Reiterate "Buy" on Strong Fundamentals and Attractive Valuation 强大的基本面与吸引人的估值，重申“买入”

股

票

研 [Table_Title] Company Report: Brilliance China (01114 HK) Toliver Ma 马守彰

究 (852) 2509 5317 EquityResearch 公司报告：华晨汽车 (01114 HK) [email protected]

27 August 2018 [Table_Summary] Reiterate "Buy" on Strong Fundamentals and Attractive Valuation 强大的基本面与吸引人的估值，重申“买入”

 Brilliance China’s 1H18 shareholders’ profit increased 54.3% yoy to 公 Rating:[Table_Rank ] Buy RMB 3,566.1 million, roughly in line with our expectation. The strong Maintained 司 1H18 results were mainly attributable to the Brilliance BMW JV, in which

share of profits increased by 37.9% yoy. The increase was mainly driven by 报评级：买入 (维持) strong vehicle sales during the year, with yoy increase of 13.4%, contributed 告 by strong sales from the 5 Series, 3 Series and X1. Net margin improved 1.6 ppts yoy to 11.7% on better sales mix. Meanwhile, the minibus segment 6[Table_Price-18m TP 目标价] : HK$15.69 CompanyReport narrowed loss amount in 1H18 to RMB 294.4 million. Revised from 原目标价: HK$25.02

 We have revised net profit by -0.3%/ -5.3%/ 1.7% in 2018 to 2020, Share price 股价: HK$10.900 respectively. We have reduced sales forecast for both the minibus segment and BMW. However, we have increased net margin for Brilliance BMW after seeing strong margin growth in the first half, which offsets the negative effect Stock performance from the reduced sales expectation. 股价表现  We expect that the Company will be 1) facing stronger challenges from [Table_QuotePic]

imported vehicles and 2) looking to release the shareholder cap restriction, 30.0 % of return

though no concrete plan has been finalized yet. Both policies should hamper 20.0

growth of the Company. We have reflected the higher risk by adjusting our 10.0 证 forecast to a more conservative stance and a lower valuation. The Company 0.0 is trading at 7.1x 12M forward PER, which we think is attractive. Therefore, 券 (10.0)

告 we reiterate our "Buy" rating for Brilliance China, but revise down TP to

研 HK$15.69, representing 8.6x 2018 PER and 7.4x 2019 PER. (20.0)

报

(30.0) 究  华晨汽车 2018 年上半年股东净利同比增长 54.3%至人民币 35.661 亿元，大致符合我们

究 (40.0) 报的预期。强劲的 2018 年上半年业绩主要归功于合资企业华晨宝马，其应占利润同比增

37.9%。增长主要受年内强劲的汽车销售驱动，汽车销售同比增长了 13.4%，主要是靠 5 (50.0) 研

告系、3 系以及 X1 的贡献。因销售构成改善，净利率同比提升 1.6 个百分点至 11.7%。同 (60.0) Aug-17 Nov-17 Feb-18 May-18 Aug-18

券时，轻型客车分部 2018 年上半年的亏损收窄至人民币 2.944 亿元。 EquityResearch Report HSI index Brilliance China

 证我们将 2018 至 2020 年的净利润分别调整了-0.3% / -5.3% / 1.7%。我们下调了轻型客车

[Table 以及宝马的销售预测。不过，在看到上半年强劲的利润率提升并将销售预期下降的负面效

_Info1 应抵消之后，我们上调了华晨宝马的净利率。 Change[Table_PriceChange] in Share Price 1 M 3 M 1 Y

股价变动 1 个月 3 个月 1 年 ]汽  我们预计公司将 1）面临进口车更强的挑战，以及 2）等待股权比例上限的放松，虽然具 Abs. % (1.3) (27.8) (46.8) 车体的规划尚未达成。两项政策均将阻碍公司的成长。我们将预测调整至更为保守的水平并绝对变动 % 下调估值，以反映上升的风险。公司目前的 12 个月预期市盈率为 7.1 倍，我们认为具有 Rel. % to HS Index 及 2.2 (17.8) (47.4) 吸引力。因此，我们重申对华晨汽车的“买入”评级，但将目标价略微下调至 15.69 港元，相对恒指变动 % 零 Avg. Share price(HK$) 对应 8.6 倍的 2018 年市盈率和 7.4 倍的 2019 年市盈率。平均股价（港元） 10.5 12.6 17.6 部 Source: Bloomberg, Guotai Junan International. 件行业

Automobiles & Components Sector AutomobilesComponents &

Y[Table_ear End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE [Table 年结Profit ] 收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 _Info2 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%)

2016A 5,125 3,682 0.731 5.2 13.4 4.710 2.1 0.110 1.1 16.9

] 2017A 5,305 4,376 0.868 18.7 10.5 5.259 1.7 0.110 1.2 17.4 中 2018F 4,094 7,447 1.477 70.2 6.3 6.133 1.5 0.221 2.4 25.9 2019F 3,221 8,715 1.728 17.0 5.4 7.185 1.3 0.259 2.8 26.0 华外 2020F 2,568 10,273 2.037 17.9 4.6 8.401 1.1 0.306 3.3 26.1 晨运总股数 5,045.3 大股东汽 [Table_BaseData]Shares in issue (m) (m) Major shareholder Huachen Auto Group 42.5% 输 Market cap. (HK$ m) 市值 (HK$ m) 54,993.8 Free float (%) 自由流通比率 (%) 车 57.0 个月平均成交股数净负债股东资金 3 month average vol. 3 (‘000) 23,407.0 FY18 Net gearing (%) FY18 / (%) Net Cash

52 Weeks high/low (HK$) 52 周高/低 (HK$) 23.850 / 9.270 FY18 Est. NAV (HK$) FY18 每股估值（港元） 19.6

Source: the Company, Guotai Junan International. Brilliance China (01114 HK) Brilliance(01114 China

See the last page for disclaimer Page 1 of 9

[Table_PageHeader]Brilliance China (01114 HK)

1H18 Results Review

] 1 r a M t h g i R _ e l b a T [

Brilliance China’s (the "Company") 1H18 shareholders’ profit increased 54.3% yoy to RMB 3,566.1 million, roughly in line with our expectation. Strong 1H18 results were mainly attributable to the Brilliance BMW JV, in which share of profits increased by 37.9% yoy. Key notes on results are discussed by segment:

Brilliance BMW

Share of result was RMB 3,677.4 million, up 37.9% yoy. The increase was mainly driven by strong vehicle sales during the 27 August2018 year, a yoy increase of 13.4%, contributed by strong sales from the 5 Series, 3 Series and X1. During the period, the sales volume of 5 Series/ 3 Series/ X1 increased yoy by 16.7%/ 5.7%/ 11.7%, respectively. As a result, revenue improved 19.0% yoy to RMB 63,119 million, with blended ASP up by 5.0% yoy to RMB 300,902. Net profit margin recorded strong improvement, increasing 1.6 ppts yoy to 11.7%. We attribute the improved margin to better product mix, in which the 5 Series represents 33% of total sales, and a more utilized UKL manufacturing plant.

Minibus segment The minibus segment continued to be loss-making but showed signs of improvement. Segment loss was RMB 294.4 million, and was about 24.9% better than 1H17 after excluding impairment charges. Revenue decreased by 19.4% yoy to RMB 2,287.1 million, as sales volume declined 32.4% yoy to only 22,739 units of minibuses and MPVs sold. Sales was mainly

] 2 r a M t h g i R _ e l b a T [

contributed by the Haise minibuses, with sales volume of 20,980 units in 1H18, but recorded decrease of 26.7% yoy. Gross margin improved 2.8 ppts to 6.9% yoy. Selling expenses decreased 38.5%, which is consistent to the decrease in sales, and administrative expenses improved 50.9% mainly due the absence of one-off impairment charges of RMB350 million on Huasong related assets in 1H17.

Table-1: 1H18 Results Summary of Brilliance China RMB mn (except per share items) 1H18 1H17 yoy Turnover 2,287.1 2,837.1 -19.4% Cost of sales (2,130.2) (2,720.1) -21.7% Gross profit 156.9 117.1 34.0% Other Income 51.5 29.4 74.8% Selling expenses (178.3) (289.8) -38.5% General and administrative expenses (272.4) (555.2) -50.9% Share of result (01114 HK)

--Associates 41.3 125.3 -67.1% --Jointly controlled entities 3,677.4 2,666.4 37.9% Operating profit 3,476.4 2,093.2 66.1%

Interest income 51.5 24.6 109.7% 华晨汽车 Finance costs (67.0) (62.9) 6.4% Profit before taxation 3,441.2 2,054.8 67.5% Income tax (16.9) (4.1) 314.8% Profit after taxation 3,424.3 2,050.7 67.0% Minority Interests (141.9) (259.8) -45.4% Attributable to: equity shareholders of the Company 3,566.1 2,310.5 54.3%

Basic EPS (RMB) 0.707 0.458 54.2% Brilliance China Diluted EPS (RMB) 0.707 0.458 54.3% Dividends (HK$) 0.11 0.11 n.a. Recurring profit 3,566.1 2,310.52 54.3% Segment profit - minibuses (294.42) (391.02) -24.7% Segment Information - Brilliance BMW (BBA)

Revenue 63,119.60 53,042.67 19.0% Profit before taxation 9,844.10 7,105.51 38.5% Net profit 7,356.00 5,337.64 37.8% Source: the Company, Guotai Junan International.

Table-2: 1H18 Operating Data of Brilliance China Operating Data 1H18 1H17 yoy Jinbei Sales volume 22,739 33,616 -32.4% ASP 100,582.0 84,398.4 19.2% Brilliance BMW

Sales volume 209,768 185,021 13.4% ASP 300,901.9 286,684.6 5.0% Pre tax margin 15.6% 13.4% 2.20 ppts Net profit margin 11.7% 10.1% 1.59 ppts

Source: the Company, Guotai Junan International. Report

Company

See the last page for disclaimer Page 2 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Luxury Segment

] 1 r a M t h g i R _ e l b a T [ Despite slower growth, the luxury vehicle market in China remained strong in 1H18. Continuously driven by demand from consumption upgrades, the luxury vehicle market maintained a double-digit growth rate of 12.1% yoy, which significantly outperformed the overall growth rate of passenger vehicle ("PV") sales of 4.6% yoy in 1H18. The penetration rate of luxury vehicles (based on % of PV sales) increased to 11.4% in 1H18 from 10.3% in 2017 and reached another historical high. The growth rate was lower than that of 16.5% in 1H17, however, this was mainly due to importers of luxury vehicles generally postponing auto imports until the reduction of the auto tariff took effect on 1st July. Hence, we expect sales of imported luxury cars to rebound in 2H18 as demand will increase when price drops occur after the tariff reduction. On the other hand, although 27 August2018 trade disputes remain tense, given that alarger portion of luxury vehicles are produced locally, the luxury vehicle market in China will be barely affected and should maintain stable growth based on increasing disposable income of Chinese consumers.

Figure-1: China Luxury Vehicle Penetration (% of China Figure-2: Luxury Vehicle Growth of Luxury Vehicle PV sales) Market

Global China 11.4% 12.0% 75.3% 10.3% 80.0% 10.0% 8.9% 9.0% 9.0% 70.0% 8.0% 7.5% 60.0% 8.0% 6.5% 50.0%

] 2 r a M t h g i R _ e l b a T [

5.1% 37% 6.0% 40.0% 33.8% 3.9% 23.4% 4.0% 30.0% 23.4%22.6% 15.3%16.5% 20.0% 12.1% 2.0% 7.3% 10.0%

0.0% 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18 Source: CAAM, the Companies, Guotai Junan International. Source: CAAM, the Companies, Guotai Junan International.

Local production supports robust growth whereas imports bring high volatility. Although growth of total sales varies widely from one luxury brand to another, sales of locally produced vehicles of most luxury brands increased steadily with growth rates over 15%, which resulted in an overall growth rate of 19.1% YoY in 1H18. The total market share of the tier-1

players, i.e. Mercedes-Benz, BMW and Audi (collectively referred to as "BBA"), slightly increased to 71.3% in 1H18 from 70.1% (01114 HK) in 2017. Both Mercedes-Benz and Audi maintained solid growth, while BMW suffered from shrinkage of imported vehicles which substantially offset growth from locally produced vehicles, leading to an overall YoY growth rate of 2.3% only. Given the distinct leading position in 1H18, Mercedes-Benz will very likely win in the full year of 2018, but uncertainty still exists since 华晨汽车 imported vehicles still accounted for nearly 30% of sales in China, among which a large portion was manufactured in the US, which may further suffer from intensified trade friction. BMW has to deal with similar challenges in its US-manufactured products, though local production of the BMW X3 began recently in 2Q18. Audi has a greater chance to turn the tide with a

higher percentage of local production; over 95%. With respect to the tier-2 players, Cadillac continued to lead in 1H18 with the Brilliance China highest YoY growth rate at 29.2% among all luxury brands, making it the strongest potential challenger to BBA. Volvo and Lexus also performed well with double-digit growth rates, which threatened Jaguar & Rover’s current position. Facing fierce competition and tariff issues, all the remaining luxury brands lost market share in 1H18. Lexus, Porsche and Lincoln, as fully imported brands, are expected to be affected by tariff factors the most, among which Lexus and Porsche, which may benefit from the tariff reductions, while Lincoln will severely suffer from the trade disputes due to its full reliance on US manufacturing, until its local production in China begins in late 2019 as planned.

Figure-3: Luxury Vehicle Sales in China Figure-4: Luxury Vehicle Brand Market Share

1H17 1H18 yoy 1H17 1H18 30.0% 400,000 29.2% 40% 26.2% 350,000 20.3% 18.4% 30% 25.0% 22.8%22.3% 15.8% 13.6% 300,000 20% 6.8% 3.9% 2.3% 10% 20.0% 250,000 -7.0% 0% 200,000 -15.5% 15.0% -10% 150,000 -20% 10.0% 7.7% 5.1% 5.3% 100,000 -30% 4.6% -38.7% 5.0% 2.5% 50,000 1.3% 1.8%

-40% 0.3% Report

0 -50% 0.0%

Audi

BMW

Volvo

Acura Infiniti

Lexus

BMW

Volvo

Acura

Infiniti

Lexus

Lincoln

Benz

Cadillac

Benz

Porsche

Cadillac

Porsche

Jaguar

Mercedes

Company

Mercedes Land Rover Land Land Rover Land

Source: CAAM, the Companies, Guotai Junan International. Source: CAAM, the Companies, Guotai Junan International. See the last page for disclaimer Page 3 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Brilliance BMW

] 1 r a M t h g i R _ e l b a T [

Sales of Brilliance BMW remained solid in the first 7 months of 2018, with YTD sales up 15.3% yoy. Brilliance BMW started production of the X3 in 2Q17, resulting to its localized model count to six, the most among the BBA brands. Sales will be discussed as follows:  5 Series – 82,300 units sold, representing an increase of 21.8% yoy in 1-7M18. This is mainly due to the low base comparison, as 2Q17 was the launch period of the current 5 Series. Also, recovery of the sedan market and the strong

demand in luxury cars continued to support sales 5of the Series. We expect sales to remain strong in the second half. 27 August2018  3 Series - Sales rather fluctuated in 2018, but still managed to record yoy growth of 4.5% yoy in the first 7 months. Comparatively, the 3 Series was less updated than its close peers, the Beijing Benz C-class and FAW Audi A4L. The current 3 Series is close to the end of the product cycle; a new generation model will be launched in 2019, therefore, we should see sales continue to be under pressure, with larger discounts expected on offer.  X1 –54,670 units sold, representing an increase of 9.0% yoy in 1-7M18. This is the only performing model based on the UKL platform. Sales performance was strong since the launch of the longer wheelbase in 2017. However, we see that sales to be under pressure by the launch of the Audi Q2 and BMW X2 (imported) in the second half, with price similar to the current X1.  1 Series/ 2 Series Active Tourer – Sales of these two models from the UKL platform underperformed so far. The 2

Series Active Tourer only recorded sales of 5,233 units, a decline of 52.7% yoy. The ] 2-series2 r a ActiveM t h Tourerg i R saw_ e onlyl b a T [

about 750 units of monthly sales so far, falling short of our expectation. We believe that the market for MPVs is still unpopular in China, whereas the 2 Series position does not fit into the right market. On the other hand, 1 Series sales was up by 56.4% yoy in 1-7M18. This was because of the of full year effect as the 1 Series was only available for sale from Feb. 2018. Despite its much lower entry price with the BMW name, this UKL model only maintained around 3,000 units in monthly sales this year, again falling short of our expectation.

Figure-5: Brilliance BMW Monthly Sales Figure-6: Brilliance BMW Product Portfolio

2016 2017 units 2018 2017 yoy BMW 5 series BMW 3 series BMW X1 50,000 2018 yoy 120.0% BMW 2 series BMW 1 series BMW X3 45,000 100%

100.0% (01114 HK)

40,000 35,000 80.0% 80%

30,000 60.0% 60% 25,000 华晨汽车 20,000 40.0% 40% 15,000 20.0% 10,000 0.0% 20% 5,000 - -20.0%

0% Brilliance China Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015A 2016A 2017A 2018F 2019F 2020F

Source: CAAM, Guotai Junan International. Source: CAAM, Guotai Junan International.

Figure-7: BBA Monthly Sales Growth Figure-8: BBA Market Share

Brilliance BMW FAW Audi Beijing Benz 200%

150% 22.8% 28.7% 100% 23.5% 29.9% Audi 50% BMW Mercedes-Benz 0%

23.4% Others

15 16 17 14

14 15 17 18 16

15 16 17 18

- - - -

- - - - -

- - -

- 23.1% 22.3%

Jul Jul Jul Jul

-50% Jul

Mar Mar Mar Mar

Nov Nov Nov Nov Report 26.2% -100%

Company Source: CAAM, Guotai Junan International. Source: CAAM, Guotai Junan International. Note: Outer ring: 1H18; Inner ring: 2017.

See the last page for disclaimer Page 4 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Earnings Revisions

] 1 r a M t h g i R _ e l b a T [

We have revised net profit by -0.3%/ -5.3%/ 1.7% in 2018 to 2020, respectively. We have reduced sales forecast for both

the minibus segment and BMW. However, we have increased net margin for Brilliance BMW after seeing strong margin growth in the first half, which has offset negative effects from sales reduction. We based our earnings forecasts on the following key assumptions:

1. We did not forecast minibus business to strongly improve in our forecasted period, despite cooperation with Renault. The 27 August2018 management guided that the business should experience a turnaround 3 years from 2017, which is roughly around 2020. We understand that two models are under development: the Renault Master model and a new Jinbei product. Since the current product line will not undergo significant renewal, we expect sales to continue to decrease.

2. We have adjusted downwards our forecast as our original forecast was rather aggressive considering the overhang of trade disputes and lowered tariffs. Comparing with our prior forecast, we have adjusted sales of Brilliance BMW by -5.8%/ -7.2%/ -6.8% in 2018 to 2020, respectively.

 5 Series: We reduced our expectations on the new 5 Series as sales has been under pressure in 1H18.

] 2 r a M t h g i R _ e l b a T [  X1: We maintain our sales forecast as sales is on track, as 1-7M18 sales represents 57% of our full-year forecast.

 X3: We maintain our sales forecast for the X3 for 2018-2020. We do not expect significant negative impact from lowered tariffs as selling price of mid-sized SUVs are significantly higher than localized models.

Figure-9: Mid-sized SUV Price Comparison

RMB '000

1,500.0

1,300.0

1,100.0

900.0

700.0 (01114 HK)

500.0

300.0

100.0

(100.0) 华晨汽车

Pace

Audi Q5 Audi

BMWX3

LexusNX

BenzGLC

FordEdge

Kia Sorento Kia

VolvoXC 60

CadillacXT5 MKCLincoln

NissanTerra

BuickEnvision

Jaguar F Jaguar

NissanMurano

PorscheMacan

Subaru Outback

Land Rover Land Velar

ChevroletEquniox ToyotaHighlander

VolkswagenTiguan L

JeepGrand Commander Brilliance China

Land RoverLand DiscoverySport Source: Autohome, Guotai Junan International.

 Net profit margin of JVs: Adjusted upwards on net margin of JVs due to the stronger-than-expected margin expansion in the first half. However, as there is discount pressure on the retail side, we conservatively increase our margin forecast in 2018 by 0.5 ppts.

Table-3: Forecast Revisions New Old Change 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Vehicle sales (units) 46,179 35,621 27,836 66,250 77,737 81,183 -30.3% -54.2% -65.7% Jinbei 469,700 510,220 564,348 498,500 549,600 605,414 -5.8% -7.2% -6.8% Brilliance BMW 5-series 144,000 151,200 158,760 156,000 163,800 171,990 -7.7% -7.7% -7.7%

130,800 117,720 141,264 120,000 108,000 129,600 9.0% 9.0% 9.0% 3-series 10,500 10,500 10,500 16,500 17,000 20,000 -36.4% -38.2% -47.5% 2-series Active Tourer X1 96,000 100,800 103,824 96,000 100,800 103,824 0.0% 0.0% 0.0%

50,000 100,000 120,000 50,000 100,000 120,000 0.0% 0.0% 0.0% X3 515,879 545,841 592,184 0 564,750 627,337 686,597 -8.7% -13.0% -13.8% Total Financials (RMB mn)

Report 4,094 3,221 2,568 5,874 7,030 7,489 -30.3% -54.2% -65.7% Revenue 3.5% 3.5% 3.5% 3.50% 3.50% 3.50% 0.0 ppt 0.0 ppt 0.0 ppt Gross profit margin 7,595 9,327 11,108 7,465 9,384 10,310 1.7% -0.6% 7.7% Profit from operation Share profit of JV (BMW) 7,818 9,411 11,081 7,919 9,961 10,916 -1.3% -5.5% 1.5%

11.0% 11.5% 12.0% 10.50% 11.30% 11.00% 0.5 ppt 0.2 ppt 1.0 ppt Company Net profit margin of JV Net income (Loss) 7,447 8,715 10,273 7,472 9,199 10,101 -0.3% -5.3% 1.7%

1.477 1.728 2.037 1.482 1.824 2.003 -0.4% -5.3% 1.7% Basics EPS (RMB) Source: Guotai Junan International. See the last page for disclaimer Page 5 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Table-4: Major Financial Data and Forecast 2016 2017 2018F 2019F 2020F

Sales volume (Jinbei) 62,673 61,028 46,179] 1 r a M t 35,621h g i R _ e 27,836l b a T [

yoy 8.0% -2.6% -24.3% -22.9% -21.9% ASP (Jinbei) - RMB/unit 81,776 86,923 88,661 90,434 92,243

yoy -2.4% 6.3% 2.0% 2.0% 2.0% Sales volume (BMW) 310,055 386,478 469,700 510,220 564,348 yoy 8.0% 24.6% 21.5% 8.6% 10.6% ASP (BMW) - RMB/unit 308,024 288,759 303,197 321,389 327,817 yoy -4.1% -6.3% 5.0% 6.0% 2.0% Share profit of JV (BMW) 3,993 5,233 7,818 9,411 11,081 yoy 4.5% 31.0% 49.4% 20.4% 17.7% Net profit margin of JV 8.4% 9.4% 11.0% 11.5% 12.0% 27 August2018 Net profit 3,682 4,376 7,447 8,715 10,273 yoy 5.4% 18.8% 70.2% 17.0% 17.9% Source: the Company, Guotai Junan International.

Valuation

We believe that Brilliance BMW is still strong fundamentally after seeing strong margin expansion in 1H18. Given that the luxury market is still thriving under the consumption upgrade environment in China, we continue to believe Brilliance China will continue to benefit through the BMW JV. However, risks are higher than the prior year, with policies of opening up of the auto market in China seeming to affect the Company. We expect that the Company will be 1) facing stronger challenges from imported vehicles and 2) looking to release the shareholder cap restriction, though no concrete plan has been finalized yet. Both policies should

hamper growth of the Company. We have reflected the higher risk by adjusting our forecast to ] a more2 r a consM t ervativeh g i R stance_ e l andb a T [

lower valuation. The Company is trading at 7.1x 12M forward PER, which we think it is attractive. Therefore, we reiterate our "Buy" rating for Brilliance China, but revise down TP to HK$15.69, representing 8.6x 2018 PER and 7.4x 2019 PER.

Figure-10: PER Band of Brilliance China Figure-11: PBR Range of Brilliance China

Forward P/E Avg 40.00 (x) 40.0 (x) 34.57 +1 S.D. -1 S.D. 35.00

35.0 +2 S.D. -2 S.D.

30.00 24.50 30.0 25.00 19.34 25.0 20.00 20.58 15.79 16.27 18.15 14.40 13.69 20.0 11.68 11.80 15.00 (01114 HK) 13.45 14.57 12.98 15.0 13.39 11.09 10.00 15.16 9.63 9.71 9.12 11.89 10.0 10.66 10.48 10.76 5.00 9.10 7.41 6.22 5.0 0.00 5.71 华晨汽车 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018

YTD

10 11 12 13 14 15 16 17 18

------

Aug Aug Aug Aug Aug Aug Aug Aug Aug

Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International. Brilliance China

Report

Company

See the last page for disclaimer Page 6 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Table-5: Peers comparison Last price PE PB ROE(%) D/Y(%) EV/EBITDA

] 1 r a M t h g i R _ e l b a T [ Company Stock Code Currency 17A 18F 19F 20F 17A 18F 19F 20F 18F 18F 18F Dongfeng Motor-H 489 HK HKD 7.51 4.0 4.1 4.0 3.9 0.5 0.5 0.4 0.4 11.3 4.8 16.8

Geely Automobile 175 HK HKD 16.36 11.9 9.1 7.2 6.0 3.5 2.8 2.2 1.7 34.1 3.3 4.6

Brilliance China 1114 HK HKD 10.90 10.9 7.1 5.7 4.9 1.7 1.5 1.2 1.0 22.8 2.0 n.a.

Great Wall Mot-H 2333 HK HKD 4.70 7.4 5.2 4.7 4.4 0.7 0.7 0.6 0.6 14.0 6.4 4.3

Qingling Motor-H 1122 HK HKD 2.22 9.6 8.5 8.1 7.4 0.6 0.6 0.6 0.6 7.0 9.3 n.a.

Byd Co Ltd-H 1211 HK HKD 47.40 27.5 26.5 20.6 18.6 2.1 1.9 1.7 1.6 9.1 0.6 9.2

Guangzhou Auto-H 2238 HK HKD 7.21 5.2 4.8 4.3 4.0 0.9 0.8 0.7 0.6 16.8 7.1 5.7 27 August2018

Baic Motor-H 1958 HK HKD 6.36 18.4 6.5 5.0 4.2 1.0 0.9 0.8 0.7 17.3 6.8 1.3

Weichai Power-H 2338 HK HKD 8.05 8.2 7.7 7.9 8.3 1.5 1.4 1.3 1.1 16.5 5.7 3.3

Sinotruk Hk Ltd 3808 HK HKD 10.12 8.0 7.2 7.5 8.1 1.0 1.0 0.9 0.9 12.9 6.7 2.4

Simple Average 11.1 8.7 7.5 7.0 1.4 1.2 1.0 0.9 16.2 5.3 5.9 Weighted Average 12.6 10.4 8.6 7.8 1.7 1.5 1.3 1.1 18.4 4.3 5.9

Dongfeng Auto-A 600006 CH CNY 3.9 38.3 13.5 11.2 10.1 1.1 1.1 1.0 1.0 8.8 2.4 n.a.

Great Wall Mo-A 601633 CH CNY 7.0 12.8 9.0 8.0 7.2 1.3 1.2 1.1 1.0 14.0 3.8 4.8

Faw Car Co Ltd-A 000800 CH CNY 6.9 39.8 n.a. n.a. n.a. 1.4 1.4 1.3 1.3 2.9 0.0 n.a.

Saic Motor-A 600104 CH CNY 28.37 9.6 8.8 8.1 7.5 1.5 1.3 1.2 1.2 15.8 7.7 6.2

Chongqing Chan-A 000625 CH CNY 7.19 4.8 6.0 5.3 5.2 0.7 0.7 0.6 0.6 12.9 5.5 3.7

Weichai Power-A 000338 CH CNY 7.57 8.9 8.2 8.1 7.9 1.7 1.5 1.3 1.1 15.4 5.0 3.2

] 2 r a M t h g i R _ e l b a T [ Beiqi Foton-A 600166 CH CNY 1.92 96.0 38.4 32.0 n.a. 0.7 n.a. n.a. n.a. n.a. n.a. n.a.

Anhui Jianghua-A 600418 CH CNY 5.08 22.1 17.0 13.1 11.1 0.7 0.7 0.7 0.6 4.6 2.4 4.4

Cnhtc Jinan T-A 000951 CH CNY 11.44 8.5 8.3 7.9 7.0 1.4 1.3 1.2 1.0 15.1 5.1 n.a.

Zhengzhou Yut-A 600066 CH CNY 15.30 10.9 9.4 8.6 7.7 2.3 1.9 1.7 1.5 20.7 5.6 5.4

Xiamen King Lo-A 600686 CH CNY 10.62 13.4 15.1 13.0 9.7 1.8 1.5 1.4 1.3 7.9 n.a. n.a.

Jiangling Moto-A 000550 CH CNY 11.28 14.1 14.9 14.9 22.0 0.8 0.8 0.8 0.8 6.0 2.7 n.a.

Yangzhou Yax-A 600213 CH CNY 7.05 37.1 n.a. n.a. n.a. 8.9 n.a. n.a. n.a. n.a. n.a. n.a.

Zhongtong Bus-A 000957 CH CNY 6.05 18.9 6.6 6.0 n.a. 1.3 n.a. n.a. n.a. n.a. n.a. n.a.

Simple Average 24.3 13.5 11.8 9.5 1.9 1.2 1.1 1.0 11.3 4.0 4.6

Weighted Average 17.3 10.3 9.2 7.2 1.5 1.2 1.1 1.0 12.9 4.0 3.3

Nissan Motor Co 7201 JP JPY 1,031.50 6.2 5.4 7.5 6.8 0.8 0.7 0.7 0.7 9.8 5.5 12.4

Toyota Motor 7203 JP JPY 6,830.00 11.3 8.1 8.6 8.0 1.2 1.1 1.0 0.9 11.8 3.4 11.0 (01114 HK)

Honda Motor Co 7267 JP JPY 3,290.00 9.6 5.6 8.2 7.6 0.8 0.7 0.7 0.6 8.8 3.5 7.9

Mazda Motor 7261 JP JPY 1,272.50 8.1 7.0 9.2 7.8 0.7 0.7 0.6 0.6 7.2 2.8 3.6

Mitsubishi Heavy 7011 JT JPY 4,140.00 15.8 19.7 16.9 12.7 0.8 0.8 0.8 0.7 4.4 3.1 6.6

华晨汽车 Fuji Heavy Indus 7270 JP JPY 3,320.00 9.1 11.6 9.7 8.6 1.7 1.6 1.5 1.4 16.0 4.4 3.4

Suzuki Motor 7269 JP JPY 7,208.00 19.9 14.7 13.3 12.4 2.8 2.5 2.2 1.9 17.1 1.1 5.9

Hino Motors Ltd 7205 JP JPY 1,143.00 13.3 12.8 11.1 9.6 1.4 1.3 1.2 1.1 11.8 2.7 5.7

Isuzu Motors 7202 JP JPY 1,619.50 13.6 12.1 10.5 9.6 1.6 1.4 1.3 1.2 12.5 2.4 5.9

Simple Average 11.9 10.8 10.5 9.2 1.3 1.2 1.1 1.0 11.0 3.2 6.9

Weighted Average 11.2 8.7 9.2 8.4 1.2 1.1 1.0 0.9 11.5 3.5 9.4 Brilliance China

Hyundai Motor 005380 KS KRW 124,500.00 8.3 9.4 7.5 6.5 0.4 0.5 0.5 0.4 6.0 3.7 9.1

Ford Motor Co F US USD 9.63 5.0 7.1 6.9 6.2 1.1 1.0 0.9 0.8 14.8 6.2 2.4

Navistar Intl NAV US USD 41.17 128.7 17.9 12.1 11.9 n.a. n.a. n.a. n.a. (7.4) 0.0 8.4

Paccar Inc PCAR US USD 66.62 14.0 11.0 10.9 11.9 2.9 2.5 2.1 1.9 21.8 3.7 9.4

Volkswagen Ag VOW GR EUR 136.30 6.0 5.5 4.8 4.5 0.7 0.6 0.5 0.5 11.6 4.8 2.1

Bayer Motoren Wk BMW GR EUR 81.07 6.2 7.2 6.9 6.7 1.0 0.9 0.8 0.8 12.4 5.1 3.9

Daimler Ag DAI GR EUR 54.68 5.6 6.2 5.9 5.9 0.9 0.8 0.8 0.7 15.0 6.6 1.8

Man Se MAN GR EUR 93.40 44.1 40.3 27.3 23.4 2.3 2.2 2.1 2.0 7.9 2.2 10.5

Renault Sa RNO FP EUR 71.72 3.8 4.7 4.5 4.4 0.6 0.6 0.5 0.5 12.9 5.6 2.4

Volvo Ab-B VOLVB SS SEK 155.75 15.1 11.6 11.4 11.4 3.0 2.5 2.3 2.1 21.5 3.4 5.5

General Motors C GM US USD 23.58 17.0 8.1 6.5 5.5 1.2 1.2 1.1 1.0 17.8 2.5 4.8

Tata Steel Ltd TATA IN INR 576.50 n.a. 4.5 7.4 7.2 1.6 1.1 1.0 0.9 14.0 1.7 5.8 Simple Average 23.1 11.1 9.3 8.8 1.4 1.3 1.1 1.1 12.3 3.8 5.5

Weighted Average 10.0 8.7 7.7 7.4 1.2 1.1 1.0 0.9 13.7 4.8 4.1

Global Simple Average 17.6 11.1 9.6 8.4 1.6 1.2 1.1 1.0 13.3 4.4 5.4 Report

Global Weighted 11.1 8.9 8.5 7.9 1.3 1.1 1.0 0.9 13.2 4.2 6.5 Source:Average the Company, Guotai Junan International.

Company

See the last page for disclaimer Page 7 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Financial Statements and Ratios

[Table_IncomeStatement] [Table_BalanceSheet] ] 1 r a M t h g i R _ e l b a T [

Income Statement Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 5,125 5,305 4,094 3,221 2,568 PPE 2,250 2,567 2,026 2,109 2,193 Cost of sales (4,954) (5,118) (3,951) (3,109) (2,478) Intangible assets 1,339 696 1,695 1,823 1,946 Gross profit 172 186 143 113 90 Lease prepayment 85 87 81 79 77 Interests in jointly controlled Other revenue and expenses 82 110 73 59 49 entities 17,645 21,594 23,335 26,009 29,113 Selling expenses (612) (572) (441) (347) (277) Other non-current assets 2,716 3,881 4,310 4,806 5,338 Administrative expenses (383) (1,193) (306) (241) (192) Total Non-current Assets 24,034 28,824 31,445 34,826 38,667 27 August2018 Share of result of: 4,246 5,450 8,126 9,743 11,438 --Associates 253 217 308 332 358 Cash & Cash Equivalents 937 1,732 5,045 8,210 11,592 --Jointly controlled entities 3,993 5,233 7,818 9,411 11,081 Inventories 1,104 1,044 905 705 565 Operating Profit 3,504 3,982 7,595 9,327 11,108 Trade and other receivables 1,880 1,387 2,357 1,677 1,407 Pledged deposit 1,532 1,757 1,441 1,122 929 Interets income 53 55 75 65 58 Other Current assets 1,556 3,112 1,912 2,171 2,378 Finance costs (133) (138) (341) (453) (535) Total Current Assets 7,009 9,032 11,660 13,885 16,872 Profit Before Tax 3,425 3,900 7,328 8,939 10,631 Total Assets 31,043 37,856 43,105 48,711 55,538 Income Tax (36) (34) (66) (369) (473) profit After Tax 3,389 3,866 7,262 8,570 10,158 Trade payables 3,324 3,279 2,541 1,936 1,568 Notes payable 2,330 2,781 3,511 4,095 4,563 Non-controlling Interest 293 510 185 145 115 Bank borrowing 1,325 2,810 4,375 5,157 6,096 Shareholders' Profit / Loss 3,682 4,376 7,447 8,715 10,273 Other current liabilities 1,343 2,096 1,635 1,306 1,065 Total Current Liabilities 8,323 10,965 12,061 12,495 13,292 Basic EPS 0.731 0.868 1.477 1.728 2.037 Total Non-current Liabilities 122 191 122 134 148

Diluted EPS 0.730 0.867 1.476 1.727 2.036 ] 2 r a M t h g i R _ e l b a T [

Dividend per share (RMB) 0.110 0.110 0.221 0.259 0.306 Total Liabilities 8,444 11,156 12,183 12,630 13,440

Total Shareholders' Equity 23,724 26,523 30,929 36,233 42,366 Share capital 397 397 397 397 397 [Table_CashFlowStatement] Cash Flow Statement Reserve 23,327 26,126 30,532 35,836 41,968 Minority Interest (1,125) 177 (7) (152) (267)

Total Equity 22,599 26,700 30,922 36,081 42,099 Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F BPS(RMB) 4.710 5.259 6.133 7.185 8.401 EBT 3,425 3,900 7,328 8,939 10,631

Share of results of JV and associates (4,246) (5,450) (8,126) (9,743) (11,438)

Depreciation and amortisation 270 278 246 233 247 Financial Ratios

Interest expenses/(income),net 80 82 267 388 477 Other adjustments (100) 601 94 138 183 2016A 2017A 2018F 2019F 2020F Change in WC (345) (2,244) (70) 262 50 Profitability Interest received 85 301 746 990 1,168 Sales Volume growth of Jinbei 8.0 (2.6) (24.3) (22.9) (21.9) Income tax paid (33) (14) (38) (36) (30) Sales(%) volume growth of BMW 8.0 24.6 21.5 8.6 10.6 Cash from Operating Activities (865) (2,547) 447 1,170 1,288 (01114 HK) Change(%) of Jinbei ASP (%) (2.4) 6.3 2.0 2.0 2.0 Change of BMW ASP (%) (4.1) (6.3) 5.0 6.0 2.0 Net Proceed of PPE (455) (620) (393) (433) (346) EPS Growth (%) 5.1 18.7 70.2 17.0 17.9 Change of pledged bank BPS Growth (%) 19.0 11.7 16.6 17.1 16.9

deposits 469 (225) 316 319 192 Gross profit margin (%) 3.3 3.5 3.5 3.5 3.5 华晨汽车 Dividend received from JV and Operating profit margin of Jinbei (14.5) (27.7) (13.0) (12.9) (12.9) associates 1,130 2,168 2,031 2,436 2,860 Operating profit margin of BMW 11.2 12.6 13.1 13.6 15.0 Others (4) (44) 0 0 0 EBITDAR (%) 71.0 77.7 183.2 282.7 421.4 Cash from Investing Activities 1,140 1,278 1,954 2,323 2,706 Net profit margin (%) 71.8 82.5 181.9 270.5 400.1

ROE(%) 16.9 17.4 25.9 26.0 26.1 Net change of bank borrowing (260) 1,565 1,565 782 939 ROA(%) 12.7 12.7 18.4 19.0 19.7 Net change of notes payable 430 913 730 584 468 Brilliance China Dividend paid (475) (277) (1,117) (1,307) (1,541) Liquidity and solvency Others (104) (137) (267) (388) (477) Gearing ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash Cash from Financing Activities (409) 2,064 912 (328) (611) Interest coverage ratio (x) 23.6 26.7 29.3 22.5 20.7

Cash ratio (x) 0.1 0.1 0.2 0.4 0.7 Net Changes in Cash (134) 795 3,313 3,165 3,383 Quick ratio (x) 0.8 0.7 0.7 0.9 1.1 Other adjustment

Cash at Beg of Year 1,071 937 1,732 5,045 8,210 Efficiency Analysis Cash at End of Year 937 1,732 5,045 8,210 11,592 Inventory turnover days 85.3 82.0 83.6 82.8 83.2

Days receivable days 250.2 170.0 210.1 190.0 200.1 Days payable days 249.4 220.0 234.7 227.4 231.0

Source: the Company, Guotai Junan International.

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Company

See the last page for disclaimer Page 8 of 9 [Table_PageHeader]Brilliance China (01114 HK)

Company[Table_CompanyRatingDefinition] Rating Definition

The Benchmark: Hong Kong Hang Seng Index ] 1 r a M t h g i R _ e l b a T [

Time Horizon: 6 to 18 months

Rating Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable.

Neutral 中性 Relative Performance is -5% to 5%; 27 August2018 or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector[Table_ RatingIndustry DefinitionRatingDefinition] The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform 跑赢大市 Relative Performance>5%;

] 2 r a M t h g i R _ e l b a T [ or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable.

[DISCLOSURETable_DISCLOSUREOFINTERESTS OF INTERESTS ]

(1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report.

(2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for KAISA GROUP (01638 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I (03156 HK),CAM SCSMALLCAP (03157 HK),ZHENRO PPT (06158 HK),MR CSI300 ETF-R (CNY) (83127 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in

this Research Report. (01114 HK) (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research

Report. 华晨汽车 (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

Brilliance China DISCLAIMER

This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).

Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.

Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.

This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in

any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject

Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction.

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Website: www.gtja.com.hk

Company

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