China Autos Sector

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China Consumer Discretionary 4 January 2016

China Autos Sector

Running on fumes in 2016; refill needed for 2017

 Positive investor sentiment on the sector should persist in 1Q-3Q16, but concerns are likely to resurface as we get closer to 2017  We prefer domestic brands to foreign brands, but expect SUV margins Kelvin Lau to continue to deteriorate over our forecast period (852) 2848 4467  Positive on Geely, BAIC and DFM; negative on GWM; initiating on [email protected] DFM with an Outperform (2) and Brilliance with an Underperform (4) Brian Lam (852) 2532 4341 [email protected]

See important disclosures, including any required research certifications, beginning on page 103

China Autos Sector: 4 January 2016

Table of contents

Running on fumes in 2016; refill needed for 2017 ...... 5 Tax cut should boost sales volume growth in 2016 ...... 5 Strong industry pipeline in 2016 ...... 6 Domestic brands should keep outpacing foreign brands ...... 10 Accelerating investment in NEVs in 2016-20 ...... 14 Balance sheets remain healthy ...... 18 Hard to see any recovery for CVs ...... 18 Valuations and recommendations ...... 20 Not that cheap anymore ...... 20 Recommendations ...... 20 Risks to our Neutral sector view ...... 21

Company Section Geely Automobile ...... 23 BAIC Motor ...... 32 BYD ...... 41 Dongfeng Motor Group ...... 52 Guangzhou Automobile Group ...... 71 Brilliance China Automotive ...... 78 Great Wall Motor ...... 93

China Consumer Discretionary 4 January 2016

China Autos Sector

Running on fumes in 2016; refill needed for 2017

What's new: We expect investor sentiment on the China Autos Sector to Key stock calls stay strong in 1Q-3Q16 on robust new PV sales resulting from the New Prev. purchase tax cut and a rich pipeline. However, we believe new PV sales Geely Automobile (175 HK) growth will slow in 4Q16, due to the high base in 4Q15 and because, as we Rating Buy Buy step into 2H16, we expect concerns on new-car unit sales to resurface in Target 4.90 4.90 Upside 15.8% 2017. In light of this, we maintain our Neutral rating on the sector. p BAIC Motor (1958 HK)

Rating Buy Buy What's the impact: Strong sales volume growth in 1Q-3Q16E but YoY Target 9.40 9.40 decline in 2017E. We expect a 12% YoY rise in new passenger vehicle Upside p 21% (PV) sales volume in 1Q-3Q16 due to the tax policy and a strong pipeline Dongfeng Motor Group (489 HK) (see p. 8-9). We expect the YoY growth to be strongest in 2Q16-3Q16, up Rating Outperform 17-18% YoY, but for it to slow to flat YoY in 4Q16. In 2017, we expect new- Target 12.20 car unit sales to fall by 3% YoY, due to the high base effect and because Upside p 14.7% our base case assumes the end of the supportive tax rate – ie, that the Great Wall Motor (2333 HK) purchase tax cut won’t be extended beyond end-2016 and the tax will Rating Underperform Underperform actually rise again to 10% in 2017. Meanwhile, we expect strong SUV sales Target 8.40 8.90 Downside q 8.1% volume growth, but see SUV margins continuing to deteriorate due to rising Brilliance China Automotive (1114 HK) competition. Rating Underperform Target 8.90 Growth opportunities remain, in lower-tier cities and NEVs. While Downside q 9.6%

overall car ownership in China’s lower-tier cities remains low, we stick with Source: Daiwa forecasts our view that this offers local OEMs good sales-volume growth opportunities. In addition, we expect local OEMs to produce more NEV China Autos sector: TP valuation summary models over our forecast period, prompted by China’s commitment to NEV Target price Target PER Company (HKD) 2016E infrastructure investment from 2016. On this theme, we see the key players Geely 4.90 11x as Geely (175 HK, HKD4.23, Buy [1]) and BYD (1211 HK, HKD42.40, BAIC Motor 9.40 9.5x Outperform [2]). Meanwhile, for luxury brands, we reiterate our view that BYD 47.00 SOTP Great Wall 8.40 7.5x overall sales performance will outperform the broader China autos market, GAC 7.00 8.5x at least in 2016-17. Dongfeng Motor 12.20 7.0x Brilliance China 8.90 10x

What we recommend: Geely is still our top pick, due to its strong pipeline Source: Daiwa in 2016 and what we view as its long-term rerating story. We also expect strong sales-volume growth in 2016E for BAIC Motor (1958 HK, HKD7.77, Buy [1]) and Dongfeng Motor (DFM) (489 HK, HKD10.64, Outperform [2]), as they also both have rich pipelines. But we remain negative on Great Wall (GWM) (2333 HK, HKD9.14, Underperform [4]) as it has failed in its bid to upgrade its brand and its 2016 pipeline looks unexciting. The outlook for Brilliance China (1114 HK, HKD9.84, Underperform [4]) also looks uninspiring. The major risks to our Neutral sector view would be if new car sales were either weaker or stronger than expected.

How we differ: We are one of only a few firms to expect a YoY decline in PV sales in 2017, making us more cautious than the market.

See important disclosures, including any required research certifications, beginning on page 103

China Autos Sector: 4 January 2016

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg BAIC Motor 1958 HK 7.77 Buy Buy 9.40 9.40 0.0% 0.674 0.674 0.0% 0.842 0.842 0.0% Brilliance China Automotive 1114 HK 9.84 Underperform 8.90 0.662 0.767 BYD 1211 HK 42.40 Outperform Outperform 47.00 56.00 (16.1%) 0.522 0.529 (1.3%) 0.918 1.089 (15.8%) Dongfeng Motor Group 489 HK 10.64 Outperform 12.20 1.395 1.532 Geely Automobile 175 HK 4.23 Buy Buy 4.90 4.90 0.0% 0.296 0.296 0.0% 0.382 0.382 0.0% Great Wall Motor 2333 HK 9.14 Underperform Underperform 8.40 8.90 (5.6%) 0.931 0.931 0.0% 0.945 0.945 0.0% Guangzhou Automobile Group 2238 HK 6.94 Hold Hold 7.00 6.40 9.4% 0.605 0.580 4.2% 0.704 0.636 10.8% Source: Bloomberg, Daiwa forecasts

China Autos Sector: key assumptions Sales Volume (units, YoY %) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Geely 549,000 418,000 500,000 600,000 645,000 13.6% -24.0% 19.6% 20.0% 7.4% Beijing Brand 202,000 309,000 314,000 420,000 480,000 159.3% 53.0% 1.3% 33.9% 14.3% Beijing Benz 116,000 145,000 249,000 323,000 372,000 12.6% 25.4% 71.0% 30.0% 15.0% Beijing Hyundai 1,031,000 1,120,000 1,042,000 1,152,000 1,226,000 19.9% 8.7% -7.0% 10.6% 6.4% GAC Honda 435,000 480,000 570,000 650,000 661,000 37.7% 10.3% 18.8% 14.0% 1.7% GAC Toyota 303,000 374,000 409,000 439,000 439,000 21.2% 23.4% 9.4% 7.3% 0.0% GWM 771,000 733,000 803,000 855,000 945,000 24.0% -4.9% 9.6% 6.4% 10.6% BYD - Conventional 470,000 373,000 386,000 395,000 423,000 11.9% -20.6% 3.5% 2.4% 7.0% BYD - NEV 3,000 21,000 68,000 123,000 149,000 -6.0% 563.9% 226.8% 79.9% 21.2% Dongfeng Nissan 926,000 952,000 981,000 1,144,000 1,202,000 19.8% 2.8% 3.0% 16.7% 5.0% Dongfeng PSA 550,000 704,000 699,000 713,000 691,000 25.0% 28.0% -0.7% 1.9% -3.0% Dongfeng Honda 321,000 308,000 398,000 458,000 455,000 13.8% -4.1% 29.1% 15.1% -0.7% Brilliance BMW 207,000 279,000 290,000 332,000 370,000 28.5% 34.7% 4.2% 14.6% 11.4% ASP (CNY, YoY %) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Geely 52,246 52,024 56,706 61,243 65,530 5.8% 1.8% 9.0% 8.0% 7.0% Beijing Brand 33,852 40,178 36,160 33,267 32,269 -25.0% 18.7% -10.0% -8.0% -3.0% Beijing Benz 286,364 302,036 314,118 314,118 314,118 -0.6% 5.5% 4.0% 0.0% 0.0% Beijing Hyundai 100,084 97,938 93,530 90,725 88,003 10.8% -2.1% -4.5% -3.0% -3.0% GAC Honda 134,191 124,586 118,357 112,439 112,439 37.6% 10.2% 12.0% 10.0% 8.0% GAC Toyota 172,842 144,020 136,819 136,819 136,819 21.2% 23.4% 12.0% 8.0% 8.0% GWM 69,809 80,964 85,822 89,254 91,039 6.5% 16.0% 6.0% 4.0% 2.0% BYD - Conventional 53,568 66,680 80,016 96,019 105,621 -0.2% 24.5% 20.0% 20.0% 10.0% BYD - NEV 488,612 345,747 328,459 312,036 296,435 n/a -29.2% -5.0% -5.0% -5.0% Dongfeng Nissan 138,391 128,173 125,609 124,353 121,866 n/a -7.4% -2.0% -1.0% -2.0% Dongfeng PSA 96,326 91,840 90,003 88,203 85,557 n/a -4.7% -2.0% -2.0% -3.0% Dongfeng Honda 149,927 133,302 130,636 128,024 124,183 n/a -11.1% -2.0% -2.0% -3.0% Brilliance BMW 353,954 339,445 325,867 325,867 325,867 1.4% -4.1% -4.0% 0.0% 0.0% Net profit (CNY m, YoY %) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Geely 2,663 1,431 2,604 3,366 3,894 30.5% -46.3% 82.0% 29.3% 15.7% BAIC 2,714 4,511 5,057 6,324 7,221 -20.6% 66.2% 12.1% 25.1% 14.2% GAC 2,653 3,185 3,891 4,533 4,670 133.9% 20.1% 22.2% 16.5% 3.0% GWM 8,224 8,042 8,497 8,624 8,956 44.5% -2.2% 5.7% 1.5% 3.8% BYD 553 86 1,327 2,512 3,674 579.6% -84.5% 1443.0% 89.2% 46.3% Dongfeng 10,528 12,845 12,021 13,201 13,591 15.8% 22.0% -6.4% 9.8% 3.0% Brilliance 3,374 5,403 3,340 3,873 4,405 46.6% 60.1% -38.2% 15.9% 13.7% Gross margin (%, YoY pp.) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Geely 20.1% 18.2% 18.3% 18.2% 18.2% 1.6 (1.9) 0.1 (0.1) (0.0) BAIC 3.2% 15.9% 17.4% 18.5% 18.7% 8.0 12.7 1.5 1.1 0.2 GAC 10.6% 11.4% 11.6% 11.6% 11.7% 5.3 0.8 0.2 0.1 0.0 GWM 25.9% 25.0% 23.3% 22.1% 21.2% 1.9 (0.9) (1.6) (1.2) (1.0) BYD 13.1% 13.8% 13.9% 13.8% 14.5% 1.5 0.7 0.1 (0.1) 0.7 Dongfeng 12.6% 13.2% 12.0% 12.0% 12.0% 6.7 0.7 (1.2) - (0.0) Brilliance 11.2% 10.2% 7.0% 7.5% 8.0% (0.5) (1.0) (3.2) 0.5 0.5 Net margin (%, YoY pp.) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Geely 9.3% 6.6% 9.2% 9.2% 9.2% 1.0 (2.7) 2.6 (0.0) 0.1 BAIC 21.2% 8.0% 5.7% 5.5% 5.5% (75.9) (13.2) (2.4) (0.2) (0.0) GAC 14.1% 14.2% 13.5% 10.1% 9.4% 5.3 0.1 (0.7) (3.4) (0.8) GWM 15.0% 13.3% 12.1% 11.1% 10.3% 1.3 (1.7) (1.2) (1.0) (0.9) BYD 1.1% 0.2% 1.6% 2.3% 3.0% 0.9 (0.3) 2.4 (0.9) 0.7 Dongfeng 28.3% 15.9% 9.7% 11.4% 12.4% (121.0) (12.4) (6.2) 1.7 1.0 Brilliance 55.3% 98.0% 65.7% 69.9% 80.0% 16.4 42.7 (32.3) 4.2 10.2 Source: Companies, Daiwa forecasts

China Autos Sector: 4 January 2016

Running on fumes in 2016; refill needed for 2017 Tax cut should boost sales volume growth in 2016 Raising our 2016 sales volume growth forecast, but cutting it for 2017 We are positive on the On 29 September 2015, China’s State Council announced new measures to support the purchase tax cut, but automotive industry. As well as its policies to support new-energy vehicles (NEV), it also expect the impact to be implemented a cut in the purchase tax, from 10% to 5%, for cars with engines of 1.6L or much milder than that less. This policy came into effect on 1 October 2015 and will last until 31 December 2016. for the 2009 cut China: details of automotive stimulus policies Subject Policy details Cars with engines of <=1.6L Purchase tax reduced from 10% to 5% NEVs Restriction on new NEV car sales removed in all cities Old cars with excessive emissions To be replaced by NEVs by 2017

Source: State Council

We estimate that the 2015 tax cut policy will boost the sales of 68% of all the models in the China market. However, we expect the impact in 2016 to be much milder than when a similar policy was implemented in 2009. We now forecast 2016 sales volume growth of 12% YoY, compared with our previous forecast of 4% YoY. However, this still would be far below the 50% YoY increase in 2009, due to differences in the macro environment (see following table).

China: impact of stimulus policy on automotive sector, 2009 vs. 2016 2009 2016E Daiwa’s GDP growth forecast 9.2% 6.5% Daiwa’s M2 Growth 28.4% 10.5% China PV market size, sales (m units) 10.3 23.5 - YoY growth 52.9% 11.6% China new PV sales market size as a % of the US’s PV market 114.5% 163.1% SUV sales as a % of PV sales 8.8% 35.6% Other stimulus policies Subsidies to farmers in rural areas Removal of purchase restrictions on NEVs; Provide subsidies to encourage the replacement of old models that with high emissions

Source: State Council, Daiwa forecasts

We currently assume no In 2009, apart from the purchase tax being cut from 10% to 5%, other supportive policies extension in the were also in place, including the CNY4tn stimulus package, which helped to boost the purchase tax cut after country’s economic growth through infrastructure investment, and by encouraging the the end of 2016; we see replacement of vehicles in rural areas (boosting both the PV and CV segments). Also, the it increasing to 10% in new car sales base was much smaller then, and China was seeing higher GDP growth. 2017, and this is our base case Further, compared to 2009, we have been seeing a gradual slowdown in the China economy since 2010. Daiwa’s economics team forecasts GDP growth to slow to 6.9% in 2015 and 6.5% in 2016. Given the backdrop of a slowing China economy, we believe this could curb demand and consumption of PVs, and thus, even with the boost of the purchase tax cut, we expect a 12% YoY increase in PV sales in 2016, after a 7% YoY rise in 2015.

Meanwhile, our base case assumes that the current tax-cut policy will not be extended into 2017, and that the rate will go back up to 10% then. Accordingly, we expect PV sales to decline by 3% YoY in 2017, given the high base in 2016.

From our sensitivity analysis, we do see a chance of the government first raising the purchase tax to 7.5% in 2017, and then 10% in 2018, as was the case in 2010. If this were to happen, we estimate that the new car sales volume would be flat YoY in 2017.

China Autos Sector: 4 January 2016

2017 China PV sales scenario analysis Purchase tax on new cars China PV sales YoY change Base case: Full reversal of the tax cut 10% 3% decline Alternative case: gradual increase in the tax cut in 2 tranches 7.5% Flat

Source: Daiwa forecasts

China: PV sales estimates by quarter China: PV sales estimates by year

(Quarterly sales, m units) (YoY %) (Yearly sales, m units) (YoY %) 7 25% 25 23.5 22.7 35% 21.0 6 20% 33.2% 19.7 30% 20 17.9 5 15% 25% 15.5 10% 13.8 14.5 20% 4 15 15.7% 5% 11.6% 15% 3 9.7% 0% 7.1% 7.0% 10% 10 2 (5%) 5% 5.2% 1 -3.3% (10%) 5 0% 0 (15%) (5%)

0 (10%)

1Q14 2Q14 4Q14 1Q15 2Q15 3Q14 3Q15

4Q15E 1Q16E 2Q16E 4Q16E 1Q17E 2Q17E 4Q17E 3Q17E 3Q16E 2010 2011 2012 2013 2014 2015 E 2016 E 2017 E China PV Sales Volume (LHS) YoY Growth (RHS) China PV Sales Volume (LHS) YoY Growth (RHS)

Source: CAM, Daiwa forecasts Source: CAM, Daiwa forecasts

Strong industry pipeline in 2016 We expect strong SUV segment sales growth, but see margins continuing to deteriorate due to fierce competition Strong SUV pipeline in Apart from the purchase tax reduction, we think overall industry sales volume growth in 2016 2016 will be driven by a strong pipeline, as many new models are being launched over the 2H15-1H16 period. We estimate that around 91 new models will be launched by the major brands, much higher than the 30 or so new models in 2H14-1H15.

We expect SUVs sales Of these new launches, SUVs should remain the major driver, with one-third of the new volume growth of 10- models launched in 2H15-1H16 being these types of vehicles. We estimate that SUVs will 30% YoY in 2016-17 account for around 50% of total new model sales volume over this period. In November 2015 YTD, SUVs saw 54% YoY sales volume growth. We forecast a 54% YoY increase in SUV sales volume in 2015, as we assume a total of 1.5m SUVs will be sold in China in November-December.

We estimate that SUVs will account for 30% of total PV sales volume in 2015, which is below the US number of 40% (see the following chart). And as we believe purchasing patterns in China will follow those in the US, we see room for further growth in 2016, with many new SUV models arriving over the same period. In 2016, we forecast SUV sales volume growth to remain strong, although it is likely to start to slow, to 33% YoY (from 54% in 2015). And, based on expected weak sales volume growth for the other segments in 2016, we look for new SUV sales to account for 35% of total new car sales for the year. But we look for the pace of SUV sales growth to slow as we move into 2017, to 10% YoY, by which time, SUVs should account for 41% of total new-car sales.

SUV penetration rate in US and China 45% 45% 40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5%

0% 0%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015 E 2015 2016 E 2016 E 2017 US: SUV and Cross Utility Vehicle to PV sales China: SUV to PV sales

Source: Wards, CAM, Daiwa forecasts

China Autos Sector: 4 January 2016

Margin erosion to On the margin side, as we expect competition to intensify in 2016, we look for SUV continue in 2016-17 margins (net and gross) to continue on their declining trend in 2016-17, although the overall gross margin should remain above the 20% level, which is better than the margin on sedans. We expect the automotive OEMs that have reported high gross margins over the 2012-15 period, such as Great Wall, to experience margin erosion in 2016 and even in 2017 due to the high base.

China Autos Sector: 4 January 2016

H-share listed OEM: model pipeline for 2H15-2016 Other OEMs: model pipeline for 2H15-2016 Company Model Type Launch date Company Model Type Launch date Geely Changan Emgrand EV* Sedan 2H15 Changan Ford Focus* Sedan 2H15 NL-3 SUV 2H15 Explorer* SUV 2H15 Compact SUVs SUV 2016 Taurus Sedan 2H15 Emgrand Cross Vehicle Cross 2016 Tourneo MPV 2016 Emgrand 4-door Sedan Sedan 2016 Changan PSA DS 5* Sedan 2H15 BAIC DS 4S Sedan 2016 Beijing Benz C350eL* PHEV Sedan 2H15 Changan Suzuki S.Cross* SUV 2H15 GLC SUV 2016 Swift* Sedan 2H15 New E-class Sedan 2016 Vitara* SUV 2H15 Beijing Hyundai Tucson* SUV 2H15 Changan Motor CS15 SUV 2016 Elantra Lingdong Sedan 2016 (Mar) Jiangling Landwind X7* SUV 2H15 Sonata PHEV ver. PHEV Sedan 2016 SAIC Equus Sedan 2016 Shanghai Volkswagen Skoda Yeti* SUV 2H15 Beijing Brand Senova X25* SUV 2H15 Skoda Octavia* Sedan 2H15 Senova X55 SUV 2H15 (Dec) Skoda Superb* Sedan 2H15 Senova X35 SUV 2H15 (Dec) Gran Lavida Sedan 2H15 EV-260 EV Sedan 2016 Passat (Facelift) Sedan 2016 BJ40 5-door ver SUV 2016 Touran L MPV 2016 BJ80 SUV 2016 Shanghai GM Buick Verano Sedan 2016 BYD Shanghai GM Chevrolet Trax* SUV 2H15 Song* PHEV SUV 2H15 Malibu* Sedan 2H15 Yuan PHEV SUV 2H15 Lova RV MPV 2H15 Qin EV EV Sedan 2016 Shanghai GM Cadillac ATS-L (Facelift)* Sedan 2H15 Great Wall CT6-40T Sedan 2H15 C30-classic (Facelift)* Sedan 2H15 SAIC Motor Roewe 360* Sedan 2H15 Haval H1 Red badge* SUV 2H15 MG5* Sedan 2H15 Haval H7 SUV 2016 MG3 SW* SUV 2H15 A new SUV smaller than H2 SUV 2016 Roewe E950 PHEV Sedan 2016 Haval H6 Blue badge SUV 2016 FAW Car Haval H5 Blue badge SUV 2016 Besturn B70* Sedan 2H15 Facelift of H8 SUV 2016 Besturn X80* SUV 2H15 GAC Besturn B30* Sedan 2H15 GAC Honda New City* Sedan 2H15 FAW Toyota Crider (Facelift) Sedan 2H15 (Dec) Crown* Sedan 2H15 Crosstour (Facelift) Sedan 2H15 (Dec) Prado (Facelift)* SUV 2H15 Acura SUV SUV 2016 Land Cruiser (Facelift) SUV 2H15 GAC Toyota Levin HEV* Hybrid Sedan 2H15 FAW Volkswagen Lingzhi EV EV Sedan 2016 FAW Volkswagen CC* Sedan 2H15 GAC Fiat-Chrysler Cherokee SUV 2H15 Golf GTI* Sedan 2H15 GAC Mitsubishi Outlander PHEV PHEV SUV 2016 Bora Sedan 2H15 GAMC GS4 EV EV SUV 2016 Golf SportsVan Sedan 2016 GA3S PHEV PHEV Sedan 2016 Magotan Sedan 2016 Brilliance FAW Volkswagen Audi Q7* SUV 2H15 Brilliance BMW 3-series (Facelift)* Sedan 2H15 A6 (Facelift) Sedan 2016 2-series Sedan 2016 Chery X1 SUV 2016 Chery Tiggo 5* SUV 2H15 Dongfeng Arrizo 5 Sedan 2016 Dongfeng Peugeot-Citroën Citroën C5* Sedan 2H15 Chery Jaguar Land Rover Discovery Sport SUV 2H15 Peugeot 3008 (Facelift) SUV 2016 Dongfeng Yueda KIA Dongfeng Nissan Venucia R50X* Sedan 2H15 K5* Sedan 2H15 Venucia T70X* SUV 2H15 KX5 SUV 2016 Lannia* Sedan 2H15 Zotye Murano* SUV 2H15 SR7 SUV 2H15 Qashqai* SUV 2H15 Z700 Sedan 2H15

Maxima Sedan 2016 Infiniti QX30 SUV 2016 Dongfeng Honda Greiz* Sedan 2H15 Civic Sedan 2016 Elysion MPV 2016 (Jan) Dongfeng Renault Kadjar SUV 2016 (Mar) Dongfeng Passenger Vehicle Fengshen A60* Sedan 2H15 Fengshen AX3 SUV 2H15 Dongfeng Liuzhou Motor S500* MPV 2H15

Source: Companies, various media Source: Companies, various media Note: *Already launched Note: *Already launched

China Autos Sector: 4 January 2016

H-share listed OEMs: model pipeline for 2H14-1H15 Other OEMs: model pipeline for 2H14-1H15 Company Model Type Launch date Company Model Type Launch date Geely Changan EC7 Sedan Jul-2014 Changan Ford Edge SUV May-2015 GC9 Sedan Apr-2015 Escort Sedan Jan-2015 Vision Sedan Nov-2014 Kuga (facelift) SUV Jan-2015 GWM Changan Suzuki Alivio Sedan Dec-2014 H2 SUV Jul-2014 Changan Mazda Mazda 3 Sedan Sep-14 H5 SUV Nov-2014 Changan Motor Eado Sedan Mar-15 H1 SUV Nov-2014 Yuexiang V7 Sedan Nov-14 H9 SUV Nov-2014 SAIC H8 SUV Apr-2015 Shanghai Volkswagen Skoda Fabia Sedan Apr-15 BAIC Tiguan SUV Jul-14 Beijing Brand Senova D20 Sedan Nov-2014 Lamando Sedan Jan-15 Senova X65 SUV Feb-2015 Touran (facelift) MPV Aug-14 Wevan 007 SUV Jan-2015 Shanghai GM Buick Envision SUV Oct-2014 Senova CC Sedan Apr-2015 Excelle GT Sedan Mar-2015 BJ 40 SUV Apr-2015 Shanghai GM Chevrolet Sail Sedan Mar-2015 EV-200 EV Sedan Mar-2015 Shanghai GM Cadillac ATS-L Sedan Aug-2014 Beijing Benz C-class Sedan Aug-2014 SAIC Motor Roewe 350 Sedan Jun-15 GLA SUV Aug-2014 FAW Car Beijing Hyundai Verna (facelift) Sedan Mar-2015 FAW Mazda CX-7 SUV Jul-2014 Elantra Langdong (facelift) Sedan Oct-2014 FAW Toyota ix 25 SUV Oct-2014 Crown Sedan Mar-2015 ix 35 (facelift) SUV Jan-2015 FAW Volkswagen Sonata 9 Sedan Mar-2015 Sagrita (facelift) Sedan Mar-2015 GAC Dongfeng Yueda KIA GAC Honda Accord (facelift) Sedan Mar-2015 K2 Sedan Nov-14 Vezel SUV Oct-2014 K4 Sedan Sep-2014 GAC Toyota Camry Sedan Jan-2015 KX3 SUV Mar-2015 Levin Sedan Jul-2014 Sportage R SUV Sep-15 EZ MPV Dec-2014 Chery GAC Fiat Viaggio Sedan Nov-2014 Tiggo 3 Sedab Nov-2014 GAC Mitsubishi ASX (facelift) SUV Aug-2014 Zotye GAMC GA5 EV Sedan Nov-2014 Z500 Sedan Nov-14 GA6 Sedan Dec-2014 Z100 EV Sedan Oct-14

GS4 SUV Apr-2015 Brilliance Brilliance BMW X1 (facelift) Oct-2014 Dongfeng Dongfeng Nissan Venucia R30 Sedan Jul-2014 Venucia E30 Sedan Sep-2014 Sunny (facelift) Sedan Feb-2015 Teana (facelift) Sedan Apr-2015 March Sedan Nov-2014 Venucia T70 SUV Jan-2015 Q50L Sedan Nov-2014 QX50 SUV Mar-2015 Dongfeng Honda Spirior Sedan Nov-2014 CR-V (facelift) SUV Apr-2015 XR-V SUV Nov-2015 Dongfeng PSA 308S Sedan Mar-2015 508 Sedan Jan-2015 C3-XR SUV Dec-2014 DS6 SUV Oct-2014

Source: Companies, various media Source: Companies, various media

China Autos Sector: 4 January 2016

China Autos Sector: key SUV model 4S store price trends (4S Price, CNY) (4S Price, CNY) 350,000 350,000

300,000 300,000

250,000 250,000

200,000 200,000

150,000 150,000

100,000 100,000 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15

BAIC Hyundai IX35 GAC Honday CR-V SAIC VW Tiguan FAW VW Audi Q3 GWM H6

Source: CAM Note: 4S refers to “Sale, Spare parts, Service, and Survey”

China sedan sales expected to be flat YoY in 2016 Sedan sales expected to For sedans, on the other hand, we expect sales volume growth to remain weak in 2016, remain weak, with flat although better than our forecast of a 6% YoY decline in 2015. Due to the purchase tax cut, YoY sales volume in sedan sales should increase by 2% YoY in 2016. But in 2017, when we expect the 2016 and a 10% YoY purchase tax to be raised again, and based on the high base effect we foresee from 2016, decline in 2017 we look for sedan sales to return to a downward trend and decline by 10% YoY. We saw this declining trend in 2015 until the purchase tax cut was implemented in October 2015.

China Autos Sector: PV sales growth estimates by segment (YoY %) (YoY %) 200% 200%

150% 150%

100% 100%

50% 50%

0% 0%

-50% -50% 2010 2011 2012 2013 2014 2015 E 2016 E 2017 E Sedan MPV SUV Cross

Source: CAM, Daiwa forecasts

On the margin side, we expect the rate of decline in sedan margins to be slower than that for SUV margins, as the sedan business is a lower-margin business and there are fewer new models competing for business. For an OEM such as Geely, which has been able to successfully upgrade its brand, we expect its sedan gross margin to remain at the current level in 2016-17.

Domestic brands should keep outpacing foreign brands Opportunities in lower-tier cities Domestic brands should While the overall automobile penetration rate (see tables on page 11) in China is still low, continue to benefit from after close analysis, we note that penetration in top-tier cities, such as Beijing and strong sales growth in Shenzhen, has already reached 200-300 cars per thousand people, which is comparable low-tier cities to mature markets like Japan, Korea and Taiwan. However, in lower-tier cities, penetration is still mild at around 100 cars per thousand people. This level of penetration is comparable to developing countries like India, where we see more sales growth opportunities, as they are often the major market for domestic brands as customers there are price-sensitive. We believe this stronger sales growth trend for domestic brands will continue in 2016 and into 2017. As such, we continue to prefer domestic brands to foreign JV brands.

Among domestic brands, independent brands like Geely and GWM are posting better profitability, on cost control and brand improvement, than domestic brands developed by

China Autos Sector: 4 January 2016

automakers that rely on JVs with foreign brands. In comparison, the profitability of domestic brands developed by BAIC Motor, Brilliance and Dongfeng, for example, is often weak due to a lack of technological independence or know-how. Their heavy reliance on profit from foreign JV brands means they focus more on foreign brands and less on their own brands. This situation leads to them to strive for more technological transfers from JV partners to capture the best technology at as low a cost as possible.

However, expectations to derive technology from a JV partner are becoming more unrealistic, as foreign JV partners often only share old model platforms and their components are usually expensive. Therefore, we are in favour of the long-term development of local brands such as Geely, which has high technological independence.

Ownership growth rate against ownership per 1,000 capita Automobile ownership: China vs. other countries, by end-2014 (Ownership annualised growth in 2010-14, %) City/Region/Country Population (m) Auto Ownership per 1,000 capita 40% Gansu China 1368 107 35% China PV only 1368 90 Ningxia 30% Beijing 22 247 Zhejiang Tianjin 15 181 25% Hunan Zhejiang 55 184 20% Shandong 98 138 Guangdong 15% R² = 0.6753 Shanghai 24 105 Tianjin Guangdong 107 124 Shanghai 10% Beijing Chongqing 30 79 5% Shanxi 36 116 0% Sichuan 81 82 0 20 40 60 80 100 120 140 160 180 200 Guizhou 35 70 (Auto Ownership per 1,000 capita in 2010) USA (PV only)* 319 404 Japan (PV only)* 127 463 S. Korea (PV only)* 50 300 Taiwan (PV only)* 23 315

Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China, Statista Note: as of end of 2012

Key model comparison: sedan Length Price range Launch date of facelift / Avg sales units Automotive OEM Model (mm) (CNY k) Launch date new options per month in 2015 Geely GC9 4956 115-230 Apr-2015 n.a. 3,090 SAIC Motor Roewe 950 4996 184-323 Mar-2012 Jul- 2015 (Facelift) 158 GAC Toyota Camry 4850 185-330 Dec-2011 Mar-2015 (Facelift) 10,727 Beijing Benz E-class 5024 398-780 Jun-2010 Aug-2013 (Facelift) 4,896

Source: Companies, various media

Key model comparison: SUV Length Price range Launch date of facelift / Avg sales units Automotive OEM Model (mm) (CNY k) Launch date new options per month in 2015 GWM H6 4640 100k - 159k Oct-2012 May-2015 (Facelift) 29,037 Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551 Dongfeng Honda CR-V 4585 180-250 Feb-2012 Apr-2015 (Facelift) 11,995 FAW VW Audi Q5 4629 359-572 Mar-2010 Apr-2013 (Facelift) 9,241

Source: Companies, various media

Demand for luxury still strong Luxury cars still sell well Among foreign JV brands, we still prefer luxury brands, as we believe rising disposable in China, especially incomes and licence restrictions in some cities have encouraged customers to skip mid-range Beijing Benz cars, such as Korean and Japanese brands, and buy luxury European cars, particularly German-made cars. In 2015, sales of Beijing Benz cars outperformed sales of peers significantly, and in 2016 we expect the outperformance to continue as the pipeline for Beijing Benz in 2016 is strong, with the forthcoming launch of the GLC and new E-class model.

On the other hand, we expect sales volume for BMW Brilliance to pick up, as the strong sales growth generated by its 3-series facelift is likely to continue in 2016 and it is due to launch the new X1 SUV and 2-series models in 2016. Even though the design for the X1 SUV is yet to be finalised (ie, 5-seater or 7-seater), we believe this SUV model will still be welcomed by customers. For the 2-series, even though we do not think it can replace sales of the 3-series or 5-series, we believe this model will offer customers an additional choice, especially those looking for an entry model luxury brand.

China Autos Sector: 4 January 2016

Overall, we do not see the anti-corruption campaign as having a big negative impact on luxury car sales growth in China, which we see still outperforming the broader China autos market at least in 2016-17. If there is any impact, it would likely be on FAW Audi, which used to be a popular brand favoured by government ministers.

Sales of luxury auto brands in China German auto OEM pipeline for 2H15-2016 (Sales unit) (YoY %) Company Model Type Launch date 120,000 60% Beijing Benz C350eL* Hybrid Sedan Nov-2015 100,000 GLC SUV 2016 40% New E-class Sedan 2016 80,000 Shanghai Volkswagen Skoda Yeti* SUV Aug-2015 60,000 20% Skoda Octavia* Sedan Aug-2015 40,000 Skoda Superb* Sedan Oct-2015 0% Bora Sedan 2H15 20,000 Passat (Facelift) Sedan 2016 0 (20%) Touran L MPV 2016

FAW VW CC* Sedan Oct-2015 Jul-15

Jul-14 Golf GTI* Sedan Nov-2015

Oct-14 Apr-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 May-15 May-14 Golf SportsVan Sedan 2016 Luxury brands monthly sales (LHS) Luxury brands YoY (RHS) Magotan Sedan 2016 China overall PV YoY (RHS) FAW VW Audi Q7 SUV Dec-2015 A6 (Facelift) Sedan 2016

Source: CAM Source: Companies, various media Note: * Already launched

Market shifting away from Korean and Japanese brands German cars are gaining Due to their aggressive sales strategies and greater number of entry-level models market share from available in the market, German brands, including Audi and BMW and recently Benz, have Japanese brands been gaining market share over the past few years, with their share having risen from 16.5% in 2011 to 20% in October 2015 YTD. Japanese brands have been losing market share, due to the aggressive sales strategies of German brands as well as rising disposable incomes and licence restrictions in top-tier cities.

Given the licence restrictions in several top-tier cities (see the following chart), we expect car buyers to favour luxury brands (such as BMW, Benz and Audi) over mid-range brands (such as Korean and Japanese brands) given the expensive new licence-plate fee and because the total number of new licences is limited depending on the city they are allocated in. This means that if a family can afford a luxury car, it would probably jump straight to it rather than buying an entry-level (ie, domestic brand) or mid-level (ie, Japanese or Korean brand) model, in our view.

China new car licence restrictions in various cities Luxury brand sales in China Cities Plate issuance through Implementation date Quota (annual) (Sales unit) (YoY %) Shanghai Bidding 1994 132,000 120,000 60% Beijing Lottery 12/23/2010 150,000 100,000 Guiyang Lottery 7/11/2011 24,000 40% 80,000 Guangzhou Bidding and lottery 6/30/2012 120,000 Tianjin Bidding and lottery 12/15/2013 100,000 60,000 20% Hangzhou Bidding and lottery 3/25/2014 80,000 40,000 Shenzhen Bidding and lottery 12/29/2014 100,000 0% 20,000

0 (20%)

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15

May-14 May-15 Luxury brands monthly sales (LHS) Luxury brands YoY (RHS) China overall PV YoY (RHS) Source: Local governments, various media reports Source: CAM

China Autos Sector: 4 January 2016

The market share for Japanese brands shrank from 20% in 2011 to 16% YTD in October 2015, and we expect it to be flat YoY in 2016 due to rich pipelines from Nissan and Honda in China. However, we remain concerned about 2017 onward, as we expect to see more competition from German cars and even local Chinese brands.

Sales volume growth for Meanwhile, Korean brand market share rose from 8% in 2011 to 9% in 2014, but fell back the Korean brands to 8% in October 2015 YTD, due partly to weak sales volumes for Beijing Hyundai and should recover in 2016, Dongfeng KIA, as a result of intense competition in the China market and the Korean but long-term growth brands’ slow pricing adjustments. We look for the sales growth of Beijing Hyundai to remains a concern recover in 2016 due to its improved product quality and more attractive models being launched, while its overall market share should remain at around 8%. In the longer term, we are concerned about the Korean brands in China as they may be the first victims of the emergence of local brands.

Local brands have also lost a lot of market share, which contracted from 42% in 2011 to 38% in 2014, due mainly to the loss in market share from the sedan segment, which declined from 29% in 2011 to 22% in 2014. As such, rising disposable incomes led to more second-time buyers shifting to luxury German cars, while the local brands pushed fewer sedan models (and more SUVs) due to declining profitability on sedans. However, with SUVs comprising a growing proportion of the China autos market, the combined market share of the local brands returned to 40% in October 2015 YTD. We expect the market share of the local brands to gradually improve over the next 3 years, in line with the growing proportion of SUVs in new-car sales.

Mixed outlook for local Among domestic brands, the outlook seems mixed. We see selective brands like Geely brands continuing to gain market share due to better pipelines in 2016, and GAC Motor’s GS4 still selling well. On the other hand, GWM may continue to lose market share to foreign brands, while we believe BAIC Motor’s Beijing Brand is unlikely to be profitable in the next 3 years.

China PV market share by originating country China Sedan market share by originating country (Market share, %) (Market share, %) 30% 40% 25%

30% 20%

15% 20% 10% 10% 5%

0% 0% 2011 2012 2013 2014 YTD-2015 2011 2012 2013 2014 YTD-2015 China Domestic Germany Japan China Domestic Germany Japan Korea US Others Korea US Others Source: CAM Source: CAM

China SUV market by originating country China PV market, market shares of selected domestic brands (Market share, %) (Market share, %) 4% 50%

40% 3%

30% 2%

20% 1%

10% 0% 2011 2012 2013 2014 YTD-2015 0% Geely Beijing Motor 2011 2012 2013 2014 YTD-2015 BYD GWM China Domestic Germany Japan GAMC Dongfeng proprietary brands Korea US Others Brilliance Jinbei Source: CAM Source: CAM

China Autos Sector: 4 January 2016

Accelerating investment in NEVs in 2016-20 Government and OEMs becoming more serious Charging facilities still According to the NDRC, by the end of 2014, there were only 780 charging stations which the major bottleneck provided 31,000 charging poles to serve more than 120,000 EVs owned in China. The ratio of EVs to charging poles is way below the targeted 1:1 level. According to a 2012 study by TÜV Rheinland regarding major concerns about purchasing EVs, 22% of Chinese interviewees were most concerned about the limited driving range, while 19% worried about the lack of charging facilities. The situation did not improve in 2015, when the major obstacle for the Chinese government to promote EVs was insufficient charging facilities.

Government and OEMs However, the policy guidelines regarding the development of charging facilities in China for more serious on NEVs 2015-20 announced on 17 November seemed to indicate a stronger commitment from the for next 5 years government to push the development of NEVs over the next 5 years in order to reduce pollution and prepare for future competition in this global growing segment. Also, the coming 5-year plan for automotive OEMs places a greater focus on EVs for the next 5 years, in order to help China meet fuel efficiency requirements by 2020.

5m NEV ownership The government estimates that the total number of NEVs owned will reach about 5m units should be achievable by the end of 2020, consisting of 4.3m electric PVs, 0.3m electric taxis, 0.2m electric buses and 0.2m electric trucks and other vehicles. We think this target is achievable, as we expect many new model launches over the next 5 years. We expect new-car sales of NEVs to increase by 70% YoY in 2016 and 40% YoY in 2017, and by 20-30% YoY in 2018-20.

NEV strategies for major China automotive OEMs Company Plans Geely NEV sales targeted to reach 90% of total sales by 2020, 65% of which would be PHEVs and hybrid EVs while the remaining 35% would be pure EVs. GWM According to market news, GMW's first EV sedan, C30EV, targeted to be launched in 2016. The company also aims to launch its first hybrid SUV model in 2017. GAC For the next 5 years, GAC will invest CNY2bn to develop NEVs and launch 5 new NEV models including sedans and SUVs. Changan Has invested CNY1bn to develop NEVs since 2001 and plans to invest CNY18bn more in the next 10 years. The company aims to introduce 34 new NEV products to the market over the next decade and targets accumulated NEV sales of 100,000 units and 2,000,000 units by 2020 and 2025, respectively, with NEVs accounting for 10% of total sales. SAIC The company will invest CNY20bn to develop EV products and aims to launch 30 NEV products consisting of 13 pure EV models and 17 hybrid EV models. It targets sales volume of NEVs to reach 600,000 units in 2020, of which 200,000 will be its self-owned brand.

Source: cnstock.com

China: NEV sales (2011-17E) (units) (YoY % ) 317% 800,000 300% 714,000 350% 700,000 300% 600,000 510,000 250% 500,000 200% 400,000 300,000 150% 300,000 63% 70% 100% 200,000 38% 40% 100,000 75,000 50% 8,000 13,000 18,000 0 0% 2011 2012 2013 2014 2015E 2016E 2017E NEV sales (LHS) YoY growth (RHS) Source: CEIC, Daiwa forecasts

China Autos Sector: 4 January 2016

Summary of fuel-efficiency targets for major markets km/l (mpg) US EU Japan China S. Korea 2005 12.4 (29.0) 15.8 (37.2) 16.7 (39.3) 11.0 (25.9) 12.3 (28.9) 2010 13.9 (33.0) 18.0 (42.3) 19.6 (46.1) 14.4 (33.9) 14.8 (34.8) 2015 15.4 (36.0) 19.7 (46.3) 21.0 (49.4) 15.7 (36.9) 16.7 (39.3) 2020 19.9 (47.0) 25.8 (60.7) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3) 2025 23.9 (56.0) 30.8 (72.4) ~ 35.0 (82.3) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3) 5-YOY (%) US EU Japan China S. Korea 2010 12.1% 13.9% 17.4% 30.9% 20.3% 2015 10.8% 9.4% 7.1% 9.0% 12.8% 2020 29.2% 31.0% 11.4% 35.7% 0.0% 2025 20.1% 19.4%~35.7% 0.0% 0.0% 0.0% Improvement (%) US EU Japan China S. Korea 2010-25 71.9% 71.1%~94.4% 19.4% 47.9% 12.8% 2015-25 55.2% 56.3%~77.7% 11.4% 35.7% 0.0%

Source: ICCT Note: No official fuel efficiency guidance have been provided for Korea (from 2015), Japan (from 2020), or China (from 2020)

Forecast of EVs owned by China Government at end-2020

0.2 0.3 0.2

An estimated 5m EVs owned

Electric passenger vehicles 4.3 Electric buses Electric taxis Electric Sanitation and logistics vehicles Source: NDRC, Daiwa

Tackling infrastructure bottleneck Better plan for charging To support the ownership of 5m NEVs in China, the government has set a target to build network 4.8m distributed charging poles and 120,000 charging stations. Apart from setting a charging pole construction target, the NDRC has also revealed a plan to establish a nationwide charging network to connect the charging facilities. At this stage, the government plans to speed up the construction of charging facilities in the more developed eastern part of the country due to that area’s more serious air pollution problem, with the middle and western parts to follow. In the longer term, the government plans to link its charging stations with the expressway network, to build a “4 Vertical, 4 Horizontal” inter-city fast-charging network to facilitate the interprovincial use of NEV vehicles.

Construction target for charging stations by vehicle usage by 2020

800

2400 3850

Total 120,000 charging stations

2450 Bus-only charging stations Taxi-only charging stations 2500 Sanitation and logistics vehicles-only charging station Public charging stations - PVs Inter-city charging stations Source: NDRC, Daiwa

China Autos Sector: 4 January 2016

Target for distributed charging poles by 2020

0.5

Total 480m 1.5 distributted charging Residential area poles 2.8

Parking areas in commercial buildings, industrial parks and government buildings, etc.

Other public areas

Source: NDRC

China: construction target for charging facilities for 2015-20

Source: NDRC, Daiwa

Plan for nationwide inter-city fast-charging network

Source: NDRC Note: red line: charging network built before 2015; blue line: network to be built in 2016-20

China Autos Sector: 4 January 2016

Other supportive Besides improving the related infrastructure, the government has announced other measures also important supportive measures, such as lifting purchase restrictions and traffic controls on NEVs, requiring property developers to reserve spaces to build charging poles in the future. Hence, we believe the problem of inadequate charging poles, one of the biggest concerns for potential EV buyers, will be gradually solved by 2020.

Latest supportive measures by China Government to promote NEVs Policy Details Licence & traffic restrictions Lift purchase restrictions and traffic controls for NEVs but retain curbs on vehicles with conventional internal combustion engines (ICE). Charging stations New residential complexes must be built with chargers or reserved spaces for future installations. At least 10% of public parking facilities should be built with chargers or spaces reserved for future installations. Every 2,000 EVs owned should be matched by 1 public charging station. In Beijing, 18% of parking spaces in all new residential complexes should be built for EVs. To build a nationwide charging network for up to 5m electric vehicles by 2020.

Source: CAAM

Customer subsidies to be phased out We expect subsidies to According to a notice issued in April 2015 by the Ministry of Industry and Information be maintained in coming Technology (MIIT) regarding subsidies on NEVs, the government plans to cut subsidies to years and scaled back customers by 20% in 2017-18 from the 2016 level, and by 40% in 2019-20 from the 2016 gradually level, except for fuel-cell vehicles. As the price of an NEV is still higher than that of a conventional PV, even with the subsidy, we see the cut on subsidies as being only slightly negative for NEV sales, as most of the sales in the near term would focus on corporates or car companies, which are required to buy more NEVs to achieve government fuel- consumption standards. Also, subsidies on EVs and PHEVs are only a small amount compared to the price of an NEV.

Geely and BYD the On the other hand, the local government subsidies on NEV R&D should continue, which potential leading NEV would provide incentive and support for OEMS to push more NEV models. We see the brands current constraint on charging facilities being solved or improved significantly by 2020. We expect public transportation and corporates to be the first to switch from more conventional cars to NEVs in the early stages, and therefore expect BYD to benefit more in the near term, while new brands such as Geely should also benefit on EV launches in the long term.

China: 2016E NEV subsidies Subsidy (CNY/vehicle) Pure electric driving range (in km), R 100 ≤ R < 150 150 ≤ R < 250 R ≥ 250 R ≥ 50 Pure EV 25,000 45,000 55,000 ／ Plug-in hybrid electric vehicle ／／／ 30,000

Source: NDRC

China: 2016E fuel-cell vehicle subsidies Vehicle type Subsidy (CNY/vehicle) Fuel-cell PV 200,000 Fuel-cell light CV 300,000 Fuel-cell mid-large CV 500,000

Source: NDRC

Price comparison of selected NEV and comparable ICE models Company Model Type Price (Before subsidy, CNY '000) Price (After subsidy, CNY '000)* Comparable ICE model Price range BYD Qin PHEV 210 - 220 144 - 153 Geely Vision, BYD F3 52 - 73 Tang PHEV 251 - 280 220 - 248 Changan CS75, FAW Besturn X80 110 - 182 Song PHEV 280 212 Soueast Motor DX7, GWM Haval H6 87 - 140 e6 EV 310 - 370 200 - 256 DF Fengxing S500, Chery Arrizo M7 61 - 110 Denza EV 370 - 400 262 - 292 GAC Trumpchi GA5, BAIC Senova D60 110 - 220 Geely Emgrand EV EV 229 - 250 121 - 142 FAW Besturn B30, DF Fengshen A60, Roewe 360 71 - 130 BAIC e-series EV 177 - 247 87 - 157 Chery Fulwin 2, Changan CX20 43 - 66 Dongfeng Nissan Venucia E30 EV 243 - 257 153 - 167 Changan CX20, BAIC Senova D20 36 - 83 Zotye Z100 EV EV 159 69 Geely Panda, Chery QQ 37 - 51 Changan Eado EV EV 235 - 250 145 - 160 FAW Besturn B30, DF Fengshen A60, Roewe 360 70 - 130 Chery eQ EV 160 - 165 70 - 75 Geely Panda, Chery QQ 37 - 51 JAC iEV4 EV 158 - 160 63 - 65 Geely KingKong, Chery E3 37 - 65

Source: Companies, Autohome, Sohu Auto and Diangdong Note: Subsidies subject to different provincial policies

China Autos Sector: 4 January 2016

Balance sheets remain healthy Little possibility of On the balance-sheet side, the industry is in good shape, with net gearing levels for the A- equity-raising unless share and H-share automakers of 23-26% in 2014, appreciably better than levels in there is another A-share Europe and Japan. Therefore, unless we see a major rally in the H-share or A-share or H-share market rally markets that prompts companies to raise more capital for future R&D (especially for NEVs), we see a limited possibility of China OEMs raising equity in 2016.

In terms of 2014 ROEs, China automakers reported ratios of 2-36%, with a weighted average of 15%, and on this measure we expect them to be stable over our forecast horizon. However, although their balance sheets remain strong, we expect dividends to remain low, as we believe the OEMs will seek to preserve cash for R&D and product development. In other words, we do not expect China automakers to be yield plays in the near term.

Global major auto OEMs: net debt-to-equity ratio (2010-14) Global autos OEMs: ROE (2011-17E) 2010 2011 2012 2013 2014 (% ) China H-share listed 11 8 13 28 22 30 China A-share listed 3 3 15 27 21 25 US net cash net cash net cash net cash net cash Europe net cash 25 26 119 55 20 Japan 81 64 63 66 62 Korea 59 47 32 21 23 15 Global 26 20 22 41 30 10

0 2010 2011 2012 2013 2014 2015E 2016E 2017E China H-share listed China A-share listed US Europe Japan Korea Source: Bloomberg Source: Bloomberg

China: H-share listed auto makers: yield (2010-17E) Name Bloomberg code 2010 2011 2012 2013 2014 2015E 2016E 2017E BAIC 1958 HK n.a. n.a. n.a. n.a. 4.2 3.9 4.6 5.2 GEELY 175 HK 0.8 1.6 1.1 2.5 1.0 1.0 1.3 1.6 DFM 489 HK 1.6 1.7 1.6 1.9 2.3 2.4 2.7 2.8 BYD 1211 HK n.a. - - 0.2 - 0.1 0.1 0.1 GAC 2238 HK 2.2 3.8 1.6 2.4 2.8 3.0 3.6 4.2 GWM 2333 HK 2.5 3.3 2.9 2.5 2.3 3.9 4.2 4.4 BRILLIANCE 1114 HK - - - - 0.9 0.9 1.0 1.2 Weighted average 1.2 1.7 1.1 1.4 1.8 2.2 2.5 2.7 Source: Bloomberg Note: Historical yield calculated by DPS/share price on last trading day of corresponding year

Hard to see any recovery for CVs We expect CV sales We expect trade data in China to remain subdued in 2016. Daiwa’s Chief Economist Kevin volume to decline by Lai forecasts China’s exports to decline by 3.4% YoY and imports to decline by 6.4% YoY 10% YoY in 2016 in 2016. In this context, we believe the overall profitability of the logistics companies, especially the freight forwarding and transportation players, will remain weak in 2016. At the same time, with new emissions standards set to come into effect in the near term, and with large replacement orders having been made in 2014, we do not expect commercial vehicle (CV) sales to pick up in 2016 — despite the fact they have been weak for 3 years now. Overall, we forecast a 10% YoY decline in CV sales volume in 2016 and a 5% YoY contraction in 2017.

China Autos Sector: 4 January 2016

China: emissions standards for heavy-duty engines CO HC NMHC CH4† NOx PM Smoke Standard Test Cycle g/kWh 1/m ESC + ELR 2.1 0.66 - - 5 0.10/0.13** 0.8 China III ETC 5.45 - 0.78 1.6 5 0.16/0.21* - ESC + ELR 1.5 0.46 - - 3.5 0.02 0.5 China IV ETC 4 - 0.55 1.1 3.5 0.03 - ESC + ELR 1.5 0.46 - - 2 0.02 0.5 China V ETC 4 - 0.55 1.1 2 0.03 -

Source: transportpolicy.net Note: *: Natural gas engines only, **: For engines with a per cylinder displacement of < 0.75 L and rated speed > 3000 rpm

China: monthly CV sales and growth (2014 – October 2015) (units) (YoY %) 500,000 20%

400,000 10% 0% 300,000 (10%) 200,000 (20%)

100,000 (30%)

0 (40%)

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15

May-14 May-15 Monthly sales (LHS) YoY growth (RHS) Source: CEIC

China: yearly CV sales and growth (2010-14) (units) (YoY %)

4,400,000 4,292,933 35% 4,300,000 30% 4,200,000 30% 25% 4,065,346 4,100,000 4,035,386 20% 4,000,000 15% 3,900,000 10% 3,809,841 3,788,647 3,800,000 5% 3,700,000 7% 0% 3,600,000 -7% (5%) 3,500,000 -6% -6% (10%) 2010 2011 2012 2013 2014 CV sales (LHS) YoY Growth (RHS)

Source: CEIC

China Autos Sector: 4 January 2016

Valuations and recommendations Not that cheap anymore The China Autos Sector has been rerated since the sales recovery in August 2015, with the reduction in purchase tax in October providing a boost. The weighted index for the H- share automakers is trading currently at a 2016E PER of 8x (excluding BYD, which is an outlier as it trades at a significant premium to the other automakers), below its past-3-year range of 7-10x (excluding BYD).

However, based on the expected slower EPS growth of the automakers vs. their past 3- year trading average, we see limited scope of a further rerating, particularly as the purchase tax reduction is essentially a one-off event. We look for car sales volume growth to continue to slow from 4Q16 into 2017, with sales volume contracting by 3% YoY in 2017.

In this context, we expect market sentiment on the sector to weaken as 2017 approaches. Hence, we remain Neutral on the China Autos Sector as a whole, and recommend a selective approach to investment in the OEMs.

PER comparison: automakers vs. market 30x

25x

20x

15x

10x

0x 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Cap-weighted H-share listed auto makers MSCI China H Index MSCI China Financials Index MSCI China Utilities GICS Sector Index MSCI China Consumer Discretionary Index Source: Bloomberg

Recommendations Top buys: Geely, BAIC and DFM We prefer local brands, In general, we prefer local brands. However, we would avoid GWM, which we think is set with Geely as our top for overall margin deterioration in the face of intense competition and a subdued consumer pick response to the H8 and H9 models so far.

On the other hand, Geely’s new model, the GC-9, looks to have been well received and has already hit the company’s sales target of 5,000 units/month. In 2016, we expect Geely’s new SUV NL-3 (to be launched in December 2015) and NL-4 (to be launched in mid-2016) to have a positive impact on the bottom line, as the GC-9 should cover the fixed costs of the Chunxiao plant, which will also start production of the NL-3 and NL-4 SUVs using the company’s A-segment sedan platform.

For BAIC, we expect a recovery for Beijing Hyundai on sales of the Tucson and the new Elantra, as well as strong sales performance for Beijing Benz due to the new E-class sedan and GLC, to be share-price drivers in 2016. On a longer-term view, however, we are concerned about the competitiveness of the Korean brands in China.

For DFM, we believe the company stands to benefit in 2016 from the strong product pipeline of Dongfeng Nissan (including SUV models, such as the Qashqai, Murano and T70X), which should have a full-year impact in terms of sales in 2016. Also, the new Lannia sedan has been well received since its launch in October 2015, and we expect it to be another sales volume driver in 2016.

China Autos Sector: 4 January 2016

Top sell: GWM We have a cautious We remain sceptical on GWM’s prospects over our 12-month investment horizon on outlook on GWM due to intense competition for its SUV models. Most of the models that GWM plans to launch in intensifying competition 2016 are SUVs, a segment where many foreign JV brands are offering bigger discounts. and resulting margin Against this backdrop, we think it could be hard for GWM to raise its ASP or sell more erosion expensive models such as the H8 or H9 (or even the H7, which is to be launched in 2016). Separately, we are not confident in GWM’s red badge/blue badge differentiation strategy, as we are not convinced that consumers will detect a material difference between the 2 offerings.

Risks to our Neutral sector view Weaker- or stronger-than-expected demand The major downside risk to our view on the sector would be weaker-than-expected sales volumes and margins. In this regard, we believe the risk for the foreign JV brands is greater than for the local brands, as we have already seen many foreign JV brands cutting prices. While we expect margins to remain under pressure across the sector, we look for 12% YoY growth in sales volume in 2016. If the macro environment turns to be weaker than we expect, there is a risk that sales volumes and margins would fall short of our expectations.

On the other hand, if sales volume and margins turn out to be higher than we expect, they would constitute the major upside risks to our call. According to our base-case scenario, the government would raise the purchase tax back to the 10% level in 2017. However, if the government were to decide to extend the tax cut to boost the auto industry further, in order to stimulate the slowing economy, the increase in sales volume could beat our expectations.

Political risk We believe the major political risk to the sector would be the state of Sino-Japanese relations. In 2012, when political tensions between China and Japan were fueled by a dispute over the Diaoyu Islands, sales of Japanese OEMs, such as GAC and DFM, slowed significantly. If the political relationship between China and Japan were to deteriorate again, we think the sales performance of the Japanese brands would be adversely affected while their domestic competitors would benefit. Separately, political instability in other countries could have a bearing on demand for the China brands, especially as most of the local OEMs are exporting to emerging countries, which tend to be less politically stable than developed markets.

Currency risk The depreciation of the Renminbi relative to the Yen and Euro would be negative for foreign JV OEMs such as BAIC, Brilliance, GAC and DFM, as it would raise the price of imported components. In 2014, most of the foreign JV OEMs recorded exchange gains due to the weakening of the Yen and Euro against the Chinese currency. However, Daiwa’s Chief Economist Kevin Lai expects the Renminbi to depreciate by 14% YoY against the US dollar by the end of 2016, which serves as our base-case scenario. And in this case, we would expect foreign JV OEMs to be negatively affected.

However, if the government decides to defend the CNY or if there are any other sudden events that cause the Euro or Yen to weaken vs. the CNY, the JV OEMs would benefit from a strengthening in this currency, which would pose another upside risk to our call.

China Autos Sector: 4 January 2016

Global automotive OEMs: valuation comparison Share 12-mth Name Bloomberg Trading price Rating Target PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) code currency 28-Dec-15 Price FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E China H-share listed Geely Automobile Holdings Lt * 175 HK HKD 4.23 Buy 4.90 11.9 9.2 1.6 1.4 6.0 4.6 1.0 1.3 14.1 15.8 BAIC Motor Corp Ltd-H * 1958 HK HKD 7.77 Buy 9.40 9.7 7.7 1.4 1.2 6.6 5.1 4.5 5.6 14.6 16.6 BYD Co Ltd-H * 1211 HK HKD 42.40 Outperform 47.00 67.8 38.6 2.3 2.1 13.3 11.2 0.0 0.0. 3.9 5.7 Great Wall Motor Company-H * 2333 HK HKD 9.14 Underperform 8.40 8.2 8.1 1.8 1.5 5.7 5.5 3.7 3.7 23.3 20.3 Guangzhou Automobile Group-H * 2238 HK HKD 6.94 Hold 7.00 9.6 8.2 1.0 0.9 30.1 14.9 3.4 3.9 10.6 11.4 Dongfeng Motor Grp Co Ltd-H * 489 HK HKD 10.64 Outperform 12.20 6.4 5.8 0.9 0.8 7.0 5.8 2.3 2.6 15.2 14.7 Brilliance China Automotive * 1114 HK HKD 9.84 Underperform 8.90 12.4 10.7 2.1 1.8 n.a. n.a. 1.3 1.1 18.2 18.1 China A-share listed BYD Co Ltd -A 002594 CH CNY 62.14 NR NA 67.1 54.7 5.3 4.7 18.5 15.4 0.0 0.1 8.9 8.8 Guangzhou Automobile Group-A 601238 CH CNY 22.57 NR NA 37.7 29.5 3.8 3.5 80.4 68.7 0.8 0.9 9.7 11.5 Great Wall Motor Co Ltd-A 601633 CH CNY 12.05 NR NA 11.9 10.0 2.7 2.2 7.8 6.5 2.3 2.7 24.4 23.5 Saic Motor Corp Ltd-A 600104 CH CNY 21.21 NR NA 8.2 7.4 1.4 1.2 10.6 9.1 6.2 6.8 17.6 17.4 Chongqing Changan Automobi-B 200625 CH HKD 16.95 NR NA 6.7 5.7 1.9 1.5 30.4 22.2 2.7 3.8 31.6 29.0 Faw Car Company Limited-A 000800 CH CNY 16.06 NR NA 48.7 55.4 2.8 2.7 17.7 15.1 0.1 0.1 7.3 5.7 Anhui Jianghuai Auto Co-A 600418 CH CNY 14.24 NR NA 17.8 12.1 2.4 2.0 11.4 8.4 1.8 2.6 13.7 17.4 Jiangsu Yueda Investment C-A 600805 CH CNY 12.61 NR NA 12.4 10.0 1.6 1.5 13.1 10.8 1.2 1.2 11.7 11.1 Tianjin Faw Xiali Automobi-A 000927 CH CNY 7.53 NR NA 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 16.08 NR NA n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 6.24 NR NA 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 NA n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. US Ford Motor Co F US USD 14.18 NR NA 8.7 7.4 1.9 1.6 4.2 3.5 4.0 4.3 27.9 25.1 General Motors Co GM US USD 34.51 NR NA 7.2 6.5 1.6 1.3 2.8 2.6 4.0 4.4 21.0 21.8 Europe Daimler Ag-Registered Shares DAI GR EUR 77.56 NR NA 9.3 8.8 1.7 1.5 3.2 3.0 4.0 4.5 18.8 18.3 Bayerische Motoren Werke AG BMW GR EUR 97.66 NR NA 10.4 10.1 1.6 1.4 7.6 7.4 3.5 3.5 16.8 15.3 Volkswagen AG VoW GR EUR 143.79 NR NA 9.9 9.0 0.8 0.7 n.a. n.a. 2.0 2.9 8.5 8.8 Fiat Chrysler Automobiles NV FCA IM EUR 13.00 NR NA 16.5 8.7 1.3 1.1 n.a. n.a. n.a. n.a. 5.6 13.0 Peugeot SA UG FP EUR 16.07 NR NA 11.7 9.1 1.2 1.1 2.6 2.4 0.0 1.0 11.2 13.0 Renault SA RNO FP EUR 93.40 NR NA 9.3 7.8 1.0 0.9 5.3 4.8 2.5 3.0 10.9 12.0 Japan Honda Motor Co Ltd *, ** 7267 JP JPY 3875.00 Hold 4,000 12.4 11.9 1.1 1.0 9.3 8.1 2.3 2.4 8.9 8.1 Nissan Motor Co Ltd *, ** 7201 JP JPY 1268.50 Hold 1,300 11.8 9.4 1.1 1.0 4.2 3.4 2.6 3.3 9.8 11.3 Toyota Motor Corp *, ** 7203 JP JPY 7484.00 Outperform 8,800 10.8 9.6 1.4 1.3 10.8 9.9 2.7 3.1 14.2 13.9 Korea Hyundai Motor Co * 005380 KS KRW 151,000 Buy 190,000 5.9 5.1 0.5 0.4 4.3 3.7 2.5 3.0 11.2 11.6 Kia Motors Corp * 000270 KS KRW 52,300 Buy 68,000 7.1 5.5 0.8 0.7 4.3 3.5 2.1 2.3 12.5 14.2 India Tata Motors Ltd ** TTMT IN INR 394.00 NR NA 7.1 11.7 1.5 1.7 3.7 4.2 0.5 0.4 24.2 16.5 Mahindra & Mahindra Ltd ** MM IN INR 1249.40 NR NA 20.1 21.1 2.9 2.5 14.9 12.4 1.2 1.2 15.5 11.4 Total Weighted average 12.9 11.0 1.5 1.4 8.5 7.3 2.7 3.1 14.8 14.6 High 67.8 55.4 5.3 4.7 80.4 68.7 6.2 6.8 31.6 29.0 Low 5.9 5.1 0.5 0.4 2.6 2.4 0.0 0.1 3.9 5.7 Median 10.6 9.1 1.6 1.4 7.6 6.5 2.3 2.8 13.9 14.1 Source: Bloomberg, *Daiwa forecasts Note: **Mar year-end Pricing as at 28 December 2015

China Consumer Discretionary 4 January 2016

(175 HK) Geely Automobile Geel y Automobil e

Target price: HKD4.90 (from HKD4.90) Share price (28 Dec): HKD4.23 | Up/downside: +15.8%

2016 likely to be another good year Kelvin Lau (852) 2848 4467  We forecast a market-beating 20% YoY rise in 2016 sales volume [email protected]  Strong 2016 pipeline should support consistent model launches Brian Lam (852) 2532 4341  We forecast a flat gross margin YoY, better than peers; reiterate Buy (1) [email protected]

What's new: Geely remains our top pick in the China Autos sector due to Forecast revisions (%) its strong product pipeline for 2016 and the successful upgrade of its brand Year to 31 Dec 15E 16E 17E via solid sales of the B-segment sedan, the GC-9. We believe 2016 will be Revenue change - - - Net profit change - - - another strong year, incorporating full-year sales of the new SUV NL-3 and Core EPS (FD) change - - - products from the CMA platform by the end of 2016 or early 2017, which Source: Daiwa forecasts we think will further enhance its brand image and competitiveness in the long run. We reiterate our view that Geely will see a long-term rerating in Share price performance the coming 3 years. (HKD) (%) 4.7 195 What's the impact: For 2016, we expect Geely to experience another 4.0 169 3.4 143 strong year, with a 20% YoY increase in new-car sales, to 600K units, due 2.7 116 to a ramp-up in sales of the GC-9, NL-3 and the new Emgrand EV. Also, 2.0 90 another SUV, NL-4, is slated for launch in mid-2016. Overall, we expect Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 16% of Geely’s sales to come from the SUV segment in 2016E. Geely Auto (LHS) Relative to HSI (RHS)

Separately, Geely plans to launch its CMA platform sharing with Volvo by 12-month range 2.44-4.67 end-2016, which we think will improve its brand acceptance and lower its Market cap (USDbn) 4.80 production costs and R&D expenses. Although we have reservations about 3m avg daily turnover (USDm) 32.95 Shares outstanding (m) 8,801 the attainability of Geely’s target of deriving 90% of its sales from EVs in Major shareholder LI Shu Fu (45.0%) 2020, we are confident it would become one of the leading NEV brands in China, given its advanced technology vs. local peers as well as the Financial summary (CNY) government’s support for local brands on NEV development. Finally, we Year to 31 Dec 15E 16E 17E believe Geely will be better placed to deliver regular new-model launches Revenue (m) 28,350 36,757 42,242 each year going forward. Operating profit (m) 3,223 4,141 4,759 Net profit (m) 2,604 3,366 3,894 Core EPS (fully-diluted) 0.296 0.382 0.442 What we recommend: We apply a target PER of 11x to Geely (on our EPS change (%) 82.0 29.3 15.7 2016E EPS), a 20% premium to the stock’s past-3-year average PER of Daiwa vs Cons. EPS (%) 2.5 3.7 1.6 PER (x) 12.0 9.3 8.0 9x. We believe this is justified as: 1) its past-3-year average was affected Dividend yield (%) 1.0 1.3 1.5 by an abnormal valuation in 2014, when Geely’s operations were affected DPS 0.036 0.046 0.054 by the restructuring of its sales network, and 2) it now has a more PBR (x) 1.6 1.4 1.2 sustainable growth model compared with previous years, in our view. EV/EBITDA (x) 6.1 4.6 3.7 ROE (%) 14.1 15.8 15.9 Therefore, we reiterate our Buy (1) rating with a 12-month TP of HKD4.90. Source: FactSet, Daiwa forecasts The key risk to our view: slower-than-expected improvements in its net margin and sales-volume growth.

How we differ: Our 2016-17E EPS are 2-4% above the consensus forecasts, as we are more optimistic on its new-product launches. We expect Geely’s car models to see a robust sales performance. In addition, we think Geely’s improving brand image in China will support solid revenue growth over our forecast horizon.

See important disclosures, including any required research certifications, beginning on page 103

Geely Automobile (175 HK): 4 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Geely: net-profit forecasts Following on from weak earnings in 2014 due to the (CNYm) restructuring of its dealer network, Geely’s bottom line 4,500 100% 4,000 looks set to get back on the right track, in our opinion. 80% 3,500 60% Coupled with forecast margin enhancement, we project net 3,000 40% profit growth of 82% YoY for 2015. Bottom-line growth 2,500 20% should also be solid in 2016-17E, on our forecasts, as we 2,000 0% expect it to gain market share from its competitors, backed 1,500 (20%) by its product pipeline and the tax-cut stimulus. Our 1,000 (40%) forecast 2016-17E net-profit growth of 16-29% is likely to 500 0 (60%) outperform those of its peers. 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (LHS) YoY Growth (RHS)

Source: Company, Daiwa forecasts

Valuation Geely: 1-year-forward PER (x)

We apply a target PER of 11x to our 2016E EPS to value (PER) Geely, marking a 20% premium to the stock’s past-3-year- 13 average PER of 9x, which we believe was distorted by the 12 stock’s abnormal valuation in 2014. We believe our target 11 10 PER is justified, as we consider Geely to have a more 9 sustainable growth model today. Therefore, we reiterate 8 our Buy (1) rating and 12-month target price of HKD4.90. 7 6

Jul-14 Jul-12 Jul-13 Jul-15

Jan-12 Jan-13 Jan-14 Jan-15

Mar-13 Mar-12 Mar-14 Mar-15

Nov-14 Sep-12 Nov-12 Sep-13 Nov-13 Sep-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: Company, Daiwa forecasts

Earnings revisions Geely: Bloomberg consensus EPS forecast revisions

Our 2015-17E EPS are 2-4% above consensus, as we are (CNY) more optimistic on its new-product launches, on the back 0.55 of its R&D capability, represented by the success of the 0.50 GC9. In addition, deeper integration with Volvo also means 0.45 stronger technical support in the future. 0.40

0.35

0.30

0.25

Jul-14 Jul-15

Apr-15 Apr-14 Oct-14 Oct-15

Jun-14 Jan-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15

May-14 May-15 2015E 2016E

Source: Bloomberg

Geely Automobile (175 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales volume (unit) 416,000 422,000 483,000 549,000 418,000 500,000 600,000 645,000 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

Geely Automobile (175 HK): 4 January 2016

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 30,485 31,992 29,001 26,140 25,960 25,430 24,207 22,354 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. 8.1 4.9 n.a. 2.5 5.2 7.4 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”.

Geely Automobile (175 HK): 4 January 2016

Promising growth outlook New-era growth strategy for Geely New SUV and EV models the next earnings-growth drivers for 2016E With the launch of 4 new Geely’s preliminary sales-volume target for 2016 is 600k units, a rise of 20% YoY and in models in the pipeline, line with our initial projection. In 2016, Geely plans to launch 4 new models, 2 of which are we forecast Geely to sell the NL-3 and NL-4 (launch date to be announced in July/August 2016). Sales of Geely’s 600k units in 2016 SUVs should then reach close to 100k units for 2016E, or 16% of its target sales, up from the current 12% for 2015. The other 2 new models are a new generation of the EC7 sedan, and a cross-SUV. Moreover, the launch of the Emgrand EV at end-2015 could help Geely establish a first-mover advantage in the NEV segment, in our view.

Geely: NL-3 SUV Geely: Emgrand EV

Source: Company Source: Company

Platform-sharing capability to result in more consistent launch schedule Platform sharing could From 2016, Geely plans to adopt a platform-sharing practice for its new models, which help Geely launch new means several auto models will share the same design blueprint for drivetrains, chassis, models every year and axles and suspension systems. The goal is save development time and lower costs, due to hence increase earnings standardised designs and economies of scale. Geely aims to focus on 3 platforms for its visibility product line-up: the FE platform, KC platform, and CMA platform. Indeed, several of its current models were developed under the FE platform or KC platform, eg, the Vision and EC7 are under the FE platform, while the GC9 is under the KC platform. As a result, new models should break even comfortably as existing models already cover the cost of the plant operations for the platform. The CMA platform (based on which Volvo models are built) is set to be unveiled in March/April 2016 and put into operation in 2017, according to Geely’s management.

Additionally, Geely is developing 2 more brand new platforms: the PE platform for smaller- size NEVs and the CV platform for commercial vehicles; it aims to launch the first models using both platforms in 2017. As such, we expect Geely to have several model launches each year going forward, as opposed to the more scattershot approach of previous years. This implies to us greater earnings visibility in the coming years.

Geely: summary of future platforms Platform name Positioning Current models Future pipeline FE Volume market Vision, EC7 (Xindihao) EC7 (2016 ver.), NL-3, NL-4, a cross-SUV KC Higher-end GC9 (Borui) no plan in 2016 CMA Premium/Luxury n.a. Start operation in 2017 PE Small size NEV n.a. First model in 2017 CV Commercial vehicle n.a. First model in 2017

Source: Company

Geely Automobile (175 HK): 4 January 2016

“Blue Geely Action Plan” a long-term positive NEV strategy A bold move to establish On 18 November 2015, Geely announced its long-term EV strategy: the “Blue Geely Action a market-leading Plan”. With this plan, it aims to derive 90% of total sales from the NEV segment in 2020, position in the NEV 65% of which should be from hybrids and 35% from pure EVs. Such a development would segment allow Geely to achieve average fuel consumption of 5.0L/100km sooner than the China Ministry of Industry and Information Technology requires it to. To reach this target, the company aims to have NEV versions of all of its models. Although we have reservations about Geely achieving its sales target for NEVs by 2020, we view this strategy to be positive for Geely in the longer term, as it would help Geely to establish itself as one of the first movers and market leaders for NEV among its customers. More details on the recent EV launch and NEV strategy can be found in “Blue Geely Action Plan” and test drive of Emgrand EV, 20 November 2015.

Improving R&D another long-term advantage GC9 breakthrough suggests that Geely is at another level GC9 is the first among Launched in April 2015, the GC9 is Geely’s first B-segment sedan model, with a length of China domestic brands 4956mm and price range of CNY130k-230k. In October 2015, just 6 months after its to see meaningful launch, it accounted for more than 10% of Geely’s monthly sales volume, or 4,979 units. traction in B-segment Traditionally, the B-segment has been dominated by foreign JVs as cars in this segment sedans tend to carry higher prices compared with small cars and consumers generally favour foreign JVs at such price points. Given the GC9’s unit-sales momentum, its market acceptance is similar to that of cars produced by foreign JVs, and we note that similar models offered by its domestic peers have recorded sales of a few hundred units or fewer. These sales numbers suggest to us that Geely’s R&D is appreciably better than its peers, which should be positive for Geely’s brand recognition.

Geely’s GC9 peer comparisons Length Price range Launch date of facelift / Avg. sales units per Auto OEM Model (mm) (CNY k) Launch date new options month in 2015 Geely GC9 4956 115-230 Apr-2015 n.a. 3,090 SAIC Motor Roewe 950 4996 184-323 Mar-2012 Jul- 2015 (Facelift) 158 Lifan 820 4865 82-120 Mar-2015 n.a. 586 GAC Motor GA6 4850 117-197 Dec-2014 Mar-2015 (New options) 879 Beijing Hyundai Sonata-9 4855 175-250 Mar-2015 n.a. 6,540 GAC Honda Accord 4930 180-300 Sep-2013 Mar-2015 (Facelift) 8,756 GAC Toyota Camry 4850 185-330 Dec-2011 Mar-2015 (Facelift) 10,727 DF Nissan Teana 4892 178-300 Dec-2013 Apr-2014 (New options) 9,068 FAW Car Mazda Mazda 6 Atenza 4870 180-240 May-2014 Aug-2015 (New options) 3,360 SAIC VW Passat 4870 132-323 Sep-2011 Aug-2015 (New options) 17,349 SAIC GM Buick Regal 4843 179-280 Sep-2013 Mar-2015 (New options) 9,194 FAW VW Magotan 4865 200-300 Jul-2011 Apr-2015 (New options) 12,782 Dongfeng Honda Spirior 4840 180-268 Nov-2014 Oct-2015 (New options) 1,716

Source: Companies, various media

Increasing integration with Volvo means quality upgrade 2015E net margin to Ever since Volvo Cars was bought by Geely’s parent holding company, Zhejiang Geely, in improve by 2.6pp YoY to 2010, Geely’s R&D capability has been improving. The GC9 is one example of this trend. 9.2%, and to remain at On a 3- to 5-year view, by leveraging technology from Volvo Cars, we believe Geely will be that level, at least, in able to source components from quality international suppliers and ultimately deliver better future years products than those of its peers. Currently, 60% of its suppliers are international (vs. 20% 10 years ago). In addition, management’s approach to pricing has helped Geely maintain its net and gross margins. Since 2Q15, there have been multiple price cuts by the auto OEMs, including domestic brands and foreign JVs. However, Geely did not participate in these price wars, as management decided instead to protect its margins. In turn, we project Geely’s net margin to come in at 9.2%, up by 2.6pp YoY, for 2015. For the years thereafter, we expect Geely’s ASP to rise steadily, due to the more upmarket offerings in its pipeline. However, the development of new platforms and models may require some upfront costs. Therefore, we conservatively forecast that its net margin through 2017 will hold at the 2015E level.

Geely Automobile (175 HK): 4 January 2016

Other long-term factors Better positioned than its peers to benefit from the tax cut Geely has relatively high On 30 September, China’s State Council announced plans to cut the purchase tax from exposure to small- 10% to 5% for cars with engine sizes smaller than or equal to 1.6L. The policy, which will engine cars be effective from 1 October 2015 until 31 December 2016, should help boost Geely’s sales volume, as 79% of its cars have engines in this category, compared with a market average of 68%.

Demand from low-tier cities Demand from low-tier The auto penetration rate in China’s top-tier cities is already comparable to that in mature cities to benefit Geely market such as Japan, Korea and Taiwan. However, the overall auto penetration rate in China is still lagging behind these markets. Hence, the growth mainly comes from low-tier cities. As such, we believe there are ample growth opportunities in this market, and we believe the domestic players are poised to capture most of the growth due to their relatively low prices and more extensive sales networks. Therefore, well-known domestic players, such as Geely, are likely to outperform the foreign JVs in general, in our view.

Geely Automobile (175 HK): 4 January 2016

Valuation and recommendation Our top pick in the sector Current valuation Our 2015-17E EPS are 2-4% above the consensus forecasts, as we are more optimistic on attractive; we expect its new-product launches on the back of its R&D capability. Based on our 2016 EPS PER to go up slightly forecast and a PER multiple of 11x, we have a 12-month target price for Geely of HKD4.90. The target multiple marks a 20% premium to the stock’s past-3-year average PER of 9x. However, we note that its past-3-year average was brought down by an abnormal valuation in 2014, when Geely’s operations were affected by the restructuring of its sales network. In addition, we believe Geely now has a more sustainable growth outlook compared with the past. Therefore, we believe our target PER is justified, and we reiterate our Buy (1) rating with a 12-month TP of HKD4.90.

Geely: PER bands (x) (PER) 13 12 11 10 9 8 7 6

Jul-13 Jul-12 Jul-14 Jul-15

Jan-12 Jan-13 Jan-14 Jan-15

Mar-12 Mar-13 Mar-14 Mar-15

Nov-12 Sep-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: Company, Daiwa forecasts

Risks Weaker-than-expected sales of new models and declining exports Risk of slower sales if As mentioned, Geely has launched several new models recently (such as the GC-9, and demand is weaker than the new Emgrand EV), and soon plans to launch the NL-3 and NL-4. Therefore, the sales we expect performance of these new models could affect market sentiment on the stock. On the other hand, after declining by 50% YoY in 2014, Geely’s exports were weak in 2015 YTD. Its exports through November 2015 were down by 55% YoY, due to ongoing sanctions or political instability in its major export markets (Iran, Egypt and Russia). Although exports accounted for only 6% of its total sales through October 2015, if this sluggishness continues it can be expected to weigh on Geely’s sales and profits to some extent.

Intensifying competition in the SUV segment Risk of weak SUV sales SUV unit-sales growth in China has been strong due to changing consumer preferences. if competition intensifies In a bid to increase market share, many domestic manufacturers (including Geely), as well further as foreign JVs, have launched new competitively-priced SUV models. Other strong competitors include GS4 and Landwind, which have driven up the sales of Guangzhou Automobile Motor (GAMC) and Jiangling Motor by 92% and 63% YoY, respectively. We also expect to see additional SUV models coming to the market in 2016, such as the Kadjar by Dongfeng Renault. However, we remain confident in Geely’s product quality and believe its new SUV models can snatch market share from peers, similar to what the company did with the GC9 in the sedan market in 2015.

Geely Automobile (175 HK): 4 January 2016

Geely NL-3/NL-4 possible competitors Price range Launch date of facelift Avg. sales units per Auto OEM Model Length (mm) (CNY k) Launch date / new options month in 2015 Geely NL-3 not disclosed yet not disclosed yet Jan-2016 Geely NL-4 not disclosed yet not disclosed yet 2016 Dongfeng Renault Kadjar 4449 not disclosed yet Mar-2016 GAMC GS4 4510 80-147 Apr-2015 n.a. 13,930 Landwind X7 4420 130 -148 Aug-2015 n.a. 4,898 Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551 GWM H2 4335 99-129 Jul-2014 Sep-2015 (new options) 13,042 SAIC GM Wuling Baojun 560 4620 77-90 Jul-2015 n.a. 20,185 BAIC Hyundai Tucson 4475 122-196 Sep-2015 n.a. 10,054 Dongfeng Nissan Venucia T70 4542 80-128 Jan-2015 Sep-2015 (new options) 4,803

Source: Companies, various media

China Consumer Discretionary 4 January 2016

(1958 HK) BAIC Motor BAIC Motor

Target price: HKD9.40 (from HKD9.40) Share price (28 Dec): HKD7.77 | Up/downside: +20.9%

2016: a year of recovery Kelvin Lau (852) 2848 4467  Beijing Benz to see strong sales growth in 2016E due to new models [email protected]  Sales volume for Beijing Hyundai continues to recover from a trough Brian Lam (852) 2532 4341  Beijing Brand’s losses should shrink in 2016; reiterate Buy (1) rating [email protected]

What's new: We see 2016 being a good year for BAIC, with the likelihood Forecast revisions (%) of a continuing sales recovery for Beijing Hyundai and another strong year Year to 31 Dec 15E 16E 17E for Beijing Benz. On the other hand, we expect losses at Beijing Brand, the Revenue change - - - Net profit change - - - company’s self-owned brand, to diminish in 2016 with new SUV models. Core EPS (FD) change - - - BAIC remains our top pick among the foreign JV brands. Source: Daiwa forecasts

What's the impact: Beijing Hyundai’s strong sales recovery looks set Share price performance to continue in 2016. Beijing Hyundai’s sales volume turned around in (HKD) (%) October, rising by 8% YoY compared to 16% YoY and 5% YoY declines for 12 110 August and September, respectively. The major driver was the launch of 10 99 8 88 the new Tucson SUV in September, as well as better sales of the Elantra 7 76

Langdong and Sonata due to higher discounts and new models. With a full- 5 65 year impact of the new Tucson and also a new Elantra Langdong launching Dec-14 Mar-15 Jun-15 Sep-15 in 1Q16, the JV looks poised for a significant sales improvement in 2016, BAIC Motor (LHS) Relative to HSI (RHS) especially given the relatively low base from which it is recovering. 12-month range 5.39-11.50 Beijing Benz likely to maintain strong growth in 2016 with a strong Market cap (USDbn) 7.52 pipeline. Beijing Benz’s fast sales-volume growth in 2015 looks set to 3m avg daily turnover (USDm) 2.36 Shares outstanding (m) 7,508 continue in 2016 with 2 new models, namely the GLC SUV and new E- Major shareholder BAIC Group (45.0%) class sedan, which combined should account for half of its sales volume for the year. In addition, luxury brand sales are likely to outgrow that for the Financial summary (CNY) broader China PV market due to the government’s purchase quota policy in Year to 31 Dec 15E 16E 17E top-tier cities. Also, Beijing Benz is projected to see the strongest growth in Revenue (m) 89,490 115,563 132,324 2016 among the luxury brands due to the favourable timing of its product Operating profit (m) 6,234 8,478 10,072 Net profit (m) 5,057 6,324 7,221 launches. Core EPS (fully-diluted) 0.674 0.842 0.962 EPS change (%) (4.2) 25.1 14.2 Losses at Beijing Brand poised to contract. With the launch of the Daiwa vs Cons. EPS (%) 12.4 7.4 10.9 PER (x) 9.7 7.7 6.8 company’s new X25, X35 and X55 SUVs in 2016, versus only the X65 Dividend yield (%) 4.5 5.6 6.4 launch in 2015, we believe Beijing Brand stands a good chance of reducing DPS 0.290 0.362 0.414 its losses, as the SUV is still the brand’s most profitable model despite its PBR (x) 1.4 1.2 1.1 declining gross margin. We forecast the JV’s losses to reduce to CNY2.3bn EV/EBITDA (x) 6.6 5.1 4.4 ROE (%) 14.6 16.6 17.0 in 2016E from CNY2.5bn in 2015E. Source: FactSet, Daiwa forecasts

What we recommend: We reiterate our Buy (1) rating and 12-month TP of HKD9.40, still based on a target PER of 9.5x, which is the industry’s past-3- year average. The stock is trading currently at a 2016E PER of 7.7x, and we expect it to be rerated back to close to peers’ average when we see evidence of the sales recovery at Beijing Hyundai extending into 2016. The key risk is weaker-than-expected new car sales.

How we differ: Our 2015-17E EPS are 7-12% higher than consensus, as we are more confident of a sales recovery at Beijing Hyundai, as well as a surge in sales for Beijing Benz.

See important disclosures, including any required research certifications, beginning on page 103

BAIC Motor (1958 HK): 4 January 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook BAIC: net profit forecasts We forecast BAIC to post sales growth of 29% YoY for (CNYm) 2016, after a 59% YoY rise for 2015. Firstly, we expect 8,000 80% 7,000 Beijing Benz’s sales volume growth to continue, projected 60% 6,000 to be 30% YoY, supported by new models. Secondly, 40% Beijing Hyundai has been on a recovery track after posting 5,000 rock-bottom sales growth in July 2015. In 2016, we 4,000 20% 3,000 forecast a 10.6% YoY increase in sales volume, benefitting 0% 2,000 from new product launches and better buying sentiment. (20%) Thirdly, Beijing Brand looks likely to reduce its losses 1,000 0 (40%) incurred. Overall, we forecast BAIC’s net profit to increase 2010 2011 2012 2013 2014 2015E 2016E by 14-25% YoY 2016-17E. Net profit (LHS) YoY Growth (RHS)

Source: Company, Daiwa forecasts

Valuation BAIC: 1-year forward PER (x) BAIC stock is trading currently at a 2016E PER of 7.7x, (PER) which is well below the industry’s past-3-year average PER 13 of 9.5x, and also below the stock’s own average PER of 9x 12 11 since listing in January 2015. With a sales volume recovery 10 for Beijing Hyundai and strong growth for Beijing Benz, we 9 expect BAIC to be rerated back to the industry average 8 PER over the next 12 months. 7 6

Jul-15

Apr-15 Oct-15

Jan-15 Jun-15

Feb-15 Mar-15

Dec-15 Aug-15 Sep-15 Nov-15 May-15 PER +1 SD Average PER -1 SD Source: Company, Daiwa forecasts

Earnings revisions BAIC: Bloomberg-consensus EPS forecast revisions Our 2015-17E EPS are 7-12% higher than consensus, as (CNY) we are more confident about a sales recovery for Beijing 1.20 Hyundai, as well as a surge in sales volume for Beijing 1.10 Benz. We expect the consensus to start revising up its 1.00 earnings for BAIC when it sees signs that the sales 0.90 recovery at Beijing Hyundai is sustainable, as well as 0.80 continuous strong sales-volume growth for Beijing Benz. 0.70 0.60

0.50

Jul-15

Oct-15 Apr-15

Jan-15 Jun-15

Mar-15 Feb-15

Nov-15 Aug-15 Sep-15 Dec-15 May-15 2015E 2016E

Source: Bloomberg

BAIC Motor (1958 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Volume - Beijing Brand (unit) n.a. 24,000 78,000 202,000 309,000 314,000 420,000 480,000 Volume - Mercedes Benz (unit) n.a. 93,000 103,000 116,000 145,000 249,000 323,000 372,000 Volume - Hyundai (unit) n.a. 740,000 860,000 1,031,000 1,120,000 1,042,000 1,152,000 1,226,000 Volume growth - Beijing Brand (%) n.a. n.a. 225.0 159.0 53.0 1.6 33.8 14.3 Volume growth - Mercedes Benz (%) n.a. n.a. 10.8 12.6 25.0 71.7 29.7 15.2 Volume growth - Hyundai (%) n.a. n.a. 16.2 19.9 8.6 (7.0) 10.6 6.4

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Beijing Motor n.a. 1,916 3,520 6,847 12,434 11,340 13,967 15,488 Beijing Benz n.a. n.a. n.a. 5,934 43,937 78,151 101,596 116,835 Other Revenue n.a. n.a. n.a. 0 0 0 0 0 Total Revenue n.a. 1,916 3,520 12,782 56,370 89,490 115,563 132,324 Other income n.a. 99 732 496 1,418 1,769 969 1,213 COGS n.a. (1,888) (3,688) (12,367) (47,387) (73,915) (94,228) (107,633) SG&A n.a. (753) (1,536) (3,520) (9,102) (11,110) (13,826) (15,832) Other op.expenses n.a. 0 0 0 0 0 0 0 Operating profit n.a. (627) (972) (2,609) 1,299 6,234 8,478 10,072 Net-interest inc./(exp.) n.a. (82) (158) (474) (533) (635) (708) (660) Assoc/forex/extraord./others n.a. 3,297 4,835 6,147 5,932 4,316 4,879 5,030 Pre-tax profit n.a. 2,588 3,704 3,065 6,698 9,915 12,648 14,442 Tax n.a. (21) (226) (114) (857) (1,983) (2,530) (2,888) Min. int./pref. div./others n.a. 32 (61) (237) (1,331) (2,875) (3,794) (4,333) Net profit (reported) n.a. 2,598 3,417 2,714 4,511 5,057 6,324 7,221 Net profit (adjusted) n.a. 2,598 3,417 2,714 4,511 5,057 6,324 7,221 EPS (reported)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962 EPS (adjusted)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962 EPS (adjusted fully-diluted)(CNY) n.a. 0.535 0.683 0.484 0.703 0.674 0.842 0.962 DPS (CNY) n.a. 0.000 2.999 0.322 0.303 0.290 0.362 0.414 EBIT n.a. (627) (972) (2,609) 1,299 6,234 8,478 10,072 EBITDA n.a. (474) (779) (1,790) 3,663 9,306 12,362 14,812

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax n.a. 2,588 3,704 3,065 6,698 9,915 12,648 14,442 Depreciation and amortisation n.a. 153 193 818 2,364 3,072 3,885 4,740 Tax paid n.a. (10) (8) (258) (1,365) (1,983) (2,530) (2,888) Change in working capital n.a. (250) 237 721 1,282 1,642 5,294 3,442 Other operational CF items n.a. (3,498) (4,750) (6,802) (6,717) (3,341) (3,841) (3,992) Cash flow from operations n.a. (1,017) (624) (2,457) 2,262 9,305 15,457 15,743 Capex n.a. (4,258) (5,659) (7,236) (11,785) (13,102) (14,362) (14,501) Net (acquisitions)/disposals n.a. (800) (328) 3,775 (2,691) 0 0 0 Other investing CF items n.a. 2,608 298 6,394 4,535 4,357 3,237 3,659 Cash flow from investing n.a. (2,449) (5,690) 2,933 (9,941) (8,745) (11,125) (10,841) Change in debt n.a. 2,549 5,998 7,194 7,396 2,000 2,000 (2,000) Net share issues/(repurchases) n.a. 1,500 3,003 6,132 7,910 0 0 0 Dividends paid n.a. 0 (1,500) (212) (2,273) (2,279) (2,174) (2,719) Other financing CF items n.a. (2,001) (115) 141 (210) (975) (1,038) (1,038) Cash flow from financing n.a. 2,048 7,386 13,254 12,822 (1,253) (1,212) (5,757) Forex effect/others n.a. 0 0 0 0 0 0 0 Change in cash n.a. (1,419) 1,072 13,730 5,143 (693) 3,119 (855) Free cash flow n.a. (5,275) (6,283) (9,692) (9,524) (3,797) 1,094 1,243 Source: FactSet, Daiwa forecasts

BAIC Motor (1958 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment n.a. 1,818 2,891 16,790 21,923 21,230 24,349 23,494 Inventory n.a. 441 835 7,479 11,068 17,264 22,009 25,140 Accounts receivable n.a. 155 527 6,004 6,422 13,424 17,334 19,849 Other current assets n.a. 2,047 4,841 3,490 4,905 5,510 5,986 6,292 Total current assets n.a. 4,461 9,094 33,763 44,319 57,428 69,678 74,775 Fixed assets n.a. 2,899 7,151 24,755 34,218 44,251 54,759 64,577 Goodwill & intangibles n.a. 4,076 5,025 11,012 13,598 13,596 13,566 13,508 Other non-current assets n.a. 10,365 10,513 15,866 17,723 17,682 19,325 20,695 Total assets n.a. 21,801 31,782 85,396 109,859 132,957 157,327 173,555 Short-term debt n.a. 3,851 4,008 9,273 18,574 20,025 21,136 21,869 Accounts payable n.a. 472 1,493 11,112 14,978 21,435 27,326 31,214 Other current liabilities n.a. 3,354 1,787 16,535 17,948 25,484 32,909 37,682 Total current liabilities n.a. 7,677 7,288 36,920 51,500 66,945 81,371 90,764 Long-term debt n.a. 2,533 8,069 15,122 13,935 15,935 17,935 15,935 Other non-current liabilities n.a. 292 413 2,300 2,455 2,455 2,455 2,455 Total liabilities n.a. 10,501 15,770 54,342 67,890 85,335 101,761 109,155 Share capital n.a. 5,000 5,462 6,382 7,508 7,508 7,508 7,508 Reserves/R.E./others n.a. 5,859 10,336 17,310 25,847 28,625 32,775 37,276 Shareholders' equity n.a. 10,859 15,798 23,692 33,355 36,133 40,283 44,784 Minority interests n.a. 441 215 7,362 8,614 11,489 15,284 19,616 Total equity & liabilities n.a. 21,801 31,782 85,396 109,859 132,957 157,327 173,555 EV n.a. 44,101 47,775 51,150 53,965 61,026 63,170 65,720 Net debt/(cash) n.a. 4,566 9,185 7,606 10,586 14,730 14,722 14,310 BVPS (CNY) n.a. 2.234 3.159 4.221 4.443 4.813 5.365 5.965

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. n.a. 83.7 263.2 341.0 58.8 29.1 14.5 EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 154.0 32.8 19.8 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. 379.8 36.0 18.8 Net profit (YoY) n.a. n.a. 31.5 (20.6) 66.2 12.1 25.1 14.2 Core EPS (fully-diluted) (YoY) n.a. n.a. 27.8 (29.2) 45.3 (4.2) 25.1 14.2 Gross-profit margin n.a. 1.4 n.a. 3.2 15.9 17.4 18.5 18.7 EBITDA margin n.a. n.a. n.a. n.a. 6.5 10.4 10.7 11.2 Operating-profit margin n.a. n.a. n.a. n.a. 2.3 7.0 7.3 7.6 Net profit margin n.a. 135.6 97.1 21.2 8.0 5.7 5.5 5.5 ROAE n.a. 47.9 25.6 13.7 15.8 14.6 16.6 17.0 ROAA n.a. 23.8 12.8 4.6 4.6 4.2 4.4 4.4 ROCE n.a. n.a. n.a. n.a. 2.0 7.9 9.5 10.2 ROIC n.a. (3.9) (4.4) (7.9) 2.5 8.7 10.2 10.8 Net debt to equity n.a. 42.0 58.1 32.1 31.7 40.8 36.5 32.0 Effective tax rate n.a. 0.8 6.1 3.7 12.8 20.0 20.0 20.0 Accounts receivable (days) n.a. 14.8 35.3 93.2 40.2 40.5 48.6 51.3 Current ratio (x) n.a. 0.6 1.2 0.9 0.9 0.9 0.9 0.8 Net interest cover (x) n.a. n.a. n.a. n.a. 2.4 9.8 12.0 15.3 Net dividend payout n.a. 0.0 438.9 66.6 50.5 43.0 43.0 43.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 2.2 2.5 Source: FactSet, Daiwa forecasts

Company profile

BAIC Motor is the second-largest Hong Kong-listed passenger vehicle manufacturer by volume. The company's manufacturing business operates under 3 brands: self-owned Beijing Motor, 51%- owned Beijing Benz, and 50%-owned JV Beijing Hyundai. BAIC has a diverse product portfolio, including economy and premium cars, small CUVs and sedans, and large SUVs and MPVs.

BAIC Motor (1958 HK): 4 January 2016

2016 unit sales growth poised to accelerate Beijing Benz likely to continue to shine in 2016 Sales growth YTD in 2015 is unrivalled in the luxury segment Luxury brands are Year-to-date to November 2015, Beijing Benz’s sales had increased by 93% YoY, chiefly outperforming the China because of new model launches last year, namely the C-class sedan and GLA SUV, both PV market, with Beijing of which were available for sale in August 2014. This is in contrast to other luxury brands, Benz enjoying the such as BMW and Audi, which had relatively unattractive pipelines during the period. fastest sales growth Another reason was the increase in demand for luxury brands in China on the back of the among them government’s purchase quota scheme, whereby buyers have to bid for the limited number of licences available. In our view, those who could afford it would favour a luxury car because they can only obtain a quota by bidding, and if they can buy only one car, they would likely prefer a luxury car.

Luxury brands outgrowing overall market in China PV Beijing Benz: outperforming other luxury brands YTD 2015 (Sales Unit) (YoY %) (YoY %) (YoY %) 120,000 60% 170% 170% 100,000 40% 120% 120% 80,000

60,000 20% 70% 70% 40,000 0% 20% 20% 20,000

0 (20%) -30% -30%

Luxury brands monthly sales (LHS) Luxury brands YoY (RHS) Beijing Benz BMW Brilliance FAW VW Audi China overall PV YoY (RHS) Source: CAM Source: CAM Note: Luxury brands include Benz, BMW, VW Audi, Buick Cadillac, Volvo and Infiniti

2016 new model launches to boost sales further Beijing Benz should Beijing Benz’s product offering remains strong for 2016. Two models, namely the GLC maintain fast sales SUV and E-class sedan, look likely to become the new sales drivers. The GLC was already growth in 2016 due to its launched in late November 2015, and is expected to replace the current GLK SUV, which strong pipeline was launched in 2012. Meanwhile, the E-class sedan is expected to be available in early 2016, and features a newer design to the existing E-class, which was launched in 2010 and facelifted in 2013. Moreover, domestic luxury brand peers Brilliance BMW and FAW VW Audi are not planning to launch any new generation models of a similar type in 2016, so Beijing Benz should enjoy another year of strong sales growth in 2016.

Beijing Benz GLC peer comparison – mid size luxury SUV Auto OEM Model Length (mm) Price range (CNY ’000) Current/Past model launch date New model launch date Beijing Benz GLC 4656 396-579 Oct-2012 (GLK) Nov-2015 BMW (Import) X3 4652 479-750 Mar-2011 (Launch); Jun-2014 (Facelift) 2016-17 (TBC) FAW VW Audi Q5 4629 250-429 Apr-2010 (Launch); Apr-2013 (Facelift) N/A

Source: Companies, various media

Beijing Benz E-class peer comparison – full size luxury sedan Auto OEM Model Length (mm) Price range (CNY ’000) Current/Past model launch date New model launch date Beijing Benz E-class 5055 398-798 Jun-2010 (Launch); Aug-2013 (Facelift) Early-2016 Brilliance BMW 5-Series 5021 436-779 Aug-2010 (Launch); Sep-2013 (Facelift) 2017 FAW VW Audi A6 5015 383-743 Mar-2012 2016 (TBC, Facelift)

Source: Companies, various media

BAIC Motor (1958 HK): 4 January 2016

Beijing Hyundai to recover in 2016 Coming back after the trough in 2015 New model launch and Beijing Hyundai’s sales volumes have been the weakest in 2015 than they have been for 3 discounts helped Beijing years. In the year to October, its sales volume had declined by 9% YoY, versus 9-20% YoY Hyundai’s sales volumes growth over the past 3 years. In particular, July 2015 seems to mark the trough, when to recover in 2H15 Beijing Hyundai posted a 32% YoY decline in sales volumes. The main reason was the overall sluggish sentiment in the market, coupled with the company’s lack of new models in the mass market in 1H15. However, after July, its sales started to pick up again, driven by its new generation Tucson SUV, more discounts being offered and a recovery in China’s broad PV market.

Beijing Hyundai: sales volumes Beijing Hyundai: sales portfolio (Sales Unit) (YoY %) (Sales mix %) 30% 100% 100% 120,000 20% 100,000 80% 80% 10% 80,000 0% 60% 60% 60,000 -10% 40% 40% 40,000 -20% 20% 20% 20,000 -30%

0 -40% 0% 0%

Jul-14 Jul-15

Jul-15 Jul-14

Apr-15 Oct-14 Oct-15

Jan-15 Jun-15

Feb-15 Mar-15

Oct-14 Apr-15 Oct-15

Jan-15 Jun-15

Dec-14 Aug-14 Sep-14 Nov-14 Aug-15 Sep-15 Nov-15

May-15

Mar-15 Feb-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 May-15 Beijing Hyundai sales (LHS) Beijing Hyundai YoY (RHS) Verna Elantra Langdong Elantra - Old gens Sonata Overall China PV YoY (RHS) Other Sedans Tucson Other SUVs Source: CAM Source: CAM

Should outperform the market in 2016 New model launches Historically, Beijing Hyundai’s sales trend is closely correlated with China’s overall PV should help Beijing market, mainly because Beijing Hyundai’s product offering has a similar composition to that Hyundai’s sales bottom of the overall market. Examples include its SUV mix and small-engine car mix. With out in 2H15 China’s overall PV market set to recover in 2016 on the back of the purchase tax cut (see the sector report for a detailed discussion) to 12% YoY according to our forecasts, we expect better buying sentiment overall in the market which would benefit Beijing Hyundai.

Also, Beijing Hyundai’s new models, including the full-year impact of the Tucson SUV and launch of the Elantra Langdong in 1Q16, which is the latest generation of the Elantra sedan, would provide an incremental source of support for sales growth. Therefore, with the low base in 2015, we forecast Beijing Hyundai’s sales growth to reach 10.6% YoY for 2016, higher than the market average of 12% YoY.

Beijing Hyundai: close resemblance to the China PV market Beijing Hyundai: new models China PV Beijing Volks- Model Segment Launch date market Hyundai Honda Toyota wagen Tucson SUV Sep-2015 SUV mix 29.0% 26.4% 42.0% 20.7% 13.4% Elantra Langdong Compact Sedan 2016 (Mar) Executive/Luxury 5.8% 6.9% 1.4% 2.4% 14.8% Equus Full size Sedan 2H15 (Dec) model mix (Sonata) (Crosstour) (Crown and Land Cruiser) (Audi) Sonata PHEV ver. Plug-in Hybrid Sedan 2016 Small-engine car mix 67.7% 66.5% 19.4% 57.9% 67.6%

Source: CAM Source: Company, various media Note: as of YTD-2015

BAIC Motor (1958 HK): 4 January 2016

Beijing Brand should see losses recede in 2016 Sluggish sales in 2015 New sedan models have In 2015, despite Beijing Brand, the self-owned brand of BAIC, launching several new been unable to help models, sales have been relatively soft, with YTD-November growth of just 3.1% YoY. The Beijing Brand in 2015 main reason was that the new models have been mostly sedans, namely the Senova CC and Senova D80, which failed to provide growth momentum as the sedan segment itself is weak. Thus, sales volume for Beijing Brand’s sedan segment has fallen by 23.2% YoY YTD.

On the other hand, new models in the SUV segment, namely the Senova X65, have been selling well, giving rise to a 265% increase in sales volume for Beijing Brand’s SUV segment in the year to November 2015. In addition, the Wevan M20, which is priced as low as CNY33-59,000, has also been a hit, posting YTD growth of 77% YoY.

However, according to BAIC’s management, Beijing Brand will still incur losses for the company in 2015, with no reduction in the magnitude of losses, due to higher promotional expenses and downward trending ASPs. As such, we forecast Beijing Brand to post a net loss of CNY2.5bn for 2015.

Beijing Brand: sales volumes Beijing Brand: sales portfolio (Sales Unit) (YoY %) (Sales mix %) (Sales mix %) 40,000 100% 100% 60% 30,000 80% 80% 20% 20,000 60% 60%

-20% 10,000 40% 40%

0 -60% 20% 20% Jul-14

Jul-15 0% 0%

Oct-14 Apr-15 Oct-15

Jan-15 Jun-15

Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 May-15

Beijing Brand monthly sales (LHS) Beijing Brand YoY (RHS)

Jul-14 Jul-15

Oct-14 Apr-15 Oct-15

Jan-15 Jun-15

Mar-15

Feb-15

Nov-14 Sep-15 Aug-14 Sep-14 Dec-14 Aug-15 Nov-15 China overall PV YoY (RHS) Sedan SUV MPV CrossoverMay-15 NEV

Source: CAM Source: Company

SUV models to improve profitability in 2016E We expect SUV models However, in 2016, we believe Beijing Brand should return to better growth, with the help of to help Beijing Brand more new launches in the SUV segment including the X25, X35 and X65. This should reduce its losses in 2016 offset the weak profitability of its sedan models. Moreover, Beijing Brand’s NEV is also projected to maintain high growth. However, the loss from Beijing Brand is likely to continue, as the management revealed that the breakeven sales unit should be around 600k units annually. Given that we are now projecting a 33.9% YoY growth in 2016, or total sales of 420k units, Beijing Brand is still far from breakeven. As such, we estimate a loss of CNY2.3bn in 2016E.

Beijing Brand new models Model Segment Launch date Senova X65 Mid-size SUV (4654mm) Mar-2015 Senova X25 Small SUV (4110mm) Nov-2015 Senova X55 Compact SUV (4405mm) Dec-2015 Senova X35 Small SUV Mar-2016 BJ40 5-door ver. Compact/Mid SUV 2H-2016 BJ80 Mid-size SUV (4765mm) 2H-2016

Source: Company, various media

BAIC Motor (1958 HK): 4 January 2016

Valuation and recommendation PER valuation should at Valuation looks undemanding least catch up with peers’ average, as we We reiterate our Buy (1) rating on BAIC and 12-month TP of HKD9.40, based on a target project higher-than-peer PER of 9.5x, which is the industry’s past-3-year average. The stock is trading currently at a EPS growth 2016E PER of just 7.7x, which we consider to be undemanding given our expectation of a sales recovery at Beijing Hyundai, continuous strong sales growth from Beijing Benz, and a loss reduction at Beijing Brand. Our 2015-17E EPS are 7-12% higher than the Bloomberg consensus, as we expect more upward earnings revisions in the next 6 months to boost sentiment toward the stock. We believe BAIC should trade at least on a par with the industry’s past 3-year average.

BAIC: PER bands (PER) 13 12 11 10 9 8 7 6 5 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 PER +1 SD Average PER -1 SD

Source: Company, Daiwa forecasts

Risks Stimulus policy not fully benefitting Beijing Benz Less exposure to small The tax reduction stimulus policy announced by the State Council in late-September is only engine cars may limit the applicable to PVs with engine sizes smaller than or equal to 1.6L. However, only 19% of growth of Beijing Benz Beijing Benz’s sales are derived from this sub-segment, versus the industry average of 67.7%. Therefore, the additional demand induced by this policy may not benefit Beijing Benz as much as its peers, which could lead to downside risk to our forecasts if more-than- expected buyers care about the 5% tax reduction and choose smaller-sized engine cars than those Benz makes.

Beijing Benz: YTD 2015 sales by engine size C-class engine size <=1.6L 27.8% engine size >1.6L 72.2% E -class engine size <=1.6L 0.0% engine size >1.6L 100.0% GLA engine size <=1.6L 63.9% engine size >1.6L 36.1% GLK engine size <=1.6L 0.0% engine size >1.6L 100.0% Beijing Benz total engine size <=1.6L 19.1% engine size >1.6L 80.9%

Source: CAM Note: Only 2L and 3L engine size model available for E-class and GLK; same for the upcoming GLC

Loss reduction at Beijing Brand not certain Loss reduction from The losses incurred by Beijing Brand, the proprietary brand of BAIC, have dragged down Beijing Brand remains a BAIC’s earnings in recent years. In 2014, this segment lost CNY2.4bn. For 2015, question mark management initially targeted the loss to narrow by CNY800m (to around CNY1.6bn). However, the loss now is more likely to be in the region of CNY2.5bn, based on our projections. For 2016, even though we project an increase in sales volume, which we forecast will lead to a scaling up of production and therefore a lower loss of CNY2.3bn, we still see a risk that margin erosion will impact its operation. Such erosion will come about

BAIC Motor (1958 HK): 4 January 2016

because Beijing Brand plans to launch 3 new models in the SUV segment, where competition is keen and many OEMs have been cutting prices to secure sales. If Beijing Brand has to follow this trend to achieve sales growth, its margins would be hampered and the much-needed reduction in losses may not materialise.

Hong Kong Consumer Discretionary 4 January 2016

(1211 HK) BYD BYD

Target price: HKD47.00 (from HKD56.00) Share price (28 Dec): HKD42.40 | Up/downside: +10.8%

Beneficiary of accelerating investment in NEVs Kelvin Lau th (852) 2848 4467  China likely to accelerate NEV investment in 13 FYP (2016-20) [email protected]  BYD would be a beneficiary of policy support Brian Lam (852) 2532 4341  But competition from other OEMs set to rise long term; Outperform (2) [email protected]

What's new: We believe the China Government will accelerate its Forecast revisions (%) investment in charging facilities nationwide over the next 5 years from Year to 31 Dec 15E 16E 17E 2016, in order to increase the popularity of new energy vehicles (NEVs) in Revenue change 9.4 12.3 10.8 Net profit change (1.3) (15.8) (11.7) China. However, in the long term, we see more local OEMs entering the Core EPS (FD) change (1.3) (15.8) (11.7) NEV market, which would intensify competition in this segment. Source: Daiwa forecasts

What's the impact: In our view, the policy guidelines announced by the Share price performance government on 17 November regarding the development of charging (HKD) (%) facilities for NEVs in China from 2015 to 2020 set out a detailed target and 60 175 methodology to improve the current bottleneck of charging facilities in the 51 151 43 128 country. If implemented, the guidelines would be positive for BYD’s new-car 34 104 sales over the next 3 years. 25 80 Dec-14 Mar-15 Jun-15 Sep-15 However, at the same time, we expect more local OEMs to produce pure BYD (LHS) Relative to HSI (RHS) electric vehicles (PEVs) in order to lower the blended fuel consumption for their brands to meet government standards by 2020 requiring a 34% 12-month range 25.15-59.30 improvement in fuel consumption as compared to 2015. Market cap (USDbn) 14.97 3m avg daily turnover (USDm) 42.19 Shares outstanding (m) 2,737 We are revising up our 2015-17E revenue after the acceleration in sales Major shareholder Mr. Wang Chuan-fu (23.1%) volume growth we saw for BYD’s NEVs year-to-date to October. However, we are cutting our 2015-17E EPS by 1-16% as a result of revising down Financial summary (CNY) our EBIT margin forecasts for the automobile business from 5-7% to 5-6%, Year to 31 Dec 15E 16E 17E and for the handset business from 6.5% to 5-6% due to increasing Revenue (m) 84,840 109,921 124,240 Operating profit (m) 3,231 4,069 5,500 competition from NEVs and weakening demand for handsets. As such, we Net profit (m) 1,327 2,512 3,674 lower our SOTP-based 12-month target price to HKD47 from HKD56. Core EPS (fully-diluted) 0.522 0.918 1.342 EPS change (%) n.a. 75.7 46.3 What we recommend: We reiterate our Outperform (2) rating on BYD as Daiwa vs Cons. EPS (%) (36.6) (4.7) 8.3 PER (x) 67.8 38.6 26.4 we believe the company would benefit from increasing investment in Dividend yield (%) 0.0 0.0 0.0 charging facilities. However, we see competition in the NEV segment DPS 0.000 0.000 0.000 intensifying as more local OEMs start producing PEVs over the next 5 PBR (x) 2.3 2.1 2.0 EV/EBITDA (x) 13.3 11.2 9.1 years. The key risks are weaker-than-expected sales due to more fierce ROE (%) 3.9 5.7 7.7 competition and slower-than-expected development of charging facilities. Source: FactSet, Daiwa forecasts

How we differ: Our 2015E EPS is 37% lower than the Bloomberg- consensus forecast as we exclude the one-off disposal gain. Our 2016E EPS is 5% lower than consensus, while our 2017E EPS is 8% higher, as we are more optimistic about BYD’s NEV sales in 2017 once the charging infrastructure has been improved.

See important disclosures, including any required research certifications, beginning on page 103

BYD (1211 HK): 4 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook BYD: adj. net profit and growth (2010-17E) We look for continued strong EPS growth of 46-76% YoY (CNYm) in 2016-17, due to the favourable outlook for NEV 4,000 1600% shipments and low base for BYD’s production. We 3,500 1400% 3,000 1200% forecast the company’s NEV sales volume to rise by 80% 1000% 2,500 YoY in 2016, which is in line with our expectation for 800% 2,000 market growth for the year. However, we only forecast a 600% 1,500 21% YoY increase in BYD’s new NEV sales in 2017, lower 400% than market growth of 50% YoY, due to more model 1,000 200% 500 launches by competitors. 0% 0 (200%) 2010 2011 2012 2013 2014E 2015E 2016E 2017E Net Profit (LHS) Growth (YoY, RHS)

Source: Company, Daiwa forecasts

Valuation BYD: SOTP valuation We stick with our SOTP valuation methodology for BYD by (CNYm) Valuation Multiple (x) NAV 16E virtue of its diversified businesses. We apply a 2016E PBR Rechargeable batteries PBR 1.0x 11,967 Mobile handsets PER 8.0x 11,460 of 1.0x (unchanged) for its rechargeable batteries Autos – conventional PER 6.0x 4,556 business, and a new PER of 8.0x (previous 10.0x) for Autos – NEVs PER 30.0x 91,579 mobile handsets, 6.0x (previous 8.0x) for conventional Sub-total 119,562 - Net debt/cash (6,813) autos, and 30.0x (unchanged) for its NEV business. We - Minority interest (4,302) lower the PER for the mobile handset and conventional Equity value (CNYm) 108,447 autos businesses to maintain a discount of 20% among Exchange rate, 1HKD = x CNY 0.85 domestic peers due to its weaker brand. Equity value (HKDm) 127,585 Equity value/share (HKD) 47.00 Source: Daiwa forecasts

Earnings revisions BYD: consensus 2015-16E EPS revisions

The Bloomberg-consensus 2015-16 forecasts remained (CNY) quite stable until late September 2015, when forecasts 1.40 started to be revised up due we believe to the purchasing 1.20 tax cut which benefits BYD’s conventional autos business. 1.00 With China’s government looking like it will speed up 0.80 construction of NEV infrastructure, we see further upside 0.60 to 2017 consensus forecasts. 0.40 0.20

0.00

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Sep-15 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Nov-15 Dec-15

May-15 May-14 2015E 2016E

Source: Bloomberg

BYD (1211 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E BYD NEV volume (units) n.a. n.a. 3,344 3,142 20,859 68,160 122,648 148,703 Volume growth - NEV (%) n.a. n.a. n.a. (6.0) 563.9 226.8 79.9 21.2 Battery shipment (%) n.a. 0.8 1.2 7.4 (0.8) 1.0 0.0 1.0 Handset shipment (%) n.a. (4.8) (12.3) 13.4 23.9 10.0 8.0 6.0

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Rechargeable Battery n.a. 4,620 4,675 5,018 4,980 5,030 5,030 5,080 Mobile handset n.a. 19,557 17,155 19,459 24,116 26,528 28,650 30,369 Other Revenue n.a. 22,136 22,551 25,291 26,270 53,282 76,241 88,790 Total Revenue n.a. 46,312 44,381 49,768 55,366 84,840 109,921 124,240 Other income n.a. 846 718 651 950 1,378 1,785 2,017 COGS n.a. (39,445) (39,255) (43,252) (47,743) (73,041) (94,751) (106,193) SG&A n.a. (5,299) (4,717) (5,364) (6,694) (9,945) (12,886) (14,564) Other op.expenses n.a. 0 0 0 0 0 0 0 Operating profit n.a. 2,414 1,127 1,803 1,879 3,231 4,069 5,500 Net-interest inc./(exp.) n.a. (687) (812) (947) (1,292) (1,192) (764) (789) Assoc/forex/extraord./others n.a. 1 (25) (24) 287 1,650 0 0 Pre-tax profit n.a. 1,727 291 832 874 3,689 3,305 4,711 Tax n.a. (132) (78) (56) (134) (516) (463) (659) Min. int./pref. div./others n.a. (210) (132) (223) (306) (443) (331) (377) Net profit (reported) n.a. 1,385 81 553 434 2,730 2,512 3,674 Net profit (adjusted) n.a. 1,385 81 553 86 1,327 2,512 3,674 EPS (reported)(CNY) n.a. 0.598 0.035 0.235 0.179 1.074 0.918 1.342 EPS (adjusted)(CNY) n.a. 0.598 0.035 0.235 0.035 0.522 0.918 1.342 EPS (adjusted fully-diluted)(CNY) n.a. 0.598 0.035 0.235 0.035 0.522 0.918 1.342 DPS (CNY) n.a. 0.000 0.000 0.050 0.000 0.000 0.000 0.000 EBIT n.a. 2,414 1,127 1,803 1,879 3,231 4,069 5,500 EBITDA n.a. 5,091 4,383 5,336 6,092 8,049 9,554 11,639

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax n.a. 1,727 291 832 874 3,689 3,305 4,711 Depreciation and amortisation n.a. 2,678 3,256 3,533 4,212 4,817 5,485 6,139 Tax paid n.a. (344) (299) (246) (192) (516) (463) (659) Change in working capital n.a. 1,179 1,132 (2,913) (6,106) 5,724 1,288 450 Other operational CF items n.a. 744 1,175 1,230 1,251 (360) 1,386 1,482 Cash flow from operations n.a. 5,985 5,555 2,436 38 13,354 11,002 12,121 Capex n.a. (8,942) (7,150) (5,764) (8,578) (8,767) (9,099) (9,449) Net (acquisitions)/disposals n.a. (280) 2,573 80 480 575 0 0 Other investing CF items n.a. 299 (32) (168) 197 0 0 0 Cash flow from investing n.a. (8,923) (4,610) (5,851) (7,901) (8,192) (9,099) (9,449) Change in debt n.a. 3,733 (3,085) 3,232 5,314 2,327 2,327 2,327 Net share issues/(repurchases) n.a. 1,368 0 0 3,342 15,000 0 0 Dividends paid n.a. 0 0 0 (124) 0 0 0 Other financing CF items n.a. (366) 1,868 1,276 (1,262) (1,290) (1,386) (1,482) Cash flow from financing n.a. 4,736 (1,217) 4,508 7,271 16,037 941 845 Forex effect/others n.a. 0 0 0 0 0 0 0 Change in cash n.a. 1,798 (271) 1,093 (592) 21,199 2,843 3,518 Free cash flow n.a. (2,958) (1,595) (3,328) (8,540) 4,587 1,902 2,673 Source: FactSet, Daiwa forecasts

BYD (1211 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment n.a. 3,737 3,487 4,511 3,950 25,149 27,993 31,511 Inventory n.a. 6,596 7,345 8,221 9,978 14,608 18,950 21,239 Accounts receivable n.a. 9,782 9,937 13,135 22,435 25,452 32,976 37,272 Other current assets n.a. 2,665 2,555 4,099 4,471 6,027 7,351 8,107 Total current assets n.a. 22,780 23,324 29,966 40,834 71,236 87,270 98,128 Fixed assets n.a. 30,723 33,659 34,147 36,379 39,935 42,217 44,331 Goodwill & intangibles n.a. 6,689 7,983 9,623 10,821 12,290 13,622 14,817 Other non-current assets n.a. 6,689 5,042 4,279 5,974 5,974 5,974 5,974 Total assets n.a. 66,881 70,008 78,015 94,009 129,436 149,083 163,251 Short-term debt n.a. 11,342 11,288 16,172 19,173 19,173 19,173 19,173 Accounts payable n.a. 17,236 19,933 22,293 25,851 36,521 47,376 53,097 Other current liabilities n.a. 6,050 6,008 4,879 7,998 12,256 15,880 17,948 Total current liabilities n.a. 34,628 37,228 43,344 53,022 67,950 82,428 90,218 Long-term debt n.a. 7,079 7,341 8,652 10,979 13,306 15,633 17,960 Other non-current liabilities n.a. 1,194 1,294 1,162 1,113 1,113 1,113 1,113 Total liabilities n.a. 42,901 45,863 53,158 65,114 82,369 99,174 109,291 Share capital n.a. 2,354 2,354 2,354 2,476 2,737 2,737 2,737 Reserves/R.E./others n.a. 18,770 18,843 19,356 22,890 40,358 42,870 46,544 Shareholders' equity n.a. 21,125 21,197 21,710 25,366 43,095 45,607 49,281 Minority interests n.a. 2,856 2,947 3,147 3,529 3,972 4,302 4,679 Total equity & liabilities n.a. 66,881 70,008 78,015 94,009 129,436 149,083 163,251 EV n.a. 113,946 114,119 119,355 125,295 106,866 106,680 105,866 Net debt/(cash) n.a. 14,684 15,143 20,313 26,202 7,329 6,813 5,622 BVPS (CNY) n.a. 9.127 9.004 9.222 10.245 15.744 16.661 18.003

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. n.a. (4.2) 12.1 11.2 53.2 29.6 13.0 EBITDA (YoY) n.a. n.a. (13.9) 21.7 14.2 32.1 18.7 21.8 Operating profit (YoY) n.a. n.a. (53.3) 60.0 4.2 71.9 25.9 35.2 Net profit (YoY) n.a. n.a. (94.1) 579.6 (84.5) 1,446.3 89.2 46.3 Core EPS (fully-diluted) (YoY) n.a. n.a. (94.2) 579.6 (84.9) 1,375.7 75.7 46.3 Gross-profit margin n.a. 14.8 11.6 13.1 13.8 13.9 13.8 14.5 EBITDA margin n.a. 11.0 9.9 10.7 11.0 9.5 8.7 9.4 Operating-profit margin n.a. 5.2 2.5 3.6 3.4 3.8 3.7 4.4 Net profit margin n.a. 3.0 0.2 1.1 0.2 1.6 2.3 3.0 ROAE n.a. 13.1 0.4 2.6 0.4 3.9 5.7 7.7 ROAA n.a. 4.1 0.1 0.7 0.1 1.2 1.8 2.4 ROCE n.a. 11.4 2.6 3.9 3.5 4.7 5.0 6.3 ROIC n.a. 5.8 2.1 4.0 3.2 5.1 6.3 8.1 Net debt to equity n.a. 69.5 71.4 93.6 103.3 17.0 14.9 11.4 Effective tax rate n.a. 7.7 26.8 6.8 15.3 14.0 14.0 14.0 Accounts receivable (days) n.a. 38.5 81.1 84.6 117.2 103.0 97.0 103.2 Current ratio (x) n.a. 0.7 0.6 0.7 0.8 1.0 1.1 1.1 Net interest cover (x) n.a. 3.5 1.4 1.9 1.5 2.7 5.3 7.0 Net dividend payout n.a. 0.0 0.0 21.3 0.0 0.0 0.0 0.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. 4.7 2.0 2.8 Source: FactSet, Daiwa forecasts

Company profile

Listed in Hong Kong in 2002, BYD is engaged in the R&D, manufacture and distribution of automobiles, rechargeable batteries and mobile phone components. It owns 65% of BYD Electronics (285 HK, Not rated). BYD focuses on autos (especially NEVs), rechargeable batteries (lithium-ion and nickel batteries used in mobile phones and other portable electronic devices), as well as mobile-phone components and its assembly mobile phones business (casings, keypads, mobile-phone designs, etc.).

BYD (1211 HK): 4 January 2016

Benefits from accelerating investment in NEVs More policy support More charging facilities to be built Government to speed up According to the NDRC, by the end of 2014, there were only 780 charging stations, NEV infrastructure providing 31,000 charging poles, to serve more than 120,000 EVs owned in China. The investment ratio of EVs to charging poles is far below the targeted 1:1 level. Therefore, the government recently announced guidelines to develop charging facilities for NEVs in 2015- 20, targeting to build up to 4.8m charging poles and 120,000 charging stations to cater to the expected 5m NEVs in China by 2020. Hence, we believe the problem of inadequate charging poles, which is the biggest obstacle for potential EV buyers, would be mostly solved by 2020. A more favourable operating environment for NEVs would benefit BYD, which is the leading NEV player focusing on plug-in hybrid electric vehicles (PHEVs).

Benefits from Apart from improving the charging facilities, other supportive measures such as lifting the replacement demand licence restriction on NEVs, and requiring property developers to reserve spaces to build from public transport charging poles in the future, are also included in the document. Also, on 29 September, the government announced a policy requiring that aged public transport vehicles that do not meet emissions standards be replaced by NEVs by 2017. Such a policy should help boost the sales volume of BYD’s PEV bus, the K9. As such, we look for the sales volume for K9 buses to increase by 30-50% YoY in 2016-17.

Chinese government’s latest supportive measures to promote NEVs Policies Details Licence & traffic restrictions Lift purchase restrictions and traffic controls for NEVs but retain curbs on conventional internal combustion engine (ICE) vehicles Charging stations New residential complexes must be built with chargers or reserved spaces for future installations At least 10% of public parking facilities should be built with chargers or spaces reserved for future installations Every 2,000 EVs owned should be matched by 1 public charging station In Beijing, 18% of parking space at all new residential complexes should be built for EVs To build a nationwide charging network for up to 5m EVs by 2020

Source: CAAM

Auto stimulus policy details Subject Policy details Cars with engine sizes of <=1.6L Purchase tax reduced from 10% to 5% New energy vehicles New car sales restriction removed in all cities Old cars with excessive pollutant emissions To be replaced by NEVs by 2017, especially for public transport

Source: PRC State Council

Policy effect may bring sales forward to 2016 We believe lower According to a notice issued by the Ministry of Industry and Information Technology (MIIT) subsidies from 2017 and in April 2015 regarding subsidies on NEVs, the Chinese Government plans to gradually a reduction in the reduce subsidies for buyers from 2017-20, except for those on fuel-cell vehicles (FCVs). purchase tax at end-2016 The government plans to cut subsidies for 2017-18 by 20% from the 2016 level, and by will lead to buyers 40% for 2019-20 from the 2016 level, except for those on FCVs. bringing forward their purchases to 2016 We believe the cuts in subsidies due to kick in by 2017 may urge more buyers to bring forward their purchases to 2016, which would benefit BYD in the near term. Also, at the moment, the purchase tax reduction is valid until the end of 2016, which could urge buyers to purchase BYD’s conventional cars in 2016. In the year to November, about 60% of BYD’s sales comprised models with an engine size of below 1.6L, which would benefit from the purchase tax cut.

BYD (1211 HK): 4 January 2016

China: subsidies on NEPVs in 2016 Pure electric driving range, R Subsidies (CNY/vehicle) 100 ≤ R < 150 150 ≤ R < 250 R ≥ 250 R ≥ 50 Pure EV 25,000 45,000 55,000 ／ Plug-in hybrid electric vehicle ／／／ 30,000

Source: NDRC China: subsidies on FCVs in 2016 Vehicle types Subsidies (CNY/vehicle) Fuel-cell PV 200,000 Fuel-cell light CV 300,000 Fuel-cell mid-large CV 500,000

Source: NDRC

BYD: YTD-November sales by engine size Engine size % <1.6L 61% >1.6L 24% EV 15%

Source: CAM, Daiwa forecasts

Strong product pipeline support for 2016 New products to contribute sales Diversified product Since May 2015, BYD has launched 4 new NEV models (including facelifts) in total. The portfolio should help company currently owns a diversified NEV portfolio making up sedans, SUVs, MPVs and BYD see broad-based even coaches with different powertrains, such as EVs and PHEVs. We believe such a growth diversified product range proves the company’s technological know-how in NEV manufacturing, and stands it in good stead to benefit from the growth of NEVs in different segments.

BYD: comparison of select NEV models Pure electric Battery Fuel consumption List price Model Segment Powertrain range (km) (kWh) (L/ 100km) ('000 CNY) Launch date F3DM Sedan PHEV 60 17 2.7 169.8 Dec-2008 K9 Coach EV ≥250 324 N.A. N.A. Sep-2010 Qin Sedan PHEV 50 10 - 11 2.0 209.8 - 219.8 Dec-2013 Denza Sedan EV 253 47.5 N.A. 369 Nov-2014 e6 (facelift) MPV EV 400 82 N.A. 309.8 - 369.8 May-2015 Tang SUV PHEV 60 13 2.4 251.3 - 279.8 Jun-2015 e5 (Surui EV) Sedan EV 256 43 N.A. N.A. Sep-2015 Song SUV PHEV 55 - 70 10 - 15 2.0 - 2.5 280 Aug-2015 Shang MPV PHEV 50-70 10 - 14 2.2 - 2.4 N.A. Nov-2015

Source: Company, MIIT, Baidu Note: list prices exclude subsidies from the government

Well-positioned in the For 2016, we expect BYD to launch 2 more NEV models, including the Qin EV and PHEV SUV segment SUV Yuan. The Yuan model is likely to be better received by customers as it belongs to the popular SUV segment, and offers a new choice of mini SUV. As a reference, unit sales of the newly launched Song SUV (August 2015) reached 2.3k in just 3 months after launch, while sales of the Tang SUV remained at 3k for 2 consecutive months since its launch in June. Hence, we assume monthly unit sales of the Yuan SUV will reach 2,000 in 2016, and further ramp up to 2,800/month in 2017.

BYD: NEV product pipeline in 2016 or later Pure electric Battery Fuel consumption Listed price Model Segment Powertrain range (km) (kWh) (L/ 100km) ('000 CNY) Launch date Yuan SUV PHEV 70 TBC TBC Est. <300k 1H2016 Qin EV Sedan EV 252-300 43 - 48 N.A. N.A. 2016

Source: company, MIIT, Baidu

BYD (1211 HK): 4 January 2016

BYD: Song SUV BYD: Yuan SUV

Source: company Source: PCAuto

BYD: Shang MPV BYD: Qin EV sedan

Source: PCAuto Source: AutoSohu

Non-PV segment to contribute in the long run Other vehicles to According the company’s “7+4” planning, BYD targets 7 markets including PVs, public support longer-term buses, inter-city transportation, taxis, sanitation vehicles, logistics trucks and construction sales-volume and vehicles, and 4 markets for special-duty vehicles, including warehouses, airports, mines earnings growth and ports. Apart from PVs, the Chinese Government will likely continue to promote the usage of EVs in different areas, especially electric buses, taxis, and sanitation and logistics vehicles through supportive policies such as promoting bulk purchases by different government offices. BYD has showcased several products in these segments at various events (eg, several auto shows, Victory Day Parade); hence, we believe the company is one of the major policy winners in this aspect.

BYD: T3 logistics electric vehicle BYD: T8 sanitation electric vehicle cleaning Tiananmen Square before the 2015 China Victory Day Parade

Source: AutoSina Source: Company

BYD (1211 HK): 4 January 2016

More challenges in the long run Challenges from competitors As the China Government plans to increase the fuel efficiency requirement for OEMs by 34% by 2020 as compared to 2015, many OEMs are likely to launch NEVs into the market over the next 5 years. In the coming 5-year plan, NEVs are the major focus for many OEMs. For example, Geely targets NEV sales to reach 90% of its total new-car sales with more than 1m new-car sales by 2020. Even though BYD has a technology advantage over other local OEMs, especially in terms of its capability to produce its own batteries, we expect competition in the NEV segment to heat up over the next 5 years.

NEV strategic plans of some major China auto OEMs Company Plans Geely NEV sales targeted to reach 90% of total sales by 2020, 65% of which would be PHEVs and hybrid EVs while the remaining 35% would be pure EVs. GWM According to market news, GMW's first EV sedan, C30EV, is targeted to be launched in 2016. The company also aims to launch its first hybrid SUV model in 2017. GAC For the next 5 years, GAC will invest CNY2bn to develop NEVs and launch 5 new NEV models including sedans and SUVs.. Changan Changan has invested CNY1bn to develop NEVs since 2001 and currently plans to invest CNY18bn more in the next 10 years. The company aims to introduce 34 new NEV products to the market over the next decade and targets accumulated NEV sales to reach 100,000 units by 2020 and 2,000,000 units by 2025, and expects to see NEVs account for 10% of total sales. SAIC The company will invest CNY20bn to develop EV products and aims to launch 30 NEV products consisting of 13 pure EV models and 17 hybrid EV models. It targets sales volume for NEVs to reach 600,000 units in 2020, of which 200,000 units would come from self- owned brands.

Source: cnstock.com

Summary of fuel-efficiency targets for major markets km/l (mpg) US EU Japan China S. Korea 2005 12.4 (29.0) 15.8 (37.2) 16.7 (39.3) 11.0 (25.9) 12.3 (28.9) 2010 13.9 (33.0) 18.0 (42.3) 19.6 (46.1) 14.4 (33.9) 14.8 (34.8) 2015 15.4 (36.0) 19.7 (46.3) 21.0 (49.4) 15.7 (36.9) 16.7 (39.3) 2020 19.9 (47.0) 25.8 (60.7) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3) 2025 23.9 (56.0) 30.8 (72.4) ~ 35.0 (82.3) 23.4 (55.0) 21.3 (50.1) 16.7 (39.3) 5-YoY (%) US EU Japan China S. Korea 2010 12.1% 13.9% 17.4% 30.9% 20.3% 2015 10.8% 9.4% 7.1% 9.0% 12.8% 2020 29.2% 31.0% 11.4% 35.7% 0.0% 2025 20.1% 19.4%~35.7% 0.0% 0.0% 0.0% Improvement (%) US EU Japan China S. Korea 2010-25 71.9% 71.1%~94.4% 19.4% 47.9% 12.8% 2015-25 55.2% 56.3%~77.7% 11.4% 35.7% 0.0%

Source: ICCT Note: No official fuel efficiency guidance has been provided for Korea (from 2015), Japan (from 2020), or China (from 2020)

BYD (1211 HK): 4 January 2016

Mild growth from handset business No high hopes in the During its recent results briefing, BYD guided for only moderate sales-volume growth in its handset segment handset business for 2015, which should not come as a surprise due to weakening handset demand growth in China. However, management also highlighted that the photovoltaic business seems to be improving in terms of profitability. We remain cautious about this segment and assume a flat margin trend in 2015-17. We look for revenue generated by the handset business to increase by 6-8% YoY in 2016-17.

BYD: mobile handset revenue and growth (2009-17E) (CNY mn) (%) 35,000 50% 30,000 40% 25,000 30% 20,000 20% 15,000 10% 10,000 0% 5,000 -10% 0 -20% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Revenue (LHS) YoY Growth (RHS) Source: Company, Daiwa forecasts

BYD (1211 HK): 4 January 2016

Valuation

We continue to apply an We stick with our SOTP valuation methodology for BYD considering its diversified SOTP valuation for BYD businesses. We still apply a 2016E PBR of 1.0x to its battery business, but now assign a but lower our multiples lower PER of 8.0x (previous 10.0x) for its mobile handset business due to the weak for its handset and sentiment towards this business. For its conventional auto business, we now apply a conventional auto 2016E PER of 6.0x (previous 8.0x) which remains at the low end of the 2016E PER of 7- businesses 11x (excl. BYD) that we set for the auto OEMs under our coverage. We believe this segment is benefitting from the purchase tax cut, as about 60% of BYD’s sales are for engines of <1.6L, according to our estimates. However, we would also highlight that this segment is characterised by fierce competition, which could put further pressure on BYD’s profitability.

For its NEV business, we believe the segment will remain the most important earnings driver for the company, and we assume BYD will remain one of the leading NEV OEMs in China. We now forecast the company’s NEV unit sales to rise by 21-80% YoY in 2016-17. Given such a high growth rate and lack of market comparables, we believe a valuation of a 30.0x PER is reasonable and appropriate for the segment.

Reiterate Outperform (2) However, we now expect more keen market competition in the NEV segment than we had as we are still positive previously after reviewing several major OEMs’ NEV strategies, and believe this fierce on the overall outlook competition will put more pressure on the margins for BYD’s NEV business. Nevertheless, for the company we are revising up our 2015-17E revenue based on the company’s strong unit sales growth recorded in the year to November 2015. However, we are cutting our 2015-17E EPS by 1-16% after revising down our EBIT margin forecasts for the automobile business over the same period from 5-7% to 5-6%, and the handset business from 6.5% to 5-6% due to increasing competition in the NEV space and weakening demand for handsets. As such, we are lowering our SOTP-based 12-month target price to HKD47 from HKD56. We reiterate our Outperform (2) rating as we remain positive on the sector outlook over the long term.

BYD: SOTP valuation Valuation Multiple (x) NAV 16E (CNY m) Rechargeable Battery P/B 1.0x 11,967 Mobile handset P/E 8.0x 11,460 Auto - Conventional P/E 6.0x 4,556 Auto - NEV P/E 30.0x 91,579 Sub-total 119,562 - Net debt/cash (6,813) - Minority interest (4,302) Equity value (CNYm) 108,447 Exchange rate, 1HKD = x CNY 0.85 Equity value (HKDm) 127,585 Equity value/share (HKD) 47.00 Current price (HKD) 42.4 Potential share price upside/downside (%) 10.8%

Source: Daiwa forecasts

BYD (1211 HK): 4 January 2016

Risks Diminishing subsidies may be problematic Subsidies will be At current production and sales levels, and taking into account the subsidies on NEVs, the important, at least for margins on NEVs are comparable to those on conventional vehicles. We believe a ramp- the next few years up in unit sales of NEVs would help BYD lower costs in the future. However, if the government decides to cut the subsidies earlier than expected or impose stricter standards, such as a higher electric drive range for NEVs, this would severely hurt BYD’s profitability. But we see a low probability of this scenario playing out.

Delays in infrastructure completion Delays on the Even though we believe the government is determined to speed up the construction of EV- completion of related infrastructure, such as charging facilities, several factors could slow down the infrastructure would process, including a lack of interest from private capital and difficulties in land acquisition greatly lower buyers’ and conversion. We believe a delay in infrastructure construction would be one of the willingness to purchase major risks hindering NEV sales, despite the government potentially lengthening the NEV subsidy scheme in response.

Keen competition within the industry Market competition may As we have pointed out, many major OEMs recently revealed long-term NEV strategies. lead to price cuts We believe some are very aggressive; for instance, Geely targets to increase the proportion of sales from NEVs to 90% by 2020 (from <5% in 2015E). Therefore, due to this intensifying market competition, the overall profitability in this segment is likely to be adversely affected.

Drop in handset shipments may hinder performance Lower handsets margins We assume a stable margin trend for BYD’s handset business. However, if global demand would be a drag on for handsets is weaker than expected in 2015-17, this segment could drag down the overall earnings company’s overall P&L account.

China Consumer Discretionary 4 January 2016

(489 HK) Dongfeng Motor Group Dongfeng Motor Group

Target price: HKD12.20 Share price (28 Dec): HKD10.64 | Up/downside: +14.7%

Initiation: attractive valuation and decent pipeline Kelvin Lau (852) 2848 4467  Valuation looks attractive vs. peers [email protected]  Rich pipeline from Dongfeng Nissan and Dongfeng Honda Brian Lam (852) 2532 4341  Initiate coverage with Outperform (2) rating and TP of HKD12.20 [email protected]

Investment case: We think Dongfeng Motor’s (DFM) current valuation Share price performance looks attractive and believe the stock is a good proxy for the strong (HKD) (%) turnaround in industry PV growth that we have seen during 4Q15. Among 14 110 DFM’s major brands, we expect Dongfeng Nissan and Dongfeng Honda to 12 99 show the strongest sales volume growth in 2016. 11 88 9 76

7 65 Catalysts: Dongfeng Nissan to be major sales driver in 2016. Apart Dec-14 Mar-15 Jun-15 Sep-15 from a pick-up in sales volume for its SUV Murano, we expect the recent Dongfeng M (LHS) Relative to HSI (RHS) launches of its other SUVs, such as the Qashqai (launched in October) and T70X (September), and its sedan the Lannia (October), to be well received, 12-month range 7.05-13.98 making a meaningful full-year unit sales impact in 2016. In 2016, we Market cap (USDbn) 11.82 forecast average monthly sales of 8,000 units for the Qashqai, 6,000 units 3m avg daily turnover (USDm) 25.21 for the T70X, 4,500 units for the Murano and 8,000 for the Lannia, and we Shares outstanding (m) 8,616 Major shareholder Dongfeng Motor Corporation (66.9%) look for Dongfeng Nissan to achieve an overall 17% YoY rise in new-car sales, much higher than the 3% YoY increase in 2015. Financial summary (CNY) Year to 31 Dec 15E 16E 17E Dongfeng Honda to record decent sales growth. We expect Dongfeng Revenue (m) 124,293 115,645 109,312 Honda to record a 15% YoY rise in new-car sales in 2016, with SUVs (such Operating profit (m) 2,859 3,007 3,061 Net profit (m) 12,021 13,201 13,591 as the XR-V and CR-V) the major driver – we expect sales volume to rise Core EPS (fully-diluted) 1.395 1.532 1.577 by 22% YoY for the XR-V and 8% YoY for the CR-V. Also, new sedans such EPS change (%) (6.4) 9.8 3.0 as the Greiz (launched in November) and the new Civic (launching in 2016) Daiwa vs Cons. EPS (%) (1.2) (0.4) (1.4) PER (x) 6.4 5.8 5.6 should contribute to new-car sales for the year. Dividend yield (%) 2.3 2.6 2.7 DPS 0.209 0.230 0.237 M&A would be a bonus share-price catalyst. We believe the PRC PBR (x) 0.9 0.8 0.7 Government might extend its ongoing sector-wide consolidation strategy to EV/EBITDA (x) 7.0 5.8 4.2 ROE (%) 15.2 14.7 13.4 the auto sector, especially to the big four auto makers (SAIC Motor, Source: FactSet, Daiwa forecasts Changan Motor, FAW Motor [all 3 not rated] and DFM), to support local brand development. Similar to other recent SOE M&A activity, we see limited synergies for DFM (if it were to merge with another automaker) but it could provide an additional share-price catalyst.

Valuation: We initiate coverage of DFM with an Outperform (2) rating and 12-month TP of HKD12.20, based on a target 2016E PER of 7.0x, inline with its past-3-year average. The stock is now trading at a 2016E PER of 5.8x, which is also lower than the average of the Hong Kong-listed China auto OEMs at 6-11x. We think the current valuation has priced in DFM’s discount for being an auto conglomerate. We expect improving investor sentiment on the auto industry in 2016 to help DFM trade at par with its past-3-year average valuation.

Risks: The key risk to our call would be weaker-than-expected new-car sales, especially for Dongfeng Nissan and Dongfeng Honda.

See important disclosures, including any required research certifications, beginning on page 103

Dongfeng Motor Group (489 HK): 4 January 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook DFM: net profit and net profit growth We expect DFM’s 2015 reported net profit to drop by 6% (CNYm) (YOY% ) YoY, mainly due to a CNY2.3bn before-tax valuation gain 16,000 25% from acquiring a 14.1% equity interest in PSA Peugeot 14,000 20% Citroën Group in 2014. In 2016, we forecast net profit to 12,000 15% 10% rise by 10% YoY, due to rising unit sales for Dongfeng 10,000 5% 8,000 Nissan on its strong SUV pipeline (including the Murano, 0% 6,000 Qashqui and Venucia T70X), as well as for its new sedan (5%) the Lannia. However, we forecast only a 3% YoY rise in net 4,000 (10%) profit in 2017, due mainly to the removal of the purchase- 2,000 (15%) tax cut, which we expect to end at the end of next year, 0 (20%) 2011 2012 2013 2014 2015E 2016E 2017E and a weaker pipeline. Net profit (LHS) Growth YoY (RHS) Source: company, Daiwa forecasts

Valuation DFM: 12-month forward PER (x) (2012-YTD 2015) The stock is now trading at 2016E PER of 5.8x, which is (PER) below its past-3-year average of 7.0x. Although the stock 11 10 has long been trading at a discount to the other Hong 9 Kong-listed China auto OEMs due to DFM’s diversified 8 business, we still see the current valuation, which is at the 7 lower end of the stock’s past-3-year average, as attractive. 6 On improving investor sentiment for the sector after the 5 implementation of the purchase-tax cut, we believe our 4

target PER of 7.0x is reasonable and achievable. 3

Jul-12 Jul-13 Jul-14 Jul-15

Jan-12 Jan-13 Jan-14 Jan-15

Mar-12 Mar-13 Mar-14 Mar-15

Sep-13 Sep-12 Nov-12 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: Bloomberg, Daiwa forecasts; note: YTD through 28 December 2015

Earnings revisions DFM: Bloomberg-consensus EPS forecast revisions The Bloomberg consensus EPS forecasts for DFM began (CNY) to be revised up in late September 2015, which we believe 1.9 was mainly due to the implementation of the purchase-tax 1.8 cut. We estimate that the tax cut will boost the company’s 1.7 2016E PV sales volume by 8% YoY, but this is likely to 1.6 create a high base for 2017. Further, as we believe the 1.5 entry- and mid-level market is crowed with new models, we 1.4 expect the margins of DFM’s major JVs to suffer from 1.3 fierce market competition. Overall, our 2015-17E EPS are 1.2

in line with consensus.

Jul-15

Apr-15 Oct-15

Jun-15 Jan-15

Feb-15 Mar-15

Dec-15 Nov-15

Aug-15 Sep-15 May-15 2015E 2016E Source: Bloomberg

Dongfeng Motor Group (489 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E DF Nissan sales volume (units) n.a. 809,000 773,000 926,000 952,000 981,000 1,144,000 1,202,000 DF PSA sales volume (units) n.a. 404,000 440,000 550,000 704,000 699,000 713,000 691,000 DF Honda sales volume (units) n.a. 255,000 282,000 321,000 308,000 398,000 458,000 455,000 DF Nissan sales volume growth n.a. n.a. (4.4) 19.8 2.8 3.0 16.6 5.1 (YoY %) DF PSA sales volume growth n.a. n.a. 8.9 25.0 28.0 (0.7) 2.0 (3.1) (YoY %) DF Honda sales volume growth n.a. n.a. 10.6 13.8 (4.0) 29.2 15.1 (0.7) (YoY %)

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Commercial vehicles 33,418 35,473 2,784 24,527 42,627 36,030 32,427 30,806 Passenger vehicles 88,143 94,921 3,254 11,905 36,671 86,011 80,556 75,475 Other Revenue 834 1,047 52 831 1,656 2,252 2,662 3,031 Total Revenue 122,395 131,441 6,090 37,263 80,954 124,293 115,645 109,312 Other income (2,462) (3,425) (168) (1,448) (1,727) (2,113) (1,966) (1,858) COGS (96,033) (105,051) (5,736) (32,582) (70,244) (109,378) (101,768) (96,194) SG&A (9,997) (9,916) (1,518) (4,447) (7,415) (9,943) (8,905) (8,198) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 13,903 13,049 (1,332) (1,214) 1,568 2,859 3,007 3,061 Net-interest inc./(exp.) 350 652 420 374 329 473 376 459 Assoc/forex/extraord./others 330 660 10,064 11,552 12,786 10,911 12,257 12,582 Pre-tax profit 14,583 14,361 9,152 10,712 14,683 14,242 15,640 16,102 Tax (3,006) (3,401) (45) (109) (1,365) (1,324) (1,454) (1,497) Min. int./pref. div./others (596) (479) (15) (75) (473) (897) (985) (1,014) Net profit (reported) 10,981 10,481 9,092 10,528 12,845 12,021 13,201 13,591 Net profit (adjusted) 10,981 10,481 9,092 10,528 12,845 12,021 13,201 13,591 EPS (reported)(CNY) 1.274 1.216 1.055 1.222 1.491 1.395 1.532 1.577 EPS (adjusted)(CNY) 1.274 1.216 1.055 1.222 1.491 1.395 1.532 1.577 EPS (adjusted fully-diluted)(CNY) 1.274 1.216 1.055 1.222 1.491 1.395 1.532 1.577 DPS (CNY) 0.180 0.180 0.150 0.180 0.200 0.209 0.230 0.237 EBIT 13,903 13,049 (1,332) (1,214) 1,568 2,859 3,007 3,061 EBITDA 17,913 16,200 (1,120) (432) 3,078 4,693 5,285 5,854

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 14,583 14,361 9,152 10,712 14,683 14,242 15,640 16,102 Depreciation and amortisation 4,010 3,151 212 782 1,510 1,834 2,278 2,793 Tax paid (2,379) (4,315) (52) (206) (1,144) (1,324) (1,454) (1,497) Change in working capital 2,665 (2,505) (1,297) (8,825) (1,643) (3,684) (4,376) (4,508) Other operational CF items (976) (1,476) (10,771) (12,157) (14,391) (10,586) (11,846) (12,231) Cash flow from operations 17,903 9,216 (2,756) (9,694) (985) 482 242 659 Capex (5,054) (7,019) (555) (1,332) (3,501) (3,800) (4,000) (4,500) Net (acquisitions)/disposals 92 (140) (310) 8,524 (10,183) 0 0 0 Other investing CF items (1,116) 6,624 5,634 10,790 12,988 8,067 8,642 8,703 Cash flow from investing (6,078) (535) 4,769 17,982 (696) 4,267 4,642 4,203 Change in debt (2,500) (701) (3,225) (145) 9,704 (3,000) (2,000) (2,000) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (776) (1,551) (1,551) (1,504) (1,551) (1,723) (1,803) (1,980) Other financing CF items (29) (937) 0 (257) 70 (324) (411) (351) Cash flow from financing (3,305) (3,189) (4,776) (1,906) 8,223 (5,047) (4,214) (4,331) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 8,520 5,492 (2,763) 6,382 6,542 (298) 670 531 Free cash flow 12,849 2,197 (3,311) (11,026) (4,486) (3,318) (3,758) (3,841) Source: FactSet, Daiwa forecasts

Dongfeng Motor Group (489 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 25,889 31,381 10,288 16,670 23,212 22,914 23,584 24,115 Inventory 13,935 12,511 1,198 4,245 9,735 13,672 13,217 12,657 Accounts receivable 17,897 19,600 3,199 14,738 15,871 17,401 20,816 19,676 Other current assets 24,616 20,524 12,215 21,969 20,339 25,204 27,463 29,665 Total current assets 82,337 84,016 26,900 57,622 69,157 79,192 85,079 86,113 Fixed assets 18,551 21,578 2,430 9,418 11,285 13,276 15,035 16,791 Goodwill & intangibles 4,021 4,686 743 4,943 5,349 5,324 5,287 5,237 Other non-current assets 5,713 7,253 32,293 44,015 59,682 62,525 66,140 70,020 Total assets 110,622 117,533 62,366 115,998 145,473 160,316 171,541 178,162 Short-term debt 13,638 15,971 2,697 17,597 29,256 28,579 29,661 26,713 Accounts payable 23,834 23,055 1,964 13,480 16,034 17,501 16,283 14,429 Other current liabilities 25,184 25,689 3,580 17,612 21,393 24,251 23,230 22,026 Total current liabilities 62,656 64,715 8,241 48,689 66,683 70,331 69,173 63,168 Long-term debt 6,289 2,820 0 0 350 350 350 350 Other non-current liabilities 341 414 122 3,275 2,988 2,988 2,988 2,988 Total liabilities 69,286 67,949 8,363 51,964 70,021 73,669 72,511 66,506 Share capital 35,943 44,843 52,626 61,584 72,106 72,106 72,106 72,106 Reserves/R.E./others 1,551 1,551 1,292 1,551 1,723 12,021 23,419 35,029 Shareholders' equity 37,494 46,394 53,918 63,135 73,829 84,127 95,525 107,135 Minority interests 3,842 3,190 85 899 1,623 2,520 3,506 4,520 Total equity & liabilities 110,622 117,533 62,366 115,998 145,473 160,316 171,541 178,162 EV 73,470 65,812 37,113 42,661 35,340 33,015 30,797 24,453 Net debt/(cash) (5,962) (12,590) (7,591) 927 6,394 6,015 6,427 2,948 BVPS (CNY) 4.352 5.385 6.258 7.328 8.569 9.764 11.087 12.434

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 33.4 7.4 (95.4) 511.9 117.3 53.5 (7.0) (5.5) EBITDA (YoY) 70.2 (9.6) n.a. n.a. n.a. 52.5 12.6 10.8 Operating profit (YoY) 77.9 (6.1) n.a. n.a. n.a. 82.3 5.2 1.8 Net profit (YoY) 75.7 (4.6) (13.3) 15.8 22.0 (6.4) 9.8 3.0 Core EPS (fully-diluted) (YoY) 75.7 (4.6) (13.3) 15.8 22.0 (6.4) 9.8 3.0 Gross-profit margin 21.5 20.1 5.8 12.6 13.2 12.0 12.0 12.0 EBITDA margin 14.6 12.3 n.a. n.a. 3.8 3.8 4.6 5.4 Operating-profit margin 11.4 9.9 n.a. n.a. 1.9 2.3 2.6 2.8 Net profit margin 9.0 8.0 149.3 28.3 15.9 9.7 11.4 12.4 ROAE 33.9 25.0 18.1 18.0 18.8 15.2 14.7 13.4 ROAA 11.2 9.2 10.1 11.8 9.8 7.9 8.0 7.8 ROCE 25.1 20.1 n.a. n.a. 1.7 2.6 2.5 2.3 ROIC 32.7 27.5 (3.2) (2.2) 1.9 3.0 2.8 2.5 Net debt to equity net cash net cash net cash 1.5 8.7 7.2 6.7 2.8 Effective tax rate 20.6 23.7 0.5 1.0 9.3 9.3 9.3 9.3 Accounts receivable (days) 45.1 52.1 683.2 87.8 69.0 48.9 60.3 67.6 Current ratio (x) 1.3 1.3 3.3 1.2 1.0 1.1 1.2 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 14.1 14.8 14.2 14.7 13.4 15.0 15.0 15.0 Free cash flow yield 16.7 2.9 n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Dongfeng Motor Group (DFM) is engaged in the manufacture and sale of autos, engines and auto parts, as well as offering other auto-related business, such as auto finance. Through its subsidiaries and JVs with various foreign brands, DFM has a wide range of product lines, including 42 major commercial vehicle models, 35 truck models and 7 for buses. It also had 51 passenger vehicles models, consisting of 31 for sedans, 7 MPVs and 13 SUVs, as at the end-1H15. DFM also has a leading position in China’s CV market, especially for medium- and heavy-duty trucks.

Dongfeng Motor Group (489 HK): 4 January 2016

Attractive valuation and decent pipeline Latest model launch means richer pipeline in 2016 Dongfeng Nissan should be the key revenue driver Focus will be on the Compared to the other OEMs in China, DFM had strong product launches in 2H15, which Qashqai, VenuicaT70X should mean better sales volume growth in 2016 compared to its peers. Of all the brands and Murano when it under DFM, we believe investors will focus the most on the success of the new car sales of comes to 2016 sales Dongfeng Nissan’s recently launched models, particularly the SUVs the Qashqai (launched volume growth in October) and the Venucia T70X (launched in September). We expect Dongfeng Nissan to account for about 50% of DFM’s net profit in 2015.

We expect sales volume for the Qashqai to reach 8,000 units/month in 2016, while for the Venucia T70X, combined with the original T70, we expect sales to reach 6,000 units/month. Another recently launched SUV model, the Murano, which was launched in August 2015, was selling at around 2,500 units/month in November YTD. We assume average monthly sales of the Murano to increase to 4500 units/month in 2016.

Major sedan sales In terms of DFM’s sedan models, we believe the new Lannia, which was launched in late should be driven by the October 2015, will record 8,000 units/month in 2016, and that the Venucia R50X, which Sylphy, Teana and was launched in early September, will see sales of around 2,000 units/month. We think the Lannia in 2016 most popular Nissan sedans will the Sylphy and Teana, for which we estimate average monthly sales of around 27,500 units (flat YoY) and 9,350 units (up 2% YoY), respectively, in 2016. Overall, we forecasts Dongfeng Nissan’s total PV sales to record 17% YoY growth.

Dongfeng Nissan: Qashqai SUV Dongfeng Nissan: Venucia R50X Hatchback

Source: company Source: company

Dongfeng Nissan: Venucia Lannia Sedan Dongfeng Nissan: Venucia T70X SUV

Source: company Source: company

Dongfeng Motor Group (489 HK): 4 January 2016

Dongfeng Honda should record stable growth Greiz to compete with We expect Honda’s new sedan models such as the Greiz and the Civic to boost Dongfeng GAC Honda’s new City Honda’s sales volume growth in 2016. Given the incremental sales volume pattern that we model have seen for the Honda New City (under GAC Honda), which was launched in August 2015, we expect the Greiz (launched on 7 November) to record around 3,000 units/month next year.

We do not have high expectations, as both models (the GAC Honda City and the Dongfeng Honda Greiz) target similar customers and were launched close together. Besides, the new Civic is likely to help total Civic sales improve to 4,000 units/month in 2H16 (we expect it to be launched in mid-2016) from 2,600 units /month for 2015, on our estimates. We believe the major sales volume drivers for Dongfeng Honda in 2016 will remain its SUV models, such as the CR-V (especially after the April 2015 facelift) and the XR-V (launched in December 2014). In 2016, we expect sales volume of 14,000 units/month for the CR-V and 12,000 units/month for the XR-V.

Dongfeng Honda: Greiz sedan Dongfeng Honda: existing Civic

Source: company Source: company

Comparison of Greiz, New City and New Civic Manufacturer Price of Launch date in China Average monthly average monthly Length (mm) Width (mm) Height (mm) Wheelbase top model sales in 2014 sales in 2Q15-3Q15 (mm) Greiz Dongfeng Honda CNY106.8k 7 Nov 15 n.a. n.a. 4,495 1,705 1,477 2,600 City GAC Honda CNY109.8k 28 Aug 15 4k 3k 4,450 1,695 1,477 2,600 Civic Dongfeng Honda *CNY167.2k 2H16 4k* 3k 4,630 1,798 1,415 2,700 Rear view Engine Front and Side airbags GPS navigation system Start-stop system VSA stability Hill-start Leather Air-filtering camera assist assist seating system Greiz Available Available Available Not Available Available Available Available Not Available Honda Earthdreams City Available Only equipped with Not Available Available Available Available Not Available Available 1.5L front airbags

Source: companies Note 1: *: sales refer to sales of the current model Note 2: Detailed configuration of the New Civic has not been released yet

Performance of other brands should continue to vary DPCA expected to record YoY decline in sales growth in 2016 Lack of new models for We think that the only new models to make any meaningful contribution to Dongfeng DPCA Peugeot Citroën Automobile’s (DCPA) sales volume in 2016 will be the recently launched Citroën C5 facelift (launched in October 2015), and the Peugeot 3008 facelift in 1H16. We expect sales of the C5 to reach 2,500 units/month and sales of the Peugeot 3008 to reach 6,100 units/month in 2016, compared to 2015 pre-facelift sales of around 2,000 units/month for the C5 and 5,500 units/month for the Peugeot 3008. However, we expect overall sales volume to be flat YoY, due to a lack of new models.

Dongfeng Motor Group (489 HK): 4 January 2016

DPCA: recently launched Citroën C5

Source: company

Dongfeng Renault’s Dongfeng Renault’s Kadjar could surprise on the upside Kadjar could turn out to Renault’s Kadjar SUV seems to have been selling well since it was first launched in France be an attractive model in in April 2015. The sales volume for this model was close to that of Nissan’s Qashqai. China in the long run However, we believe Renault is likely to have a home base advantage when it comes to sales and distribution in France, and we do not expect it to replicate this in China. We currently assume sales volume of 5,000 units/month in China by the end of 2016, assuming it will start to launch the Kadjar in the country in March 2016 (full-year 2016E average of 3,500 units/month). We expect the Kadjar to be less popular than the Qashqai, given that the Kadjar will be the first model to be launched by Dongfeng Renault (likely to be in March 2016). We believe this will rise to 8,000 units/month by the end of 2017, reaching average monthly sales of 6,500 units/month in 2017, as we are confident that the Renault brand will sell well in China, even though it will take more time to get full brand recognition among car buyers.

Renault: Kadjar SUV

Source: company

Dongfeng Motor Group (489 HK): 4 January 2016

Other share-price catalysts for DFM Improving sales volume growth on tax cut Better sector sentiment On 29 September 2015, the PRC Government announced several policies to support the should help DFM as well auto industry, including a cut in the purchase tax, from 10% to 5%, from 1 October 2015 until 31 December 2016 (applies to all cars with engines of 1.6L or less). Even though only around half of DFM’s models fall into this category (less than 1.6L engines), we think the tax cut boosted investor sentiment on the auto sector in October. We expect relatively better YoY sales growth for the industry in 2016 as a result of the cut, and believe DFM’s shares should also benefit from a rerating of the sector.

China and selected China OEM sales by engine size YTD 2015 November: China PV Small engines 68% Large engines 32% EV 1% Geely Small engines 79% Large engines 18% EV 3% BAIC Small engines 62% Large engines 37% EV 1% Great Wall Small engines 94% Large engines 6% EV 0% GAC Small engines 45% Large engines 55% EV 0% Brilliance BMW Small engines 34% Large engines 66% EV 0% Dongfeng Small engines 57% Large engines 43% EV 0% Changan Small engines 75% Large engines 25% EV 0%

Source: cars with small engines of 1.6L or below

M&A would be another share-price catalyst Any news on M&A With ongoing SOE reforms in China, the PRC government is aiming to reduce the number activity could boost of SOEs in some industries to improve efficiency and reduce losses. The railway- investor sentiment equipment players (CSR Corporation and CNR Corporation) have seen one merger so far (finalised in June 2015), while the state-owned shipping groups, COSCO Group and China Shipping Group and Sinotrans&CSC Group and China Merchants Group are also going through a restructuring and merger. We believe the auto sector, especially the big four auto makers (SAIC Motor, Changan Motor, FAW Motor and DFM), will be affected by consolidation. We believe the focus of any restructuring would be on how to improve the profitability of these companies’ self-owned auto brands. Similar to the other SOE mergers that we have seen, even though we expect only limited synergies, we would consider it a positive and thus a positive share-price catalyst, boosting investor sentiment on the stock.

Fraud investigation We believe the fraud On 2 November 2015, DFM announced that, according to the CPC Central Commission for investigation will have a Discipline Inspection, its executive director and president Mr Zhu Fushou was being limited impact on DFM’s investigated for serious disciplinary violations. With immediate effect, Mr Zhu was daily operation suspended from his role at DFM, and there is no news yet as to whether he has been charged. Even though this investigation may have raised concerns in the market about DFM’s corporate governance, we are not concerned that it will have any material impact on its business as it is an SOE, and we don't think the government will allow it to go bankrupt or face large penalties. We think this investigation could continue for the next 3 years and believe there could be news on the senior management of other SOEs being investigated for similar reasons.

Dongfeng Motor Group (489 HK): 4 January 2016

Therefore, in terms of DFM, we expect the market to become less reactive to any future news flow in the near term. We believe there could be a management reshuffle given Mr Zhu’s suspension, but that this is unlikely to have any material change on DFM’s business development and long-term strategy.

We expect little from commercial vehicle segment in 2016-17 Weak trade data leading We expect China’s trade data to remain weak in 2016. Daiwa’s Chief Economist Kevin Lai to lack of investor expects China exports to decline by 3.4% YoY and imports to decline by 6.4% YoY in 2016. confidence in CV As such, we believe the overall profitability of the logistics companies in China, especially segment freight-forwarding and transportation companies, to remain weak next year. This in turn leads us to believe that consumer confidence in the commercial vehicle (CV) segment will remain weak during the same period.

Also, without new emissions standard being implemented in China in the near term and, given that replacement orders were mostly made in 2014, we do not expect CV sales to pick up in 2016. Overall, we expect a 10% YoY decline in China CV sales in 2016 and a further 5% YoY decline in 2017. We expect DFM’s CV sales to record the same YoY declines for 2016-17E.

Dongfeng Motor Group (489 HK): 4 January 2016

Financial analysis Strong balance sheet, indicated by stable low gearing ratio We forecast DFM’s net DFMs’ net gearing ratio has been stable for the past few years, at lower than 10%. We debt-to-equity ratio to expect the ratio to be 7% in both 2015 and 2016 and 3% in 2017, mainly due to substantial remain low in 2015-17 dividend from JV brands. However, we think this will be partly offset by DFM’s increasing capex, as management guides for an increase in overall production capacity to 3.1m vehicles by the end of 2016 (vs. guidance of 2.7m as at end-2015].

DFM: net debt-to-equity ratio 10% 9% 9% 8% 7% 7% 7% 6% 6% 5% 4% 3% 3% 2% 1% 1% Net cash Net cash Net cash 0% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Source: company, Daiwa forecasts

Payout ratio stable in Although management has given no guidance on the company’s dividend policy for 2015 2009-14; we assume a or beyond, its payout ratio in 2009-14 was 12-15%. We expect management to maintain 15% ratio in 2015-17 the payout ratio in this range and assume a 15% payout ratio in 2015-17, which would translate into a 2015-16E yield of 2.3-2.6% at the current share price.

DFM: dividend per share and payout ratio (CNY) 0.25 15% 15% 16% 15% 15% 15% 15% 14% 14% 13% 0.20 14%

0.15 12% 13% 0.23 0.24 0.20 0.21 0.18 0.18 0.18 12% 0.10 0.15 11% 0.09 0.05 10% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E DPS (CNY, LHS) Payout ratio (%, RHS) Source: company, Daiwa forecasts

Mixed margin As DFM manufactures autos for several JV brands, including Japanese and European performance likely in brands, we believe the margins for these different brands will move in different directions 2015-17 as DFM based on individual product pipelines and product mixes. For Dongfeng Limited (mainly in manufactures different terms of its work in the manufacture and sales of Dongfeng Nissan), we believe its net brands, but overall net margin peaked at 9.6% in 2014, and think its net margin will decline gradually to 8.3% in margin should be stable 2017, due mainly to significant market competition in the mid-level auto market.

We expect a similar scenario for Dongfeng Honda and DPCA. We look for net margins to come down gradually to 8.8% in 2017 from 10.3% in 2014 for Dongfeng Honda and to 4.2% in 2017 from 5.1% in 2014 for DPCA. For DF Renault, we currently assume a net margin of 2% in 2016 and 4% in 2017. We expect this relatively low margin mainly as the Dongfeng Renault factory will still be in the early stages of production in its first 2 years of operation.

Dongfeng Motor Group (489 HK): 4 January 2016

DFM: net profit margin for major JVs 12%

10%

0% 2013 2014 2015E 2016E 2017E DFL DPCA DHAC DF Renault DFM Pro forma net margin

Source: company, Daiwa forecasts Note: DFL = Dongfeng Limited which owns Dongfeng Nissan; DPCA = Dongfeng PSA; DHAC = Dongfeng Honda

3Q15 results on an upward trend We expect earnings- In 3Q15, DFM’s revenue increased by 95% YoY, mainly due to the 100% consolidation of growth momentum to subsidiary DF PSA Sales Company. Investment income came in at CNY2,562m, up 3% continue in 4Q15 YoY. We believe the mild growth was due to a strong rebound in sales volume for Dongfeng Honda (+106% YoY), but was partly offset by weak sales performance at DPCA (-19% YoY). Overall, net profit increased by 22% YoY, which helped to narrow the net profit decline in 9M15 to 11% YoY, from a YoY decline of 19% YoY in 1H15.

We expect net profit in 4Q15 to grow at a similar pace, due to the impact of the 5% purchase-tax cut, as 57% of DFM’s sales volume is for cars with engines of 1.6L or less. We believe the October and November 2015 sales figures support our view of the 4Q15 growth trajectory. Dongfeng Honda recorded strong sales volume growth of 52% YoY in October and 99% YoY in November, while November sales for DPCA rose by 12% YoY and those for Dongfeng Nissan rose by 23% YoY. Overall, DFM’s November sales growth was 27% YoY, which was substantially higher than the company’s November YTD growth of 5.9% YoY and the auto industry’s November YTD growth of 6.1% YoY.

DFM: income statement summary (CNYm) PRC GAAP YoY % (Equity method) 3Q14 3Q15 1H14 1H15 9M14 9M15 3Q15 1H15 9M15 Revenue 14,317 27,913 34,365 69,066 48,682 96,979 95% 101% 99% Cost of sales (12,418) (23,833) (29,065) (59,445) (41,483) (83,277) 92% 105% 101% Investment income 2,477 2,562 6,317 5,892 8,794 8,454 3% -7% -4% Profit before tax 2,098 2,887 9,429 8,028 11,527 10,915 38% -15% -5% Net profit 1,994 2,430 8,500 6,885 10,494 9,315 22% -19% -11% EPS 0.23 0.28 0.99 0.80 1.22 1.08 20% -19% -11%

Source: company, Daiwa

Dongfeng Motor Group (489 HK): 4 January 2016

Valuation and recommendation Still undemanding even after recent rally Trading near low end of Since late August 2015, DFM shares have rebounded by more than 50%, we believe due past-3-year PER range partly to the implementation of the 5% purchase-tax cut. However, the stock is still trading at only a 2016E PER of 5.8x. Although DFM has long traded at a discount to its Hong Kong-listed China OEM peers due to the conglomerate nature of its business, the current valuation of 5.8x is undemanding as it is close to the low end of the stock’s past-3-year trading range of 4-9x.

Decent upside expected from current level Initiate with Outperform On the strong pipeline that we see for 2016, we believe DFM’s sales volume will (2) rating and target outperform the overall market, serving as a catalyst for a rerating of the stock. Hence, we price of HK12.20 consider the current share price as a good entry point for investors.

We initiate coverage of DFM with an Outperform (2) rating. We set a 12-month target price of HKD12.20 based on 7.0x our 2016E EPS, which is in line with its past-3-year average. We believe our target PER of 7.0x is reasonable as DFM is now trading near the low end of its past-3-year range, and because we see better-than-industry sales volume growth in the coming year. Given the recovering market sentiment in the sector due to the purchase- tax cut, we do not think it will be difficult for the valuation to bounce back to its past-3-year average. Our target price implies upside of 15% to our target price from current share price levels.

DFM: 12-month forward PER (x) (2012 – YTD 2015) (PER) 11 10 9 8 7 6 5 4

Jul-12 Jul-13 Jul-14 Jul-15

Jan-12 Jan-13 Jan-14 Jan-15

Mar-12 Mar-13 Mar-14 Mar-15

Sep-12 Nov-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: company, Daiwa forecasts

Risks Currency risk CNY depreciation a concern Currency exposure to We believe the recent CNY depreciation is likely to affect DFM’s profitability, as the EUR is a negative for the company imports certain auto parts and components from Japan and Europe given its JVs company, in our view, with the various Japanese and European brands. especially given the CNY depreciation The company has highlighted that for every 5% weakening in the CNY against the EUR, the company would record a CNY233m decrease in its after-tax profit. However, we believe the company’s exposure to currency risks caused by fluctuations in the Yen is less than it is for the Euro, as the localisation rate for its Japanese brand JVs is higher than for its European peers.

Dongfeng Motor Group (489 HK): 4 January 2016

Market risk Severe market competition could drag down margins DFM not immune to We believe competition in the China auto market is intensifying at a faster pace than the intensifying market market has expected. Especially for the SUV segment, we believe the OEMs are keen on competition fighting for market share, as indicated by their SUV pipelines and because they keep introducing more SUV models into the market.

Therefore, we believe possible price cuts and the resulting margin erosion could hurt DFM’s profitability. Furthermore, we think the fact that the luxury brands have started to introduce more entry- and mid-level models into the market could put even more pressure on DFM’s sales, given its high exposure to this segment.

Political risk Sino-Japan tensions could crimp margins Escalation in Sino-Japan We think DFM could be exposed to potential political risk due to ongoing tensions between tensions stands a risk China and Japan, given the company’s exposure to Japanese brands. In 2012, when China and Japan were in dispute over the Diaoyu Islands, the China OEMs with Japanese JVs, such as GAC and DFM, saw their sales slow significantly. Therefore, we believe the political climate between China and Japan could have an impact on the sales performance of DFM’s Japanese brands while potentially benefiting their competitors.

Further, political instability in other countries could affect export demand for Chinese domestic brands, especially as most of the local OEMs export to emerging countries, which are politically less stable than developed countries.

Unexpected macro slowdown could result in further deterioration of CV segment profitability

CV segment may be a drag CV segment could weigh CV sales are closely correlated with the macro environment, particularly trade flows. DFM’s on overall performance CV segment is likely to be adversely affected by the current China and global macroeconomic slowdown. Hence, we conservatively assume modest profitability for the segment. However, an unexpected “hard landing” for China’s economy would likely lead to the CV segment being a further drag on the company’s overall performance.

Dongfeng Motor Group (489 HK): 4 January 2016

Company background Diversified product range, with both PVs and CVs A leading manufacturer in the China PV market A leading China auto Listed in Hong Kong in 2005, Dongfeng Motor is engaged in the manufacture and sales of OEM, with a broad autos, engines and auto parts, and is involved in other auto-related businesses such as product range auto finance. In 2014, DFM was one among the largest manufacturers in the China PV market based on sales volume.

For its PV OEM business, DFM had 51 PV models, comprising 31 sedan models, 7 MPV models and 13 SUV models, as at the end-1H15. Its major products for the China market include well-recognised global brands such as Nissan, Infiniti, Honda, Peugeot, Citroen and Renault. Similar to its peers, besides manufacturing foreign brands, DFM also invests in and develops its own brand, namely Dongfeng Fengshen, which is run under the Dongfeng Passenger Vehicle Company.

DFM has a leading position in China’s CV market, especially for medium- and heavy-duty trucks. Through its subsidiaries and JVs with various foreign brands, DFM has a wide range of product lines, including 42 major commercial vehicle models, comprising 35 truck models and 7 bus models.

Major profit contributors Big 3 account for largest share of JV profit DFM’s own Dongfeng Fengshen is still loss-making. Its major profit contributors are its JVs with several foreign brands. In 2014, DFL (mainly in terms of its work in the manufacture and sales of Dongfeng Nissan), DPCA and DHAV accounted for 93% of the total share of DFM’s profit from joint ventures, while its total profit from JVs accounted for 83% of its net profit. We believe the distribution in 2015-17 will be similar.

DFM: profit share from JVs in 2014

20% DFL DPCA DHAC 58% Others 16%

Source: Company, Daiwa estimates Note: DFL = Dongfeng Limited which owns Dongfeng Nissan; DPCA = Dongfeng PSA; DHAC = Dongfeng Honda

Dongfeng Motor Group (489 HK): 4 January 2016

DFM: management profile Management Profile Mr. Xu Ping Mr. Xu has been the chairman of the board of directors of the company since 2005. He is also the chairman of the board of directors of Dongfeng Peugeot Citroën, Dongfeng Honda and Dongfeng Renault. Mr. Li Shaozhu Mr. Li is an executive director of the company. Mr. Li has more than 20 years’ business and management experience in the auto industry. Mr. Zhu Yanfeng Mr Zhu is the chairman of the Board, and assumed the role and duty of the president of DFM with effect from 2 November 2015, prior to the election of a new president of the company. Mr. Cai Wei Mr. Cai is the vice-president and the secretary of the board of directors of the company. He is a director of Dongfeng Peugeot Citroën, and the chairman of the board of directors of Dongfeng Honda Engine and Dongfeng Honda. Source: company

DFM: development milestones Year Event 2004 Dongfeng Motor Group Co., Ltd established. 2005 Dongfeng Motor Group Co., LTD listed on the Hong Kong Stock Exchange, with stock code 489. 2006 On 30 August 2006, Nissan Motor and DFM jointly signed an agreement in Wuhan to establish Dongfeng Nissan Auto Finance Co., Ltd, in 2007 in China. 2007 Dongfeng Motor Group Company Ltd awarded the title of “Most Influential Chinese Overseas Listed Company of 2006”. 2011 Acquired an equity interest in Dongfeng Yu'an to accelerate R&D for new EVs. 2013 DFM acquired the commercial vehicle and other businesses from Dongfeng Motor Corp and formed a new JV with Volvo to develop medium and heavy-duty commercial vehicles under the Dongfeng brand. 2013 DFM announced the restructuring plan for Sanjiang Renault, which was approved by the NDRC and a new JV, Dongfeng Renault, was formed by DFM and Renault S.A. 2014 DFM undertook to subscribe 69,866,666 PSA shares, representing around a 14% stake in PSA. 2014 DFM announced the establishment of Dongfeng Infiniti, a JV between DFM and Nissan Motor that is responsible for managing the sales operations of the Infiniti brand in China. Source: Company

DFM: organisational chart

Dongfeng Motor Corporation Public shareholders

66.86% 33.14% 25%

Dongfeng Yueda Kia Dongfeng Auto Group Co. (489.HK)

50% 50% 50% 50% 100% 55% 75% 44% 50% 25% 100%

Motor

Honda

Commercial Vehicle Commercial

Nissan Finance Auto Nissan

Dongfeng

Dongfeng Renault Dongfeng

Dongfeng Honda Engine Honda Dongfeng

Dongfeng LiuZhou Dongfeng

Dongfeng Motor Company Motor Dongfeng

Dongfeng Peugeot Citroen Peugeot Dongfeng

Dongfeng Peugeot Finance Peugeot Dongfeng

Dongfeng Honda Auto PartsAuto Honda Dongfeng

Dongfeng Pessenger Vehicle Pessenger Dongfeng

Dongfeng Dongfeng

100% 100%

Vehicle

Dongfeng Infiniti Dongfeng Dongfeng Nissan Passenger Nissan Dongfeng

Source: Company

Dongfeng Motor Group (489 HK): 4 January 2016

Dongfeng Nissan: Sunny Sedan Dongfeng Nissan: Sylphy Sedan

Source: Company Source: Company

Dongfeng Nissan: Teana Sedan Dongfeng Nissan: Qashqai SUV

Source: Company Source: Company

Dongfeng Nissan: X-Trail SUV Dongfeng Nissan: Murano SUV

Source: Company Source: Company

Dongfeng Motor Group (489 HK): 4 January 2016

Dongfeng Honda: Civic Sedan Dongfeng Honda: CR-V SUV

Source: Company Source: Company

Dongfeng Honda: XR-V SUV Dongfeng Infiniti: Q50L Sedan

Source: Company Source: Company

Dongfeng Infiniti: QX50 SUV Dongfeng PSA: Citroen C3-XR SUV

Source: Company Source: Company

Dongfeng Motor Group (489 HK): 4 January 2016

Dongfeng PSA: Citroen Elysee Sedan Dongfeng PSA: Citroen C4L Sedan

Source: Company Source: Company

Dongfeng PSA: Peugeot 301 Sedan Dongfeng PSA: Peugeot 308 Sedan

Source: Company Source: Company

Dongfeng PSA: Peugeot 408 Sedan Dongfeng PSA: Peugeot 3008 SUV

Source: Company Source: Company

Dongfeng Motor Group (489 HK): 4 January 2016

Dongfeng Passenger Vehicle: Fengshen AX7 SUV Dongfeng LiuZhou: Joyear SUV

Source: Company Source: Company

Dongfeng LiuZhou: Future MPV

Source: Company

DFM: commercial vehicles

Source: Company

China Consumer Discretionary 4 January 2016

(2238 HK) Guangzhou Automobile Group Guangzhou Automobile Group

Target price: HKD7.00 (from HKD6.40) Share price (28 Dec): HKD6.94 | Up/downside: +0.8%

Encountering strong headwinds Kelvin Lau (852) 2848 4467  Japanese brands facing stiff competition from luxury/local brands [email protected]  A latecomer to China’s SUV market boom in 2016E Brian Lam (852) 2532 4341  Maintain Hold (3) with new TP of HKD7.0, based on 8.5x 2016E PER [email protected]

What's new: GAC’s share price is up more than 50% since the year’s Forecast revisions (%) trough in September on improving sentiment on the China Autos Sector Year to 31 Dec 15E 16E 17E after the government’s decision to cut the purchase tax on vehicles with Revenue change 16.5 66.4 75.8 Net profit change 4.2 10.8 2.7 engines of 1.6L or smaller. While we believe the recent share-price rally Core EPS (FD) change 4.2 10.8 2.7 has factored in the positive impact of the supportive tax policy, GAC is likely Source: Daiwa forecasts to face keen competition from the other OEMs in 2016. Share price performance

What's the impact: We expect the Japan brands, which focus on mid-range (HKD) (%) sedans and to which GAC has large exposure through its JVs with Toyota and 9.5 115 Honda, to lose market share to the luxury brands in the first-tier cities, and to 8.3 105 7.0 95 cheaper local brands in the lower-tier cities. As the licence plate restrictions are 5.8 85 due to be rolled out in more cities over the next few years, the earnings growth 4.5 75 potential of GAC’s Japanese JV brands could be further dampened. Dec-14 Mar-15 Jun-15 Sep-15 Gzhou Auto (LHS) Relative to HSI (RHS)

In our view, SUVs are eating into the market share for sedans in China’s PV market, yet GAC only has a limited range of SUVs. That said, sales of 12-month range 4.88-9.09 GAC’s self-owned GS4, and that of GAC Toyota’s Highlander, were better Market cap (USDbn) 5.76 than expected in 2015, which should offset the losses for other sedan 3m avg daily turnover (USDm) 12.22 Shares outstanding (m) 6,435 models. GAC is scheduled to launch a few SUV models in 2016 (including Major shareholder GZ Auto Industry Grp (57.6%) an SUV from Acura, which is a sub-brand of Honda, and the EV version of the GS4), which should drive its earnings growth in 2016. Nevertheless, we Financial summary (CNY) expect the margins and profitability on SUVs to deteriorate given the Year to 31 Dec 15E 16E 17E intensifying competition, as more OEMs rush to launch new models. Revenue (m) 28,828 44,717 49,934 Operating profit (m) (691) (374) (251) Net profit (m) 3,891 4,533 4,670 We raise our 2015-17E revenues by 16-76% to factor in the potential Core EPS (fully-diluted) 0.605 0.704 0.726 positive impact from the tax cut and the strong performance of the new EPS change (%) 22.2 16.5 3.0 models launched to date. However, our upward revisions of 3-11% for Daiwa vs Cons. EPS (%) 7.2 4.1 (5.9) PER (x) 9.6 8.2 8.0 2015-17E EPS reflect a potential margin decline. We now forecast GAC’s Dividend yield (%) 3.4 3.9 4.0 net profit to rise by 22% YoY to CNY3.9bn for 2015. For 2016-17, we look DPS 0.195 0.228 0.235 for the net profit growth to slow to 17%/3% YoY, respectively. PBR (x) 1.0 0.9 0.8 EV/EBITDA (x) 30.1 14.9 10.5 ROE (%) 10.6 11.4 10.8 What we recommend: We maintain our Hold (3) rating and raise our 12- Source: FactSet, Daiwa forecasts month target price to HKD7.0 (from HKD6.40), based on an unchanged 2016E PER of 8.5x, at the low end of the target PER range (7.0-11.0x) we apply to the other auto OEMs we cover, due to our concerns about Japanese cars losing market share to premium European brands under the licence-plate restrictions, as well as the popularity of cheaper local brands in lower-tier cities. The key upside and downside risks to our call: impact of weaker/stronger-than-expected currency fluctuations.

How we differ: We are slightly more positive on GAC than the market for 2016, as some orders originally scheduled for 2017 have now been brought forward to 2016 on the back of the positive impact of the tax cut.

See important disclosures, including any required research certifications, beginning on page 103

Guangzhou Automobile Group (2238 HK): 4 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook GAC: net profit forecasts We look for GAC’s net profit to rise by 22% YoY to (CNYm) CNY3.9bn for 2015. Japanese JV brands have been 5,000 170% cutting prices during the course of 2015, and we expect 4,000 120% pricing pressure on mid-range JV brands, such as those that GAC makes, to continue. For 2016-17, we forecast 3,000 70% net-profit growth of 17% YoY and 3% YoY, respectively, 2,000 20% partly helped by the company’s launch of some new SUV models. 1,000 (30%)

0 (80%) 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (LHS) YoY Growth (RHS)

Source: Company, Daiwa forecasts

Valuation GAC: 1-year forward PER (x)

Our 12-month target price of HKD7.0 is based on an 8.5x (PER) PER applied to our 2016E EPS forecast, which is at the 15 low end of the target PER range of 7.0-11.0x we apply to 13 the auto OEMs under our universe. 11 We see Japanese cars, to which GAC has large exposure, 9 losing market share to premium European brands under stronger licensing restrictions, as well as the popularity of 7 cheaper local brands in lower-tier cities, and intensifying 5

competition in the sedan market.

Jul-14 Jul-12 Jul-13 Jul-15

Jan-12 Jan-15 Jan-13 Jan-14

Mar-13 Mar-12 Mar-14 Mar-15

Sep-14 Sep-12 Nov-12 Sep-13 Nov-13 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: Bloomberg, Daiwa forecasts

Earnings revisions GAC: Bloomberg consensus EPS forecast revisions

We have seen continuous downward earnings revisions (CNY) from the street since June 2014. Our EPS forecasts for 1.15 2015-16E are now 4-7% above the consensus, as we 1.05 0.95 assume higher passenger vehicle (PV) sales-volume 0.85 growth from the forward shift demand as a result of 0.75 purchase tax cut, but 6% lower than consensus earnings 0.65 forecast for 2017E. 0.55 0.45

0.35

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jan-15 Jun-14 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15

May-14 May-15 2015E 2016E

Source: Bloomberg

Guangzhou Automobile Group (2238 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Volume - GAC Honda (unit) 386,000 362,000 316,000 435,000 480,000 570,000 650,000 661,000 Volume - GAC Toyota (unit) 269,000 274,000 250,000 303,000 374,000 409,000 439,000 439,000 Volume - GAC Motor (unit) 39,000 31,000 59,000 109,000 135,000 197,000 308,000 343,000 Volume Growth - GAC Honda (%) n.a. (6.2) (12.7) 37.7 10.3 18.8 14.0 1.7 Volume Growth - GAC Toyota (%) n.a. 1.9 (8.8) 21.2 23.4 9.4 7.3 0.0 Volume Growth - GAC Motor (%) n.a. (20.5) 90.3 84.7 23.9 45.9 56.3 11.4

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Vehcicle-related operations 7,460 10,719 12,713 18,124 21,553 27,840 43,532 48,512 Other revenue 1,282 266 251 700 823 988 1,185 1,423 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 8,742 10,984 12,964 18,824 22,376 28,828 44,717 49,934 Other income (27) 836 8 117 340 438 679 759 COGS (7,999) (10,560) (12,274) (16,830) (19,829) (25,489) (39,510) (44,103) SG&A (842) (1,806) (2,147) (2,784) (3,715) (4,468) (6,260) (6,841) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit (126) (545) (1,449) (672) (827) (691) (374) (251) Net-interest inc./(exp.) (128) (41) (193) (169) (307) (458) (572) (633) Assoc/forex/extraord./others 5,773 4,643 2,641 3,470 4,187 4,895 5,310 5,380 Pre-tax profit 5,520 4,057 1,000 2,629 3,053 3,746 4,364 4,496 Tax (2) 110 65 (101) (126) (155) (180) (186) Min. int./pref. div./others (1,225) 105 69 124 259 300 349 360 Net profit (reported) 4,295 4,272 1,134 2,653 3,185 3,891 4,533 4,670 Net profit (adjusted) 4,294 4,272 1,134 2,653 3,185 3,891 4,533 4,670 EPS (reported)(CNY) 0.919 0.695 0.178 0.412 0.495 0.605 0.704 0.726 EPS (adjusted)(CNY) 0.919 0.695 0.178 0.412 0.495 0.605 0.704 0.726 EPS (adjusted fully-diluted)(CNY) 0.919 0.695 0.178 0.412 0.495 0.605 0.704 0.726 DPS (CNY) 0.263 0.209 0.091 0.160 0.160 0.195 0.228 0.235 EBIT (127) (545) (1,449) (672) (827) (691) (374) (251) EBITDA 72 (55) (781) 279 388 750 1,331 1,724

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 5,520 4,057 1,000 2,629 3,053 3,746 4,364 4,496 Depreciation and amortisation 199 490 668 951 1,216 1,441 1,704 1,975 Tax paid (42) (81) (117) (172) (83) (155) (180) (186) Change in working capital (825) (422) 1,555 566 612 349 1,562 509 Other operational CF items (5,859) (4,677) (2,621) (3,426) (4,450) (4,078) (4,322) (4,156) Cash flow from operations (1,008) (633) 485 548 348 1,303 3,128 2,638 Capex (1,349) (2,244) (2,948) (1,904) (3,511) (3,696) (3,806) (3,922) Net (acquisitions)/disposals (835) (1,079) (1,307) (1,077) (89) 0 0 0 Other investing CF items 4,143 3,056 6,585 3,689 348 3,345 3,916 4,248 Cash flow from investing 1,960 (267) 2,329 708 (3,252) (351) 110 326 Change in debt 461 429 38 4,041 28 2,500 4,000 5,000 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (840) (686) (1,757) (538) (1,172) (1,030) (1,258) (1,465) Other financing CF items (55) 56 (31) 9 235 (817) (988) (1,224) Cash flow from financing (434) (201) (1,749) 3,512 (909) 654 1,755 2,311 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 518 (1,102) 1,065 4,767 (3,813) 1,605 4,993 5,275 Free cash flow (2,356) (2,877) (2,463) (1,356) (3,163) (2,393) (678) (1,284) Source: FactSet, Daiwa forecasts

Guangzhou Automobile Group (2238 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 9,382 8,239 9,316 14,083 10,268 11,874 16,866 22,141 Inventory 1,353 1,537 1,397 2,036 2,661 2,832 4,390 4,900 Accounts receivable 2,845 2,980 3,303 4,725 5,515 7,105 11,021 12,307 Other current assets 6,242 8,903 6,258 5,669 8,434 8,434 8,434 8,434 Total current assets 19,822 21,659 20,274 26,514 26,878 30,245 40,712 47,783 Fixed assets 3,028 4,309 5,927 7,366 8,536 9,916 11,250 12,535 Goodwill & intangibles 2,112 3,257 4,141 4,234 5,499 6,373 7,142 7,804 Other non-current assets 13,558 15,388 19,091 19,729 21,459 23,009 24,403 25,535 Total assets 38,520 44,612 49,434 57,843 62,372 69,544 83,507 93,656 Short-term debt 1,053 2,100 2,515 9,397 9,541 10,041 11,041 12,041 Accounts payable 3,254 4,069 6,376 8,637 10,645 12,744 19,755 22,051 Other current liabilities 33 37 139 25 37 47 73 82 Total current liabilities 4,339 6,206 9,030 18,059 20,222 22,832 30,869 34,174 Long-term debt 7,950 7,737 7,776 4,775 4,769 6,769 9,769 13,769 Other non-current liabilities 386 483 564 893 1,212 1,212 1,212 1,212 Total liabilities 12,676 14,426 17,370 23,727 26,203 30,814 41,850 49,155 Share capital 6,148 6,148 6,435 6,435 6,435 6,435 6,435 6,435 Reserves/R.E./others 19,463 23,062 24,707 26,876 28,938 31,799 35,075 38,279 Shareholders' equity 25,612 29,210 31,142 33,311 35,373 38,234 41,510 44,714 Minority interests 233 976 922 805 796 496 147 (213) Total equity & liabilities 38,520 44,612 49,434 57,843 62,372 69,544 83,507 93,656 EV 23,869 25,574 22,397 19,851 23,527 22,572 19,836 18,070 Net debt/(cash) (379) 1,598 975 89 4,042 4,936 3,943 3,669 BVPS (CNY) 5.481 4.751 4.894 5.177 5.497 5.942 6.451 6.949

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. 25.6 18.0 45.2 18.9 28.8 55.1 11.7 EBITDA (YoY) n.a. n.a. n.a. n.a. 39.2 93.1 77.5 29.6 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net profit (YoY) n.a. (0.5) (73.5) 133.9 20.1 22.2 16.5 3.0 Core EPS (fully-diluted) (YoY) n.a. (24.4) (74.4) 131.3 20.0 22.2 16.5 3.0 Gross-profit margin 8.5 3.9 5.3 10.6 11.4 11.6 11.6 11.7 EBITDA margin 0.8 n.a. n.a. 1.5 1.7 2.6 3.0 3.5 Operating-profit margin n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net profit margin 49.1 38.9 8.7 14.1 14.2 13.5 10.1 9.4 ROAE 33.5 15.6 3.8 8.2 9.3 10.6 11.4 10.8 ROAA 22.3 10.3 2.4 4.9 5.3 5.9 5.9 5.3 ROCE n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. ROIC (0.5) (1.9) (4.5) (1.9) (2.1) (1.6) (0.8) (0.5) Net debt to equity net cash 5.5 3.1 0.3 11.4 12.9 9.5 8.2 Effective tax rate 0.0 n.a. n.a. 3.8 4.1 4.1 4.1 4.1 Accounts receivable (days) 59.4 96.8 88.4 77.8 83.5 79.9 74.0 85.3 Current ratio (x) 4.6 3.5 2.2 1.5 1.3 1.3 1.3 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 28.6 30.1 51.1 38.8 32.3 32.3 32.3 32.3 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

GAC is engaged in the manufacturing of vehicles and parts, as well as automobile finance and insurance and related services. It sells passenger vehicles under the Trumpchi marque, passenger and commercial vehicles under Gonow, SUVs under Changfeng Motor, and buses under GAC Bus. GAC has also formed JVs with a number of foreign brands, including Honda, Toyota, Mitsubishi and Fiat to sell passenger vehicles. It sells commercial vehicles through its GAC Bus and GAC Hino businesses.

Guangzhou Automobile Group (2238 HK): 4 January 2016

Tough times ahead in 2016 Losing market share to local and luxury brands Mid-range Japanese brands losing market share on licensing restrictions We believe the Japanese In an effort to combat air pollution and traffic congestion, top-tier cities in China, like brands will likely lose Beijing, Shanghai, Guangzhou, Shenzhen and Tianjin, have introduced policies to restrict market share to both new car registrations and curb the ownership of private cars in China. We believe more Chinese and European cities will follow suit in 2016. luxury brands as a result of licensing restrictions Japanese brands, such as Toyota and Honda, to which GAC has significant exposure via its various JVs, and which focus on mid-range sedans, would be impacted the most over the next few years, in our view. Under the licensing restrictions, we see Japanese brands in first-tier cites losing market share to European luxury brands, and in lower-tier cities to local Chinese brands. The reasons are as below:

1) In higher-tier cities where licence restrictions have been imposed, first-time car buyers, due to their relative affluence, are likely to purchase luxury cars, while replacement car buyers in these cities would seek to upgrade to premium European cars, given the marginal extra cost required versus upgrading to a mid-range sedan.

2) In lower-tier cities where restrictions have not yet been imposed and where disposable incomes are on the rise, first-time buyers would likely opt for entry-level local brand cars for their value, not mid-level sedans.

GAC: market share since January 2015 (Market share %) (YoY %) 8% 40%

7% 30%

6% 20%

5% 10%

4% 0%

3% -10% Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 GAC's Market Share in China PV market (LHS) Growth YoY (RHS)

Source: CAM

A latecomer to China’s SUV boom; profitability of new SUVs to deteriorate in 2016 on keen competition GAC’s model portfolio is skewed to the slowing sedan market in 2015 China’s SUV market posted robust sales-volume growth of 54% YoY for January to November 2015, accounting for 29% of total PV sales. However, by our estimates, more than 70% of the units GAC sold in 2015 comprised vehicles from the slowing sedan segment, while SUVs and MPVs combined accounted for only 30% of its total sales volume due to the company’s limited range of SUV models. GAC, as a result, failed to catch China’s SUV boom and became trapped in the keenly contested sedan market in 2015.

Based on its product launch pipeline, the company seem to be making a concerted effort to increase its SUV exposure, including launching a GAC-Mitsubishi Outlander-PHEV and self-owned GS4-EV in 2016, after the launch of the Cherokee in 2H15. However, we believe the profitability of its new SUV models in 2016 would not be as good as it was in 2015.

Guangzhou Automobile Group (2238 HK): 4 January 2016

Despite our forecast for continuous strong SUV sales unit growth of 33% YoY for 2016E (especially if we compare the 28% SUV penetration in China versus over 40% in the US), margins on the SUV will likely see a deterioration over the next 2 years given the intensifying competition in the segment as several other OEMs rushed into this lucrative segment of the market. Given the current visibility, about one-third of the new models launched during 2H15-1H16 will be SUVs, contributing around 35% of the total new model auto sales volume for China during the period.

GAC: product mix GAC: product pipeline (2H15-2016) 100% 100% GAC product pipeline Model Type Launch time 2H15-2016 80% 80% GAC Honda New City* Sedan 2H15 Crider (Facelift) Sedan 2H15 (Dec) 60% 60% Crosstour (Facelift) Sedan 2H15 (Dec) Acura SUV SUV 2016 40% 40% GAC Toyota Levin HEV* Hybrid Sedan 2H15 Lingzhi EV EV Sedan 2016 20% 20% GAC Fiat-Chrysler Cherokee SUV 2H15 GAC Mitsubishi Outlander PHEV PHEV SUV 2016 GAMC GS4 EV EV SUV 2016 0% 0% GA3S PHEV PHEV Sedan 2016

Jul-14 Jul-15

Jan-14 Jan-15

Mar-15 Mar-14

Sep-14 Nov-14 Sep-15

May-14 May-15 Sedan SUV MPV

Source: CAM Source: Company, various media Note: *already launched

Financial forecasts We forecast the 2016E We believe GAC Honda and GAC Toyota will continue to be the 2 key earnings and 2017E net profit to contributors for GAC. However, Japanese brands and slowing sales volume amid the high rise by 17% and 3% YoY operating leverage environment for the auto OEMs suggest that the net margin for the respectively, impacted Japanese JVs is likely to come under increasing pressure. by a decreasing margin We are revising up our revenue forecasts for GAC by 17-76% for 2015-17E on a potential forward shift in demand from China’s purchase tax cut, and the strong sales-volume performance of the self-owned GS4. However, we are raising our earnings forecasts to a lesser extent, 3-11%, for 2015-17E due to the potential for a margin decline. We now forecast GAC’s net profit to rise by 22% YoY to CNY3.9bn for 2015. For 2016, we look for GAC’s net profit to rise by 17% YoY for 2016, but slow to 3% YoY for 2017, due to the aforementioned forward shift in demand to 2016 on the purchase tax cut.

We forecast GAC Honda to post sales volume growth of 14% YoY to 650k units in 2016, slowing from 19% YoY growth for 2015. The Honda City should help offset part of the volume slowdown in 2015, in our opinion. However, margins across the board could be under pressure given GAC’s aggressive price discounting and its weaker-than-peer product mix.

The Highlander SUV, contrary to its past strong sales performance, sold more than 9,000 units in October 2015, stronger than our previously forecast normalised sales-volume level of 6,000-7,000 units per month for the rest of the year. Such a result could be due to pent- up demand as car buyers have been waiting for the new-generation model which was launched in April 2015. Having said that, we expect demand for high-end SUVs to continue to be strong, with few competitors in China in this niche market.

Guangzhou Automobile Group (2238 HK): 4 January 2016

Valuation and recommendation Maintain Hold (3) rating with new TP of HKD7.0 We maintain our Hold (3) rating on GAC and set a new 12-month target price of HKD7.0 (from HKD6.40 previously), based on an unchanged 8.5x PER on our 2016E EPS forecast (from the 2015E-16E average previously), which is at the low end of the target PER range of 7.0-11.0x that we apply to the auto OEMs under our coverage. Our target price implies 1% upside from current levels. We expect GAC to continue to register negative free cash flow of CNY2-3bn per year over our forecast horizon on continual R&D and production capacity expansion. Dividends received from its JVs are unlikely to see significant growth on the sluggish performance of its Japanese brands.

We see the potential for Japanese cars, to which GAC has large exposure, losing market share to premium European brands and other local brand rivals under strengthening licensing restrictions and intensifying competition in the sedan market. As such, sales momentum for GAC’s high-end models is likely to be weak, as first-time buyers in lower- tier cities opt for low-end cars or local brands, and replacement car buyers in higher-tier cities prefer luxury models and SUVs. However, the stock’s current valuation, trading at the low end range of our coverage of China auto OEMs, looks well justified to us.

GAC: PER bands (x) GAC: PER based valuation (PER) 2016E EPS (CNY) 0.70 15 PER (x) 8.5x Exchange rate, HKD1:CNY 0.85 13 Equity value/share (HKD/share) 7.00 Current price (HKD) 6.94 11 Potential share price upside/downside (%) 1% Implied target 2017E PER 8.2x 9

Jul-14 Jul-12 Jul-13 Jul-15

Jan-12 Jan-15 Jan-13 Jan-14

Mar-13 Mar-12 Mar-14 Mar-15

Sep-14 Sep-12 Nov-12 Sep-13 Nov-13 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD Source: Bloomberg, Daiwa forecasts Source: Daiwa forecasts

Risks The main risk to our call on GAC is currency risk. The fluctuation of the Yen implies higher or lower prices of imported components for GAC’s Japanese JVs. If the Yen depreciates/ appreciates against the CNY, this would imply upside/downside for the earnings of GAC Honda and GAC Toyota, which are currently the main profit contributors to the company.

Other company-specific risks include better- or worse-than-expected sales volume from newly launched SUV models, and narrowing losses for its self-owned brands benefiting from the purchase tax cut, which would imply upside potential for our earnings forecasts.

China Consumer Discretionary 4 January 2016

(1114 HK) Brilliance China Automotive Brilliance C hina Automoti ve

Target price: HKD8.90 Share price (28 Dec): HKD9.84 | Up/downside: -9.6%

Initiation: improving pipeline but expectations too high Kelvin Lau (852) 2848 4467  BMW Brilliance pipeline should do better in 2016 [email protected]  But market expectations look too high Brian Lam (852) 2532 4341  Initiating with Underperform (4) rating and TP of HKD8.90 [email protected]

Investment case: We initiate coverage of Brilliance China with an Share price performance

Underperform (4) rating. On the one hand, the pipeline for 2016 looks (HKD) (%) promising, with the launch of the 3-series facelift in September 2015 and 17 130 the coming 2-series sedan and X1 SUV in 2016 (we look for 2016-17 EPS 15 115 growth of 14-16% YoY, after declining by 38% YoY in 2015E). But on the 13 100 10 85 other hand, we believe Bloomberg-consensus expectations of an earnings 8 70 recovery in 2015-17 are too optimistic. Our 2015-17E EPS are 16-25% Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 lower than consensus, mainly as we are more cautious on the impact of the Brilliance (LHS) Relative to HSI (RHS) purchase tax cut on the company’s bottom line. Despite this, we expect BMW Brilliance to meet its 2015 sales volume target of 4% YoY. 12-month range 8.16-16.92 Market cap (USDbn) 6.38 Catalysts: While unit sales of the 3-series facelift may be a near-term 3m avg daily turnover (USDm) 18.62 Shares outstanding (m) 5,026 sales volume driver, sales of the X1 SUV are likely to continue to Major shareholder Huachen Automotive Group (42.5%) deteriorate until the launch of the new version, which we assume will be mid-2016. As such, we assume the new X1 SUV will boost overall X1 Financial summary (CNY) sales, resulting in 6% YoY growth in 2016, and 24% YoY in 2017. For the 2- Year to 31 Dec 15E 16E 17E series model, we expect monthly sales of around 2,000-2,500 units in Revenue (m) 5,085 5,543 5,503 Operating profit (m) (423) (395) (353) 2016-17. We do not expect the 2-series to be as much of an earnings Net profit (m) 3,340 3,873 4,405 contributor over the next 2 years compared with the 3- and 5-series Core EPS (fully-diluted) 0.662 0.767 0.873 models. EPS change (%) (38.2) 15.9 13.7 Daiwa vs Cons. EPS (%) (15.6) (21.5) (24.6) PER (x) 12.4 10.7 9.4 Separately, the purchase-tax cut should boost sentiment on the sector, but Dividend yield (%) 1.3 1.1 1.3 this should be less relevant to BMW Brilliance’s financials as most of its DPS 0.110 0.092 0.105 models/sales are not eligible for the tax cut (ie, engines are bigger than PBR (x) 2.1 1.8 1.5 EV/EBITDA (x) n.a. n.a. n.a. 1.6L). Thus, we think current consensus forecasts have factored in overly ROE (%) 18.2 18.1 17.6 optimistic expectations for earnings growth in 2015-17. Source: FactSet, Daiwa forecasts

Valuation: The stock is trading currently at a 2016E PER of 11x, which is in line with its past-3-year average. However, with Beijing Benz emerging as a strong competitor and what we see as Brilliance’s less-attractive model launches in 2016-17 (vs. Benz), we apply a 2016E PER of 10x (a 10% discount to its past-3-year average, which we think is appropriate given the circumstances), to derive our 12-month TP of HKD8.90. We initiate coverage with an Underperform (4) rating and expect to see downward 2015-17 consensus forecast revisions, leading to negative stock sentiment.

Risks: The major risk to our call would be higher-than-expected new-car sales for the company, especially sales of its new models such as the 2- series sedan and new X1 SUV (scheduled to hit the market in 2016).

See important disclosures, including any required research certifications, beginning on page 103

Brilliance China Automotive (1114 HK): 4 January 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Brilliance: net profit and net profit growth We forecast Brilliance’s net profit to decline by 38% YoY for (CNYm) (YoY%) 2015 as a result of its weak pipeline and new car sales in 6,000 80% China. However, with a better pipeline in late 2015 and 5,000 60% 2016 (including the 3-series facelift, 2-series sedan and X1 40% 4,000 SUV), we look for net profit to recover to 16% YoY growth 20% in 2016 and 14% YoY in 2017. 3,000 0% 2,000 (20%)

1,000 (40%)

0 (60%) 2011 2012 2013 2014 2015E 2016E 2017E Net profit (LHS) Growth YoY (RHS) Source: Company, Daiwa forecasts

Valuation Brilliance: 12-month forward PER (x) (2012 – 2015) The stock is trading currently at 2016E PER of 11x based (PER) on our earnings forecasts, which is in line with the past-3- 22 20 year consensus average. We expect more downside to the 18 current valuation given that the competition from Beijing 16 Benz has ramped up in 2015 and also as we expect 14 downward earnings revisions to occur over the next 6 12 months after Brilliance announces its 2015 results. The 10 recent purchase tax reduction should boost sentiment 8

toward the stock slightly, but is unlikely to lead to a strong 6

Jul-12 Jul-14 Jul-15

rerating to a level well above its past-3-year average. Jul-13

Jan-12 Jan-13 Jan-14 Jan-15

Mar-14 Mar-12 Mar-13 Mar-15

Nov-12 Sep-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-15 May-12 May-13 May-14 PER +1 SD Average PER -1 SD

Source: Company, Daiwa forecasts

Earnings revisions Brilliance: Bloomberg consensus EPS forecast revisions Our 2015-17E EPS are 16-25% lower than the Bloomberg- (CNY) consensus figures, as we expect BMW Brilliance to just 1.6 about meet its 2015 sales growth target of 4% YoY, and 1.4 also because we expect the impact of the purchase tax reduction to be less significant for Brilliance. The fiercer 1.2 competition in the auto industry is also having an impact on 1.0 the bottom line. 0.8

0.6

Jul-15

Apr-15 Oct-15

Jun-15 Jan-15

Feb-15 Mar-15

Dec-15 Aug-15 Sep-15 Nov-15 May-15 2015E 2016E Source: Bloomberg

Brilliance China Automotive (1114 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E BMW Sales volume 70,000 108,000 161,000 207,000 279,000 290,000 332,000 370,000 BMW blended ASP 305,000 347,000 349,000 354,000 339,000 326,000 326,000 326,000 Local brands sales volume 95,000 82,000 83,000 84,000 78,000 64,000 59,000 57,000 Local brands blended ASP 94,000 78,000 72,000 73,000 71,000 70,000 69,000 68,000

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Domestic revenue n.a. 6,151 5,319 5,430 4,639 4,475 4,878 4,843 Overseas revenue n.a. 291 597 673 876 610 665 660 Other Revenue n.a. 0 0 0 0 0 (0) 0 Total Revenue 8,949 6,443 5,916 6,103 5,515 5,085 5,543 5,503 Other income 125 98 82 87 166 178 194 193 COGS (7,725) (5,587) (5,220) (5,417) (4,952) (4,729) (5,128) (5,063) SG&A (825) (749) (878) (1,008) (987) (957) (1,004) (986) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 523 205 (99) (234) (258) (423) (395) (353) Net-interest inc./(exp.) (92) (117) (100) (92) (103) (102) (135) (125) Assoc/forex/extraord./others 1,034 1,862 2,494 3,650 5,704 3,828 4,359 4,834 Pre-tax profit 1,465 1,949 2,295 3,325 5,343 3,303 3,829 4,356 Tax 54 (58) (58) (8) (43) (27) (31) (35) Min. int./pref. div./others (248) (79) 64 58 103 64 74 84 Net profit (reported) 1,271 1,812 2,301 3,374 5,403 3,340 3,873 4,405 Net profit (adjusted) 1,271 1,812 2,301 3,374 5,403 3,340 3,873 4,405 EPS (reported)(CNY) 0.255 0.363 0.458 0.671 1.075 0.665 0.771 0.876 EPS (adjusted)(CNY) 0.255 0.363 0.458 0.671 1.075 0.665 0.771 0.876 EPS (adjusted fully-diluted)(CNY) 0.252 0.359 0.456 0.669 1.071 0.662 0.767 0.873 DPS (CNY) 0.000 0.000 0.000 0.078 0.087 0.110 0.092 0.105 EBIT 523 205 (99) (234) (258) (423) (395) (353) EBITDA 663 343 41 (95) (119) (265) (210) (143)

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 1,465 1,949 2,295 3,325 5,343 3,303 3,829 4,356 Depreciation and amortisation 139 138 140 139 139 158 184 210 Tax paid (49) (12) (3) (9) (47) (27) (31) (35) Change in working capital 531 (1,001) (108) (83) 1,100 (102) 239 (45) Other operational CF items (907) (1,702) (2,325) (3,526) (5,766) (3,665) (4,196) (4,671) Cash flow from operations 1,180 (628) (2) (154) 770 (333) 26 (186) Capex (431) (306) (526) (616) (737) (958) (958) (958) Net (acquisitions)/disposals 46 (301) 61 30 (435) 0 0 0 Other investing CF items (1,076) 671 828 1,057 1,387 1,360 1,754 2,177 Cash flow from investing (1,461) 64 363 470 214 401 796 1,219 Change in debt 309 688 27 151 (268) 0 0 0 Net share issues/(repurchases) 3 9 5 0 0 0 0 0 Dividends paid 0 0 0 (394) (437) (553) (465) (529) Other financing CF items (1,212) 25 (143) (7) (3) (163) (163) (163) Cash flow from financing (900) 722 (110) (250) (709) (716) (627) (691) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (1,181) 158 251 67 275 (647) 194 342 Free cash flow 749 (934) (528) (770) 32 (1,291) (932) (1,144) Source: FactSet, Daiwa forecasts

Brilliance China Automotive (1114 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 428 586 837 903 1,179 532 726 1,068 Inventory 791 737 838 769 797 761 825 814 Accounts receivable 3,018 1,881 1,812 2,220 1,964 1,811 1,974 1,960 Other current assets 2,861 2,828 2,931 2,632 2,406 2,406 2,406 2,406 Total current assets 7,098 6,032 6,417 6,524 6,345 5,509 5,931 6,248 Fixed assets 1,585 1,670 1,745 1,686 1,960 2,440 2,904 3,350 Goodwill & intangibles 252 261 424 731 1,055 1,375 1,686 1,987 Other non-current assets 4,285 4,848 7,471 10,050 13,847 16,315 18,919 21,577 Total assets 13,220 12,811 16,058 18,990 23,207 25,639 29,440 33,161 Short-term debt 3,593 3,087 2,827 2,826 3,223 3,139 3,289 3,264 Accounts payable 2,788 2,466 3,120 2,991 2,963 2,830 3,068 3,029 Other current liabilities 1,581 1,019 910 975 948 874 953 946 Total current liabilities 7,962 6,572 6,857 6,793 7,134 6,843 7,310 7,239 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 2 2 2 56 119 119 119 119 Total liabilities 7,964 6,573 6,859 6,849 7,253 6,962 7,429 7,358 Share capital 6,325 6,989 10,015 13,015 16,931 16,931 16,931 16,931 Reserves/R.E./others 0 0 0 0 0 2,787 6,195 10,072 Shareholders' equity 6,325 6,989 10,015 13,015 16,931 19,719 23,126 27,003 Minority interests (1,069) (752) (816) (874) (977) (1,041) (1,116) (1,200) Total equity & liabilities 13,220 12,811 16,058 18,990 23,207 25,639 29,440 33,161 EV 40,385 38,974 35,730 33,027 29,698 27,730 25,006 21,898 Net debt/(cash) 3,165 2,501 1,991 1,923 2,044 2,608 2,563 2,197 BVPS (CNY) 1.267 1.395 1.993 2.590 3.369 3.924 4.602 5.373

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 45.5 (28.0) (8.2) 3.2 (9.6) (7.8) 9.0 (0.7) EBITDA (YoY) (15.8) (48.3) (88.1) n.a. n.a. n.a. n.a. n.a. Operating profit (YoY) 60.3 (60.8) n.a. n.a. n.a. n.a. n.a. n.a. Net profit (YoY) n.a. 42.6 27.0 46.6 60.1 (38.2) 15.9 13.7 Core EPS (fully-diluted) (YoY) n.a. 42.5 26.9 46.6 60.1 (38.2) 15.9 13.7 Gross-profit margin 13.7 13.3 11.8 11.2 10.2 7.0 7.5 8.0 EBITDA margin 7.4 5.3 0.7 n.a. n.a. n.a. n.a. n.a. Operating-profit margin 5.8 3.2 n.a. n.a. n.a. n.a. n.a. n.a. Net profit margin 14.2 28.1 38.9 55.3 98.0 65.7 69.9 80.0 ROAE 22.4 27.2 27.1 29.3 36.1 18.2 18.1 17.6 ROAA 10.3 13.9 15.9 19.3 25.6 13.7 14.1 14.1 ROCE 7.2 2.3 n.a. n.a. n.a. n.a. n.a. n.a. ROIC 8.4 2.3 (1.0) (1.8) (1.6) (2.1) (1.7) (1.3) Net debt to equity 50.0 35.8 19.9 14.8 12.1 13.2 11.1 8.1 Effective tax rate n.a. 3.0 2.5 0.3 0.8 0.8 0.8 0.8 Accounts receivable (days) 100.0 138.8 113.9 120.5 138.4 135.5 124.6 130.5 Current ratio (x) 0.9 0.9 0.9 1.0 0.9 0.8 0.8 0.9 Net interest cover (x) 5.7 1.7 n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 0.0 0.0 0.0 11.7 8.1 16.6 12.0 12.0 Free cash flow yield 1.8 n.a. n.a. n.a. 0.1 n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Brilliance China Automotive is an automotive manufacturer in China. Through BMW Brilliance Automotive, a joint venture formed with BMW, the group produces the BMW 3-series sedan, 5- series sedan and X1 SUV in China. Further, BMW Brilliance plans to introduce a BMW 2-series sedan and X3 SUV in the near future to diversify its product range. The group also manufactures and sells minibuses under its own brand, Jinbei, and in 2014 introduced a premier product line, namely Huasong. In addition to auto manufacturing, Brilliance is also engaged in the manufacture of automotive components as well as diesel engines and gasoline engines for use in minibuses, sedans, SUVs and light duty trucks.

Brilliance China Automotive (1114 HK): 4 January 2016

Fighting back A better year in 2016 Behind target for 2015 We forecast BMW BMW sales in China (represented by BMW Brilliance) have been disappointing this year, Brilliance’s new car with only a 2.6% increase in November 2015 YTD, and significantly lagging the sales of sales to rise by 4% YoY Mercedes Benz (represented by Beijing Benz), which were up 93%YoY in November YTD. in 2015 We believe the disappointing BMW sales were a result of BMW Brilliance’s weak product pipeline in 2H14, during which it only introduced a facelift for the X1 SUV, while Benz launched its new C-class sedan and GLA SUV models. As a result, at the 1H15 results briefing, Brilliance revised down its 2015 unit sales-growth target from 10% YoY set in early 2015 to 4% YoY.

We now expect BMW Brilliance to just about achieve its revised 2015 sales growth target, mainly due to a pick-up in sales in November and December. That said, we believe the market is being overly optimistic on the effects on BMW Brilliance of the recent purchase tax cut, which was announced on 29 September 2015, as most of the models (around 97%) manufactured by BMW Brilliance have engines that are larger than 1.6L, which means they are not eligible for the tax reduction.

With reference to its new car sales in October 2015, when the tax reduction was implemented, BMW Brilliance recorded only a 3.5% YoY increase in sales, lagging behind the market’s 13% YoY increase. However, unit sales in November increased substantially, by 18% YoY, driven mainly by the 3-series and 5-series sedans, for which sales rose by 32% YoY and 20% YoY, respectively. Although we think BMW Brilliance is likely to achieve its targeted 4% YoY sales volume in 2015, we expect the net profit margin in 2015 to decline by 4.0pp YoY, due to a decline in ASPs as a result of fierce competition.

November 2015 YTD sales for BMW Brilliance and Beijing Benz YTD Nov sales units YoY % Brilliance BMW 262,600 2.6% Beijing Benz 220,700 93.4% Source: CAM

Price trend of the middle configuration of BMW 3-Series (320Li) and 5-Series (525Li) (Price, CNY) (Price, CNY) 450,000 450,000

400,000 400,000

Price increase due 350,000 350,000 tolaunch of 3-Series facelift

300,000 300,000

250,000 250,000 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Price of Mid config of BMW 320Li Price of Mid config of BMW 525Li

Source: CAM

Brilliance China Automotive (1114 HK): 4 January 2016

BMW Brilliance: 3-series sedan (new facelift model)

Source: company

Improving product pipeline in 2016, but not enough 2-series unlikely to To reverse the weak growth trend for new-car sales, BMW Brilliance has planned a much replace the position of better pipeline in 2016. Apart from the launch of the facelift for its 3-series model in the 3- and 5-series September 2015, BMW Brilliance plans to launch a new 2-series sedan (first time in China) and a new X1 SUV in 2016. The 2-series is a new size of compact sedan in China. While we are not that positive on small sedans overall, if the pricing is not aggressive, such a product could still be an incremental sales booster for BMW. On a global basis, the 2- series sedan (which was launched in other countries in 2014) comprised around one-third of the sales of the 3-series. We therefore assume the new sedan can achieve monthly sales of only around 2,000-2,500 units in 2016, albeit still incrementally positive for BMW Brilliance’s new-car sales.

BMW: retail sales volume by model 2009 2010 2011 2012 2013 2014 1H15 1 -series 216,944 196,004 176,418 226,829 213,611 190,033 86,029 2-series - - - - - 41,038 64,285 3-series 397,103 399,009 384,464 406,752 500,332 480,214 219,369 4-series - - - - 14,763 119,580 79,351 5-series 175,983 238,454 332,501 359,016 366,992 373,053 174,228 6-series 8,648 5,848 9,396 23,193 27,687 23,988 11,393 7-series 52,680 65,814 68,774 59,184 56,001 48,519 19,324 X1 8,499 99,990 126,429 147,776 161,353 156,471 58,226 X3 55,634 46,004 117,944 149,853 157,303 150,915 66,444 X4 - - - - - 21,688 28,146 X5 88,851 102,178 104,827 108,544 107,231 147,381 85,983 X6 41,667 46,404 40,822 43,689 36,688 30,244 22,125 Z4 22,761 24,575 18,809 15,249 12,866 10,802 4,576 BMW i - - - - 311 17,793 12,562 Total 1,068,770 1,224,280 1,380,384 1,540,085 1,655,138 1,811,719 932,041 Source: company

More significant With respect to the new X1 SUV, we believe it will help BMW Brilliance recapture market contribution from X1 share in the SUV market. The average X1 SUV has sold around 3,300 units/month as at SUV in 2017E November 2015 YTD, and we see this trend continuing until the launch of the X1 SUV facelift. Therefore, even though the new X1 SUV model may be able to achieve a higher level of sales of 4,500 units/month by the end of 2016, the average monthly sales in 2016 would still be just 3,625 units/month, an increase of 6% YoY on our forecasts. However, we see the X1 SUV’s unit sales rising in 2017 to post 24% YoY sales volume growth.

Overall, with the company’s low base in 2015, we see a good chance that BMW Brilliance’s fortunes will turn around in 2016 and 2017, and that the company will achieve new car sales growth of 15% YoY in 2016 and 11% YoY in 2017, on new model launches. Based on

Brilliance China Automotive (1114 HK): 4 January 2016

the YTD November sales number, BMW is still one of the leading luxury brands in China, even though we expect Beijing Benz to match its sales closely in 2016.

Product pipeline of luxury cars Company Model Segment Launch date 3-series (Facelift) Sedan Sep-2015 Brilliance BMW 2-series Sedan 2016 X1 SUV 2016 Q7 SUV Dec-2015 FAW VW Audi A6 (Facelift) Sedan 2016 C350eL Sedan (Hybrid EV) Nov-2015 Beijing Benz GLC SUV 2016 New E-class Sedan 2016 ATS-L (Facelift) Sedan Oct-2015 Shanghai GM Cadillac CT6-40T Sedan end of 2015 Chery Jaguar Land Rover Discovery Sport SUV Nov-2015

Source: various media

BMW Brilliance: 2-series Active Tourer BMW Brilliance: X1 SUV (new model)

Source: company Source: company

November 2015 YTD luxury brands sales in China YTD Nov sales units YTD YoY % FAW VW Audi 463,378 0.6% Brilliance BMW 262,645 2.6% Beijing Benz 220,700 93.4% Volvo Car 58,956 354.7% SAIC GM Cadillac 47,444 42.1% Dongfeng Infiniti 22,603 2164.8% Source: CAM

Brilliance: new vehicle sales forecasts 2015E 2016E 2017E BMV JV sales volumes 290,000 332,000 370,000 3-series 98,000 105,000 108,000 5-series 151,000 156,000 160,000 X1 41,000 44,000 54,000 2-series - 29,000 30,000 1-series - - 18,000

Shenyang Automotive(Jinbei minibuses)sales volume 64,000 59,000 57,000 Haise minibuses 55,000 50,000 47,000 Granse minibuses 9,000 9,000 9,000 Huasong 7 MPV 3,000 6,000 7,000

Source: Daiwa forecasts

Brilliance China Automotive (1114 HK): 4 January 2016

Market share may flow to Benz Beijing Benz is catching With many top-tier cities having imposed licence restrictions, we expect car buyers to up fast favour luxury brands (such as BMW, Benz and Audi) over mid-range brands (such as Korean and Japanese brands) due to the expensive new car licence-plate fee and as the number of new licences are limited. As a result of rising disposable incomes in China and more luxury brands launching more affordable entry-level models, we believe mid-range cars will be squeezed. Such a situation is evidenced by the consistently strong, mostly double-digit, unit sales growth in the luxury segment in China (see the chart below). This was true even amid the slowdown in overall new car sales growth in China in 2015, and even when overall sales declined for some months.

Even though this is a positive factor for BMW Brilliance, the company is currently up against strong competition from Beijing Benz. Compared to the start of 2014, when BMW Brilliance’s monthly sales volume was double that of Beijing Benz, in November YTD 2015, Beijing Benz sales volume was already 93% of BMW Brilliance’s, and we expect Beijing Benz to overcome BMW Brilliance to become the second most popular luxury brand in China (the No.1 is likely still FAW Audi).

China new car licence restrictions in different cities Luxury brand sales in China Cities Plate issuance through Implementation date Quota (annual) (Sales unit) (YoY %) Shanghai Bidding 1994 132,000 120,000 60% Beijing Lottery 12/23/2010 150,000 100,000 Guiyang Lottery 7/11/2011 24,000 40% 80,000 Guangzhou Bidding and lottery 6/30/2012 120,000 Tianjin Bidding and lottery 12/15/2013 100,000 60,000 20% Hangzhou Bidding and lottery 3/25/2014 80,000 40,000 Shenzhen Bidding and lottery 12/29/2014 100,000 0% 20,000

0 (20%)

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15

May-14 May-15 Luxury brands monthly sales (LHS) Luxury brands YoY (RHS) China overall PV YoY (RHS) Source: Local governments, various media reports Source: CAM

Luxury brands: combined market share in 2015 Luxury brand breakdown

(Luxury brands) (German brands) (Breakdown of luxury brands, sales %) 8% 25% 100% 7% 80% 6% 20% 5% 15% 60% 4% 3% 10% 40% 2% 5% 20% 1%

0% 0% 0%

Jul-14 Jul-15

Jan-14 Jan-15

Mar-14 Mar-15

Nov-14

Sep-14 Sep-15

Nov-14

Sep-14 Sep-15

May-14 May-15

May-14 May-15 Luxury brands' overall market share in China (LHS) Beijing Benz Brilliance BMW FAW VW Audi German brands' overall market share in China (RHS) Dongfeng Infiniti SAIC GM Cadillac Volvo

Source: CAM Source: CAM

Positive sentiment from purchase tax reduction Brilliance should benefit On 29 September 2015, the China State Council announced a series of supportive policies the least from the for the auto sector, including a purchase tax reduction from 10% to 5%. Such measures purchase tax reduction should help boost overall new car sales in China, which we now forecast to increase by 12% YoY in 2016 (previously 4% YoY) from 7% YoY in 2015. However, Brilliance not likely to see much of a benefit from the purchase tax reduction, as only a small proportion of its car models have engine sizes smaller than 1.6L. Nevertheless, we expect the policy to help partly boost sentiment for the overall China Auto Sector.

Brilliance China Automotive (1114 HK): 4 January 2016

Brilliance BMW: YTD 2015 sales by engine size 3-series engine size <=1.6L 6.3% engine size >1.6L 93.7% 5 -series engine size <=1.6L 0.0% engine size >1.6L 100.0% X1 engine size <=1.6L 0.0% engine size >1.6L 100.0% Brilliance BMW total engine size <=1.6L 2.1% engine size >1.6L 97.9%

Source: CAM Note: Only 2L and 3L engine size model available for 5-series and only 2L engine size model for X1

Lower YoY impact on increasing dealer margins We do not expect any After experiencing weak auto demand in 2H14, which led to many dealers in China having higher rebates given to sell at a loss to clear the previous high inventory, dealers in China joined forces to current weak auto sales bargain for better rebates and a more frequent review of sales targets and incentive payments by OEMs to dealers. So far, the alliance has been successful in terms of bargaining for better margins from OEMs, such as BMW, Jaguar Land Rover (JLR) and Audi, and a more frequent review of sales targets on a quarterly basis (previously annual basis).

In BMW’s case, it paid CNY5.1bn in cash rebates to dealers in 2014. However, we believe such an impact will diminish in 2016, as BMW and the other OEMs are likely to revise down their sales targets and control their production to better fit demand – which we believe was the case in 2H15. We believe the OEMs are now more concerned about ASP and margin erosion rather than chasing volume growth. Therefore, we think it unlikely that BMW will offer additional rebates to dealers in 2016, as it did in 2015 and 2014.

Negotiations between BMW and its Chinese dealers Date Events 2H14 China auto market deteriorated unexpectedly in 2H14 and BMW missed the chance to adjust its yearly sales targets which caused most of the BMW dealers to pile up around 2-3 months of inventory (usually should be around 1.5 months). In order to gain the rebates offered by BMW, dealers started to cut prices to meet what they saw as unachievable sales targets. Late - Nov, 2014 Some BMW dealers started to take the lead and contacted other dealers, and eventually they formed an alliance. Early - Dec, 2014 The dealer alliance had 2 meetings with BMW, during which both sides preliminarily agreed on a subsidy of less than CNY6bn. Late - Dec, 2014 The two parties finalised a subsidy of CNY5.1bn. 17 April, 2015 BMW China and BMW Brilliance issued a circular to their dealers to reduce sales targets for 2Q15. Further, they announced that dealers achieving 85% of their sales targets would also be entitled to rebates, while those achieving equal to or more than 90% of their sales targets would get bonus rebates. Early - July, 2015 BMW China released more details of the rebate policy for 1H15. For imported models, dealers that achieve 100% of their sales targets are granted CNY16,000/vehicle sold, while for localised models, dealers that achieve 100% of their sales targets are granted CNY18,000/vehicle sold. For dealers that do not achieve 100%, but were above 85% of their sales target, they still get a rebate but it is lower.

Source: Caxin, Sina

CNY depreciation only having a slight effect Likely no near-term According to management, the company has already hedged most of its currency impact on the bottom exposure and would not incur any forex gains or losses over the next 3 years. On the line from CNY income statement, it may record a lower contribution from BMW Brilliance as the cost of depreciation BMW Brilliance would be recorded in Euros, while it receives revenue in CNY. Daiwa’s chief economist, Kevin Lai expects the CNY to depreciate further by 4.8% against the Euro by the end of 2016. However, due to hedging, we believe BMW Brilliance’s contribution should not be affected significantly by such currency movements.

Financial analysis Relatively strong financials, but net margin should fall in coming years Low net gearing Between 2010 and 2014, Brilliance’s net gearing ratio declined gradually from 50% to 12%. compared with peers We believe one of the major reasons for this was that BMW Brilliance started to pay indicates strong dividends to Brilliance China in 2011: CNY200m in 2011, CNY500m in 2012, CNY1,000m financials in 2013 and CNY1,250m in 2014. We expect this payout policy to continue, as BMW Brilliance’s business is approaching maturity and it is capable of financing its own opex

Brilliance China Automotive (1114 HK): 4 January 2016

and capex. We consider Brilliance’s current overall financials as healthy, due to its lower- than-average net gearing ratio compared with its China peers and overseas counterparts.

Brilliance: net gearing ratio 60% 50% 50%

40% 36%

30% 20% 20% 15% 13% 12% 11% 6% 8% 10%

0% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Net gearing Daiwa forecasts

Source: company, Daiwa forecasts Note: net gearing ratio calculated as (net debt/equity)

Global major auto OEMS: net debt-to-equity ratio comparison (2010-14) 2010 2011 2012 2013 2014 China H-share listed 11 8 13 28 22 China A-share listed 3 3 15 27 21 US net cash net cash net cash net cash net cash Europe net cash 25 26 119 55 Japan 81 64 63 66 62 Korea 59 47 32 21 23 Global 26 20 22 41 30

Source: Bloomberg

But net profit margin Since 2009, we have observed a general uptrend in Brilliance BMW’s net profit margin, might have peaked in which reached an all-time high of 11.7% in 2014. However, we believe the 2015 net profit 2014 margin is likely be adversely affected by the increase in rebates demanded by BMW Brilliance’s dealers and general pressure on new-car sales in China. We expect this effect to last until end-2017. We forecast Brilliance BMW’s net-profit margin to fall to 7.7% in 2015-17.

BMW Brilliance: net margin (2009-17E) 14% 11.7% 12%

9.4% 10% 9.2% 8.3% 8.3% 7.7% 7.7% 7.7% 8%

6% 4.8%

4% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Net margin Daiwa forecasts

Source: company, Daiwa forecasts

We expect payouts of Brilliance started to pay a dividend in 2013, and its payout ratio was 12% in 2013 and 8% 17% in 2015 and 12% in in 2014. We believe a payout ratio ranging from 10-15% is a reasonable assumption, and 2016-17 now assume payout ratios of 17% in 2015 and 12% in both 2016 and 2017.

Brilliance China Automotive (1114 HK): 4 January 2016

Valuation and recommendation Downside expected Negatives from The stock is currently trading at 2016E PER of 11x based on our earnings forecasts, in line competition and lack of with its past-3-year average. We see more downside from the current valuation as we benefit from purchase believe BMW Brilliance is currently facing much more competition from Beijing Benz than it tax reduction don’t look was before. Also, BMW Brilliance is less likely to benefit from the purchase-tax reduction, priced in and therefore investors are likely to focus more on local brands in 2016.

Our 2015-17E EPS are 16-25% lower than those of the Bloomberg consensus and, therefore, we expect more downward revisions to earnings forecasts, which could create negative sentiment on the stock. We believe the market is too optimistic about BMW Brilliance’s planned new-model launches.

Looking for a better entry point We initiate coverage with We initiate coverage of Brilliance with an Underperform (4) rating and 12-month target an Underperform (4) price of HKD8.90, based on a target PER of 10x on our 2016E EPS, which represents a rating 10% discount to the stock’s past-3-year consensus average. We see such a valuation as appropriate, given the competition from Beijing Benz and Brilliance’s relatively unaggressive model launch plans for 2016.

Brilliance: 12-month-forward PER (2012–2015) (PER) 22 20 18 16 14 12 10 8

Jul-12 Jul-13 Jul-14 Jul-15

Jan-12 Jan-13 Jan-14 Jan-15

Mar-12 Mar-13 Mar-14 Mar-15

Nov-12 Sep-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-12 May-13 May-14 May-15 PER +1 SD Average PER -1 SD

Source: Company, Daiwa forecasts

Risks to our call Better-than-expected revenue from self-owned brands Brilliance’s self-owned brands have been mostly engaged in the manufacture and sale of minibuses, which have been loss-making for the past 3 years. As the data shows that the cross-vehicle segment (sales volume) has also been shrinking over the same period, we now forecast a mild loss for this segment in 2015-17. However, if there is strong demand for the company’s minibuses and/or its MPV Huasong, this could lead to a reduction in the net loss for Brilliance, and thus upside to our earnings forecasts.

Less competition within the sector We believe BMW Brilliance’s major competitors, such as FAW Audi and Beijing Benz, may now be more eager to penetrate the entry-level segments, which is evidenced by the introduction of the 2-series by BMW Brilliance, the GLC by Beijing Benz, and the A3 facelift and A4 by FAW Audi, etc. Given that a certain proportion of the entry-level segments segment in China are already occupied by some of the domestic brands, the entry of these foreign brands is likely to stir up a new round of competition, which may eventually lead to price cuts and margin erosion for Brilliance. However, there is a chance that the launch of new models by competitors could slow down due to concerns on demand for new cars in China. This would help BMW Brilliance better uphold its gross margin, in our view.

Brilliance China Automotive (1114 HK): 4 January 2016

Better-than-expected benefits from supportive policies Supportive policies may On 29 September, the State Council announced a series of supportive policies for the auto pose upside risk sector, including the purchase-tax reduction from 10% to 5%. We expect this to only slightly boost overall new car-sales in China. However, if the policy is more effective than we expect, this could lead to upside risks to our forecasts, despite Brilliance BMW’s sales being the least likely to benefit versus peers (in terms of sales volume and models), given its limited exposure to models with engines of 1.6L or less.

Brilliance China Automotive (1114 HK): 4 January 2016

Company background A leading luxury car OEM in China Riding on BMW A major player in China’s Listed in Hong Kong in 1999, Brilliance is an automotive manufacturer in China. Through luxury car segment that its subsidiaries, associated companies and joint ventures in China, the group manufacture is heavily reliant upon and sell minibuses and automotive components. BMW In 2003, the group established a joint venture with BMW, BMW Brilliance Automotive Ltd. (BMW Brilliance), to produce BMW 3-series and 5-series sedans in China. BMW Brilliance commenced the production and sale of the BMW X1 SUV in early-2012. At the end of 2014, BMW Brilliance introduced the very first China-produced BMW new energy vehicle, the 5-series long-wheelbase plug-in hybrid model, BMW 530Le, in China. Further, BMW Brilliance plans to introduce BMW 2-series sedans and the X3 SUV in order to broaden its product range in the near future.

Through its subsidiaries, Brilliance is engaged in the production and sale of minibuses in China under the brand Jinbei, with 3 separate platforms (Haise, Grand Haise, and Granse). A new premium MPV model was launched at the end of 2014 under a new brand, Huasong.

In addition to auto manufacturing, Brilliance is engaged in the manufacture of diesel engines and gasoline engines for use in minibuses, sedans, SUVs and light duty trucks and automotive components, including window mouldings, strips, axles and stamped parts.

Brilliance: management profile Management Profile Mr Wu Xiao An Mr Wu has been the chairman of the board of directors of the company since 18 June 2002, and an executive director since 11 January 1994. Mr Wu has over 20 years of experience in the automotive industry and is primarily responsible for the overall strategic planning and business development of the group. Mr Qi Yumin Mr Qi has been an executive director, the president and the chief executive officer of the company since 6 January 2006. From 1982 to 2004, Mr Qi held various positions in Dalian Heavy Industries Co., Ltd., including chairman and general manager. From October 2004 to December 2005, he was the vice mayor of Dalian municipal government. He was qualified as a senior engineer professor level) by the Personnel Department of Liaoning Province in December 1992. Mr Wang Shiping Mr Wang has been an executive director of the company since 16 September 2005. Mr Wang was previously the deputy head engineer of Radiator Branch Company of China First Automobile Group Corporation, the general manager of FAW-ZEXEL Air-Condition Branch Company, the deputy general manager and director of Strategic Planning of Fawer Automobile Part Co., Ltd. Mr Wang is a senior engineer (researcher) in corporate management. Mr Tan Chengxu Mr Tan has been an executive director of the company since 10 November 2010. Mr Tan has been appointed as a director and the vice president of Huachen since March 2010, and a director and the vice chairman of Shenyang Automotive since June 2011. Mr Tan is a senior engineer. Mr Qian Zuming Mr Qian has been the chief financial officer of the company since 1st July, 2008. Mr Qian has been appointed as an assistant to the president of Huachen since December 2009 and a director of Shenyang Automotive since January 2010. Mr Qian is a fellow of the Institute of Financial Accountants of the United Kingdom. Ms. Lisa Ng Ms Ng has been a senior vice president of the company since October 2006, with primary responsibilities in investor relations, capital market transactions, and financial reporting review. In addition, she is also the company secretary to the board of directors and audit and compliance committee of BMW Brilliance. Ms Ng is a qualified Chartered Accountant with the Canadian Institute of Chartered Accountants. Ms Huang Yu Ms Yu is currently the vice president and chief accountant of the company. She is a certified public accountant of the PRC and also a member of the Association of Chartered Certified Accountants. Ms Huang is also qualified to be a lawyer in China. Mr Wang Tao Mr Tao has served as general manager of Shenyang Automotive since February 2012. Source: Company

Brilliance China Automotive (1114 HK): 4 January 2016

Brilliance: development milestones Year Event 1991 The company was initially established to hold a 51% interest in Shenyang Automotive, a Sino-foreign equity joint venture enterprise under the law of the PRC on 22 July 1991. Shenyang Automotive produced two principal types of minibuses under the JinBei brand, a version of Toyota's fourth generation 15-seat Hiace Minibus based on vehicle kits imported from Toyota, and a domestically designed 11-seat minibus based on domestic components. 1996 Formal launch of Shenyang Automotive's Mid-priced Minibus, which later became the flagship products of Shenyang Automotive. 1998 Established Xing Yuan Dong, a wholly owned subsidiary of the company, to centralise and consolidate the purchasing and sourcing of spare parts and automotive components for Shenyang Automotive so as to reduce production costs and optimise profits. 1999 Shares were listed on the Stock Exchange of Hong Kong Limited. 2000 The company acquired a 50% equity interest in Shenyang Xinguang, a manufacturer of gasoline engines for use in passenger vehicles. 2001 The company entered into a technical assistance agreement with BMW relating to technical support and training to be provided to Shenyang Automotive in connection with the commencement and production of the "Zhonghua" sedans. 2002 Huachen Automotive Group Holdings Company Limited became the substantial shareholder of the Company by acquiring a 39.45% interest in the company from the Chinese Financial Education Development Foundation. 2003 The company, through its indirectly owned subsidiary, entered into a joint venture contract with BMW to produce and sell BMW sedans in the PRC. The company's effective interest in the joint venture was approximately 40.5%. 2004 Commenced production of the BMW 3-series and 5-series sedans based on domestic and imported components. 2009 Completed disposal of Zhonghua sedan business by Shenyang Brilliance JinBei Automobile Co., Ltd. to Huachen Automotive Group Holdings Company Limited. 2010 The group entered into agreements for further acquisition of a 1% equity interest in each of Shenyang XinJinBei Investment and Development Co., Ltd. and Shenyang JinBei Automotive Industry Holdings Company Limited. With completion of the acquisition, the effective interest of the Company in BMW Brilliance increased to 50%. 2011 The group entered into an agreement for the acquisition of a 9.9% equity interest in Shenyang Brilliance JinBei Automobile Co., Ltd. Upon completion, Shenyang Automotive directly and indirectly owned 60.9% of the company. 2012 BMW Brilliance Automotive Ltd. commenced the production and sale of BMW SUVs in the PRC. 2013 Listing of and dealings in the shares of Xinchen China Power Holdings Limited on the Main Board of The Stock Exchange of Hong Kong. Following the listing of Power Xinchen, the indirect shareholding of the Company in Power Xinchen fell from 42.544% to 31.908%. 2014 The shareholders of BMW Brilliance Automotive Ltd. extended, four years before the expiry of the original agreement, the terms of the BMW Brilliance equity joint venture agreement by another ten years to 2028. BMW Brilliance introduced the very first China-produced BMW new energy vehicle, the 5-series long-wheelbase plug-in hybrid model. 2015 Brilliance-BEA Auto Finance Co., Ltd commenced business following approval by local regulators in the PRC in April 2015. This joint venture will offer a number of products and services, with an initial focus on financing dealers for the purchase of automobiles and providing car loans to individuals and companies. Source: Company

Brilliance: organisational chart

Huachen Automotive Group Public shareholders

42.48% 57.52%

Shenyang JinBei Automotive Brilliance China Automotive (1114.HK)

39.1% 60.9% 100% 100% 100% 25% 100% 100% 80.45% 49% 70.68% 31.07% 50% 14.43% 48%

e e

Automobile

Industrial

Mianyang Brilliance Ruian Automotive MianyangAutomotive BrillianceRuian Components NingboAuto BrillianceRuixing Components PowerTrainShenyang Brilliance Machinery Design ShanghaiHideaAuto Shenyang Brilliance JinBei Automobile JinBei Shenyang Brilliance Automobile Shenyang XingYuanDong Component Automobile Shenyang Chenfa Components Dongxing Automotiv Shenyang Brilliance Components Machinery Yuming Ningbo Development Shenyang Jindong (1148.HK) Holdings Xinchen Power China Brilliance Shenyang Xinguang Motors Mitsubishi Shenyang Aerospace Engine Dies Vehicle Shenyang jinbei Manufacturing

50%

BMW Brilliance Automotive

Source: Company

Brilliance China Automotive (1114 HK): 4 January 2016

BMW Brilliance: 5-series sedan BMW Brilliance: 530Le hybrid sedan

Source: Company Source: Company

BMW Brilliance: X3 SUV

Source: Company

China Consumer Discretionary 4 January 2016

(2333 HK) Great Wall Motor Great Wall Motor

Target price: HKD8.40 (from HKD8.90) Share price (28 Dec): HKD9.14 | Up/downside: -8.0%

Market share declining, margin erosion Kelvin Lau (852) 2848 4467  Share of SUV market likely to decline in 2016 on thinner pipeline [email protected]  GWM could suffer margin compression like SUV peers Brian Lam (852) 2532 4341  Reiterate Underperform (4) rating; long-term derating expected [email protected]

What's new: We still see a gloomy earnings-growth outlook for Great Wall Forecast revisions (%) Motor (GWM) in 2016. Its market share of SUVs (accounting for more than Year to 31 Dec 15E 16E 17E 80% of its sales volume YTD in 2015) has declined since January 2015, Revenue change - - - Net profit change - - - and we expect the decline to continue in 2016. We also think GWM will Core EPS (FD) change - - - face margin pressure going into next year, like its peers. Source: Daiwa forecasts

What's the impact: We attribute GWM’s declining share of the SUV Share price performance segment to its unsuccessful pricing strategy and the poorly received launch (HKD) (%) of its H8 model, which was delayed by more than a year. As the foreign 20 125 brands have been offering price discounts as a result of weak car sales in 17 104 China since mid-2015, the difference in the price of the H8 and similar 13 83 10 61

SUVs (ie, the Dongfeng Honda CRV and FAW Mazda CX7) has narrowed 6 40 significantly, affecting GWM’s sales. And this situation looks likely to Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 continue in 2016. Great Wall (LHS) Relative to HSI (RHS)

With the unsuccessful upgrading of its brand in general, we have low 12-month range 6.17-19.91 expectations for the launch of its H7 in 2016, for which we estimate Market cap (USDbn) 10.76 average monthly sales of 2,500 units. As a result, we expect GWM to have 3m avg daily turnover (USDm) 49.81 Shares outstanding (m) 9,127 to rely heavily on sales of its H6 and H2 models in 2016. We are also not Major shareholder Baoding Great Wall Asset (56.0%) particularly inspired by GWM’s bid to differentiate itself via its Blue and Red badge strategy for each model (ie, a sporty version and standard version Financial summary (CNY) for each of its models). With more new SUV models coming onto the Year to 31 Dec 15E 16E 17E market in 2016, and the little confidence we have in GWM’s badge strategy, Revenue (m) 69,968 77,482 87,264 we believe 2016 will be a weak year for GWM. Operating profit (m) 9,860 9,999 10,399 Net profit (m) 8,497 8,624 8,956 Core EPS (fully-diluted) 0.931 0.945 0.981 What we recommend: We reiterate our Underperform (4) rating but lower EPS change (%) 5.7 1.5 3.8 our 12-month TP to HKD8.40, from HKD8.90, after rolling forward our Daiwa vs Cons. EPS (%) (6.5) (15.0) (14.8) valuation basis to a 2016E PER of 7.5x, set at a discount of about 15% PER (x) 8.2 8.1 7.8 Dividend yield (%) 3.7 3.7 3.9 (previously 10%) applied to the stock’s past 3-year-average PER of 9x DPS 0.282 0.286 0.297 (previously: 8.1x on our average 2015-16E EPS) to factor in our concerns PBR (x) 1.8 1.5 1.3 about a continuous decline in market share. We view our target PER as EV/EBITDA (x) 5.7 5.5 5.2 ROE (%) 23.3 20.3 18.4 reasonable, as we expect GWM shares to be derated in 2016. Source: FactSet, Daiwa forecasts

How we differ: Our 2015-17E EPS are 7-15% lower than consensus, as we think GWM’s product pipeline is relatively unexciting compared to its peers. The downward margin trend is also likely to continue over our forecast period.

See important disclosures, including any required research certifications, beginning on page 103

Great Wall Motor (2333 HK): 4 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook GWM: net profit For 2015, we forecast only 6% YoY net profit growth for (CNYm) GWM, as its net profit margin has continued to deteriorate 10,000 70% 60% due to persistent price cuts. We forecast growth of only 1% 8,000 YoY in 2016 and 4% YoY in 2017, lower than the revenue 50% 40% growth of 11-13%, as we think strong competition in the 6,000 30% China SUV market will lead to margin deterioration. 4,000 20% 10% 2,000 0% 0 (10%) 2010 2011 2012 2013 2014 2015E 2016E 2017E Net profit (LHS) YoY Growth (RHS)

Source: Company, Daiwa forecasts

Valuation GWM: 1-year forward PER (x) The stock is trading at a 2016E PER of 8.1x, lower than its (PER) past-3-year average of 9x. However, we now see more 20 downside as we expect GWM to be derated on a lack of 18 16 new products in the pipeline, and given that the launch of 14 the H8 has not been well received. We believe GWM has 12 passed the sweet spot and therefore expect it to trade at a 10 discount to its past 3-year average. We lower our 12-month 8 TP to HKD8.40, from HKD8.90, after rolling forward our 6

valuation basis to a 2016E PER of 7.5x, set at a discount 4

Jul-13 Jul-14 Jul-15

of about 15% (from 10%) applied to the stock’s past-3-year Jul-12

Jan-13 Jan-14 Jan-15 Jan-12

Mar-12 Mar-14 Mar-15 Mar-13

Sep-12 Nov-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-12 May-14 May-15 average of 9x (previously: 8.1x on our average 2015-16E May-13 PER +1 SD Average PER -1 SD EPS) to factor in our concerns about a continuous decline Source: Company, Daiwa forecasts in market share. We view our target PER as reasonable, as we expect GWM shares to be derated in 2016.

Earnings revisions GWM: Bloomberg consensus EPS forecast revisions Our 2015-17 EPS forecasts are 7-15% lower than the (CNY) Bloomberg consensus, as we think GWM’s product 1.75 pipeline is relatively unexciting, while its competitors are 1.55 expected to aggressively launch new models in 2016. 1.35 Accordingly, we expect further downward consensus 1.15 revisions to GWM’s 2015-17E EPS in the near term. 0.95 0.75 0.55

0.35

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15

Jan-14 Jun-14 Jan-15 Jun-15

Feb-14 Mar-14 Feb-15 Mar-15

Sep-14 Sep-15 Aug-14 Nov-14 Dec-14 Aug-15 Nov-15 Dec-15

May-15 May-14 2015E 2016E

Source: Bloomberg

Great Wall Motor (2333 HK): 4 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales volume (unit) 363,000 463,000 621,000 771,000 733,000 803,000 855,000 945,000 Sales volume growth (%) 73.2 27.3 34.3 24.0 (4.9) 9.6 6.4 10.6 SUV (unit) 137,000 147,000 280,000 420,000 523,000 662,000 737,000 843,000 Sedan (unit) 123,000 188,000 199,000 205,000 87,000 46,000 37,000 30,000 Pick up truck (unit) 99,000 122,000 137,000 136,000 122,000 95,000 80,000 72,000 Others (unit) 5,000 6,000 6,000 9,000 1,000 0 0 0

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Revenue - New car sales 21,725 28,178 40,728 53,796 59,346 68,952 76,285 86,047 Revenue - After-sales 761 1,212 1,974 2,674 3,034 3,443 3,908 4,299 Other Revenue (311) (353) (1,137) (1,743) (2,062) (2,427) (2,711) (3,081) Total Revenue 22,175 29,037 41,565 54,727 60,317 69,968 77,482 87,264 Other income 35 47 74 233 352 408 452 509 COGS (17,298) (22,594) (31,562) (40,538) (45,252) (53,646) (60,326) (68,805) SG&A (1,944) (2,477) (3,400) (4,643) (5,907) (6,870) (7,608) (8,569) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 2,967 4,014 6,678 9,779 9,510 9,860 9,999 10,399 Net-interest inc./(exp.) 22 48 106 87 76 36 49 47 Assoc/forex/extraord./others 52 68 57 53 54 290 290 290 Pre-tax profit 3,041 4,131 6,841 9,920 9,640 10,186 10,338 10,736 Tax (214) (620) (1,119) (1,688) (1,599) (1,689) (1,715) (1,781) Min. int./pref. div./others (126) (84) (30) (8) 0 0 0 0 Net profit (reported) 2,701 3,426 5,692 8,224 8,042 8,497 8,624 8,956 Net profit (adjusted) 2,701 3,426 5,692 8,224 8,042 8,497 8,624 8,956 EPS (reported)(CNY) 0.329 0.406 0.624 0.901 0.881 0.931 0.945 0.981 EPS (adjusted)(CNY) 0.329 0.406 0.624 0.901 0.881 0.931 0.945 0.981 EPS (adjusted fully-diluted)(CNY) 0.329 0.406 0.624 0.901 0.881 0.931 0.945 0.981 DPS (CNY) 0.167 0.100 0.190 0.273 0.267 0.282 0.286 0.297 EBIT 2,967 4,014 6,678 9,779 9,510 9,860 9,999 10,399 EBITDA 3,516 4,713 7,622 10,935 11,183 11,921 12,496 13,341

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 3,041 4,131 6,841 9,920 9,640 10,186 10,338 10,736 Depreciation and amortisation 549 700 944 1,155 1,672 2,061 2,496 2,942 Tax paid (917) (1,473) (2,602) (4,352) (4,999) (1,689) (1,715) (1,781) Change in working capital (147) 303 (2,278) (288) (3,569) (1,340) (1,625) (2,523) Other operational CF items (105) (94) 1,100 877 1,901 (70) (70) (70) Cash flow from operations 2,421 3,567 4,005 7,313 4,644 9,148 9,425 9,304 Capex (2,602) (3,343) (4,370) (6,204) (6,636) (7,036) (7,366) (7,366) Net (acquisitions)/disposals (262) (1,535) (177) (575) (632) 0 0 0 Other investing CF items 974 459 1,029 1,591 1,701 647 453 317 Cash flow from investing (1,890) (4,418) (3,518) (5,188) (5,567) (6,389) (6,913) (7,049) Change in debt 0 5 1 182 (14) 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (274) (552) (917) (1,729) (2,506) (2,434) (2,572) (2,610) Other financing CF items (764) 4,217 264 (95) 299 0 0 0 Cash flow from financing (1,038) 3,670 (652) (1,641) (2,220) (2,434) (2,572) (2,610) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (506) 2,819 (166) 484 (3,143) 325 (60) (355) Free cash flow (181) 225 (365) 1,109 (1,992) 2,112 2,059 1,938 Source: FactSet, Daiwa forecasts

Great Wall Motor (2333 HK): 4 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 962 3,775 3,602 4,074 926 1,251 1,191 836 Inventory 2,104 2,777 2,695 2,764 3,470 3,832 4,309 4,915 Accounts receivable 9,255 10,033 16,337 20,764 26,979 30,086 33,317 39,269 Other current assets 2,504 3,789 3,214 3,424 3,938 3,407 3,045 2,845 Total current assets 14,825 20,374 25,848 31,026 35,314 38,576 41,861 47,864 Fixed assets 7,313 10,443 14,009 18,646 22,548 27,162 31,682 35,767 Goodwill & intangibles 1,113 1,871 2,216 2,445 2,815 3,174 3,524 3,864 Other non-current assets 448 447 497 487 669 739 809 879 Total assets 23,698 33,135 42,569 52,605 61,345 69,652 77,877 88,374 Short-term debt 0 0 0 182 0 0 0 0 Accounts payable 8,279 10,011 13,039 15,252 18,231 19,312 20,511 23,394 Other current liabilities 3,608 4,702 6,280 7,406 7,913 9,076 10,051 11,320 Total current liabilities 11,887 14,714 19,319 22,839 26,145 28,389 30,562 34,713 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 1,410 1,400 1,607 1,757 1,682 1,682 1,682 1,682 Total liabilities 13,298 16,113 20,926 24,597 27,827 30,071 32,244 36,395 Share capital 1,095 3,042 3,042 3,042 3,042 3,042 3,042 3,042 Reserves/R.E./others 8,920 13,695 18,472 24,953 30,409 36,473 42,525 48,870 Shareholders' equity 10,015 16,737 21,514 27,996 33,452 39,515 45,567 51,913 Minority interests 385 284 129 12 67 66 66 65 Total equity & liabilities 23,698 33,135 42,569 52,605 61,345 69,652 77,877 88,374 EV 69,107 66,269 66,316 65,904 68,905 68,510 68,499 68,784 Net debt/(cash) (962) (3,775) (3,602) (3,892) (926) (1,251) (1,191) (836) BVPS (CNY) 3.048 1.834 2.357 3.067 3.665 4.329 4.992 5.688

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. 30.9 43.1 31.7 10.2 16.0 10.7 12.6 EBITDA (YoY) n.a. 34.0 61.7 43.5 2.3 6.6 4.8 6.8 Operating profit (YoY) n.a. 35.3 66.4 46.5 (2.8) 3.7 1.4 4.0 Net profit (YoY) n.a. 26.9 66.1 44.5 (2.2) 5.7 1.5 3.8 Core EPS (fully-diluted) (YoY) n.a. 23.4 53.7 44.5 (2.2) 5.7 1.5 3.8 Gross-profit margin 22.0 22.2 24.1 25.9 25.0 23.3 22.1 21.2 EBITDA margin 15.9 16.2 18.3 20.0 18.5 17.0 16.1 15.3 Operating-profit margin 13.4 13.8 16.1 17.9 15.8 14.1 12.9 11.9 Net profit margin 12.2 11.8 13.7 15.0 13.3 12.1 11.1 10.3 ROAE 53.9 25.6 29.8 33.2 26.2 23.3 20.3 18.4 ROAA 22.8 12.1 15.0 17.3 14.1 13.0 11.7 10.8 ROCE 57.1 29.3 34.5 39.2 30.8 27.0 23.5 21.3 ROIC 29.2 30.1 35.7 38.5 28.0 23.2 20.2 18.2 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 7.0 15.0 16.4 17.0 16.6 16.6 16.6 16.6 Accounts receivable (days) 76.2 121.2 115.8 123.7 144.5 148.8 149.3 151.8 Current ratio (x) 1.2 1.4 1.3 1.4 1.4 1.4 1.4 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 50.7 24.6 30.5 30.3 30.3 30.3 30.3 30.3 Free cash flow yield n.a. 0.3 n.a. 1.6 n.a. 3.0 2.9 2.8 Source: FactSet, Daiwa forecasts

Company profile

Great Wall Motor is the largest manufacturer of SUVs and pickups in China. In 2014, the company sold 733,000 vehicles (71% SUVs, 17% pickups, and 12% sedans), derived 95% of its revenue from new car sales and 5% from after sales, and generated 5% of its revenue and 7% of its sales volume from export sales.

Great Wall Motor (2333 HK): 4 January 2016

Weak outlook for 2016 Weak product pipeline, margin erosion Thin pipeline in 2016 Unexciting 2016 pipeline In 2H15, both the domestic China manufacturers and foreign JVs have launched new SUV models, with the most prominent being the Baojun 560 from SAIC GM Wuling and the Tucson from Beijing Hyundai. GWM, in comparison, launched only different versions of its H5 and H6 coupe SUVs. In addition, sales of the H8, which was launched in April 2015 (having been delayed by more than a year), have not ramped up well, with average monthly sales of about 1,000 units/month YTD, lower than company’s initial target of 4,000 units/month.

GWM’s weak sales volume is likely to continue in 2016, as it plans to launch only 3 new models – a facelift of the H8, a compact SUV that is smaller than its current H2, and potentially the H7, which we may not be that popular as it is likely to be more expensive than the H6. GWM is also launching a “Blue badge” version (sporty version) of the H2 and a “Red badge” (standard version) of the H6 Coupe, which are only variants of their respective current models.

We don't have GWM plans to launch a “Blue badge” and “Red badge” version of each of its models (we confidence in GWM’s refer to this as the “Blue/Red badge” strategy), where the Blue badge features a sportier “Blue/Red badge” design and the Red badge is a standard version aimed at the mass market. The sales differentiation strategy network will be split between the Blue and Red badges. We don't see this strategy as being incrementally positive for GWM, as we don't expect much difference between the two badges. Therefore, we expect consumers to just go for the cheaper version, rendering the strategy ineffective. Also, dividing the sales network could imply higher sales expenses.

GWM: product pipeline (2H15 - 2016) Model Segment Launch Facelift of C30-Classic* Sedan Nov-2015 Red badge version of Haval H1* SUV Dec-2015 Haval H7 SUV 2016 A new SUV smaller than H2 SUV 2016 Haval H2 Blue badge SUV 2016 Haval H6 Coupe Red badge SUV 2016 Facelift of H8 SUV 2016 Source: Company Note: *launched already

Losing share in the SUV market GWM’s market share In November 2015 YTD, SUV sales in China grew by 54% YoY, driven by strong consumer expected to continue demand and new model launches. However, GWM’s SUV sales for the same period rose decreasing in 2016 by only by 35% YoY, due to weak sales of new models, as mentioned previously. As such, its share of the China SUV market has shrunk, from 14% in January 2015 to 10% in November. Given GWM’s lack of exciting new models in its pipeline, we expect its SUV sales in 2016 to rely on the H6 again (sales volume growth of only 16% YoY in January- November 2015).

The H6 was launched in August 2011, more than 4 years ago, and although it has gone through several facelifts since then, we expect sales growth for this model to slow in 2016. As such, we expect 2016 sales volume for this model to grow by 10% YoY, and for GWM’s total 2016 SUV sales volume to grow by 6% YoY. Both of these numbers are significantly lower than our 2016 growth estimate of 33% YoY for the overall China SUV market.

Great Wall Motor (2333 HK): 4 January 2016

GWM: monthly SUV sales YoY underperforming market GWM: SUV market share declining since January 2015 (Sales Unit) (YoY %) 80,000 80% 16% 14% 60% 60,000 12% 10% 40% 40,000 8% 20% 6% 20,000 4% 0% 2% 0 (20%) 0%

GWM SUV monthly sales (LHS) GWM SUV sales YoY (RHS) GWM's Market share in China SUV China SUV sales YoY (RHS) Source: CAM Source: CAM

GWM: H2 peer comparison Length Price range Launch date of facelift / Avg sales units per Auto OEM Model (mm) (CNY k) Launch date new options month in 2015 GWM H2 4335 99-129 Jul-2014 Sep-2015 (new options) 13,042 BAIC Hyundai ix25 4270 117-187 Oct-2014 n.a. 8,028 GAC Honda Vezel 4294 128-190 Oct-2014 n.a. 9,492 Dongfeng Honda XR-V 4270 128-163 Nov-2014 n.a. 9,753 SAIC GM Chevrolet Trax 4248 110-164 Apr-2014 Jul-2015 (new options) 3,845 Changan CS 35 4160 79-99 Jan-2014 Mar-2015 (Facelift) 14,241

Source: Companies, various media

GWM: H5/H6 peer comparison Length Price range Launch date of facelift / Avg sales units per Auto OEM Model (mm) (CNY k) Launch date new options month in 2015 GWM H6 4640 100-159 Oct-2012 May-2015 (Facelift) 29,037 GWM H5 4650 95-164 Nov-2014 n.a. 1,866 GAMC GS 5 4750 102-232 Jan-2013 n.a. 2,375 Dongfeng Honda CR-V 4585 180-250 Feb-2012 Apr-2015 (Facelift) 11,995 Changan CS 75 4650 109-164 Apr-2014 Sep-2015 (new options) 14,551 SAIC GM Wuling Baojun 560 4620 77-90 Jul-2015 n.a. 20,185

Source: Companies, various media

Margin erosion to continue Price cuts and Since June 2015, the company has initiated several price cuts, from a CNY5,000 reduction increasing sales for the H2 to a CNY22,000 reduction for the H8. While the price cuts led to an early expenses have led to recovery in sales volume, they also hurt the gross margin. In 3Q15 (based on PRC GAAP), margin erosion, which GWM’s gross margin declined by 3.1pp. This trend of lower prices is likely to continue for should continue the rest of 2015, as management has acknowledged that it would be difficult for customers to respond positively to any price increases at this point.

The only way to alter this declining price trend would be to launch new variants or models with higher prices. However, as the launches in 2016 have not been confirmed, we expect the price cuts, and hence margin erosion, to continue to hurt GWM, resulting in a 1.2pp drop in gross margin, to 22.1% in 2016E.

GWM: price cuts since 2H15 Model Type Price cut Price discount % in terms of MSRP Valid period C30 Sedan CNY7,000 8.8-10.5% 27 June to 31 December 2015 C50 Sedan CNY7,000 7.5-8.8% 29 June to 31 December 2015 M4 SUV CNY7,000 9.0-10.8% 29 June to 31 December 2015 H1 SUV CNY5,000 6.0-7.3% 29 June to 31 December 2015 H2 SUV CNY5,000 3.9-5.1% 16 June to 31 December 2015 H6 SUV CNY6,000 3.7-4.8% 16 June to 31 December 2015 H8 SUV CNY22,000 10.9-8.6% 21 July 2015 to 31 March 2016

Source: Company

Great Wall Motor (2333 HK): 4 January 2016

Tax-cut benefits may not stop derating October sales did not The State Council announced a tax cut for cars with engines smaller than 1.6L. The tax show market-share rate was lowered from 10% to 5%, effective from October 2015 until the end of 2016. We gains for GWM believe this is a tailwind for GWM’s sales volume, as it has higher exposure to PVs with engine sizes smaller than 1.6L. For instance, from January until October 2015, 94% of GWM’s unit sales came from smaller-engine cars, much higher than the market average of 68%. As such, we expect GWM to benefit more than peers from this tax-cut policy. However, even though the share prices of most of the OEMs, including GWM, have risen, partly on this positive catalyst, the October unit sales do not seem to show that GWM has regained any market share.

Great Wall Motor (2333 HK): 4 January 2016

Valuation and recommendation Discount to past-3-year average reasonable The stock is trading at a 8.1x 12-month forward rolling PER, lower than its past-3-year Stock expected to derate average of 9x. We expect a derating and therefore apply a target PER of 7.5x set at a on weaker earnings- discount of about 15% (from 10%) applied to the stock’s past-3-year average of 9x growth outlook (previously: 8.1x on our average 2015-16E EPS) to factor in our concerns about a continuous decline in market share. As such, we now lower our 12-month TP to HKD8.40, from HKD8.90. We reiterate our Underperform (4) rating on account of our 2015-17 EPS forecasts being lower than the consensus by 7-15% due to what we see as a relatively unexciting product pipeline.

We assume the A-share In addition, we believe the proposed A-share placement is unlikely to go through, as placement won’t go management seems unwilling to revise down the issue price from CNY14.39. Therefore, through we have excluded it from our modelling.

GWM: 1-year forward PER bands (x) (PER) 20 18 16 14 12 10 8 6

Jul-12 Jul-13 Jul-14 Jul-15

Jan-13 Jan-14 Jan-15 Jan-12

Mar-12 Mar-13 Mar-14 Mar-15

Sep-12 Sep-13 Sep-14 Sep-15 Nov-12 Nov-13 Nov-14 Nov-15

May-13 May-14 May-15 May-12 PER +1 SD Average PER -1 SD

Source: Company, Daiwa forecasts

Risks Better-than-expected sales of new models and ‘Blue/Red badge’ strategy We have low expectations for GWM’s outlook in 2016, as we see the pipeline being relatively thin and its new-model launches seem to have been unsuccessful so far. Also, we have little confidence in its differentiation strategy for ‘Blue/Red badge’ models. However, our forecasts could see upside if GWM’s sales performance were to beat our expectations, which could be due to better-than-expected new-model sales, the ramp-up of sales of existing models, or better-than-expected acceptance by customers of the ‘Blue/Red badge’ strategy.

Slower-than-expected margin decline We forecast a 1.2pp YoY decline in the gross margin due to intense competition in the SUV segment in 2016, and because of GWM’s continued loss of market share to foreign JVs. However, there could be upside to our forecasts if the competition were milder than expected or if the market’s perception of its models were better than expected, which could lead to better unit sales and market-share gains.

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Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities

Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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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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