EQUITY RESEARCH

Dongfeng (489.HK)

Annual sales volumes review: downgrade to accumulate rating 12 March 2015

Hong Kong | Automobile | Update Report

·The annual passenger vehicle sales volume increases by 10% Accumulate (Downgrade) The overall sales volume of was 2.7335 million in 2014, stably CMP HKD11.82 increasing by 6.46% compared with that in the same period of the previous years. Among TARGET HKD14 (+18.4%) that, the sales volume of passenger vehicle was up 10.4% yoy and reached 2.339 million, while that of commercial vehicle was down 12.2% yoy and reached 394 thousand. The COMPANY DATA overall sales volume of passenger vehicle of the group slightly exceeded the average level of O/S SHARES (MN) : 8616 the market which was 9.9%. However, that of its commercial vehicle was greatly impacted MARKET CAP (HKD MN) : 33755 by the cold market, losing to the average level of the market which was -6.5%. 52 - WK HI/LO (HKD): 15.2 / 9.6

··· Japanese cars: "one tie and one failure" for and Among three JV passenger vehicle enterprises, Japanese cars had a poor performance. The sales volume of Dongfeng Nissan was about 950 thousand, basically holding the line yoy and SHARE HOLDING PATTERN, % slightly up 3%. The new vehicle models that Dongfeng Nissan plans to release in 2015 Dongfeng Motor Corporation 66.86 include a seven-seat large SUV, the new generation Qashqai and a compact sedan as well as the T70 that came into the market in January. We predict that the sales power of

2015 will still come from the SUV vehicle models. PRICE PERFORMANCE, % 1M 3M 1Y The sales volume that Dongfeng Honda completed in 2014 was 308 thousand, down 4.1% Dongfeng 3.99 7.73 14.97 yoy. In 2015, Dongfeng Honda will release face-lifted CRV equipped with brand-new engine HIS index 5.71 5.23 7.66 and CVT gear box; in addition, the first small-sized SUV vehicle model XRV that came into the PRICE VS. HSI market at the end of 2014 will also be released with the 1.5 L model with smaller engine in the first half of this year, which is expected to relieve the condition of Dongfeng Honda SUV vehicle models being insufficient and chase market share in the current Chinese SUV spending spree.

···French cars: a suddenly rising new force; JVs` profits 50% more DFPSA performed fairly well in making progress in 2014, whose annual sales volume reached around 700, 000 and was up 28% yoy. In accordance with our judgments, DFPSA`s whole- year powerful product sales brought a positive scale effect, which made its expense ratio Source: Phillip Securities (HK) Research greatly diluted and profitability rise accordingly. According to the latest announcement, the KEY FINANCIALS turnover in 2014 of the two joint ventures DFPSA and DFPC Motor Sales Company geared to CNY mn FY13 FY14E FY15E FY16E the company and PSA was up 21% to 699, 000 million Yuan yoy ; the net profit was 45, 900 Net Sales 161253 171037 187221 212589 million Yuan after taxes, up 50% yoy, and the cash in hand surged 84.8% to 128, 000 million Net Profit 10528 13867 14162 16025 yoy.In 2015, DFPSA plans to release at least four new vehicle models (including the new 508, EPS, CNY 1.22 1.61 1.64 1.86 308S and C4 Picasso). The target sales volume is 800000 with a rate of increase of 15%. P/E, x 7.6 5.8 5.7 5.0 BVPS, CNY 7.33 8.24 8.94 10.09 P/BV, x 1.3 1.1 1.0 0.9 Investment Thesis DPS (CNY) 0.18 0.22 0.23 0.28 In conclusion, in order to reflect the worse-than-expected Japanese cars` sales volume in Div. Yield (%) 1.9% 2.4% 2.5% 3.0% Source: Company reports, Phillip Securities Est. 14H2, we revised the company`s EPS in 2014/2015/2016 to RMB 1.61, 1.64 and 1.86 and accordingly regulate the target price to 14 HKD, corresponding to 6.9/6.7/5.9 times of the Research Analyst expected price earnings ratio in 2014/2015/2016 and 1.3/1.2/1.1 x P/E for 2014/2015/2016, ZhangJing (+ 86 51699400-103) gowngrade to the "accumulate" rating. [email protected]

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Dongfeng UPDATE REPORT

The annual passenger vehicle sales volume increases by 10% According to the public data, the overall motor sales volume of Dongfeng Motor Group was 2.7335 million in 2014, stably increasing by 6.46% compared with that in the same period of the previous years. Among that, the sales volume of passenger vehicle was up 10.4% yoy and reached 2.339 million, while that of commercial vehicle was down 12.2% yoy and reached 394 thousand. The overall sales volume of passenger vehicle of the group slightly exceeded the average level of the market which was 9.9%. However, that of its commercial vehicle was greatly impacted by the cold market, losing to the average level of the market which was -6.5%.

Dongfeng`s monthly sales Total PV CV yod-Total yod-PV yod-CV 300000 50% 40% 250000 30% 200000 20% 10% 150000 0% -10% 100000 -20% -30% 50000 -40% 0 -50%

1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - l------l------l------l- - - n r y u p v n r y u p v n r y u p v n r y u p v a a a J e o a a a J e o a a a J e o a a a J e o J M M S N J M M S N J M M S N J M M S N

Source: Company, Phillip Securities Hong Kong Research

Japanese cars: "one tie and one failure" for Dongfeng Nissan and Dongfeng Honda Among three JV passenger vehicle enterprises, Japanese cars had a poor performance. The sales volume of Dongfeng Nissan was about 950 thousand, basically holding the line yoy and slightly up 3%. Due to the hot SUV market of China, Dongfeng Nissan`s “X-TRAIL+SYLPHY" had replaced the former "TIIDA+TEANA+SYLPHY+SUNNY" and became the main contributing vehicle models. The monthly sales volume of X-TRAIL was over 10 thousand and that of SYLPHY was over 25 thousand. TEANA continued to keep a tepid monthly sales volume of over 9 thousand after dropping from a high level. The sales volume of SUNNY and TIIDA dropped to the level of 6 to 8 thousand monthly. The new vehicle models that Dongfeng Nissan plans to release in 2015 include a seven-seat large SUV, the new generation Qashqai and a compact sedan as well as the Venucia T70 that came into the market in January. We predict that the sales power of 2015 will still come from the SUV vehicle models.

Dongfeng`s JV monthly sales 120000 DFNissan DFHonda DFPSA

100000

80000

60000

40000

20000

0 3 3 4 4 1 3 13 13 13 1 1 4 14 14 14 1 - -1 - l- - v- - -1 - l- - v- an ar ay u p o an ar ay u p o J M M J Se N J M M J Se N

Source: Company, Phillip Securities Hong Kong Research

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Dongfeng UPDATE REPORT

The sales volume that Dongfeng Honda completed in 2014 was 308 thousand, down 4.1% yoy. The main reason was that the competitiveness of its main force vehicle model CRV was weakened due to the emergence of more competitive products, while the performance of the newly released vehicle models was not good enough. The sales volume of CRV in 2014 was down 11.5% yoy, and the monthly sales volume of Civic and Jade stayed at about 4 to 5 thousand, respectively. In 2015, Dongfeng Honda will release face-lifted CRV equipped with brand-new engine and CVT gear box; in addition, the first small-sized SUV vehicle model XRV that came into the market at the end of 2014 will also be released with the 1.5 L model with smaller engine in the first half of this year, which is expected to relieve the condition of Dongfeng Honda SUV vehicle models being insufficient and chase market share in the current Chinese SUV spending spree.

French cars: a suddenly rising new force; JVs` profits 50% more DFPSA performed fairly well in making progress in 2014, whose annual sales volume reached around 700, 000 and was up 28% yoy. In accordance with our judgments, DFPSA`s whole-year powerful product sales brought a positive scale effect, which made its expense ratio greatly diluted and profitability rise accordingly. According to the latest announcement, the turnover in 2014 of the two joint ventures DFPSA and DFPC Motor Sales Company geared to the company and PSA was up 21% to 699, 000 million Yuan yoy ; the net profit was 45, 900 million Yuan after taxes, up 50% yoy, and the cash in hand surged 84.8% to 128, 000 million yoy.

In 2015, DFPSA plans to release at least four new vehicle models (including the new 508, 308S and C4 Picasso). The target sales volume is 800000 with a rate of increase of 15%. Among them, there are 350000 Citroen vehicles and 450000 Peugeot vehicles. Restrained by productivity, before the DFPSA fourth plant goes into operation, part of the vehicle models` production will be contracted to Dong Feng .

Investment Thesis In conclusion, in order to reflect the worse-than-expected Japanese cars` sales volume in 14H2, we revised the company`s EPS in 2014/2015/2016 to RMB 1.61, 1.64 and 1.86 and accordingly regulate the target price to 14 HKD, corresponding to 6.9/6.7/5.9 times of the expected price earnings ratio in 2014/2015/2016 and 1.3/1.2/1.1 x P/E for 2014/2015/2016, downgrade to the "accumulate" rating.

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Dongfeng UPDATE REPORT

Peer Comparison BEst BEst BEst BEst Mkt Cap BEst P/B: P/E: P/E: EV/BEst ROA Div OPM GM PM Ticker Name (HKD) P/B 2FY 1FY 2FY EBITDA P/B LF% ROE yid% LF% LF% LF% CNY (6 securities)

600104 CH Equity SAIC MOTOR CORP LTD-A 319504 1.6 1.5 9.2 8.0 9.6 1.8 7.5 19.6 N/A 2.1 11.3 4.5 000800601777 CH CH Equity LIFANFAW CAR COMPANY LIMITED-A39135 3.3 2.9 20.4 18.1 15.5 3.6 2.3 5.5 N/A -1.4 17.6 -0.9 Equity INDUST 15822 N/A 21.2 15.8 N/A 1.8 2.9 9.1 0.5 5.4 18.9 4.9 600805 CH Equity JIANGSU YUEDA INVESTMENT13848 C-A 1.8 1.5 8.9 7.8 8.8 1.8 10.1 18.7 N/A -1.3 10.9 40.8 000572 CH Equity HAIMA AUTOMOBILE GROUP12088 CO-A N/A N/A N/A N/A 1.4 1.8 3.7 N/A 1.3 11.3 1.2 601965 CH Equity CHINA AUTOMOTIVE ENGINEERI-A11771 2.7 2.4 23.1 19.4 27.7 2.9 11.1 13.8 1.3 25.7 36.8 28.5 EDM (2 securities)

VOW GR EquityVOLKSWAGEN AG 902354 1.1 0.9 9.5 8.4 7.6 1.2 3.2 12.3 N/A 6.6 17.3 4.3 BMW GR Equity BAYERISCHE MOTOREN WERKE605714 AG 1.9 1.7 12.6 11.9 11.0 2.0 4.1 16.6 N/A 11.5 21.2 6.7 EFR (2 securities)

RNO FP Equity RENAULT SA 212496 0.9 0.9 9.4 7.5 10.4 1.1 2.4 8.0 N/A 1.8 18.7 5.4 UG FP Equity PEUGEOT SA 105698 1.3 1.3 18.5 11.2 4.4 1.4 -1.2 -8.8 N/A 2.0 15.8 -2.3 HKD (11 securities)

489 HK Equity DONGFENG MOTOR GRP CO101843 LTD-H 1.1 1.0 6.5 6.1 42.9 1.2 10.9 21.0 1.9 3.5 14.4 27.5 2333 HK Equity GREAT WALL MOTOR COMPANY-H168120 3.4 2.7 14.0 10.4 12.0 3.9 16.9 30.3 2.2 16.9 26.0 14.4 1211 HK Equity BYD CO LTD-H 130429 2.7 2.4 115.1 35.4 24.1 2.8 0.6 2.1 0.2 5.1 14.9 1.4 200625 CH Equity CHONGQING CHANGAN AUTOMOBI-B113677 3.2 2.4 10.7 7.5 32.2 3.4 11.6 32.6 N/A -1.0 16.2 15.2 1114 HK Equity BRILLIANCE CHINA AUTOMOTIVE72070 3.4 2.6 11.5 10.1 N/A 3.5 24.5 35.1 0.8 -5.6 8.7 145.4 2238 HK Equity GUANGZHOU AUTOMOBILE GROUP-H62515 1.0 0.9 10.5 8.2 77.6 1.0 5.7 9.5 3.2 -1.1 9.9 16.0 2338 HK Equity WEICHAI POWER CO LTD-H 63501 1.4 1.3 9.4 9.9 8.4 1.5 5.1 18.1 1.1 8.7 20.1 11.1 200550 CH Equity JIANGLING MOTORS CORP LTD-B37298 2.4 1.9 12.2 9.3 9.2 2.5 12.3 21.0 N/A 6.3 22.8 6.5 175 HK Equity GEELY AUTOMOBILE HOLDINGS30453 LT 1.4 1.2 14.1 9.5 6.4 1.5 7.6 15.4 1.3 13.8 20.3 11.0 3808 HK Equity SINOTRUK HONG KONG LTD 12369 0.5 0.5 20.4 14.9 5.2 0.5 0.8 2.1 1.1 4.1 16.6 1.9 1122 HK Equity QINGLING MOTORS CO LTD-H 6603 0.7 0.7 11.3 10.5 2.9 0.7 4.3 5.9 6.1 7.1 15.7 7.9 INR (1 security)

TTMT IN Equity TATA MOTORS LTD 206947 2.2 1.7 9.7 8.2 4.3 2.8 7.2 27.1 0.4 10.3 6.1 JPY (10 securities)

7203 JP Equity TOYOTA MOTOR CORP 1780443 1.6 1.4 11.8 10.5 11.7 1.6 4.6 13.3 N/A 10.6 20.3 8.4 7267 JP Equity HONDA MOTOR CO LTD 468603 1.1 1.0 12.7 10.8 9.9 1.1 3.6 9.5 2.2 5.4 25.7 4.1 7201 JP Equity NISSAN MOTOR CO LTD 356436 1.1 1.0 11.2 9.9 11.0 1.1 2.9 10.2 N/A 5.3 17.9 3.5 6902 JP Equity DENSO CORP 307763 1.5 1.4 16.1 14.1 7.5 1.4 5.6 9.0 N/A 8.6 18.0 6.7 7270 JP Equity FUJI HEAVY INDUSTRIES LTD204304 3.2 2.5 12.0 9.4 5.7 3.3 11.2 25.1 N/A 16.6 30.7 10.3 7269 JP Equity SUZUKI MOTOR CORP 129091 1.4 1.3 17.8 15.1 5.3 1.4 3.6 7.6 N/A 6.3 27.3 3.6 7261 JP Equity MAZDA MOTOR CORP 94459 1.8 1.5 8.6 8.5 6.1 1.8 8.6 27.1 N/A 6.5 25.6 5.2 7211 JP Equity MITSUBISHI MOTORS CORP 69427 1.7 1.5 9.2 9.6 4.1 1.7 7.3 32.7 N/A 6.9 22.4 6.8 7272 JP Equity YAMAHA MOTOR CO LTD 67897 2.0 1.8 12.7 11.1 7.8 2.3 5.6 16.2 N/A 4.1 25.5 4.0 7205 JP Equity HINO MOTORS LTD 67605 2.7 2.3 14.1 11.8 8.1 2.7 8.1 23.5 N/A 7.3 18.0 4.8 KRW (2 securities)

005380 KS Equity HYUNDAI MOTOR CO 267348 0.7 0.7 5.7 5.5 6.6 0.6 5.2 10.7 N/A 8.0 21.2 7.0 000270 KS Equity KIA MOTORS CORP 133354 0.8 0.7 5.8 5.3 3.8 0.9 9.4 16.8 N/A 4.3 19.4 3.7 SEK (1 security)

VOLVB SS EquityVOLVO AB-B SHS 185438 2.4 2.1 16.5 12.5 10.2 2.5 0.6 2.6 N/A -3.0 21.4 -3.8 USD (5 securities)

DDAIF US Equity DAIMLER AG-REGISTERED 790291SHARES 1.9 1.7 12.6#N/A 11.2 Field Not 10.1 Applicable #N/A3.9 Field Not 16.1 Applicable 6.0 20.8 3.1 F US Equity FORD MOTOR CO 482643 1.9 1.6 9.8 8.4 5.3 2.5 1.5 12.5 3.2 0.8 11.6 0.1 GM US Equity GENERAL MOTORS CO 469308 1.5 1.3 8.3 7.6 4.1 1.7 2.3 7.5 3.2 3.3 14.1 5.0 Source: Company, Phillip Securities Hong Kong Research

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Dongfeng UPDATE REPORT Financials FYE DEC FY12 FY13 FY14F FY15F FY16F Valuation Ratios P/E (X), adj. 9.1 7.6 5.8 5.7 5.0 P/B (X) 1.5 1.3 1.1 1.0 0.9 Dividend payout Yield (%) 14.2% 14.7% 13.7% 14.0% 15.1% Dividend Yield (%) 1.6% 1.9% 2.4% 2.5% 3.0% Per share data (RMB) EPS, reported 1.06 1.22 1.61 1.64 1.86 EPS, adj. 1.06 1.22 1.61 1.64 1.86 DPS 0.15 0.18 0.22 0.23 0.28 BVPS 6.3 7.3 8.2 8.9 10.1 Grow th & Margins (%) Grow th Revenue -5.6% 30.0% 6.1% 9.5% 13.5% EBIT -12.0% 20.7% 30.8% 0.9% 13.8% Net Income, adj. -13.3% 15.8% 31.7% 2.1% 13.2% Margins EBIT margin 10.5% 9.7% 12.0% 11.1% 11.1% Net Profit Margin 7.3% 6.5% 8.1% 7.6% 7.5%

Key Ratios ROE (%) 18.13% 17.99% 20.67% 19.13% 19.55% ROA (%) 7.83% 7.36% 7.48% 6.93% 7.00%

Income Statement (RMB mn) Revenue 124036 161253 171037 187221 212589 Gross profit 23876 31900 35918 39129 44431 EBIT 12986 15679 20502 20691 23542 Profit before tax 12758 15448 19920 20257 23049 Tax (2919) (3989) (4880) (4963) (5762) Profit for the period 9779 11459 15040 15294 17287 Minority interests (687) (931) (1173) (1132) (1262) Total capital share 8616 8616 8616 8616 8616 Net profit 9092 10528 13867 14162 16025 Source: PSR

FY12 FY13 FY14F FY15F FY16F Balance Sheet (HKD mn) Total Assets 114810 171204 199506 209189 248240 Total liabilities 57177 103563 123707 127179 156300 Minority interests 3715 4506 4782 4947 5047 Shareholders' Equity 53918 63135 71017 77063 86893 Source: PSR

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Dongfeng UPDATE REPORT

Ratings History

20 Market Price Source: Bloomberg, PSR Target Price

16

12

8

4

0 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

1 2 3 4 5

PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2 -5% to +5% Neutral 3 -5% to -20% Reduce 4 <-20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk rew ard profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

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Dongfeng UPDATE REPORT

PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4 -5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock`s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

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