145: Revenue breakdown by product type, FY14F Fig. 146: Revenue breakdown by customer origin, FY14F

Others, Roof rack, 5.8% American, 30.5% Korean, 6.5% 5.9% Seat frame Trims, system, 26.5% Chinese, 4.2% 6.0% Others, 0.8%

Body European, structural 13.9% parts, 25.0%

Decorative, Japanese, 32.0% 42.9%

Source: Nomura estimates Source: Nomura estimates

Fig. 147: Revenue breakdown by region

120% America Europe Asia Pacific China

100%

80%

69.7% 68.4% 67.0% 66.2% 65.2% 76.5% 73.5% 60% 84.6%

40% 6.2% 5.6% 7.4% 7.2% 6.8% 7.7% 11.2% 20% 7.8% 8.4% 7.7% 9.0% 10.0% 3.4% 4.5% 5.7% 16.3% 2.8% 14.3% 16.5% 16.8% 17.0% 17.4% 7.0% 12.3% 0% 2009 2010 2011 2012 2013 2014F 2015F 2016F

Source: Company data, Nomura estimates

69

Nomura | Minth Group 9 July 2014

Valuation and risks Following our FY14-15F EPS revisions, and still based on 13.5x (representing 1 SD above the historical mean) mid-15F P/E (EPS: CNY1.10), we raise our target price to HKD18.6 (from HKD18.2). The benchmark index for this stock is MSCI China. Risks: 1) continued pressure on profit margins; 2) deteriorating relationship with key customers; 3) heavy reliance on Japanese brands, and; 4) a slowdown in global auto production.

Fig. 148: P/E chart Fig. 149: P/B chart

(x) (x) 35 6

30 5 25 4 20 +2SD 16.3x 3 15 +1SD 13.2x +2SD 2.5x LT avg = 10.0x +1SD 2.0x 10 2 LT avg = 1.5x -1SD 7.0x 5 1 -1SD 1.0x 0 0 Jul-06 Jul-13 Apr-08 Oct-11 Jun-09 Jan-10 Feb-07 Mar-11 Feb-14 Sep-07 Aug-10 Dec-05 Dec-12 Nov-08 Jul-06 Jul-13 May-12 Apr-08 Oct-11 Jun-09 Jan-10 Feb-07 Mar-11 Feb-14 Dec-05 Sep-07 Nov-08 Aug-10 Dec-12 May-12

Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates

70

Nexteer Automotive 1316.HK 1316 HK

EQUITY: AUTOS & AUTO PARTS

Initiate with Buy and TP of HKD7.5 Global Markets Research

Near-term negatives priced in; Buy for long-term 9 July 2014 Rating structural growth Starts at Buy

Target price Action: Initiate with Buy rating and target price of HKD7.5 Starts at HKD 7.50 We initiate coverage of Nexteer with a Buy rating as we see it as a key Closing price beneficiary of an expected long-term structural demand shift from hydraulic 4 July 2014 HKD 5.49 power steering (HPS) to electric power steering (EPS). With about 76% of future lifetime revenue likely to be derived from EPS systems (vs 41% in Potential upside +36.6% 2013), we believe the growing global EPS demand will see Nexteer enjoy a gradual and sustainable product mix upgrade, and thereby gross margin Anchor themes improvement. Coupled with the ongoing EU auto market recovery, on which We remain constructive on the we have turned more positive in our report, Global autos outlook - It’s a brave 2H14F outlook for new auto new world, and the kicking in of new contract revenue in China, we expect sales, underpinned by growing Nexteer to deliver a strong three-year net earnings CAGR of 19% over 2013- replacement demand and 16F. The stock has corrected by c15% in the past two months mainly on a availability of auto financing. We series of vehicle recalls initiated by General Motors (GM), which contributed prefer SUVs, entry-level luxury, 50%-plus of Nexteer’s 2013 total revenue (see details inside). Despite this, we and OEMs with strong new model note that GM’s post-recall fleet sales have remained robust and the relevant pipelines. financial impact for Nexteer has been one-off, we believe. Should the market look past the events, the recent pull-back, in our view, should present Nomura vs consensus investors an ideal opportunity to accumulate and capture Nexteer’s structural Our 2014-16F earnings are in growth story. 13% lower than consensus, mainly on lower top-line growth Catalysts: Improving macro economic data from US/EU, where Nexteer and gross margin assumptions. generated 71%/15% of 2013 revenue; stronger-than-expected GM fleet deliveries; and new purchase orders from OEMs Research analysts

Valuation: Reasonable considering strong earnings growth prospects China Autos & Auto Parts Nexteer shares trade at 10.9x FY14F EPS of USD0.06 and 2.0x FY14F BVPS of USD0.36, with 19.6% ROE. Our target price of HKD7.5 is based on 13x our Joseph Wong - NIHK [email protected] mid-FY15F EPS forecast of USD0.07, representing its Hong Kong/China peer +852 2252 6111 average given Nexteer’s short trading history. In our view, the valuation is Benjamin Lo - NIHK reasonable considering the company’s 19% three-year EPS CAGR. [email protected] +852 2252 6220 Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (USD) Actual Old New Old New Old New Revenue (mn) 2,387 N/A 2,660 N/A 2,972 N/A 3,335 Reported net profit (mn) 109 N/A 121 N/A 154 N/A 184

Normalised net profit (mn) 109 N/A 121 N/A 154 N/A 184

FD normalised EPS 5.85c N/A 6.48c N/A 8.25c N/A 9.84c FD norm. EPS growth (%) 72.1 N/A 10.9 N/A 27.2 N/A 19.3 FD normalised P/E (x) 12.1 N/A 10.9 N/A 8.6 N/A 7.2 EV/EBITDA (x) 6.4 N/A 5.6 N/A 4.7 N/A 4.1 Price/book (x) 2.3 N/A 2.0 N/A 1.7 N/A 1.4 Dividend yield (%) 1.7 N/A 1.8 N/A 2.3 N/A 2.8 ROE (%) 29.6 N/A 19.6 N/A 21.1 N/A 21.2 Net debt/equity (%) 48.2 N/A 43.6 N/A 35.6 N/A 29.5

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Nexteer Automotive 9 July 2014

Key data on Nexteer Automotive Relative performance chart Cashflow statement (USDmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 231 324 368 441 511 Change in working capital -10 -8 52 29 -17 Other operating cashflow -63 -93 -155 -175 -197 Cashflow from operations 158 223 265 294 297 Capital expenditure -304 -287 -260 -260 -260 Free cashflow -146 -64 5 34 37 Reduction in investments 70 -14 0 0 0 Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments 41 24 0 0 0 CF after investing acts -35 -55 5 34 37 Source: Thomson Reuters, Nomura research Cash dividends 0 -11 -23 -28 -34 Equity issue 0 32 0 0 0 Notes: Debt issue 134 47 0 0 0 Convertible debt issue Others -113 236 2 1 1 CF from financial acts 21 305 -21 -26 -33 Performance Net cashflow -14 250 -16 8 4

(%) 1M 3M 12M Beginning cash 78 64 314 298 306

Absolute (HKD) 3.6 -1.4 M cap (USDmn) 1,769.4 Ending cash 64 314 298 306 310

Absolute (USD) 3.6 -1.4 Free float (%) 32.7 Ending net debt 477 274 290 282 278

Rel to MSCI China 2.6 -4.3 3-mth ADT (USDmn) 3.3 Balance sheet (USDmn) Income statement (USDmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 64 314 298 306 310 Revenue 2,168 2,387 2,660 2,972 3,335 Marketable securities Cost of goods sold -1,896 -2,047 -2,274 -2,533 -2,830 Accounts receivable 324 364 379 423 475 Gross profit 271 339 386 439 505 Inventories 174 185 187 194 217 SG&A -98 -89 -110 -109 -122 Other current assets 65 76 76 76 76 Employee share expense Total current assets 628 939 940 1,000 1,078 Operating profit 174 250 276 330 383 LT investments EBITDA 231 324 368 441 511 Fixed assets 434 563 644 713 770 Depreciation -53 -57 -69 -81 -93 Goodwill Amortisation -5 -17 -23 -29 -36 Other intangible assets 179 271 358 439 513 EBIT 174 250 276 330 383 Other LT assets 18 32 32 32 32 Net interest expense -22 -22 -23 -22 -22 Total assets 1,259 1,805 1,974 2,183 2,393 Associates & JCEs Short-term debt 99 130 130 130 130 Other income -90 -77 -85 -95 -106 Accounts payable 296 336 405 486 543 Earnings before tax 62 151 168 213 254 Other current liabilities 112 125 125 125 125 Income tax -4 -40 -45 -57 -68 Total current liabilities 507 592 660 741 798 Net profit after tax 59 111 123 156 187 Long-term debt 442 458 458 458 458 Minority interests -2 -2 -2 -2 -3 Convertible debt Other items Other LT liabilities 118 165 165 165 165 Preferred dividends Total liabilities 1,067 1,214 1,283 1,364 1,421 Normalised NPAT 57 109 121 154 184 Minority interest 21 23 25 27 30 Extraordinary items Preferred stock Reported NPAT 57 109 121 154 184 Common stock 0 32 32 32 32 Dividends 0 -22 -24 -31 -37 Retained earnings 63 174 272 398 548 Transfer to reserves 57 87 97 123 147 Proposed dividends Valuations and ratios Other equity and reserves 108 362 362 362 362 Reported P/E (x) 20.8 12.1 10.9 8.6 7.2 Total shareholders' equity 171 568 666 792 942 Normalised P/E (x) 20.8 12.1 10.9 8.6 7.2 Total equity & liabilities 1,259 1,805 1,974 2,183 2,393 FD normalised P/E (x) 20.8 12.1 10.9 8.6 7.2 Dividend yield (%) na 1.7 1.8 2.3 2.8 Liquidity (x) Price/cashflow (x) 7.5 5.9 5.0 4.5 4.4 Current ratio 1.24 1.59 1.42 1.35 1.35 Price/book (x) 6.9 2.3 2.0 1.7 1.4 Interest cover 8.0 11.5 12.1 15.1 17.4 EV/EBITDA (x) 9.8 6.4 5.6 4.7 4.1 Leverage EV/EBIT (x) 13.0 8.2 7.5 6.3 5.4 Net debt/EBITDA (x) 2.06 0.85 0.79 0.64 0.54 Gross margin (%) 12.5 14.2 14.5 14.8 15.1 Net debt/equity (%) 278.8 48.2 43.6 35.6 29.5 EBITDA margin (%) 10.7 13.6 13.8 14.8 15.3 EBIT margin (%) 8.0 10.5 10.4 11.1 11.5 Per share Net margin (%) 2.6 4.6 4.6 5.2 5.5 Reported EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c Effective tax rate (%) 5.7 26.7 26.7 26.7 26.7 Norm EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c Dividend payout (%) 0.0 20.0 20.0 20.0 20.0 FD norm EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c ROE (%) na 29.6 19.6 21.1 21.2 BVPS (USD) 0.10 0.30 0.36 0.42 0.50 ROA (pretax %) na 18.6 17.4 18.6 19.3 DPS (USD) 0.00 0.01 0.01 0.02 0.02 Growth (%) Activity (days) Revenue 3.6 10.1 11.5 11.7 12.2 Days receivable 55.0 52.6 51.0 49.3 49.3 EBITDA -1.0 40.0 13.6 19.8 16.0 Days inventory 34.0 32.1 29.9 27.5 26.6 Normalised EPS -14.4 72.1 10.9 27.2 19.3 Days payable 57.0 56.4 59.5 64.2 66.5 Normalised FDEPS -14.4 72.1 10.9 27.2 19.3 Cash cycle 32.0 28.3 21.3 12.6 9.4 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

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Nomura | Nexteer Automotive 9 July 2014

Investment thesis

Recent negatives priced in The first half of this year saw Nexteer shares trend down from March as a result of a series of vehicle recalls by General Motors (GM), which contributed 50%-plus of Nexteer’s 2013 revenue. After GM announced the first recall this year on 19 March, which involved Nexteer steering products, Nexteer shares dipped 7.3% in following few days. The share price has further corrected by 17.3% since 30 March when GM announced another recall involving Nexteer steering products for more than 2.4mn vehicles worldwide. Nexteer shares continued to respond in a similar fashion following subsequent product recalls at GM on 13 May and Ford on 29 May, falling by 9.6% and 9.0%, respectively. Following a share price decline of c15% from the peak in March this year, we feel that much of the bad news is already in the price, as the share price has started to plateau at around 9x FY14F P/E.

Fig. 150: Nexteer share price performance (1H14)

HKD GM recall on halfshaft with an GM recall on EPS system with additiional USD14mn provision 6.5 no financial liability Ford recall on EPS systems, engaging Ford to discuss any potential liabilities 6.0

5.5

5.0

4.5 GM recall on steering gears system with no expected 4.0 financial liability Mar 14 Ap r 14 May 14 Jun 14

Source: Bloomberg, Nomura research

Market appears to be overreacting to recall issues While we note that Nexteer faces an inherent business risk of warranty and liability claims in the event that its products fail to perform as expected, the company explained that it is not liable for material financial claims in the past four recalls. Of note, Nexteer has put aside USD14mn for potential liability claims and has recognised a USD200k expense for the half-shaft and steering gears involved in the recent recalls. Financial claims related to the other two recalls, according to the company, are largely non- material and are unlikely to have any financial impact.

Fig. 151: Summary of recent recalls involving Nexteer products

Date OEM Event Models involved No. of vehicles affected Financial liabilities involved Recognised USD8.3mn expense and accrue March 19 2014 GM Halfshaft recall Chevrolet Cruze 1,340,447 another USD14mn in 1H14 Chevrolet Malibu, Malibu Maxx, No financial impact as the quality solution was March 31 2014 GM EPS recall Pontiac G6, Saturn Aura 2,440,524 made in 2010 Chevrolet Silverado, GMC Sierra, Recognised USD200k expense as costs of May 13 2014 GM Steering gears recall Chevrolet Tahoe 477 recalling No financial impact as the recalls are promiarly May 29 2014 Ford Steering systems recall Escape, Mariner 915,000 driven by customer design

Source: Company data, NHTSA, Nomura research

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Nomura | Nexteer Automotive 9 July 2014

While the USD14mn (USD14mn + USD0.2mn from the 1st and 3rd recall, respectively) in recall-related expense may still raise investor concerns over Nexteer’s near-term profit outlook, to assess the impact of this expense on the share price, we conduct the following sensitivity analysis. In the base case, we assume Nexteer will incur the full USD14mn expense in its mid-2015F net earnings, which puts the share price in the range of HKD6.3- 8.6 on a target P/E range of 11.0-15.0x. In our bear case, we assume Nexteer will accrue an additional USD14mn in provisioning for possible further product liability claims (net profit of USD124mn), which implies a share price range of HKD5.7-7.7. In our bull case, we assume market participants will look past the USD14mn non-cash accrual and we expect Nexteer’s share price will range from HKD6.9 to HKD9.5, implying average upside of 55% from the current level.

Fig. 152: Sensitivity analysis on share price (HKD/share)

Net earnings (USDmn) Bear Base Bull 124 138 152

11.0 5.7 6.3 6.9

Target P/E 13.0 6.7 7.5 8.2

15.0 7.7 8.6 9.5

Source: Nomura estimates

GM’s post-recall sales remain broadly in check Another investor concern over the recalls is the interruption of GM’s sales, hence jeopardising Nexteer’s product delivery. Despite overhang from the recall, we note that GM managed to increase its sales by 13% y-y in May 2014 to 284,694 units in the US – the best monthly sales since August 2008. GM attributed the strong growth to the timing of rental customer deliveries. It also expects that May will be the company’s highest fleet volume month in 2014. Hence, the impact of the recent recalls on GM appears to be relatively muted.

China revenue to double by 2016F as new contracts kick in With stronger 2014F auto sales growth (10.4%, vs 2.2% for global) and lower EPS penetration (34.5%, vs 58.8% for global in 2012), China will likely continue to offer the highest growth for Nexteer relative to its US and Europe markets. The revenue from the two new EPS purchase orders signed with Shanghai GM-Wuling and DF PSA in late 2013 should kick in from 2014F. We estimate a lifetime volume of 2.5bn units and look for these vehicle programmes to offer strong and visible earnings contributions to Nexteer. We estimate China revenue will record a 31% CAGR over 2014-16F, lifting the region’s revenue contribution from 11.0% in 2013 to 17.7% in 2016F.

Fig. 153: Revenue breakdown by region Fig. 154: China revenue forecasts

120% (USD mn) China (LHS) y-y (RHS) America Europe RoW China 700 50% 100% 43.6% 7.2% 7.5% 8.4% 45% 11.0% 13.7% 15.9% 17.7% 600 39.0% 7.0% 6.8% 5.6% 40% 12.7% 4.9% 80% 5.2% 4.5% 4.9% 30.0% 20.3% 15.2% 12.5% 500 35% 22.5% 12.3% 12.1% 25.0% 30% 60% 400 25% 300 20% 40% 71.1% 14.3% 70.9% 68.9% 63.2% 65.4% 67.2% 65.3% 200 15% 20% 10% 100 8.2% 5% 0% 0 0% 2010 2011 2012 2013 2014F 2015F 2016F 2010 2011 2012 2013 2014F 2015F 2016F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

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We are turning more positive in Europe With encouraging data-points released over the first five months of this year, we are now turning more positive on the European auto market and we believe that it has not only bottomed, but has also started to recover from the lows reached during the global financial crisis in 2008-2010. Our Japan auto analyst Masataka Kunugimoto expects the region to grow by 4.3% y-y to 14.34mn units in 2014F and by a further 3.9% y-y to 14.90mn units in 2015F. He believes that six continuous years of falling sales in the region have led to an aging vehicle parc (ie, vehicle population) and have created enough underlying pent-up demand to support our estimates. For further details, please refer to the report, Global autos outlook - It’s a brave new world, published 18 June.

Fig. 155: SAAR for Europe Fig. 156: Europe auto sales forecasts

(mn unit) Western Europe (LHS) (mn units) (mn units) Unit sales (LHS) 20 10% 16 Rest of Europe (RHS) 1.6 y-y (RHS) 1.4 16.00 4.4% 3.9%3.8% 14 1.2 16 14.7414.52 5% 13.7913.61 13.35 1.0 12.52 12.85 13.86 1.2% 12.31 12 0.8 12 0% -1.5% -1.4% 0.6 -1.7%

10 0.4 8 -5.0% -5% 0.2 -7.9% -8.0% 8 0.0 4 -10% Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 2007 2008 2009 2010 2011 2012 2013 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 2014F 2015F 2016F

Source: ACEA, Nomura research Source: ACEA, Nomura estimates

Steady US auto sales growth US SAAR stayed above 16mn for the third-straight month in May 2014. Total vehicle sales were at 1.61mn units, up 11% y-y, while passenger car sales were up 9% y-y (8.04mn SAAR, vs 7.55mn in April and 7.60mn in May 2013). Incentives for passenger cars have edged higher. Our Japan auto analyst Anindya Das believes that this has resulted from: 1) tougher competition in the compact and mid-size segment; and 2) a shift in consumer preferences toward roomier compact SUVs as their fuel economy levels approach those of compact/midsize cars at broadly similar price points. We also note that inventory levels have continued to moderate, reaching 3.54mn units at the end of May, after touching a recent high of 3.73mn in February (vs 3.19mn in May 2013). For details, please refer to the report, Japanese automakers’ US sales - SAAR stays above 16mn for third straight month, published 4 June 2014.

Fig. 157: US production, capacity and utilisation trend Fig. 158: US auto annual sales volume and forecasts Total NA Std Capacity (Only LV) Unit sales (mn) (LHS) y-y (RHS) Total NA Sales (Only LV) 18 20% (000 units) Total NA LV Production Utilization (standard) - Total NA (RHS) 16 15% 21,000 110% 14 10% 100% 12 5% 17,500 90% 10 0% 80% 8 -5% 14,000 70% 6 -10% 10,500 60% 4 -15% 50% 2 -20% 7,000 40% 0 -25% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2014F 2015F 2016F

Source: Ward’s, ANFAVEA, Marklines, company data, Nomura estimates Source: Ward’s, ANFAVEA, Marklines, Nomura estimates

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Nomura | Nexteer Automotive 9 July 2014

Improving gross margins on better sales mix Global shift from HPS to EPS system accelerated since 2007 To reduce carbon emissions and ensure better fuel efficiency, local governments in the US, Europe and more recently China have enacted varied policies and tax incentives to encourage the switch from HPS to EPS systems. We note that global EPS penetration has accelerated since 2007 from 44.6% to 58.8% in 2012. The IPSOS estimates that revenue from EPS systems will continue to grow strongly and reach 70.6% of global steering system revenue in 2016F and 73.8% in 2017F.

Fig. 159: Global steering system revenue breakdown

120% EPS HPS Manual Others

100% 2.1% 2.1% 2.1% 2.0% 2.0% 2.1% 3.7% 4.6% 5.0% 4.9% 4.2% 6.6% 6.4% 6.4% 6.3% 6.3% 5.9% 4.9% 4.0% 3.3% 2.7% 2.2% 21.9% 19.7% 80% 29.9% 27.0% 24.3% 38.5% 37.5% 35.1% 33.2% 46.7% 40.3% 60%

40% 70.6% 73.8% 61.6% 64.4% 67.4% 51.2% 53.0% 54.2% 56.6% 58.8% 20% 44.6%

0% 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Source: Company data, IPSOS, Nomura research

Strong EPS order backlog benefits Nexteer from the demand shift We believe that Nexteer is a potential beneficiary of the demand shift discussed above, as a result of an increasing earnings contribution from EPS systems. We note that EPS will contribute approximately 76% of Nexteer’s future lifetime revenues, based on the booked business from the company’s 16 key purchase orders. These orders have been awarded and should start to generate revenue typically within 2-2.5 years of when the business was awarded. With such a strong order flow, we expect Nexteer’s EPS revenue to grow at 22-24% during 2014-16F and contribute 45-54% of total revenue.

Fig. 160: Summary of key purchase orders

Exp. lifetime revenue Est. lifetime volume Commencement date Products offered (USD bn) Customers Vehicle type (units bn) Award Date of production Duration (years) EPS 6.2 German OEM 1 Car 6.3 Aug-10 Sep-13 12.0 US OEM 1 SUV, Car, Van 5.2 Apr-12 Jun-14 5.0 US OEM 2 Pickup & Car 3.9 Jul-11 May-14 6.0 US OEM 3 Crossover 1.6 Mar-13 Oct-15 6.0 China OEM 1 Car 1.5 Dec-10 Aug-13 6.0 China OEM 2 Van 1.0 Nov-11 Oct-13 4.0 German OEM 2 Car 0.8 Jul-12 Nov-14 4.0 HPS 0.2 US OEM 2 Pickup & SUV 0.7 Nov-12 Sep-13 6.0 Steering columns 1.1 US OEM 2 Pickup & SUV 3.5 Jul-11 Jul-14 6.0 US OEM 1 Van, Crossover 2.0 Jun-13 Aug-15 6.0 US OEM 3 SUV 1.1 May-10 Jan-14 5.0 US OEM 3 Pickup 1.0 Feb-12 Aug-14 7.0 Halfshafts 0.9 US OEM 3 Crossover 5.6 Jan-13 Oct-15 7.0 US OEM 3 Crossover 4.8 Oct-11 Jun-15 6.0 US OEM 3 Car 4.8 Dec-12 Mar-14 7.0 China OEM 3 Car 4.1 Oct-11 Jan-15 7.0 India OEM 1 Car 1.7 Jun-13 Apr-15 5.0

Source: Company data, Nomura research

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Nomura | Nexteer Automotive 9 July 2014

Improvement in gross margins on sales mix upgrade We expect Nexteer’s gross margin to improve on: 1) a higher revenue contribution from EPS systems, which are generally priced above traditional HPS systems, from 40.9% in 2013 to 54.4% in 2016F; and 2) further upside potential in EPS ASP as a result of the strong demand. These could help improve the company’s gross margin from 14.2% in 2013 to 15.1% in 2016F, we estimate.

Fig. 161: Revenue contribution by type of steering system Fig. 162: Margin trends

120% EPS HPS CIS Driveline 20% Gross margins EBITDA margins Net margins 100% 14.2% 15.1% 16.4% 15.3% 16% 14.5% 14.8% 19.4% 19.8% 21.9% 19.7% 17.9% 12.5% 12.6% 80% 20.4% 12.4% 11.6%12.1% 22.3% 21.4% 12% 10.6% 25.6% 22.3% 22.2% 22.4% 10.3% 60% 12.1% 9.9% 17.0% 14.7% 24.0% 20.6% 8% 6.4% 6.5% 25.7% 40% 5.2% 5.5% 4.6% 4.6% 54.4% 50.1% 4% 2.8% 3.0% 20% 40.9% 45.2% 2.6% 29.3% 33.9% 35.3% 0.4% 0% 0% 2010 2011 2012 2013 2014F 2015F 2016F 2010 2011 2012 2013 2014F 2015F 2016F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Valuation Our TP of HKD7.5 is based on 13x mid-2015F P/E, benchmarking to its HK/China peer average. Instead of comparing with its own historical trading average, we believe that the peer average is more representative to accurately reflect its share price upside potential given Nexteer’s short trading history. A comparison with local peers suggests our target multiple is conservative Within the Hong Kong/China auto component space, we see Johnson Electric (179 HK, Neutral) as Nexteer’s closest peer. We note that both firms are exposed to similar business operating environments: engaged in internal mechanical auto component manufacturing (Johnson produces sub-motion/power-train cooling systems), have similar overseas exposure (both with ~70% revenue from the US and EU markets) and benefit from the strong growth of the China PV market. Considering also their similar FY14 divided yield of c2%, we believe our target multiple (13x FY14F, vs Johnson’s trailing P/E of 15x) is conservative enough to warrant the 30%-plus upside potential implied by our target price for Nexteer.

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Nomura | Nexteer Automotive 9 July 2014

Fig. 163: P/E chart Fig. 164: P/B chart

(x) (x) 3.0 12 +2SD 11.6x 2.8 11 +1SD 10.1x 2.6 10 2.4 +2SD 2.3x 9 LT avg = 8.6x 2.2 +1SD 2.1x 8 2.0 -1SD 7x 1.8 7 LT avg = 1.8x 1.6 6 1.4 -1SD 1.5x 5 1.2 4 1.0 -14 -14 -14 -14 r-14 y r-14 y y y p p 7-Oct-13 7-Apr-14 2-Jun-14 2-Dec-13 7-Oct-13 7-Apr-14 2-Jun-14 4-Nov-13 5-Ma 4-Nov-13 2-Dec-13 5-Ma 21-Oct-13 21-A 13-Jan-14 27-Jan-14 16-Jun-14 30-Jun-14 10-Feb-14 24-Feb-14 10-Mar-14 24-Mar-14 16-Dec-13 30-Dec-13 21-Oct-13 21-A 16-Jun-14 30-Jun-14 13-Jan-14 27-Jan-14 18-Nov-13 10-Feb-14 24-Feb-14 10-Mar-14 24-Mar-14 19-Ma 18-Nov-13 16-Dec-13 30-Dec-13 19-Ma

Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates

Fig. 165: Global auto parts supplier valuation summary

Up/ Mkt Cap PE PB ROE EPS Growth Div yield Net Gearing Company NameTicker Rating TP Closing Downside (USDm) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F Auto-part makers Johnson Electric 179 HK Equity NEUTRAL 6.9 -3.4% 3,297 7.14 15.2 14.2 1.7 1.6 12% 12% 4% 7% 1.7% net cash Minth Group 425 HK Equity BUY 18.6 19.5% 2,194 15.56 12.2 10.5 1.6 1.5 14% 15% 14% 16% 3.3% net cash Nexteer 1316 HK Equity BUY 7.5 36.6% 1,769 5.49 10.9 8.6 2.0 1.7 20% 21% 11% 27% 1.8% 43.6% Xinchen 1148 HK Equity Not rated n.a n.a 829 4.99 17.4 12.9 2.1 1.8 n.a n.a 4% 35% n.a net cash Xingda Intl 1899 HK Equity Not rated n.a n.a 653 3.32 8.5 7.2 0.8 0.7 10% 11% 19% 19% 3.9% 16.4% Sector average 13.3 11.5 1.7 1.5 13% 13% 9% 17% 2.1% International part makers Nidec Corp 6594 JP Equity BUY 6,150 -6.0% 18,601 6,543 22.4 20.1 3.2 2.9 15% 15% 41% 11% 0.8% 7.1% Minebea 6479 JP Equity BUY 1,130 -7.2% 4,764 1,218 15.4 14.7 2.7 2.3 18% 16% 41% 5% 1.1% 45.6% Mabuchi Motor 6592 JP Equity NEUTRAL 7,000 -11.9% 2,950 7,950 26.2 24.3 1.3 1.3 5% 5% 1% 8% 1.9% net cash Hyundai Mobis 012330 KS Equity BUY 360,000 27.9% 27,144 281,500 7.0 6.5 1.2 1.0 18% 16% 16% 7% 0.7% net cash Mando 060980 KS Equity NEUTRAL 145,000 14.2% 2,264 127,000 10.6 9.3 1.2 1.1 12% 13% -2% 15% 0.9% 48.7% Hyundai Wia 011210 KS Equity BUY 220,000 12.5% 4,983 195,500 10.7 9.8 1.8 1.5 19% 17% 14% 9% 0.4% 17.0% Hankook Tire 161390 KS Equity BUY 74,000 26.7% 7,166 58,400 9.0 8.0 1.6 1.3 19% 18% 8% 13% 0.7% 18.3% Nexen Tire 002350 KS Equity NEUTRAL 15,000 -2.6% 1,471 15,400 9.3 n.a 1.6 n.a 18% n.a 19% n.a 0.5% 76.3% Johnson Controls JCI US Equity Not rated n.a n.a 34,158 51.43 16.4 13.8 2.9 2.5 17% 18% 82% 19% 1.7% 66.7% Magna International MG CN Equity Not rated n.a n.a 23,850 116.77 13.2 11.4 2.5 2.2 19% 19% 21% 16% n.a net cash ThyssenKrupp Presta TKA GR Equity Not rated n.a n.a 17,395 22.62 51.3 19.3 4.0 3.3 11% 18% -116% 166% n.a 55.3% TRW Automotive TRW US Equity Not rated n.a n.a 10,084 91.04 12.2 10.6 2.3 1.9 20% 19% -9% 14% n.a 20.0% Lear Corp. LEA US Equity Not rated n.a n.a 7,461 91.76 12.0 10.2 2.2 1.9 19% 19% 51% 17% 0.8% net cash Faurecia EO FP Equity Not rated n.a n.a 4,969 29.50 15.7 10.6 2.1 1.8 13% 17% 138% 47% n.a 93.0% Gentex Corp. GNTX US Equity Not rated n.a n.a 4,376 29.99 16.1 15.0 2.9 2.6 19% 17% 20% 7% 1.9% 153.1% Wanxiang Qianchao 000559 CH Equity Not rated n.a n.a 3,864 12.54 35.8 32.2 n.a n.a 15% 15% 27% 11% n.a 153.1% American Axle AXL US Equity Not rated n.a n.a 1,486 19.63 8.1 7.4 6.3 3.3 n.a n.a 98% 9% n.a 10.3% Zhejiang Shibao 002703 CH Equity Not rated n.a n.a 726 20.60 n.a n.a n.a n.a n.a n.a n.a n.a n.a -28.0% CUB Elecparts 2231 TT Equity Not rated n.a n.a 795 387.00 n.a n.a n.a n.a n.a n.a n.a n.a n.a 203.7% San Shing Fastec 5007 TT Equity Not rated n.a n.a 655 84.00 18.1 15.3 n.a n.a n.a n.a 17% 19% n.a 161.4% International average 17.9 13.1 2.4 2.1 16% 17% 23% 29%

Source: Bloomberg, Nomura estimates. Bloomberg consensus for NR stocks. Prices as on 4 July 2014

Catalysts • Improving US macro economic data • Stronger-than-expected General Motors fleet deliveries • New purchase orders from OEMs.

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Nomura | Nexteer Automotive 9 July 2014

Investment risks Rising raw material costs could erode gross margins Similar to other auto component suppliers, Nexteer is also exposed to fluctuations in basic material prices, mainly for steel, certain rare earth materials and plastic/resins. While raw material costs normally account for c65-70% of the cost of sales of steering system providers, steel prices have in general been increasing since 2009, while steering system prices have generally remained stable. The continuous strength in steel prices, in our view, could potentially erode the gross margins of steering system providers.

Fig. 166: COGS breakdown (2014F) Fig. 167: Margin trends

20% Gross margins EBITDA margins Others, 3% Net margins 16% 14.2% 14.5% 14.8%15.1% 12.5% 12.6% Manufacturing 12.4% 11.6%12.1% cost, 30% 12% 10.3% 10.6%

Direct 8% 6.4% 6.5% material 5.2% 5.5% cost, 67% 4.6% 4.6% 4% 2.8% 3.0% 2.6%

0.4% 0% 2010 2011 2012 2013 2014F 2015F 2016F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Fig. 168: US scrap steel price trend Fig. 169: ASP trends of global steering systems

(USD/mt) (USD) EPS system HPS system 700 400 Manual system Others 600 350 500 300

400 250 200 300 150 200 100 100 50 - 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 2007 2008 2009 2010 2011 2012

Source: Bloomberg, Nomura research Source: Company data, IPSOS, Nomura research

Slowdown in auto demand in the US An unexpected slowdown in US auto demand could significantly impair Nexteer’s earning outlook, given the company will derive c65-70% of its revenue from the US in 2014-16F, we estimate. According to Autodata, US LCV sales in May reached 1.6mn units, up 8.3% y-y and 4.6% m-m. This set of data was well above market expectation and was the best monthly sales number since July 2006. Despite this, the recent US consumer data have remained mixed. Employment trends remain reasonable; however, slowing disposable income growth and the apparent peaking of consumer credit growth have raised concerns over a slowdown in auto sales growth going forward.

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Potential price pressure exerted by OEMs Downstream OEMs have traditionally gained stronger bargaining power in pricing negotiation over upstream component producers. The former are generally not obligated to accept a price increase as they often reserve the ultimate right to terminate their purchase orders. Even when part suppliers successfully pass on a price increase, in most cases, there will be delays before they can do so effectively. OEMs will also periodically request discounts from part suppliers, typically 1-3% per year, according to Nexteer, when the price protection period is over for their new models.

Fig. 170: Gross margins for auto and auto-parts industry

Gross margins (%) autos auto-parts 19 18 17 16 15 14 13 12 08 09 10 11 12 13 08 09 11 12 13 y y y y y g g g g g g Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Au Au Au Au Au Au Nov 08 Nov 09 Nov 10 Nov 11 Nov 12 Nov 13 Ma Ma May 10 Ma Ma Ma

Source: Wind, Nomura research

Fig. 171: Porter’s 5 force model for global steering system industry

Low risk from new entrants New Strong buyer bargaining power - Capital intensive and strong technical and entrants - Capability of backward integration engineering capabilities required; - Ability to require steering and driveline - Intense competition leaves little room for systems manufacturers to lower prices, when economic profits for new entrants the launch of a new product has passed its - No absolute cost advantage over peers price protection period.

Intense rivalry among players -Competition not only based on price, but also on technology, global presence and product Suppliers quality Buyers - Only suppliers with strong relationship with OEM enjoy competitive advantage

Strong supplier bargaining power Medium threats from substitutes - Raw material costs comprise 65-70% of - OEMs have low propensity to self COGS production given possible cost economies - Steering system producers are mainly price achieved from outsourcing takers when commodities are publicly traded in - Long product life cycle for global major the exchanges OEMs (i.e. 4-7 years) makes switching - Unlikely for parts producers to move into a more costs for OEMs high capital and regulated industry Substitute - Long lead time and usually steering

Source: Nomura research

Potential liability claims on OEM recalls Nexteer is liable for OEM product recalls, not only given that OEMs may demand parts suppliers to bear the cost of recall (as suppliers assume more responsibility in the vehicle design process), but also given that the exercise would normally affect the production levels of the OEMs involved which would lead to disruption of Nexteer’s sales outlook. We estimate that the cost of recall per vehicle for Nexteer could be as high as 150% of the original product price, including other related administration costs.

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Global steering industry outlook The growing global auto market has fuelled continuous demand for steering systems. According to IPSOS, global sales revenue and volume increased from USD22.8mn and 90.3mn units in 2007 to USD27.1mn and 102.3mn units in 2012, representing CAGRs of 3.4% and 2.5%, respectively. The organization also forecasts sales revenue and volume of global steering system market recorded CAGRs of 5.3% and 4.7%, respectively, during the same period.

Fig. 172: Global steering systems revenue Fig. 173: Global steering systems unit sales

(USD mn) (Units mn) Revenue (LHS) y-y (RHS) Units (LHS) y-y (RHS) 40,000 25% 140 25% 35,000 19.2% 20% 120 19.8% 20% 30,000 15% 15% 5.3% 100 6.8% 10% 25,000 4.7% 5.3% 5.3%5.3%5.3% 4.7% 10% 5% 80 4.7%4.7% 4.7%4.7% 20,000 3.2% 5% 0% 60 15,000 2.7% -2.4% 0% -5% 3.4% 40 10,000 -10% -5% 5,000 -15% 20 -10% -13.6% -9.2% - -20% 0 -15% 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2013F 2014F 2015F 2016F 2017F

Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research

Industry competition remains keen The global steering system industry is dominated by seven manufacturers. These players have secured strong relationships with most of the well-known OEMs around the globe and captured more than 70% market share in terms of revenue in 2012, according to IPSOS. However, competition remains keen, as it is not simply based on price, but also on technology, global presence and overall customer service, etc, in our view.

Fig. 174: Market share of global steering system suppliers, Fig. 175: Market share of global driveline suppliers, 2012 2012

JTEKT Others 22% 26% Others GKN 37% 38%

Mando 5% ZF Lenksysteme 19% Thyssen Neapco Krupp 1% Presta 5% Nexteer TRW Wanxiang 6% Automotive Qianchao Nexteer NTN NSK 3% 5% 16% 7% 10%

Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research

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Average product price on a downward trend The intense competition has nevertheless driven down ASPs of steering systems, despite part makers’ ability to seek ASP upside through continued technology improvement and scale in production. According to IPSOS, the average prices of HPS and EPS decreased at CAGRs of approximately -0.4% and -1.6%, respectively, from 2007 to 2012. The rapidly evolving nature of the markets, as a result of the frequent launch of new OEM models and the continuous change in the regulatory environment, creates lots of opportunities for new players, especially those in low-cost countries such as China, Brazil and India, in our view.

Structural change from HPS to EPS driving new demand In pursuit of higher fuel efficiency and a better driving experience, there has been a structural demand shift from hydraulic power steering systems (HPS) to electric power steering systems (EPS). Since 2007, global EPS sales revenue has recorded a CAGR of 9.3%, with the market penetration rate rising from 45% in 2007 to 59% in 2012. IPSOS expects the strong growth to continue, as countries such as the US and China are enacting more regulations and tax incentives to reduce greenhouse gas emissions and promote fuel efficiency. In our view, these efforts should provide strong incentives for OEMs to switch to EPS systems in their new vehicles. In addition to the reduction in fuel consumption, other benefits of EPS systems over HPS systems include the use of fewer components and shorter and simpler vehicle assembly, which result in a reduction in weight and increased energy efficiency. In light of this, IPSOS estimates global EPS sales revenue will record a CAGR of 10.2% from 2012-17F, vs the industry at 5% over the same period.

Fig. 176: Global steering system breakdown by steering system type

120% EPS HPS Manual Others

4.2% 100% 2.1% 2.1% 2.1% 2.0% 2.0% 2.1% 3.7% 4.6% 5.0% 4.9% 6.6% 6.4% 6.4% 6.3% 6.3% 5.9% 4.9% 4.0% 3.3% 2.7% 2.2% 19.7% 80% 24.3% 21.9% 33.2% 29.9% 27.0% 40.3% 38.5% 37.5% 35.1% 46.7% 60%

40% 73.8% 67.4% 70.6% 58.8% 61.6% 64.4% 51.2% 53.0% 54.2% 56.6% 20% 44.6%

0% 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Source: Company data, IPSOS, Nomura research

China to see the strongest EPS revenue growth On a geographical basis, the growth rate in steering system demand in emerging countries was higher than that in developed nations. Among emerging countries, IPSOS forecasts that China’s EPS revenue will record a grow of 25.6% from 2012-17F, owing to: 1) the strong vehicle production growth in China which should consistently provide opportunities for auto part suppliers in the near future; 2) relatively low production cost and rapid market response; and 3) a higher attention to air pollution and fuel economy standards of the Chinese government. The organization also predicts that the gradual but happening technological advances of local producers could eventually beat those of foreign JV producers and drive export sales in the more remote future.

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Growth should remain intact in the US and Europe At the same time, the organization also forecasts the steering industry in the US and Europe to maintain steady CAGRs of 2% and 1.9%, respectively, during 2012-17F. Similar to the situation in China, the organization expects fuel economy to drive increased adoption of EPS in the US, when OEMs are required to adopt EPS to meet the new fuel economy regulations for the 2016 model year when new vehicle fleet averages will be required to reach 35.5 miles per gallon.

Future developments Expanding international presence Steering system producers are expanding their regional footprints along with their major clients’ expansion. In our view, this should help the former to explore new individual local markets, and to reduce single currency and market risks. Further quality and service enhancement in EPS systems We believe that steering system manufacturers will continue to add more functionality to EPS systems to improve the driving experience. These include offsetting wind effects, mitigating hand-wheel vibration due to chassis disturbances and enabling more marketable features such as parking assist. We also note that increasing the maximum output of EPS systems would allow use in larger vehicles such as D-segment sedans, SUVs and even full-size trucks.

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Financial analysis As a beneficiary of the structural growth in EPS system demand, we expect Nexteer to: • continue to record double-digit growth in sales revenue, resulting in a three-year net profit CAGR of 19% during 2013-16F. • have stronger FCF, which should yield upside to dividend payments.

Revenue growth likely to remain in double digits in 2014-16F Nexteer had a weak 2011, when: 1) it started phasing out its HPS products before fully commencing mass production of EPS products; and 2) revenue from Europe declined on market share losses by major clients PSA and Fiat attributable to the sluggish economy. However, we see solid ground for Nexteer’s sales momentum to reaccelerate, thanks to: 1) the continuous launch of EPS programmes; 2) higher revenue contribution from the China market; and 3) the kicking in of new orders from the German OEMs. Specifically, we forecast Nexteer’s net earnings will record a 19% three-year CAGR on continued EPS conversion (while HPS earnings decline by 7%), despite a likely flat ASP at around USD59-62.

Fig. 177: Key revenue assumptions

2010 2011 2012 2013 2014F 2015F 2016F - EPS 2.3 2.7 2.7 3.2 3.9 4.8 5.8 - HPS 10.7 10.7 8.3 7.0 6.5 6.0 5.5 - CIS 4.1 3.7 3.5 3.7 4.0 4.3 4.6 Total steering 17.1 17.1 14.4 13.9 14.4 15.1 15.9 Driveline 7.9 8.0 8.7 8.8 9.0 9.2 9.6 Total sales volume (mn) 25.0 25.1 23.1 22.7 23.4 24.3 25.5

- EPS 264 284 285 305 308 310 313 - HPS 49 50 54 58 60 60 60 - CIS 128 134 139 145 148 148 148 Average steering 97 105 117 138 152 165 178 Driveline 50 55 54 54 53 53 53 Average unit price (USD) 82 89 94 105 114 122 131

- EPS 601 763 765 976 1,201 1,488 1,815 - HPS 527 540 447 406 390 360 330 - CIS 526 500 482 535 592 636 681 Total steering 1,653 1,804 1,694 1,917 2,183 2,484 2,826 Driveline 399 444 474 470 477 488 509 Total revenue (USD mn) 2,052 2,248 2,168 2,387 2,660 2,972 3,335

- EPS n.a 27.0% 0.3% 27.6% 23.1% 23.9% 22.0% - HPS n.a 2.6% -17.2% -9.2% -3.9% -7.7% -8.3% - CIS n.a -4.9% -3.7% 11.1% 10.6% 7.5% 7.0% Total steering n.a 9.1% -6.1% 13.2% 13.9% 13.8% 13.8% Driveline n.a 11.4% 6.6% -0.8% 1.5% 2.2% 4.3% Total revenue growth n.a 9.5% -3.6% 10.1% 11.5% 11.7% 12.2%

Source: Company data, Nomura estimates

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Improving FCF suggests potential dividend upside potential Nexteer had maintained a healthy balance sheet and been at a net cash position from 2010 to 2013. However, free cashflow during the period was negative as a result of low sales coupled with aggressive capacity expansion across the globe. Should sales start improving this year, we look for positive free cashflow which would give rise to potential dividend upside.

Fig. 178: Net cash and free cashflow Fig. 179: Dividend payout

(USD mn) (USD) Net cash FCF 600 0.025 DPS (LHS) Payout ratio (RHS) 35% 477 500 30% 0.020 400 328 25% 274 290 282 278 20.0% 20.0% 300 20.0% 20.0% 0.015 20% 200 15% 0.010 0.012 0.016 100 36 38 0.013 0.020 7 10% - 0.005 5% (100) (35) (54) (115) (200) - 0% 2011 2012 2013 2014F 2015F 2016F 2013 2014F 2015F 2016F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

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Company profile

Background Founded as Jackson, Church & Wilcox in 1906, the company was purchased by Buick in 1909 and later became the business division of General Motors engaged in steering systems operations. In 1998, the business operation was transferred to Delphi Corporation which later spun off to become an independent publicly-held corporation in 1999 but filed for Chapter 11 bankruptcy protection in 2005. In 2009, GM acquired the steering operations again from Delphi and renamed it Nexteer Automotive. In 2010, PCM China, the financing and investment arm of the Beijing Municipal Government, acquired Nexteer from GM for a total consideration of USD465mn. In March 2011, AVIC acquired a 51% equity interest in PCM China with CNY408mn in an open auction and later listed Nexteer on HKEx in October 2013.

Fig. 180: Shareholding structure

Source: Company data, Nomura research

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Global presence and market share With 20 manufacturing plants located in the US, Mexico, China, Poland, India, Brazil and Australia, Nexteer seeks to operate its production bases in developing countries, along with major OEM customers, to minimize production and delivery costs. According to Nexteer, it also operates three vehicle performance centres, five regional application engineering centres and 10 customer service centres. This enables the company to meet customer support requirements on a timely basis and satisfy regional variations in its global OEM customers’ vehicle platforms.

Fig. 181: Location of global production bases

Source: Company data, Nomura research

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The strong global presence and solid relationship with major OEMs have enabled Nexteer to be ranked 5th and 3rd largest steering and driveline producers globally in 2012, according to IPSOS, with market share of 6% and 5% respectively.

Fig. 182: Market share of global steering system suppliers, Fig. 183: Market share of global driveline suppliers, 2012 2012

JTEKT Others 22% 26% Others GKN 37% 38%

Mando 5% ZF Lenksysteme 19% Thyssen Neapco Krupp 1% Presta 5% Nexteer TRW Wanxiang 6% Automotive Qianchao Nexteer NTN NSK 3% 5% 16% 7% 10%

Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research

Key products Nexteer’s major products are mainly used in vehicles ranging from small passenger cars to full-size trucks. These include: 1) steering systems and components such as electric power steering systems (EPS systems), hydraulic power steering systems (HPS systems) and steering columns and 2) driveline systems and components such as halfshafts, intermediate drive shafts and propeller shaft joints.

Fig. 184: Nexteer’s product offering

Source: Company data, Nomura research

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Steering systems Steering system usually refers to the components controlling the direction of the vehicle motion. It helps drivers steer by augmenting steering effort of the steering wheel. Hydraulic or electric actuators add controlled energy to the steering mechanism, so the driver only needs to supply a modest effort to steer regardless the environment outside the vehicle. Power steering also gives a continuous sense of how the wheels are interacting with the road by providing feedback of forces acting on the front wheels, where this is normally called the "rοad feel". • Electric power steering uses an electric motor to assist driver steering. The EPS system monitors vehicle speed and steering angle to ensure that the steering feel is optimized for every driving situation. Electric systems have an advantage in fuel efficiency because there is no belt-driven hydraulic pump constantly running. Another major advantage is the elimination of belt-driven engine accessories, which greatly simplifies its manufacturing and maintenance process. The charts below summarize the key EPS products offered by Nexteer.

Fig. 185: Column assist EPS Fig. 186: Rack assist EPS Fig. 187: Pinion assist EPS

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

• Hydraulic power steering uses high pressure fluids to assist driver steering. A belt- driven power steering pump creates system pressure. The pressurized fluid is then routed into a cylinder that turns the wheels of the vehicle.

Fig. 188: Steering pumps Fig. 189: Steering hoses Fig. 190: Steering gears

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

• Steering column connects the steering wheel to the steering mechanism and controls steering by transferring the driver’s input torque from the steering wheel.

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Fig. 191: Intermediate shafts Fig. 192: Steering columns

Source: Company data, Nomura research Source: Company data, Nomura research

• Driveline system consists of the components that transfer power from the transmission and deliver it to the drive wheels. Nexteer’s driveline system products include front wheel drive halfshafts, intermediate drive shafts and rear wheel drive halfshafts as well as propeller shaft joints.

Fig. 193: Halfshafts Fig. 194: Intermediate drive shafts Fig. 195: Propeller shaft joints

Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research

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Appendix A-1

Analyst Certification We, Benjamin Lo and Joseph Wong, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating Brilliance China 1114 HK HKD 15.60 08-Jul-2014 Neutral Reduce 09-Jul-2014 N/A Nexteer Automotive 1316 HK HKD 5.36 08-Jul-2014 Buy Not rated 09-Jul-2014 N/A Geely Automobile 175 HK HKD 2.89 08-Jul-2014 Buy Neutral 09-Jul-2014 N/A Johnson Electric Holdings 179 HK HKD 7.07 08-Jul-2014 Neutral Not Rated 13-Jan-2014 N/A Guangzhou Auto 2238 HK HKD 9.68 08-Jul-2014 Buy Neutral 30-Jul-2013 N/A Great Wall Motor 2333 HK HKD 30.40 08-Jul-2014 Buy Neutral 13-Jan-2014 N/A Minth Group 425 HK HKD 15.30 08-Jul-2014 Buy Not Rated 13-Jan-2014 N/A Dongfeng Motor 489 HK HKD 14.70 08-Jul-2014 Buy Neutral 09-Jul-2014 N/A SAIC Motor 600104 CH CNY 15.43 08-Jul-2014 Buy Not rated 09-Jul-2014 N/A

Rating and target price changes

Issuer Ticker Old stock rating New stock rating Old target price New target price Brilliance China 1114 HK Reduce Neutral HKD 9.30 HKD 15.10 Nexteer Automotive 1316 HK Not rated Buy N/A HKD 7.50 Geely Automobile 175 HK Neutral Buy HKD 3.38 HKD 3.76 Johnson Electric Holdings 179 HK Neutral Neutral HKD 7.30 HKD 6.90 Guangzhou Auto 2238 HK Buy Buy HKD 10.50 HKD 11.50 Great Wall Motor 2333 HK Buy Buy HKD 47.20 HKD 40.00 Minth Group 425 HK Buy Buy HKD 18.20 HKD 18.60 Dongfeng Motor 489 HK Neutral Buy HKD 12.40 HKD 16.60 SAIC Motor 600104 CH Not rated Buy N/A CNY 21.20

Brilliance China: Valuation Methodology Our TP of HKD15.1 is based on the long-term average of 13x (based on mid-15F EPS: CNY0.92). The benchmark index for this stock is MSCI China.

Brilliance China: Risks that may impede the achievement of the target price Upside risks: 1) margin surprise on the upside due to better-than-expected cost management; 2) stronger-than-expected sales volumes; and 3) unexpected delays or drop-off of new models by major competitors. Downside risks: 1) delays in the proposed listing of BAIC; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition in the luxury car segment.

Nexteer Automotive: Valuation Methodology Our TP of HKD7.5 is based on 13x mid-2015F P/E, benchmarking to its HK/China peer average. Instead of comparing with its own historical average, we believe that the peer average is more representative to accurately reflect its share price potential given the company’s short trading history. The benchmark index for this stock is MSCI China.

Nexteer Automotive: Risks that may impede the achievement of the target price 1)Gross margin erosion from rising raw material costs; 2) slower-than-expected US auto sales; 3)continuous price pressure from OEMs; and 4) potential financial claims from vehicle recalls.

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Geely Automobile: Valuation Methodology Our TP of HKD3.76 is based on 1.3x P/B (based on end-15F FD BVPS: CNY2.30), representing -1 SD below historical mean. The benchmark index for the stock is MSCI China.

Geely Automobile: Risks that may impede the achievement of the target price 1) lower export sales; 2) CNY depreciation; 3) failure of its brand restructuring exercise; and 4) delays in the launch of new models.

Johnson Electric Holdings: Valuation Methodology Our target price of HKD6.9 is based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53). In our DCF model, we assume: 1) market risk premium of 4.75%, 2) risk-free rate which is based on China’s 10-year bond yield of 4.2%; 3) beta of 0.9; 4) terminal growth rate of 3%; and 5) WACC of 8.3%. Cash flows are discounted back to FY15F. The benchmark index for this stock is MSCI HK.

Johnson Electric Holdings: Risks that may impede the achievement of the target price 1) uncertainty over the sustainability of US/ EU economic recovery, and auto demand recovery, and 2) rising commodity prices could exert pressure on gross margins.

Guangzhou Auto: Valuation Methodology Our TP of HKD11.5 is based on a target P/E of 12.1x (LT average) and our mid- 2015F EPS forecast of CNY0.76. The benchmark index for this stock is MSCI China.

Guangzhou Auto: Risks that may impede the achievement of the target price Risks: 1) All of GAC's production is located in Guangdong province, where we believe it will continue to face pressure from rising labour and component costs; 2) lingering tension between China and Japan may hamper the pace of the recovery for Japanese-brand sales; and 3) delays/postponement of new model debuts/upgrades.

Great Wall Motor: Valuation Methodology Our TP of HKD40 is based on -1 SD below its long-term average of 11x mid-15F EPS at CNY3.51. The benchmark index for the stock is MSCI China.

Great Wall Motor: Risks that may impede the achievement of the target price 1) delays or cancellation of new product launches; 2) worse-than-expected cost controls, and; 3) a slowdown in industry SUV sales as a result of the possible change in government policy towards private vehicle ownership.

Minth Group: Valuation Methodology Based on 13.5x and on mid FY14-15F P/E (EPS: CNY1.10), representing 1 SD above historical mean, our target price is HKD18.6. The benchmark index for this stock is MSCI China.

Minth Group: Risks that may impede the achievement of the target price Risks include 1) continued pressure on profit margins; 2) deteriorating relationship with key customers; 3) heavy reliance on Japanese brands, and; 4) a slowdown in global auto production.

Dongfeng Motor: Valuation Methodology Our TP of HKD16.6 is based on the long-term average P/E of 8.5x (based on mid- 15F EPS: CNY1.55). The benchmark index for this stock is MSCI China.

Dongfeng Motor: Risks that may impede the achievement of the target price Risks: 1) lingering tensions between China and Japan may hamper the pace of recovery of Japanese-brand autos; 2) delay or cancellation of new model launches; and 3) lacklustre CV sales owing to continued weakness in the commercial vehicles segment.

SAIC Motor: Valuation Methodology Our TP of CNY21.2 is based on the LT average P/E of 8x and our mid-2015F EPS forecast of CNY2.65. The benchmark index for this stock is MSCI China.

SAIC Motor: Risks that may impede the achievement of the target price 1) Delay or cancellation of the proposed ‘Shanghai-HK through-train’; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition among overseas brands.

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