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Geely Automobile (175 HK) 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 2 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.
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