China Consumer Discretionary 20 November 2015

Geely Automobile (175 HK)

Target price: HKD4.90 (from HKD4.90) Share price (20 Nov): HKD4.20 | Up/downside: +16.6%

“Blue Geely Action Plan” and test drive of Emgrand EV Kelvin Lau (852) 2848 4467  Management highlighted no additional capital needed for NEV [email protected]  Positive feedback from the Emgrand EV test drive Brian Lam (852) 2532 4341  However, we see the 90% sales target as too aggressive [email protected]

What's new: Geely’s management held several meetings on 19 November Forecast revisions (%) to explain its strategic plan, namely the “Blue Geely Action Plan”, by which Year to 31 Dec 15E 16E 17E it aims to expand its EV sales to 90% of its new-car sales by 2020. Revenue change - - - Net profit change - - -

Core EPS (FD) change - - - What's the impact: No additional capital needed. Management Source: Daiwa forecasts emphasised that Geely had started investing in NEV and related technology 5 years ago. But, it did not disclose a plan back then as it did Share price performance not want to present a strategy without a specific product. As such, (HKD) (%) management expects R&D expenses to remain at about CNY3bn for 2016 4.7 125 and 2017, exactly what was disclosed during our conference last week. 4.0 109 3.4 93 Compared with peers, the R&D budget is significantly lower for EV. 2.7 76

2.0 60 Profitability of Emgrand EV should be similar to conventional version. Nov-14 Feb-15 May-15 Aug-15 Nov-15 Since the newly launched Emgrand EV shares the same platform and Geely Auto (LHS) Relative to HSI (RHS) design with the conventional sedan EC7, certain procurement costs can be lowered. The overall gross margin, according to Geely, should be similar to 12-month range 2.44-4.67 that for EC7. In 2016, Geely aims to sell 20,000 units of Emgrand EV. The Market cap (USDbn) 4.76 target customers are companies such as car operators, located in Tier-1 3m avg daily turnover (USDm) 32.47 Shares outstanding (m) 8,801 cities, as opposed to Geely’s current products, which target end-customers Major shareholder LI Shu Fu (45.0%) in lower-tier cities. With the price close to around CNY150K, we believe its strategy to target corporates (which need to have lower average fuel Financial summary (CNY) consumption by 2020) is appropriate. Year to 31 Dec 15E 16E 17E Revenue (m) 28,350 36,757 42,242 Emgrand EV test drive experience. Geely also held a test drive session Operating profit (m) 3,223 4,141 4,759 Net profit (m) 2,604 3,366 3,894 for the newly launched NEV. Its powertrain performance and interior space Core EPS (fully-diluted) 0.296 0.382 0.442 was better than our expectations. Feedback from other participants was EPS change (%) 82.0 29.3 15.7 also positive. One fault is that the touch screen of the multimedia control Daiwa vs Cons. EPS (%) 2.5 3.7 1.6 PER (x) 11.7 9.0 7.8 panel is not very sensitive. Dividend yield (%) 1.0 1.3 1.6 DPS 0.036 0.046 0.054 What we recommend: We see the target of reaching 90% of new-car PBR (x) 1.5 1.3 1.2 sales by 2020 as very aggressive as Geely would likely continue to launch EV/EBITDA (x) 5.9 4.5 3.6 ROE (%) 14.1 15.8 15.9 new conventional car models and sales of new EV models in general are Source: FactSet, Daiwa forecasts much lower than that of conventional cars. However, we believe the new EV exhibits Geely’s potential to be one of the best-selling EV brands in the future. We reiterate our stance that Geely is worth a long-term rerating. We reaffirm our Buy (1) rating on the stock, with a 12-month TP of HKD4.90, based on 11x PER on our 2016E EPS. Key risks: slower-than-expected car sales and margin improvement.

How we differ: Our 2015-17E EPS are 2-4% higher than those of the Bloomberg consensus as we are more positive on Geely’s sales volumes due to its strong product pipeline in coming years.

See important disclosures, including any required research certifications, beginning on page 5

Geely Automobile (175 HK): 20 November 2015

Geely: Emgrand EV outlook Geely: Emgrand EV charger

Source: Daiwa Source: Daiwa

Selected comparison of EVs from different brands: Brand Model Segment Launch date Max. Power Electric driving-range (km) Listed Price (CNY k) Geely Emgrand EV Pure EV sedan Nov-2015 95 253 229-250* Geely EC7 Conventional sedan July-2014 98 / 68-86 BAIC NEV EV200 Pure EV sedan Dec-2014 53 200 227-247* JV by BYD & Daimler Denza Pure EV sedan Sep-2014 86 253 369-399* Dongfeng Nissan Venucia E30 Pure EV sedan Sep-2014 80 175 268-282*

Source: Companies Note: *NEVs are subject to government subsidies of CNY80-100k/car, depending on which city the car is bought in

Global auto manufacturer: valuation comparison Bloomberg Trading Share Name Code Currency price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) 20-Nov- 15 FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E China H-share listed Geely Automobile Holdings Lt * 175 HK HKD 4.20 Buy 11.7 9.0 1.5 1.3 5.9 4.5 1.0 1.3 14.1 15.8 Baic Motor Corp Ltd-H * 1958 HK HKD 7.75 Buy 9.5 7.6 1.3 1.2 6.5 5.0 4.5 5.7 14.6 16.6 Byd Co Ltd-H * 1211 HK HKD 47.10 Outperform 73.3 35.6 2.5 2.3 14.4 11.4 n.a. n.a. 3.9 6.7 Great Wall Motor Company-H * 2333 HK HKD 10.12 Underperform 9.0 8.8 1.9 1.7 6.3 6.0 3.4 3.4 23.3 20.3 Guangzhou Automobile Group-H * 2238 HK HKD 7.68 Hold 10.9 10.0 1.1 1.0 50.1 30.0 3.0 3.2 10.2 10.4 Dongfeng Motor Grp Co Ltd-H 489 HK HKD 11.22 NR 6.6 6.0 0.9 0.8 21.4 19.3 2.3 2.6 15.2 14.7 Brilliance China Automotive 1114 HK HKD 10.28 NR 10.9 8.8 2.2 1.8 n.a. n.a. 1.0 1.0 21.1 21.8

China A-share listed Byd Co Ltd -A 002594 CH CNY 66.60 NR 70.1 58.4 5.6 5.0 19.1 16.0 0.0 0.1 9.1 8.7 Guangzhou Automobile Group-A 601238 CH CNY 22.83 NR 38.6 30.2 3.9 3.5 87.0 74.3 0.8 0.9 9.6 11.3 Great Wall Motor Co Ltd-A 601633 CH CNY 13.34 NR 13.2 11.1 2.9 2.4 8.6 7.2 2.1 2.4 23.8 23.1 Saic Motor Corp Ltd-A 600104 CH CNY 19.96 NR 7.7 7.0 1.3 1.2 10.2 8.8 6.6 7.2 17.4 17.2 Chongqing Changan Automobi-B 200625 CH HKD 15.57 NR 6.0 5.1 1.7 1.4 32.7 21.8 2.9 4.2 31.8 29.2 Faw Car Company Limited-A 000800 CH CNY 16.68 NR 50.5 57.5 2.9 2.8 18.3 15.6 0.1 0.1 6.3 5.7 Anhui Jianghuai Auto Co-A 600418 CH CNY 16.04 NR 20.1 13.7 2.7 2.2 12.6 9.3 1.6 2.3 13.6 17.3 Jiangsu Yueda Investment C-A 600805 CH CNY 12.51 NR 11.1 9.0 1.6 1.5 13.0 10.7 1.2 1.2 12.0 13.4 Tianjin Faw Xiali Automobi-A 000927 CH CNY 8.22 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Lifan Industry Group Co Lt-A 601777 CH CNY 14.63 NR n.a. 21.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 6.81 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Shenyang Jinbei Automotive-A 600609 CH CNY 7.19 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total Weighted average 25.6 19.3 2.3 2.0 22.1 17.4 2.4 2.7 14.4 14.5 High 73.3 58.4 5.6 5.0 87.0 74.3 6.6 7.2 31.8 29.2 Low 6.0 5.1 0.9 0.8 5.9 4.5 0.0 0.1 3.9 5.7 Median 11.1 9.5 1.9 1.7 13.7 11.0 1.8 2.4 14.1 15.8

Source: Bloomberg, *Daiwa forecasts

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Geely Automobile (175 HK): 20 November 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales volume (unit) 415,843 421,611 483,483 549,468 417,851 499,952 600,180 644,623 Sales volume (YoY %) 27.3 1.4 14.7 13.6 (24.0) 19.6 20.0 7.4 ASP 48,334 49,726 50,939 52,246 52,024 56,706 61,243 65,530 ASP (YoY %) 12.2 2.9 2.4 2.6 (0.4) 9.0 8.0 7.0

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Domestic revenue 18,505 18,924 19,305 21,962 17,646 23,014 29,838 34,291 International revenue 1,594 2,041 5,323 6,745 4,092 5,336 6,919 7,951 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 20,099 20,965 24,628 28,708 21,738 28,350 36,757 42,242 Other income 765 991 1,046 976 1,016 1,247 1,617 1,859 COGS (16,379) (17,145) (20,069) (22,942) (17,776) (23,162) (30,067) (34,554) SG&A (2,386) (2,459) (2,881) (3,474) (3,083) (3,213) (4,166) (4,787) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 2,098 2,352 2,723 3,267 1,896 3,223 4,141 4,759 Net-interest inc./(exp.) (192) (167) (195) (40) (24) (47) (24) 14 Assoc/forex/extraord./others (5) (1) 0 77 71 60 64 64 Pre-tax profit 1,900 2,183 2,529 3,304 1,943 3,235 4,182 4,837 Tax (351) (467) (479) (624) (494) (599) (774) (895) Min. int./pref. div./others (181) (172) (10) (17) (19) (32) (42) (48) Net profit (reported) 1,368 1,543 2,040 2,663 1,431 2,604 3,366 3,894 Net profit (adjusted) 1,368 1,543 2,040 2,663 1,431 2,604 3,366 3,894 EPS (reported)(CNY) 0.186 0.207 0.271 0.317 0.163 0.296 0.382 0.442 EPS (adjusted)(CNY) 0.186 0.207 0.271 0.317 0.163 0.296 0.382 0.442 EPS (adjusted fully-diluted)(CNY) 0.161 0.181 0.252 0.303 0.163 0.296 0.382 0.442 DPS (CNY) 0.023 0.023 0.032 0.036 0.020 0.036 0.046 0.054 EBIT 2,098 2,352 2,723 3,267 1,896 3,223 4,141 4,759 EBITDA 2,603 2,993 3,583 4,345 2,770 4,168 5,239 6,012

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 1,900 2,183 2,529 3,304 1,943 3,235 4,182 4,837 Depreciation and amortisation 504 642 860 1,078 874 946 1,097 1,252 Tax paid (214) (281) (711) (610) (497) (599) (774) (895) Change in working capital (701) (1,647) 1,503 (449) (960) (285) (314) (221) Other operational CF items 492 310 256 238 673 53 28 (5) Cash flow from operations 1,983 1,208 4,438 3,562 2,033 3,350 4,220 4,969 Capex (2,072) (2,197) (1,922) (2,022) (2,421) (2,561) (2,611) (2,663) Net (acquisitions)/disposals 122 (788) (232) 313 429 0 0 0 Other investing CF items 604 32 83 844 524 0 0 0 Cash flow from investing (1,346) (2,953) (2,071) (865) (1,468) (2,561) (2,611) (2,663) Change in debt (639) 716 (1,460) (930) (274) (200) (700) (700) Net share issues/(repurchases) 106 14 618 11 0 0 0 0 Dividends paid (148) (170) (170) (264) (320) (174) (316) (409) Other financing CF items (52) (166) (193) (183) 1,766 (113) (92) (59) Cash flow from financing (732) 393 (1,206) (1,366) 1,172 (487) (1,108) (1,168) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (95) (1,352) 1,160 1,330 1,737 302 501 1,138 Free cash flow (90) (989) 2,515 1,540 (388) 789 1,609 2,306 Source: FactSet, Daiwa forecasts

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Geely Automobile (175 HK): 20 November 2015

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 4,393 3,030 4,189 5,478 7,203 7,505 8,006 9,144 Inventory 987 1,358 1,822 1,784 1,620 2,110 2,739 3,148 Accounts receivable 9,913 12,215 13,476 14,785 16,385 21,369 27,705 31,840 Other current assets 392 403 368 204 95 104 115 122 Total current assets 15,684 17,006 19,855 22,251 25,303 31,089 38,566 44,254 Fixed assets 5,467 6,796 7,008 6,209 5,861 6,285 6,693 7,084 Goodwill & intangibles 2,823 3,708 4,282 4,392 5,346 6,537 7,642 8,662 Other non-current assets 0 87 235 747 771 831 895 959 Total assets 23,974 27,597 31,380 33,599 37,280 44,741 53,796 60,959 Short-term debt 1,097 2,532 1,379 966 692 492 292 92 Accounts payable 10,508 12,114 15,183 16,075 17,017 22,173 28,783 33,078 Other current liabilities 174 339 131 197 137 178 231 266 Total current liabilities 11,778 14,985 16,693 17,237 17,845 22,843 29,306 33,436 Long-term debt 1,562 843 525 0 1,820 1,820 1,320 820 Other non-current liabilities 1,556 1,619 958 133 149 149 149 149 Total liabilities 14,897 17,447 18,176 17,370 19,814 24,812 30,775 34,404 Share capital 139 140 153 161 161 161 161 161 Reserves/R.E./others 7,883 9,443 12,734 15,907 17,127 19,557 22,607 26,092 Shareholders' equity 8,022 9,582 12,887 16,068 17,288 19,718 22,768 26,253 Minority interests 1,056 568 317 162 178 211 253 301 Total equity & liabilities 23,974 27,597 31,380 33,599 37,280 44,741 53,796 60,959 EV 29,772 31,278 28,287 25,426 25,246 24,716 23,494 21,640 Net debt/(cash) (1,734) 344 (2,285) (4,512) (4,691) (5,194) (6,394) (8,232) BVPS (CNY) 1.078 1.285 1.560 1.826 1.964 2.240 2.587 2.983

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 42.9 4.3 17.5 16.6 (24.3) 30.4 29.7 14.9 EBITDA (YoY) 33.1 15.0 19.7 21.3 (36.3) 50.5 25.7 14.8 Operating profit (YoY) 31.9 12.1 15.8 20.0 (42.0) 70.0 28.5 14.9 Net profit (YoY) 15.7 12.8 32.2 30.5 (46.3) 82.0 29.3 15.7 Core EPS (fully-diluted) (YoY) (2.5) 12.6 39.2 20.1 (46.3) 82.0 29.3 15.7 Gross-profit margin 18.5 18.2 18.5 20.1 18.2 18.3 18.2 18.2 EBITDA margin 12.9 14.3 14.5 15.1 12.7 14.7 14.3 14.2 Operating-profit margin 10.4 11.2 11.1 11.4 8.7 11.4 11.3 11.3 Net profit margin 6.8 7.4 8.3 9.3 6.6 9.2 9.2 9.2 ROAE 19.0 17.5 18.2 18.4 8.6 14.1 15.8 15.9 ROAA 6.4 6.0 6.9 8.2 4.0 6.4 6.8 6.8 ROCE 19.4 18.6 19.0 20.2 10.2 15.3 17.7 18.3 ROIC 26.8 20.7 20.6 23.4 11.5 19.1 21.5 22.2 Net debt to equity net cash 3.6 net cash net cash net cash net cash net cash net cash Effective tax rate 18.5 21.4 19.0 18.9 25.4 18.5 18.5 18.5 Accounts receivable (days) 145.8 192.6 190.4 179.7 261.7 243.0 243.7 257.3 Current ratio (x) 1.3 1.1 1.2 1.3 1.4 1.4 1.3 1.3 Net interest cover (x) 10.9 14.1 14.0 81.7 80.0 68.1 175.8 n.a. Net dividend payout 12.3 11.0 11.7 11.5 12.2 12.2 12.2 12.2 Free cash flow yield n.a. n.a. 8.3 5.1 n.a. 2.6 5.3 7.6 Source: FactSet, Daiwa forecasts

Company profile

Listed on the Hong Kong Stock Exchange in 2003, Geely Automobile is engaged principally in the manufacture and trading of automobiles, automobile parts and related automobile components. Focused on the economy car segment, the company currently has 3 self-owned brands, Gleagle, Emgrand and Englon, with an aggregated 2.1% market share in China’s passenger car market. However, over the next 2 years, these 3 brands will gradually be consolidated into a single brand under “Geely”.

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Geely Automobile (175 HK): 20 November 2015

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Geely Automobile (175 HK): 20 November 2015

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 63.8% Hold** 22.2% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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